Manufacturing Perspective

A recent Economy.com article about manufacturing kind of rubs me the wrong way. The article says in a nutshell that the decline in manufacturing employment that has occurred in the past three years is really "no big deal" as long as manufacturing output remains strong. This the typical argument that any and all productivity growth is good for us.

The figure below charts industrial production versus manufactuirng employment over the past five years. Employment, as we know, has fallen through the floor, while production has declined from its peak but held up much better than employment.

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My reply to this issue is a question: "If human capital is supposedly driving our overall economic growth, then shouldn't we be looking at how to strengthen and expand human capital in manufacturing?" I think we should. I am not arguing that we should prop up (subsidize) low-skilled manufacturing jobs that do not have a chance in hell in surviving, but I am arguing that it is a bit naive to assume that China and other developing nations will be content to occupy the low-skilled rung on the labor ladder for long. They are also after our higher skilled and knowledge-intensive jobs. We shouldn't forget that for a moment. Moreover, local economies should be looking at manufacturing from the standpoint of the big picture--that is the shifting international division of labor perspective.

I do agree with the following point made by the Economy.com author: "The need to align the currencies in which revenues and costs are incurred is another factor that will support the continued presence of manufacturing within the U.S. If a company’s revenues are earned primarily in one currency, while its costs are incurred in another, it opens itself up to considerable exchange rate risk. Adverse movements in currencies can quickly eliminate profit margins, particularly for capital-intensive industries, which generally have high fixed cost structures. This is a major reason why foreign automakers started to build plants in the U.S. when they began to acquire significant market share here."

Manufacturing matters to our economy for a wide variety of reasons. The current period of restructuring is a major one and not just a temporary blip on the radar screen. Political handwringing about the issue does no good. Nor does it make sense to create huge subsidies to keep those parts of the manufacturing sector that are destined to go elsewhere no matter what we do. Level-headed thinking with a keen eye focused on changing economic realities around the globe is needed.

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