Commentary

Manufacturing Myths

This article originally appeared in The Washington Times on August 31, 2003.

Back in 1995, right in the middle of a nine-year economic boom, Louis Uchitelle co-authored an absurdly downbeat series of New York Times articles on “The Downsizing of America.” That series was full of opinion polls, as though popular illusions could substitute for facts. More recently, there has been hope that scandals at the New York Times might have given new editors at least a casual interest in factual accuracy. Apparently not. A couple of weeks ago, the unrepentant Mr. Uchitelle wrote yet another weirdly apocalyptic piece claiming, that “manufacturing is slowly disappearing in the United States.”

If you were hoping for some proof this time, be prepared to be disappointed again. Mr. Uchitelle says, “Manufacturing’s share of real gross domestic product… has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950s…. The downward trends are alarming.” Similar statistical exercises recently led to an interesting debate between my old friends Bruce Bartlett and Paul Craig Roberts. Yet the National Association of Manufacturers’ Web site shows that “manufacturing’s share of the U.S. economy, as measured by real GDP, has been stable since the late 1940s…. The overall share remains the same over the business cycle.”

It is impressive for any private activity to maintain a stable share of GDP, since government spending has risen from about 20 percent of GDP in the early 1950s to 30 percent since the 1980s. Manufacturing does not need protection from foreign countries; it needs protection from domestic governments.

Mr. Uchitelle claims “the essence of a great world power is its edge in producing not services but manufactured products.” By that standard, the two greatest world powers are Turkmenistan (with 39.8 percent of GDP attributed to manufacturing in 2000) and Cuba (at 37.2 percent). In China, services have risen from 21.4 percent in 1980 to 33.7 percent by 2002. In Hong Kong, manufacturing declined from 22.4 percent of the economy in 1980 to 5.2 percent in 2001.

Mr. Uchitelle claims “the shrinking manufacturing sector is again a source of public agitation, this time because so many American manufacturers are decamping to China and India.” Don’t editors check the facts? Direct U.S. investment in other countries was worth more than $1.5 trillion last year, according to the July Survey of Current Business. Europe accounts for 52.3 percent of American investment abroad, Mexico for 3.8 percent and China for seven-tenths of 1 percent. Any decamping to India is statistically invisible.

It helps to keep in mind a few simple points. First, manufacturing is extremely cyclical. The manufacturing component of the U.S. industrial production index fell by 5.5 percent a year in 1974-75, then rose by 6.6 percent a year for the next four years. In 1980-82, manufacturing fell by 3.1 percent annually for three years, then rose by 4.8 percent a year for six years. Manufacturing then dropped 2 percent in 1991. What happened next?

While Mr. Uchitelle first began whining about manufacturing being “downsized,” it actually grew by 5.3 percent a year from 1992 through 2000. Manufacturing then fell 4.1 percent in 2001 (the bottom of his “trend”) but rose at a 6.1 percent pace during the first three quarters of last year. What has been unusual about U.S. manufacturing was not the inevitable recession in 2001 but the unusually long and strong expansion for the preceding eight years. About half of the unusually strong gains came from the manufacture of high-tech equipment, which is a lot more valuable than T-shirts.

The cyclical ups and downs of manufacturing are international, by the way, not national. Manufacturing started falling in August 2000 in Japan and Korea, followed by the United States a month later. When manufacturing falls, so do imports.

Increases in productivity from improved machinery and skills are the reason manufacturing employment falls most of the time, as it does in farming, even when output is growing briskly. From 1990 to 2000, manufacturing employment fell by 0.4 percent a year in the U.S., by 1.8 percent a year in Japan and by 2.5 percent a year in Germany.

Efforts to stir up “public agitation” about China are based on lies. China accounts for only 18 percent of our imports of merchandise. Chinese imports seem bigger because they are concentrated in clothing and consumer goods, which are far more visible than more costly industrial supplies and equipment. Apparel accounts for only about 6 percent of U.S. imports, industrial supplies and equipment for 55 percent. Major industrial countries supply almost 48 percent of U.S. imports of manufactured goods, while all newly industrialized Asian countries account for 9.3 percent.

The level of value-added per Chinese worker in 1999 was only 8 percent of U.S. productivity, according to the International Labor Organization. It takes a dozen Chinese manufacturing workers to match one American. The ILO says real wages in Chinese manufacturing industries rose 80 percent from 1990 to 1999, or 8.9 percent a year. Roughly comparable figures for productivity show slower gains of 6.8 percent. That means Chinese unit labor costs are rising much faster than in the United States — a trend that ultimately caused a loss of 15 percent of South Korean manufacturing jobs in the 1990s (when U.S. manufacturers shed only 3 percent).

Unfortunately, it looks as though indefensible assertions about the supposed long-term disappearance of U.S. manufacturing are going to become a familiar political complaint over the coming year (as well as a promising source of special interest campaign funds). This rerun of the old “downsizing” story will again bore us with many more efforts by bumbling business writers and their slumbering editors to trump up some sort of “public agitation.” If the rhetoric gets too annoying, ask the authors for a few facts. They just hate that.

Alan Reynolds is a senior fellow with the Cato Institute.