The Business and Media Institute is out with it’s list of the Top Ten Economic Myths of 2006 report, which includes all sorts of fun subjects like the minimum wage, global warming, housing bubble, bird flu and of course the supposed gasoline conspiracy. Number 10 on the list is "American Manufacturing is Obsolete," which takes on the misperception that the only manufacturing remaining in this country is in a handful of mostly-empty GM and Ford plants. The roots of this myth can be found in many media reports on the fall of GM’s market share, the increase in imports, and reductions in manufacturing labor.
However their rebuttal is only half right. They correctly point out that American auto manufacturing is alive… just not at GM and Ford. Honda, Toyota, and others are building factories left and right, employing American workers and for the most part using American suppliers. They join the ranks of other non-automotive companies that have focused internally instead of complaining about "competitive burdens" and have therefore been able to create streamlined globally competitive operations. It is very possible to be efficient and competitive if you don’t follow the outsourcing lemmings chasing cheaper labor while ignoring the off balance sheet costs of long overseas supply chains.
Where the Business and Media Institute gets it wrong is on the impact of productivity. Like many other media and policy organizations, they try to use increased productivity to explain why manufacturing employment has gone down. There definitely has been an increase in productivity, and it is responsible for some of the decrease, but as we pointed out several months ago incorrect assumptions within the productivity calculation itself mask what is really happening.
At its most fundamental level, productivity is manufacturing output divided by labor. If a company can produce more with less labor, the productivity number goes up. If a company moves an entire factory overseas, that manufacturing output and its associated labor are removed entirely from the domestic productivity number.
The complication arises with the increasingly common practice of sourcing intermediate components from overseas factories. The final assembly is finished at a domestic factory, therefore the manufacturing output is counted. But the labor is only what was used at the domestic facility. The same output divided by a lower domestic labor content creates a higher domestic productivity number… even though the conversion efficiency of that factory was not necessarily higher. The reported productivity number has increased and jobs were sent overseas.
The rebuttal of the other nine myths are also interesting, but this continued misinterpretation of the "productivity defense" should make you realize that superficial analyses may be incorrect.
UPDATE: A reader provided some studies that helped quantify the effect on productivity. Read about it here.