Is the US losing its Manufacturing Base?

What is happening to US manufacturing? My message is do not listen to the politicians who have no clue. They will tell you anything and many have very marginal powers of discernment when it comes to economic issues.

My answer to the question about the US production base is, yes US production is shrinking but:

• Production is becoming more efficient – Fewer factory workers are needed to support more people’s needs. To argue otherwise would put yourself in with the Luddites of the nineteenth century who destroyed weaving looms which were taking away their jobs.
• New industries are replacing old – Even if the US manufacturing base is getting smaller in old fashion industries, clothes, toys, etc, it growing in new technologies like pharmaceuticals and gadgets.
• Ownership matters – Also the US might not be doing the production but many US companies control the production process as companies are multi-national.   I buy my sneakers with a US trademark, design and quality control but Asian production.
• Services are an extension of the production process – It is counter counter-intuitive to be a pro services economist. Meditate on what services are.  Services are an extension of the production process. Adam Smith was wrong on his understanding of economics with production vs services. He was like, well service people are good people, but it is an industry that creates value. This is wrong. As economies develop, services are an extension of production, whether outsourcing accounting or transporting consumer goods or repairing the machines. It is a result of a more complex economy.

Therefore the purpose of this post is to look at the loss of the US manufacturing base from an objective historical and economic viewpoint.  I want to give you a definitive answer to the question “is the US losing its manufacturing base”, why is it going overseas and is it bad?

A nation and economy is built ‘not through speeches and majority decisions , but by iron and blood’. – Bismark 19th century politician.

This type of thinking is old fashion and leads down a dangerous path. Similarly thinking that the old industries make a nation great is not forward-looking, nor enlightened.

Why is this important for you? Because people, the media and politicians love to press people’s buttons and stir emotions regarding the US economy. Particularly ideas based on populist notions of economics rather than reality. Lets look at reality and the truth.

Why did the US manufacturing rule?

• The US ruled the economic world after the Second World War because much of the world was destroyed and the US was untouched and well organized because it embraced capitalist ideas.
• The US had almost unlimited natural resources relative to its output needs.
• Half the world had either communism or European style protectionist markets. These were both inefficient.

The world changed. That is it. We were great, but the world caught up and now we have to work harder to compete for money and power.

The US government can not control the development path of other countries – Therefore, for a period of time US manufacturing and its workers lived a relatively privileged life. When the world recovered and markets opened up and became free, everything got competitive. There is no way the US government could stop this. No internal US economic policy could prevent China from developing or Eastern European markets from opening up or the EU getting organized. It was just an economic reality that the whole world wants to live a middle-class life, not just Americans.

I mean don’t you want a car and a house and a trip to Europe or two? Well, so does everyone else in the world, and they are educating themselves and working to achieve this. This is life.

• If you think that something the US could do would have prevented the rise of China, it is very arrogant thinking.

Is it bad we are losing our manufacturing base because of increasing global competition? People overlook one thing. That is we do not have a 1890s or 1930s economy. This is so important to understand. Politicians are making wrong economic policy based on this idea. Let me explain.

I have thought a lot about free trade and our factories going abroad. But this is the way I see it.

What happened to our agricultural base is happening to our manufacturing base

Agricultural sector – Society moves to more efficient means of production. In the past, agriculture was 50% or more of the workforce, but now it is less than 1%. That is one farmer can support 100 other people. For me, this is a positive thing. Further, if I am an organic non-GMO guy, I still have the option of growing my own food or shopping at Whole Foods, nothing is stopping you. It is that civilization and economies are becoming more organized and efficient.

Manufacturing sector – Similarly production is not about employing legions of factory workers but has high-tech robotics and advanced technology. Production like agricultural has become more efficient. We do not need workers in the past. Steel mills and assembly plants are from the last generation or two generations ago. Fewer farmers and factory workers can support the world because of technology and efficiency gains. We do not need as many farmers or factory workers as the world has changed with technology and more specialization of labor. Factories of the future produce higher level more complex things that require more R&D rather than blood and iron.

Less and fewer factory workers can support more and more people. Why can people not see this? It is so obvious.

• From handmade workshops and crafts to assembly lines
• From plants with production lines to industrial robots and automation
• This transition from labor-intensive to labor-saving allows for surplus capacity and churning out of manufactured goods in a cost-effective way. This frees others for easier service work.  Economics is not zero-sum and people do not realize this.

Service jobs are good jobs

If you know anything about Maslow’s hierarchy of needs, working in the service sector is easy. You do not need to  get your hands dirty in the service sector, this is a good thing. Who wants to work in a factory. Is it not better to do some fun service job?

I have back problems because I worked such hard physical industrial jobs when I was younger. Do you really want a return to this economy? I do not, any more than I want to be farming potatoes (which I do on my wife’s family’s farm). Believe me, service jobs are an easy life relatively speaking.

Think about it this way, you could throw out your washing machine at home, but why? You can let the machine do the wash while you write a blog. Life is better this way.

What about the argument that service jobs do not pay as much as manufacturing jobs? I do not know when I asked a group of Eastern Europeans and they all said they would prefer to work for some accounting or investment firm or outsourcing center than a low paid factory job. Don’t you understand, if you want to get paid, actualize yourself, do not be a factory worker, use your brain?

Maybe, in the end, we will all be pressing each other’s pants in a service-based economy. But this is not all bad, life is easier now than during the industrial age. Further, if you are employed in cutting edge services, you can make good money.  The world is changing and change your ideas about economics.

Granted there are many ten dollar an hour jobs in the US economy. I know this is the problem. But if you keep a positive attitude and find your niche you can do well in the US economy. I live in Eastern Europe and no matter what Americans say about how bad it is, you would have a hard time to convince me even in the worst economic areas that the US is not the land of opportunity,  for those who do not give up.

In the end, if you understand what the Austrian economist was saying you would understand that service jobs are nothing more than an extension of manufacturing jobs. Service jobs exist because the economy is at a higher level. We are not all coal miners and farmers anymore, nor need to be.

Free markets make people rich – Economic history lesson

It is a very counter-intuitive argument that a decreasing manufacturing base is not bad and free trade is good. This is especially in hard economic times. However, this was no more so than Adam Smith’s arguments against the popularity and mercantile arguments of the 18th century. No one wants to hear the message of capitalism and free movement of labor and capital as they fear economics is a zero-sum game. It is not. It is a positive-sum. There are more winners than losers.

The French pursued protectionism with regard to their industry and the English free trade and the latter prevailed. As much as China is prospering they are prospering in spite of their mercantilism, not because of it. Restrictions and burying your head in the sand is not the way to move the US into the future.

Did I convince you that you need not fear the changes in the economy? If you put yourself on the cutting edge and try to improve your life you do not have to worry about macro economy doomsayers. If you want to make an argument for something noble, argue for a smaller government and less interference in people’s lives and markets. This is the higher ground than protecting some union workers’ jobs in Detroit. That thinking will not put money in your pocket.

Why I get upset when politicians try repeat the US is losing manufacturing jobs – If the US chooses to have an industrial policy and support industries, know that the middle class will pay the price with higher taxes, prices and the elite who work in those chosen industries will have a better life than those who try to better themselves on their own. It is very unfair. I want to better myself without the government engineering the economy based on special interests.