I lost respect for the "reporting" in The Washington Post long, long ago, but I still peruse it briefly online each morning just to see what the inside-the-beltway nut cases are thinking. This morning there was an op-ed that was so off-base and so factually incorrect that I had to literally go pound some iron in the gym for an hour in order to cool off. No wonder the policies of both parties are so bizarre to those of us in the real world; the politicians obviously read the idiotic drivel that is printed in the WaPo. Apparently I wasn’t the only one to notice the flaws… so did a couple economists.
Gilbert Kaplan, a partner at the "international trade practice" of King & Spalding in Washington, penned the op-ed titled "5 Myths About the Death of the American Factory." Let’s start with the original premise of his piece, which even a sixth grader could poke a hole in with a couple seconds of thought.
Sure, U.S. banking is in trouble, but the longer-term and possibly
more damaging threat to the nation’s prosperity is the decline of the
manufacturing sector. Late last year, the number of U.S. manufacturing
jobs dropped below 14 million for the first time since 1950.
Should we bother discussing this yet again? Ok, just in case someone doesn’t quite understand, we wrote about this just a couple weeks ago.
America’s manufacturing output, as measured by the Federal Reserve, is
up seven-fold since 1950, but manufacturing jobs as a share of all jobs
have fallen to 10% from 30%. The problem, if it really is one, is not foreign competition or evil
financiers. It is technology and productivity. In the 10 years ending
in 2007, durable goods manufacturing productivity averaged an annual
growth rate of 4.8%.
Manufacturing output is up, contrary to the incorrect popular wisdom that the flight of manufacturing to China as decreased output. Last year we even put to bed the myth that the productivity numbers were skewed due to offshored subassemblies that were then returned and finished in U.S. factories. The problem is that productivity increased faster than output, therefore manufacturing labor requirements decreased thereby leading to lost jobs. The same thing happened with farming in the last century, only slower. The speed of the change in manufacturing productivity is what has created the pain as it has been difficult to accommodate the changes to the labor pool.
And we haven’t even started with Mr. Kaplan’s "myths"… or perhaps we should call them "mythical myths" to be more accurate. So here we go:
1. It’s all about cheap wages. American workers are just paid too much.
For most manufacturing sectors, that’s just wrong.
Actually it’s not necessarily right or wrong, it’s just inconsequential. Companies generally do pay considerably more labor dollars to operate from the U.S., but there’s value in those people as well. And that value is not manifested just in the high tech sector; even in low margin apparel manufacturing there are examples of U.S. companies that can out-compete Asian sweatshops. If you can do it making t-shirts and underwear, it’s almost a no-brainer to do it in the tech sector. Or it should be.
2. U.S. manufacturers can save themselves by investing in innovation. Okay, but how much are you going to invest? U.S. private-sector
companies can’t put as much money into technology and research and
development as foreign governments do to build up their sectors. As the
chief executive of a technology firm with whom I’ve worked for many
years says, "We’re the best company in the world, but we can’t compete
with foreign governments." Consider Airbus. The European Union has put more than $15 billion into building this aircraft company from the ground up.
And Boeing is eating Airbus for lunch these days. U.S. companies also have access to U.S. universities, U.S. infrastructure… you get the picture. Don’t peel off one slice of the onion without realizing there are several others.
3. Trade laws and trade agreements level the playing field for U.S. manufacturers. If only this were so. This should be the main goal of our trade
negotiations. The manufacturing sector is hurting more than any other,
but we’re using our political capital — in the Doha round, for
example, the latest World Trade Organization negotiating round — to help the service and agricultural sectors. Little is being done for basic manufacturing.
The manufacturing sector is doing just fine, thank you, but although manufacturing output from domestic factories is increasing, it could increase even more if companies would realize the true value of their employees instead of chasing low labor costs overseas. We do need to be sensitive to those that still lose their jobs, and find ways to use and leverage their knowledge and experience.
4. Good management can make U.S. manufacturers lean enough to fight in the international economy. I wish it were that easy. Even the best management can’t
overcome some of the structural disadvantages we face. Take health-care
costs. In Europe, these costs are absorbed by the government. In the
United States, manufacturers have to pay for them.
Uh, yes it can. It all depends whether you spend your time whining and complaining, or focusing inward to figure out how to run your operations more efficiently. Remember the low margin t-shirt manufacturer I mentioned above? Perhaps we should call it leadership instead of management.
5. We make high-tech goods here, so we’re okay. It’s only schlock items that come from abroad. Really? The truth is, very few high-tech companies are building new plants in the United States.
Give me a break. Exhibit one: Intel’s $3 billion Fab 32, which opened in Chandler, Arizona less than a year ago.
Despite all the bad news, the United States still has a manufacturing
sector and still produces about $4.5 trillion worth of goods a year.
But we’re also consuming fewer and fewer of our own products each year,
and factory workers’ slice of the pie is getting smaller by the month.
If we don’t address this problem soon, the last thing we’ll be
producing in America may be paper.
So should we ratchet back on productivity so it takes more labor to make a product? How would that affect our global competitiveness? How would that affect prices to consumers?
Why make anything in this country at all? It’d be easier to disassemble
the paper mills, pack the equipment in enormous wooden crates and send
it off to China — probably on the same cargo ships that, in time, will
carry massive rolls of paper back to our shores.
Except that it takes a lot of fuel to float those ships across the oceans, and that increase in cost is already causing the outsourcing lemmings to reconsider their decisions to chase cheap labor. Unfortunately they’re in for a bit of a surprise when they realize that many of their competitors stayed in North America and focused inward and improved their overall efficiency. Interesting competitive dilemma.
Michael F. Martin says
Very insightful. Thanks for taking the time to break it down.
Have you ever explored the connections between lean accounting and management and the ideas of spontaneous ordering promoted by Hayek?
Scott Sorheim says
I know you’ve broken a lot of this down before, but thanks for doing it again. Great info!