Sunday, July 3, 2011

The State of Manufacturing in the US

Who Says the US Doesn't Make Anything? 

The Unrepentant Capitalist likes to dispel common myths that people have about the economy.  In prior postings I've addressed myths about the 'sorry state' of the middle class (the middle class has prospered over the long run), families needing two incomes to make ends meet (they don't), and the evils of outsourcing (it's not) among others. 

In this posting the Unrepentant Capitalist takes a look at the widely held myth that says the US manufacturing sector is in terrible shape and we don't make anything in this country anymore.

Not only do we make things, but depending on whose data you believe, the US makes as much or more stuff as anyone in the world including China. 

According to the International Monetary Fund (IMF), the US is the world's top manufacturer and China is #2.  Data compiled by IHS Global Insight, a widely quoted US based economic consultancy, says the US and China are neck-and-neck for the top spot.  Data from the Economic Statistics Branch of the United Nations says that China is #1 and the US is #2.  The differences among the various reporting bodies has to do with a number of factors like differences in how countries measure output, differences in what gets included or excluded from manufacturing, measuring manufacturing output in local currency or dollars, etc, etc.  It’s complicated stuff, and while not exact, the reports cited give us a pretty good measure of what’s happening.

Whether we're the world's #1 or #2 manufacturer, there are some important points to remember.  China has 4 times our population, so all things being equal, they should produce 4 times as much stuff.  They don't come anywhere near that level of output.  The other thing to remember is that the US allocates a much smaller percentage of its economy to manufacturing than does China.  In the US, about 12% of our economy is devoted to manufacturing.  In China the figure is more like 41%.  They've got more people, they try harder, and we're still roughly even in manufacturing output.  Looking at the trend lines on the graph below, it's clear China will become the world's top manufacturing economy, but they have a long way to go before they catch the US (if they ever do) in terms of manufacturing productivity.

Our use of technology means our manufacturing output per worker (productivity) is much higher than China’s.  Robots, computers, and business process re-engineering techniques, replace people with machines.  Not everyone likes this stuff, but improvements in productivity make raises and higher standards of living possible.  I can’t let a discussion of productivity pass without sharing one of my favorite Milton Friedman stories.  I’m sure my readers are familiar with him, but just in case, Milton Friedman was a famous University of Chicago economist who thoughtfully argued in favor of free market economics and minimal government involvement in and regulation of the economy.  He was the 20th century’s version of Adam Smith.  If you don’t know who Adam Smith was, do not pass go, do not collect $200. 

While traveling overseas, government officials took Friedman to a large infrastructure project where he spotted a large group of road workers moving dirt with shovels.  When he asked why the workers were using shovels instead of modern machinery, his hosts said the government wanted to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs.  At that, Friedman replied, "Instead of shovels, why don’t you give them spoons?"

With 1.2 billion people, China is an economic heavyweight whether they’re using spoons, shovels, or front-end loaders. 

China has been growing steadily over the last few years as much of the rest of the world’s economies have struggled.  A number of recent articles in the business press suggest that China may have its own economic issues on the horizon.  At the government’s direction, Chinese banks have invested heavily over the last few years in infrastructure and real estate projects.  Some analysts are wondering if all these projects make good sense.  How many of these projects will generate their forecasted returns or did anyone properly scrutinize the projects to see if there was a return?  In short, is China facing its own bad debt problem?

The current situation in China has some interesting parallels to the situation in Japan in the 80’s.  An unbalanced economy with strong export led growth—check.  Heavy investment in domestic infrastructure and real estate—check.  High domestic savings with relatively low levels of domestic consumption—check.  Government directed industrial policies—check.    

Back in the 80s' all anyone could talk about was how Japan was going to take us down.  In 1989, the Japan stock market crashed and the bubble burst on their economy.  Banks had mounds of bad debt.  The Japanese economy has basically gone sideways for 20 years.

I’m not suggesting that China will go the way of Japan.  I don’t know.  But unless the Chinese government takes a step back from the driver seat to allow more free market forces to drive, they may confront a similar set of issues.  

NOTE:  For those who are reading closely, you may be asking, "Hey UC, where's Russia on your chart?  They're big right?"  In recent years, Russia is among the top 5 in terms of manufacturing output, but the UN data only goes back to the early 90's for Russia.  Trying to break out manufacturing data for the old USSR is very complicated.  What do you count as Russian output vs. output for Kyrgyzstan for example?  I really just wanted to say 'Kyrgyzstan'.    

No comments:

Post a Comment