The Loss of American Manufacturing Jobs

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NEW YORK ( TheStreet) -- Many have bemoaned the loss of U.S. manufacturing jobs to foreign lands. The following quote by Mark Riddix is typical:
One of the biggest challenges facing the American economy is that we lack a domestic manufacturing base. Simply put we do not produce anything anymore. We buy tons of foreign goods and then wonder why we are lacking jobs. We import most of our goods which has resulted in a huge trade deficit and industrial job losses. Our economy has transitioned from an agricultural society to an industrial society to a service economy 1 .
And recently, Steve Hansen has argued that job losses are associated with the growing U.S. trade deficit. I quote Hansen:
The burr under my saddle is jobs.... Trade deficits export jobs. Some think it is only money on balance sheet -- but it is jobs that are exported when a country imports manufactured goods. 2
Is it correct to associate job losses with the U.S. trade deficit? Should the U.S. worry about losing manufacturing jobs? After all, a growing service sector is a common characteristic of countries with growing per capita incomes. Are the current problems in manufacturing merely cyclical -- a direct result of American bankers causing a panic that led to the global recession? Remember that between 1998 and 2007, the U.S. unemployment rate averaged 4.9%. Or are there longer term structural problems at work?

I have looked carefully at recent writings on the subject -- many of the claims for why the jobs were lost are way off the mark. It is notable that most of those bemoaning U.S. job losses look at manufacturing as a single industry. It is not. The manufacturing sector is made up of different industries with different dynamics.

What Manufacturing Industries Lost Jobs?

Looking back to 1975, 1978 was the peak year for jobs in manufacturing. Table 1 shows the manufacturing industries with the largest job losses in the 1978-2007 period. 3

What caused these job losses? In reacting to Steve Hansen's article, John Lounsbury pointed out:
Now, to be fair, not all the employment decline was due to increased employment overseas. Trade deficits remained fairly benign by 21st century standards. Employment declined significantly because of productivity improvements as more and more automation replaced manual labor. 4
So let's look at job-saving automation. In the 1987 to 2007 period, manufacturing value added output has increased by 123% while employment has fallen by 21%. This suggests an overall productivity increase of 181% for the manufacturing sector, and it would have been greater if the data had gone back to 1978. So where in manufacturing were productivity gains greatest? Probably in electronics and computers.

When it comes to textiles and garments, the Chinese are by far the most efficient. Consumers around the world would benefit in lower costs if all garments were made in China. And yet, the U.S. quota on garments from China is the largest trade barrier in the world.

The reason for the job loss in primary metals is because the U.S. makes most of its fabricated metals out of scrap metal. China is now the major global consumer of iron ore. The job losses in the remaining three categories can be attributed largely to productivity gains. But why then did the trade deficit grow? Because of growing U.S. demand for goods and services. Read on.

The U.S. Trade Deficit

Hansen and other associate U.S. manufacturing job losses with a growing trade deficit. Hansen suggests that most jobs resulting from new technologies are being created overseas. Again, let's look at the trade figures for the different manufacturing industries. Table 2 shows what has happened net to those manufacturing industries whose net trade deficits (imports minus exports) between 1989 and 2007.

It appears there is a white elephant in the room: the manufacturing sector with the trade deficit that grew most in this period was oil and gas. This had nothing to do with lower-priced overseas workers and unfair labor practices. It had to do with the growing U.S. dependency on foreign oil. I quote from an earlier piece:
Unlike Japan and China, the U.S. was at one time richly endowed with energy resources. Even today, it is the third leading producer of energy from oil, the second leading producer from coal, the second leading producer of energy from natural gas, and by far the largest producer of nuclear energy. But because of its voracious energy consumption, the U.S. must supplement its own production of energy with imports. It now imports 63% of its crude oil, and this constitutes 21% of all crude oil traded globally. This is an extreme and dangerous dependency.
The European countries and Japan have imposed heavy taxes on motor vehicle fuels so gas prices have been in the $6-$7 range for more than a decade. But the U.S. government policy has been to keep the gas price as low as possible. The result? Per capita, the U.S. consumes almost four times as much oil as the other OECD countries. Is there a U.S. energy policy?
Why does the U.S. import so much oil? Because at existing exchange rates, extraction and shipping oil from overseas is less costly than U.S. extraction. And U.S. extraction costs will continue to climb.

I have written numerous pieces on purchases of U.S government securities by China and the Japanese to promote their exports. Together, these two countries hold more U.S. Treasury debt ($1.8 trillion) than the Fed ($1.2 trillion). There is no question that this propping up of the U.S. dollar has contributed significantly to U.S. manufacturing job losses.

All of this is not to say American jobs have not been lost to overseas competition. But what more should be done? I have already mentioned the China garment quota -- the largest trade barrier in the world. U.S. agricultural subsidies range between $10 and 30 billion annually. More pressure on the Chinese and Japanese to strengthen their currencies?

Conclusion

With all the Japanese efforts to keep the yen from getting stronger, the dollar has lost 60% of its value against the yen since 1978. And they still export excellent cars to the U.S. at competitive prices. At some point, Americans have to understand that people in other countries are willing to work harder for less. And if that continues, Americans' real incomes will fall further. It is called global competition.

1 http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base
2 http://econintersect.com/b2evolution/blog2.php/2011/01/21/usa-trade-deficit-exports-1-3-million-jobs.
3 I look only to 2007 because I do not want to confuse the findings with cyclical job losses resulting from the global recession.
4 http://econintersect.com/wordpress/?p=5769

Elliott Morss is an economic consultant and an individual investor in developing countries. He has taught at the University of Michigan, Harvard University, Boston University, among other schools. Morss worked at the International Monetary Fund and helped establish Development Alternatives Inc. He has co-written six books and published more than four dozen articles in professional journals.

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