Manufacturing and the Bubble
Atrios passes on an interesting contention:
Last night at a roundtable for our nations’s elite, that is to say, “bloggers,” Richard Trumka, AFL-CIO President, implied, though did not say outright, that one consequence of the real estate bubble was that manufacturing and other types of businesses were finding it difficult to obtain credit at favorable terms. As I said, this seemed to be the gist of what he was saying though I’m not 100% sure that was his point. So I’m curious! How much was credit being funneled away from all other sectors in the economy?
I’m not sure that’s right. But what I think is pretty clear is that foreign purchase of over-valued real estate-related financial products was intimately tied to the high price of the dollar and the large size of the American trade deficit. All this meant less manufacturing. The alternative to the real estate boom was a cheaper dollar, less construction, fewer imports, more exports, less construction employment and more manufacturing employment.
That said, it is worth learning the lesson of this chart:
Despite what people sometimes say, until the recession hit it’s not actually the case that America was becoming a country where “we don’t make things.” More goods were being made abroad, but more goods were also being made here. Beyond the ups-and-downs of the trade cycle, manufacturing employment is being undermined by increasing productivity in the manufacturing sector. That’s good—more stuff to go around—but it means that the manufacturing share of employment will tend to decline over the long run no matter what happens with the price of the dollar.
The short term fluctuations around the trend are, however, really big. Imports, exports, and currency values matter a lot. A so-called “weak dollar” means manufacturing jobs and an economy brought back into balance.
44 Responses to “Manufacturing and the Bubble”
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October 29th, 2009 at 4:10 pm
Beyond the ups-and-downs of the trade cycle, manufacturing employment is being undermined by increasing productivity in the manufacturing sector.
That is not what you see at all in this chart until 2001: productivity increases along with manufacturing output, and jobs stay at the same level.
After 2001 the number of jobs just falls off a cliff while output stagnates. I wonder what happened that year!
October 29th, 2009 at 4:13 pm
Despite what people sometimes say, until the recession hit it’s not actually the case that America was becoming a country where “we don’t make things.”
Hrmm. Manufacturing employment was cycling around a high value until about 00, when it went into a ditch. Meanwhile, production climbed more slowly than had been the case, and then manufacturing employment fell off a cliff with the economy, and so did production. When we finally this complete the cycle, I’m not seeing where the output doesn’t fall off a cliff as well when foreign ownership liquidates factories currently operating in rundown mode. (That is to say, the rampage in manufacturing after employment fall off looks a lot like housing materials plus ‘assembly’ of components made offshore.)
We certainly are now, thanks to balanced budgets and declining R&D and manufacturing employment, a country that doesn’t invent anything.
max
['We shall see hjust how artifacty the situation actually is, I expect.']
October 29th, 2009 at 4:14 pm
A so-called “weak dollar” doesn’t mean manufacturing jobs, it means increased output (on a $ basis). As the chart shows, output and jobs are capable of moving in opposite directions.
October 29th, 2009 at 4:14 pm
Re “That’s good—more stuff to go around—but it means that the manufacturing share of employment will tend to decline over the long run no matter what happens with the price of the dollar.”
————–
1) Aside from doctors, it is hard to see where much in the Services sector adds to our prosperity. Most people measure quality of life by things. The Sales Revenue of those things is not necessarily a good indicator — we also like cheap things with high value/quality. If the real price of a standard sedan soars from $20,000 to $40,000 , most of us would agree that we are worse off.
2) Since the nation state is our fundamental political unit, that should also be the unit of economic policy: You have no right to ask people to risk their lives in defense of the nation if that same nation leaves them to starve in peacetime — or to live in hopeless poverty. There has to be some foreign trade –e.g, in raw materials, but there is a strong argument for autarky. During the Cold War, USA imports and exports were only about 3 percent of GDP each.
3) The Globalization that has impoverished so many US citizens was a policy decision — including the tax incentives to Build Empire and the Massive Borrowing for enormous military expenditures to expand said Empire. As is the tax policy which let the profits of that Empire enrich a few while the huge costs — high unemployment, stagant incomes, covert stealing of Social Security/Medicare payroll taxes to support military operations, and blood — are dumped onto the common citizen.
October 29th, 2009 at 4:17 pm
Max, this may come as a shock, but increasing $ value with declining employment numbers is usually thought of as progress.
October 29th, 2009 at 4:19 pm
Needless to say, globalization collapses when the relative military supremacy of the Hegemon collapses due to the financial bleeding.
