THE STASH DECEMBER 22, 2009
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Several commenters have responded to my recent story (and blog posts) about the decline of U.S. manufacturing by insisting it's no big deal if the manufacturing sector shrinks. The United States will gradually replace current manufacturing-sector work with higher-value-added manufacturing and service-sector work, the argument goes, just as we replaced agriculture with manufacturing during the last century. (About 40 percent of the labor force toiled in agriculture in 1900; that was down to about 2 percent in 2000.) These critics are confident we either won't miss a beat or will get a lot richer in the process.
I think there are at least three big problems with this argument, which I may elaborate on later, but will just briefly lay out here:
1.) U.S manufacturing has major competitive problems; the agricultural sector doesn't--and, so far as I can tell, didn't develop them as it shrank. American farmers consistently produce more than we consume; American manufacturers do not. In 1980, we ran a surplus in agricultural food production of $20.4 billion; in 2008 that was $32.7 billion (though it was significantly smaller as a percentage of the total amount traded). By contrast, in 1980 we ran a trade surplus of $17.4 billion in manufacturing; last year we ran a deficit of $433.2 billion. So while both sectors have become more productive over time, food production stabilized relative to domestic demand even as the sector shrank, while manufacturing continues to decline relative to domestic demand. That means our foreign competitors our eating our lunch in manufacturing; not so in, well, lunch.
2.) The beauty of manufacturing is that wages and productivity aren't necessarily tied to education level. A person with a high school diploma (or less) can make a middle-class living in the manufacturing sector. (See the example of FormFactor in my piece about Ron Bloom.) By contrast, wages and productivity are much more closely tied to education level in the service sector. A person with a high school education or less will generally do very badly in a service-sector job--there are very few service jobs that can provide them with a middle-class living.
Now it would be great if everyone would go to college and be able to thrive in the post-industrial economy. But, in reality, there's always going to be a significant portion of the population that doesn't get beyond high school. Which means that an economy with almost no manufacturing is probably an economy with much greater income inequality. (This obviously wasn't a problem during the transition from agriculture to manufacturing, for the opposite reason.)
3.) What of the idea that we can continue to shed l0w-value-added manufacturing functions and focus on the most sophisticated and innovative parts of the sector? For example, you could outsource production of laptop components and assembly to Asia, but continue to develop and design laptops in the United States. In that case, we might have a smaller manufacturing sector, but a much more profitable one.
Unfortunatately, the evidence suggests it's nearly impossible to thrive at R&D and product-design unless you're also actively involved in the production process, too. (And that's setting aside the income-inequality issue.) To stick with the laptop example, while U.S. manufacturers initially outsourced less sophisticated components and assembly to Asia, laptops are now almost entirely developed and designed in Asia, too. (Apple is really the only exception to this trend.)
As Harvard business professor Gary Pisano explains in this blog item:
To innovate, you need great two-way feedback. You need to transfer knowledge from R&D into production, but you also need to move knowledge from production back to R&D. The act of production creates knowledge about the process and the product design.
Yes, there are some instances where R&D and manufacturing are separable. But these are the exceptions. In the vast majority of high tech products (and even some low-tech products like apparel), knowledge about manufacturing helps you design products and get them to market quickly. What this means is that when manufacturing capabilities migrate from a country, design and R&D capabilities eventually follow. That's exactly what's been happening in many high tech industries in the U.S. over the past 20 years.
Pisano and his colleague Willy Shih, from whom I lifted the laptop example, had a long piece on the topic in the Harvard Business Review this summer. You can peruse it here (though most of it is behind a subscriber wall).
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13 comments
I'm personally more concerned about item 2. The one iron rule of human history is that wealth and power cannot long be separated. The very existence of democratic self-government relies on the widespread distribution of wealth. When a small minority controls the great majority of wealth but not political power, one of two things has always eventually occurred: either the elite use their wealth to seize power, or the masses use the power of their numbers to seize wealth (which typically winds up in the hands of their leaders, who displace the old elite with a new one that now controls both wealth and power). Rome or Zimbabwe. In neither case can anything like American liberty survive. What has allowed for a great deal of wealth concentration to persist in a still-democratic America has been the availability of middle-class comfort to anyone with a reasonable work ethic. This safety valve has all but ceased to exist since the early 1970s, and so income inequality is becoming an ever more acute threat to the survival of our republic. Shoring up and restoring a manufacturing base, even if at the expense of free trade, should therefore be seen as an existential necessity for the United States -- unless of course one prefers either authoritarian plutocracy or populist anarchy to democratic republicanism.
