As Americans were trying to shake off the worst economic downturn since the Great Depression, the consulting firm IHS/Global Insight recently delivered a bit of humbling news: China will surpass the United States as the world's leader in manufacturing by 2015.
Critics of U.S. trade policy trumpeted the news as another sign that we are losing an economic war to China. But China's emergence as the world's top manufacturer is nothing to worry about. Manufacturing long ago ceased to be the chief benchmark of economic might and success. It is time we adjusted our economic and political thinking and understanding.
Americans will not stop making things. The IHS/Global Insight study projects that America's manufacturing, as measured in value-added terms, or the value of goods manufactured after subtracting the cost of imported inputs, will resume its growth after the recession and reach new highs.
A Lot of Stuff
America remains a manufacturing powerhouse. As recently as 2007, American factories produced 5,250 complete civil aircraft, 15,341 complete civil-aircraft engines, 81 million metric tons of raw steel, 10.7 million motor vehicles, and 25.6 million computers. That same year, "Made in the U.S.A." was stamped on 44.5 million household refrigerators and refrigerator-freezers, washing machines, dishwashers, water heaters, household gas and electric ranges, and clothes dryers, according to the U.S. Department of Commerce.
Add to that pile of U.S.-made goods 1.61 billion square yards of carpet and rugs; 28.1 million short tons of chlorine gas, sodium hydroxide, hydrochloric acid, commercial aluminum sulfate, sodium sulfate, finished sodium bicarbonate, and sodium chlorate; 1.5 billion gallons of paint and allied products; and $123 billion worth of pharmaceuticals. That's a lot of stuff for a nation that supposedly doesn't make anything anymore.
Americans make fewer shirts, shoes, tables and toys than in decades past, because we have traded up the value chain to a more sophisticated array of goods that play more to our strengths as a nation with an educated workforce and plenty of capital per worker. And we are producing all those upper-end goods with fewer workers, because those still employed in U.S. manufacturing have become so much more productive.
It is one of the Big Lies of the trade debate that we have been giving up middle-class manufacturing jobs to flip burgers at McDonalds and run cash registers at Wal-Mart. Since the early 1990s, two-thirds of the net new jobs added to our economy have been in service sectors, such as education, health care and business, financial and professional services. Average wages are higher in those service sectors than in manufacturing.
The American middle class today earns its keep in the service sector. Knock on the doors of middle-class suburbs and you will meet teachers, managers, carpenters, architects, engineers, computer specialists, truck drivers, accountants and auditors, police officers and fire fighters, insurance and real- estate agents, registered nurses, physical therapists, dental hygienists and other health-care professionals, and self-employed business owners. Those are the occupations that now form the backbone of the American middle class. Those are the jobs our children should aspire to fill.
A major reason why manufacturing is relatively less important in what Americans produce is that it is less important in what we consume. It appears to be an iron law of human development that, as incomes rise, we spend a smaller share on goods, such as food and manufactured products, and a higher share on services.
In 1950, Americans spent two-thirds of their personal consumption income on durable and non-durable goods and one-third on services. Today we spend 60% on services and 40% on goods. The share of personal income Americans spend on food, clothing and shoes has dropped since 1950 from 38% to 18%, and the share spent on durable goods such as motor vehicles and furniture has dropped from 16% to 11%.
About half the increase in spending on services has been for increased medical care in the form of doctors, dentists, and other professionals, and hospitals, nursing homes, and health insurance. The increasing share of gross domestic product for health care is often considered a problem, but it is also a sign of growing wealth.
We have increased the share of our spending on housing, recreation, education and research, religious and charitable activities, domestic and foreign air travel, and "personal business," brokerage charges, investment counseling, and bank, financial, and insurance services. This also signals growing wealth.
Those who mourn the relative decline of U.S. manufacturing should blame not foreign competition, but the evolving preferences and resulting spending habits of their fellow Americans.
As usual, the American people are far ahead of their politicians in understanding this transition. The federal government maintains trade barriers against imports such as shoes, T-shirts and sugar, even though the number of Americans working in those sectors is a tiny fraction of those in the service sector who must pay higher prices as a result of those barriers. That same government has spent $50 billion to cushion the decline of General Motors and Chrysler, even though the combined domestic workforce of those two companies is less than 200,000. The $50 billion will be paid largely by the 112 million of us who work in the service economy.
The biggest threat to the American economy and our standard of living isn't the rise of Chinese manufacturing, but politicians and economists who base policies on nostalgia rather than the aspirations of middle-class Americans striving to better themselves in a more open, dynamic and service-oriented economy.