Global trade actually reached a height under the Victorian British Empire — only to collapse as the wogs learned how to make and use machine guns. And when globalization collapses, you get the Great Depression. Prior to that, you get WWI as financial elites try to protect their foreign investments.
(E.g, the House of Morgan pushing the USA into WWI to protect its assets in the London Branch.)
October 29th, 2009 at 4:21 pm
Unless I am badly mistaken, the manufacturing output values include products that are effectively foreign made but assembled here, or even just shipped and sold here by “manufacturing” companies. My guess is that the foreign-made component of these output figures has increased substantially over time. Needless to say, fewer manufacturing jobs are required to “produce” such goods. The declining jobs line reflects both such foreign input and increased labor productivity.
October 29th, 2009 at 4:24 pm
One consequence of the bubble was this:
At most companies, investment in manufacturing infrastructure is gamed out as annual return. Every company had a target return that must be met for a capital project to go forward. This target was artificially inflated due to then-current market returns. Basically, at public companies the thought was “If I can make 12% in the market, why would I install this 10 million dollar piece of equipment that’ll only net me 8%”.
The effect was that these companies are now stuck with out of date, run-down processes that are long past their depreciation age; they’re now competing against plants in china, india, japan, and europe that are much newer (and thus are more labor and energy efficient).
October 29th, 2009 at 4:26 pm
Re Thomas at 5: “Max, this may come as a shock, but increasing $ value with declining employment numbers is usually thought of as progress.”
==========
NOT when the real incomes of most Americans has stagnated and the incomes of the wealthy few have soared.
Especially when part of those profits go to establishing institutionalized corruption and legal bribery in Congress –plus a massive , deceitful propaganda machine –to support and extend that malign inequity.
The slaves of the pre-bellum American South were pretty productive — doesn’t mean they were well off. To the contrary.
October 29th, 2009 at 4:30 pm
That chart leaves out a big component, wages of manufacturing jobs. They have stagnated or declined, largely due to the neoliberal, Brad DeLong endorsed, and Clinton implemented, free trade globalism policies of the last 15 years.
October 29th, 2009 at 4:32 pm
Max, this may come as a shock, but increasing $ value with declining employment numbers is usually thought of as progress.
For a rentier economy, this is correct. The problem we are facing is that rentier economies are unsustainable once inequality crosses a certain threshhold.
October 29th, 2009 at 4:37 pm
Um, Matt, we don’t make things.
Computers, robots, and an ever decreasing number of technicians do. For those industries that do not follow the aforementioned plan, we ship them overseas.
Pretty much everyone else is engaged in the clusterfuck that is the “service” economy.
October 29th, 2009 at 4:39 pm
Re Walker at 11: “The problem we are facing is that rentier economies are unsustainable once inequality crosses a certain threshhold.”
True. John Kenneth Galbraith pointed out that a major cause of the Great Depression was that people who had Demand for goods did not have the money to buy them –and the wealthy few who had money to buy goods had pretty much surfeited their consumption and could not support Demand. Hence, Supply had to recede to match a Depressed Demand.
Not that the Masses were poor not only due to unemployment –but also because Corrupt Republicans had let financial con men steal the savings of millions.
October 29th, 2009 at 4:40 pm
So, what is all this $3 trillion worth of stuff manufactured in the US? A lot of military machinery. Some civilian aircraft. Some cars. What else? Is building construction included into this?
October 29th, 2009 at 4:42 pm
“Global trade actually reached a height under the Victorian British Empire — only to collapse as the wogs learned how to make and use machine guns.”
No, global trade collapsed as the developed economies decided to destroy each other (except for the US) in two large world wars. That the wogs got machine guns was not a factor.
October 29th, 2009 at 4:44 pm
(E.g, the House of Morgan pushing the USA into WWI to protect its assets in the London Branch.)
Err, Don, you’ve got it really backwards.
When Morgan died, it turned out he wasn’t even that rich.
Morgan was the factor – a brilliant, cunning and powerful factor, but a factor nonetheless – of the Rothschilds in the US.
It was more the London Home Office trying to call on the resources of its New York Branch.
Pretty much every important Jew in the US was at least mildly supportive of the Kaiser; for fuck’s sake, the guy who made Albert Speer look like a fuckwit and ran the Kaiser’s war effort was a Jewish industrialist.