- rhubarbs
December 22, 2009 at 1:28pm
1. The manufacturing sector is not shrinking. 2. You don't understand comparative economic advantage which is taught in every International Economics 101 course on every college campus in the country. Our manufacturing sector could be 10x as productive as the manufacturing sector in every other country, but if our ag sector is is 11x as productive, we will end up exporting ag and importing manufactured products. 3. Manufacturing jobs are going away period. Even with zero competition, jobs are getting replaced with automation. They are not coming back. Also you're confusing skilled jobs with jobs requiring a college education. There are plenty of skilled and unskilled jobs in both the manufacturing and the service sectors. 4. You're mostly wrong about R&D as well, but I don't have time to elaborate.
- dtohmatsu
December 23, 2009 at 1:46am
your application of comparative advantage here is off. it would apply if we produced/consumed two products in roughly equal amounts--"manufacturing" and "ag." if we're more productive in ag than we are in manufacturing, then we would make the former and import the latter, and trade flows would roughly balance. but of course we're talking about thousands of products; the manufacturing sector is way, way bigger than ag; and we run a major trade deficit overall. so something big is amiss...
- Noam Scheiber
December 23, 2009 at 10:24am
also, yes - of course there are skilled and unskilled jobs in both manufacturing and services. the point is that there are a lot of skilled jobs in manufacturing that people can do without a college education. there are way fewer such jobs in the service sector. that's what i was getting at when i said that wages and productivity are more closely tied to education in the service sector.
- Noam Scheiber
December 23, 2009 at 11:10am
I must ask dtohmatsu, what industry do you work in and in what capacity? If you think you can separate R&D and manufacturing long term, then you don't know what you're talking about. Anyone that works in a manufacturing/R&D environment will tell you the two are connected, and if you quit making it you lose the ability to do R&D in it. If you don't believe me, then go tell that to the American consumer electronics industry (oh wait, we don't have one), US companies that make display technologies (wait, we don't have one of those either), American machine tool companies (oh yeah, we lost that too). I could go on but you get the idea. I work in a design capacity (call it "D" in R&D) for an American semiconductor company. If I didn't have intimate knowledge of the manufacturing process my designs would be deficient and we'd go out of business. That's true in nearly any manufacturing business. And last I checked I thought the US runs a trade deficit in agriculture.
- tnmats
December 23, 2009 at 11:48am
Noam and tnmats are absolutely on target. I too work for a semiconductor company, and understanding the manufacturing side is fundamental to any meaningful R&D work. I also witness everyday the fact that we can utilize fairly uneducated people to do quite skilled jobs, with "middle class level" salaries. My technicians would never be paid equally well in the service sector, for the obvious reason that they would not be in a position to actually create value.
- pdobrilla
December 23, 2009 at 1:19pm
Pdobrilla, my experience is technicians usually have some education beyond high school and would stack up with most anyone in the service sector. They've always has 2 yr. degrees and would put many supposed college grads to shame with their intelligence and work ethic.
- tnmats
December 23, 2009 at 2:07pm
So a couple of points. First Noam, there are very few jobs that actually require a college education. I was a literature major in college and ended up developing derivative products for a well known Wall St. firm, a job which I could have done equally well straight out of high school. LeBron James (another service industry worker) would make the same point. Unskilled jobs don't pay well in any industry in any country regardless of educational level. If your point is that there are more skilled jobs in manufacturing that can be done with a lower level of intelligence, I think you would have a hard time substantiating that. A lot of factory jobs such as machinists, technicians, maintenance require a pretty high level of smarts. Second, there are a ton of very skilled jobs in the service industry (linebacker, chef, salesperson, newscaster, some health care workers) that don't require much mental horsepower but that pay well. Second as to the point made by tnmats, it's true that in some high tech industries manufacturing is a key part of the value chain, and with respect to the semi-conductor industry which you cite, it is illustrative to note that all but a few of Intel's fabs are located in the U.S. LCD display production on the other hand has moved overseas (first to Japan and now increasingly to Korea and Taiwan) because they're commodity products that require primarily a large source of capital willing to accept very low or negative returns. That being said for most companies in the high tech area, the keys to success in order of importance are access to equity capital, a good sales and marketing organization, good R&D (mostly software nowadays) and in a distant fourth... manufacturing. There are some exceptions, but in most cases manufacturing is like electricity. It's critical to the process, but you can get it anywhere and you don't spend a lot of time worrying about it. tnmats - In answer to your question, I primarily do consulting for U.S. high tech companies selling into the Japanese market.