Combine that with massive German and Irish populations, and you’ve got a country very unwilling to help out its traditional imperialist enemy.
The fellows in London played a very, very dangerous game, and the result was that in the 20s and 30s, absolutely no one trusted the Brits, for good reason. Moreover, had FDR been known to be in the kind of contact with Churchill that he was, he would have been impeached and removed.
October 29th, 2009 at 4:46 pm
“Aside from doctors, it is hard to see where much in the Services sector adds to our prosperity.”
I agree with your general argument (more manufacturing in the US = good), but you do realize services include such things as retail, tourism, and so on? It isn’t all marketing consultants and mortgage brokers, you know.
October 29th, 2009 at 4:49 pm
You’re all missing something critical about this graph. Can’t believe no one has pointed it out, but US population has increased by about 50 percent since 1970. So the claim that “productivity increases along with manufacturing output, and jobs stay at the same level” until 2001, as the first commenter claims, is simply not true.
October 29th, 2009 at 4:53 pm
Side note: I was actually in the business of lending to distressed companies during that period. Some of the companies we lent to were manufacturing companies, some in horrible business shape (during the boom – so these were really crap companies). My firm didn’t usually end up lending to them, but these companies got loans, generally at extremely thin margins (200-300 above LIBOR). Not only were these companies not having any `trouble getting credit, the environment was that there was far too MUCH credit out there for them.
October 29th, 2009 at 4:54 pm
Pretty much everyone else is engaged in the clusterfuck that is the “service” economy.
You sound like the IBM executives who handed Bill Gates the PC OS monopoly. They thought all the money was in hardware, not software. Guess who was wrong? IBM sold the last of its PC business to Lenovo in 2004.
October 29th, 2009 at 5:08 pm
So the claim that “productivity increases along with manufacturing output, and jobs stay at the same level” until 2001, as the first commenter claims, is simply not true.
Why do you confuse “number of manufacturing jobs” (you know, what is on the graph) and “share of manufacturing jobs in the economy”?
October 29th, 2009 at 5:13 pm
Computer Software is a physical product.
So are books.
Could those exist without creativity? Or, alternatively, other products like Hardware or Printing Presses or Paper?
Well, no, but then neither could the cars that rely on designers and robots.
I wasn’t talking about anything like the IBM vs MSN thing, and you know it.
October 29th, 2009 at 5:14 pm
Why do you confuse their importance? The share of the manufacturing jobs in the economy has been dropping forever. It is not a new phenomenon as of 2001. The absolute number is not relevant to anything.
October 29th, 2009 at 5:16 pm
That’s another example of favoring Wall Street over the real economy. The cheap dollar ensures the U.S. as a financial capital. It makes it more profitable to move money around, compared to actually making things.
October 29th, 2009 at 5:26 pm
The national account left out is the most important one, consumption. Consumption as a pct of GDP has to drop.
October 29th, 2009 at 6:40 pm
Here’s a little something from Stanislaw Lem that might shed a little light on the matter:
This was written at least thirty years ago, but variants of this – Vonnegut’s Player Piano comes to mind – go back much earlier.
October 29th, 2009 at 9:13 pm
Trumka might be right. Not only does it make (potential) sense intuitively, it has some real-world precedents. Manufacturers in late 1970s Colombia and Argentina complained (gently in the case of Argentina because it was a dictatorship, less gently in Colombia which wasn’t) that financial speculation was attracting all available capital and there was nothing left for industrial investment.
October 29th, 2009 at 10:26 pm
If capital gains profits were taxed at more than double the rate of manufacturing profits instead of the other way around, then more money would be invested in productive enterprises and less would be wasted on negative sum financial instruments.
October 29th, 2009 at 11:49 pm
Why do you say that, Tony? I’d think it’s just the reverse.
October 29th, 2009 at 11:56 pm
The US has a net trade surplus for capital goods, exporting about a half trillion dollars per year of them. We also have large exports of high-end medical equipment and electronics, industrial chemicals and industrial power plants.
Our trade balance is negative because we import a lot, not because we don’t make anything.
October 30th, 2009 at 1:14 am
Abb1,
People assume the US doesn’t make anything because a lot of what we make aren’t consumer goods. For example – IBM is a $100 billion dollar company with 400,000 employees. As far as I know they have no consumer products. What do they do?
Well, if your the Bank of China and you need a new mainframe, you call IBM. If you’re the State of Bavaria and you need a new car registration system, you call IBM.