- dtohmatsu
December 23, 2009 at 4:11pm
Noam, Also a couple of points with respect to your comments on comparative advantage. First there is a related issue regarding the overall deficit in our trade balance. That really is a separate issue, and at this point I would suffice it to say that in my opinion the capital account drives the current account not the other way around, i.e. the U.S. is a very attractive destination for capital so we have a surplus in the capital account which means that there must be a deficit in the current account. Second, the mechanism for comparative advantage works the same way at the micro level whether you have a 2 product model of an n product model. Over time, individual producers (companies and individuals) shift production to those products or services which generate the highest return on capital and labor. Bemoaning the fact that more people are now employed playing baseball, trading financial products (or producing jet engines and medical devices) rather than making Nike tennis shoes and children's toys is akin to wishing we could go back to our roots as hunter gatherers.
- dtohmatsu
December 23, 2009 at 4:35pm
"distant fourth... manufacturing. There are some exceptions, but in most cases manufacturing is like electricity. It's critical to the process, but you can get it anywhere and you don't spend a lot of time worrying about it." Spoken like a consultant; now it makes sense. If you can't build it, it doesn't matter. So manufacturing does matter if you want to build something worth a damn. If you wonder why so many things are built pitifully, there's your reason. Those of us in the trenches, the ones actually developing technology and doing the real creative work would beg to differ. The professor cited by Noam differs too. So would past experience of companies that gave up building things and eventually went away. There are countless examples. A few that went "asset light" are AMD and Motorola. They're shells of what they used to be. Having been in design and development for over 2 decades gives you some perspective on things.
- tnmats
December 23, 2009 at 10:16pm
tnmats As I said there are exceptions, and the industry you work in, semi-conductors, is one of them.... And clearly in those industry where manufacturing is a critical part of the value process, you won't stay in business if you don't stay in manufacturing. However, the examples you cite are anecdotal. I've done work for over 200 U.S. technology companies, run a half dozen and invested in another half dozen. Manufacturing is becoming less and less important to success. Figuring out what customers will buy and getting it funded is a lot harder than manufacturing and usually a lot harder than product development. The implicit concern regarding R&D raised by Noam is that the loss of manufacturing is going to reduce our competitiveness in key strategic industries. Nobody gives a shit if China makes all the Nike tennis shoes in the world or if their R&D for golf shaft technology is the best in the world, but we are worried if they start to make most of the missile components or super-computers. My point is that a) a lot of the innovation needed for strategic materials, devices and components is no longer manufacturing dependent, and b) where manufacturing is strategic (i.e. hard to do and high value add), the U.S. has remained very competitive.
- dtohmatsu
December 24, 2009 at 5:29am
Great thread here and lots of intelligent discussion. Allow me to belatedly jump in with the view from Detroit. Rhubarbs started the discussion with a clever observation. Without a broad based and secure middle class, democracy is in danger. Remember the 1930's when everyone thought the battle was between fascism and communism. We have had a lot of good times, but another year ot two of this recession and the riots will start. Tnmats understands the design and manufacturing of chips and how R&D is tied to manufacturing. Tnmats and dtohmatsu are both right regarding R&D and Manufacturing. You can not innovate in the product side without knowing the manufacturing process. But manufacturing is a commodity. I think dtohmatsu's perspective is a little skewed because most development today is investment driven. Automate and lower a price point. Add features to expand the market. But long term growth like we saw in the 1950-1970 saw small incremental improvements. Those required active manufacturing and participation across the enterprise. And produictivity improvements were shared. In the service economy it's not what you are worth, but what you negoitiate. And most folks are not in a position to bargain for higher wages.
- CRS9TNR
December 29, 2009 at 5:47pm
I'll belatedly jump in too in response to CRS9's comment - in small ways the riots have begun. People are walking away from their mortgages, even in some cases where they can afford to pay, but they find a comparable home cheaper to rent so they can buy a new car, furniture, take a vacation. I guess no one in that particular act is physically hurt, and in many cases, even the home isn't - i. e., they're not ripping out the plumbing, electricity and appliances out of spite. But there is a physical "fuck you" about it that I think could escalate to property or bodily harm as things get worse. And of course, sometimes communities will cordon off foreclosed homes to prevent sherrifs from entering.
- Juniper
December 30, 2009 at 1:52pm