There are tons of companies that don’t make consumer products, firms like Baker Hughes or Cabot Corp or Egenera – they sell products you’ve never heard of all over the world.
October 30th, 2009 at 1:23 am
Abb1,
The thing to keep in mind nearly 70% of our trade deficit is the result of oil imports. In terms of manufactured goods import vs. export those are nearly in balance.
October 30th, 2009 at 6:40 am
@26 ScentOfViolets: “No one oppressed the Drudgelings, no one forced them to do anything; they were completely free and could do what they pleased, yet instead of rejoicing at such freedom they died off like flies.”
Thanks for the Stanislaw Lem, ScentOfViolets.
I take from this chart two clear messages.
One: Capitalism has won a great victory.
Two: We are officially a third world country.
October 30th, 2009 at 10:16 am
We don’t make much… consumer goods.
Doesn’t our defense industry (boondoggle) account for much of that, because each unit is so incredibly costly? That’s the impression I’m under, and largely because defense spending went through the roof in the past decade.
That would also explain why consumers think “Gee, nothing is made here”. Generally, they are not buying missiles or nuclear submarines. Although, I hear Lockeed is lobbying to allow Walmart to sell both! It’s our right to be allowed to own nuclear subs… Don’t tramp on my 2nd amendment!
October 30th, 2009 at 10:31 am
#34 DcDan: :Although, I hear Lockeed is lobbying to allow Walmart to sell both! It’s our right to be allowed to own nuclear subs…”
Too funny. Good point, too.
I have the right to bear arms. So why can’t I mosey on down to the Wal-Mart weapons center and have them weld/mount a .50 caliber machine gun to the bed of my pick-up truck? Why can’t I have a nuclear tipped missile in my backyard -to protect me from my neighbors. From sky attack.
I’m a consumer. But I ain’t free. My rights are getting infringed upon bigtime.
October 30th, 2009 at 10:46 am
Max, the question of what to do with the ‘unnecessary’ humans is an old one. Right now, it manifests as manufacturing vs service sector, so that the question is how to ensure that those on the lower end of the service scale – which is the overwhelming majority of people – are adequately fed and and housed and taken care of.
But I’ve read of other, grimmer futures, where once a certain tech level was reached, the wealthy simply killed off the other 99% of the population – plague took care of most of the lower orders, robotic killers hunted down the rest in a matter of months. What need have the ruling classes of rude mechanicals when they can simply have their factories build much more capable and obedient servants?
October 30th, 2009 at 11:14 am
Doesn’t our defense industry (boondoggle) account for much of that
In 2008 the US exported $1.6 trillion worth of goods and services. Of that $80 billion was military equipment.
October 30th, 2009 at 11:28 am
Largest US Exports by Category
1. Semiconductors
2. Industrial Machines
3. Commercial Aircraft
4. Telecommunications Equipment
5. Computer Accessories
China Exports
1. Computer accessories, peripherals and parts
2. Miscellaneous household goods
3. Toys & sporting goods
4. Computers
5. Non-cotton household furnishings & clothing
Again, the US exports far more industrial goods while China exports consumer goods leading to the impression that we don’t make anything. When was the last time you bought a new cell phone tower or computer controlled plasma cutter?
October 30th, 2009 at 1:24 pm
Well, if your the Bank of China and you need a new mainframe, you call IBM.
Sure you call IBM, but are the IBM mainframes produced in US? I doubt it. Korea, probably, or Taiwan.
October 30th, 2009 at 1:29 pm
abb1,
The IBM mainframe factory is in Poughkeepsie, NY.
October 30th, 2009 at 3:27 pm
They actually produce chips in Poughkeepsie, huh?
October 30th, 2009 at 3:59 pm
abb1,
Come on – don’t be an idiot.
The Poughkeepsie mainframe plant tour provided its own revelations to the students, whether it was the assembly factory capable of producing and sending out a mainframe within 48 hours, or the realization of how many mainframes are still being produced and in operation worldwide.
http://www.ibmsystemsmag.com/mainframe/mayjune07/stoprun/16376p1.aspx
Why is it so hard for you to accept? Is it because so much of your politics is based on false assumptions?
October 31st, 2009 at 10:55 am
So, it’s an assembly factory, components are built elsewhere.
What politics, and how does it make me an idiot? This is a straightforward factual question.
October 31st, 2009 at 4:47 pm
abb1,
You already said they make the chips there as well.
Are you really that much of a moron?