So the terrible recession is finally over. Wall Street banks [Guerrera] and big corporations are doing fine now with profits soaring [Schwartz]. Well, maybe there are a few little problems. About one out of every six Americans who would like a full time job can't find one [BLS][Gallup][mybudget360]. And many of the employed are unhappy with their jobs [Thibodeau]. (E.g., computer programmers reluctantly working as real estate agents.) Many of those currently employed are worried about their futures as it does not appear that we are on the road to a real recovery.
I think a good case can be made that the root cause of these problems is the phasing out of manufacturing in the US. This view, while not accepted by most conventional economists, who are mesmerized by the phrase, "free trade", regardless of real world consequences, is shared by people from all over the political spectrum [Buchanan], [Kar]. Below is my effort to explain why manufacturing is so important, why it is being phased out, and to suggest what can be done about it.
Consider a factory where refrigerators are produced. Even where there is a considerable amount of automation, there will still be some low-skilled workers associated with the assembly line, and skilled technicians operating and maintaining the various machines involved. Various kinds of engineers are needed to develop the manufacturing process and to modify it as needed. Prior to consideration of the manufacturing operation, engineers are needed to design the refrigerators, specifying the necessary components (such as motors, relays, electronic controls), and there will inevitably be ongoing design work to refine the product and to develop different models, varying in size, etc.
Construction workers are needed to erect the buildings housing the factory and to modify them as requirements change. A building maintenance staff is needed. There will be managers at various levels, a human relations staff, finance people, a computer department, people to load, unload and drive trucks. Most likely there will also be a cafeteria with associated staff. I am sure that this list is not complete.
There is more. A refrigerator or similarly complex product is not built from scratch at a single facility. All kinds of components are needed, many with unique specifications: valves, circuit breakers, door latches. These needs are often subcontracted out to other companies, and it is usually convenient to have these companies nearby to facilitate shipping and interactions with respect to design. Other local businesses also benefit from the presence of the factory, selling it such standard items as stationery, screws, and lubricants.
The refrigerator factory, and probably its local suppliers of components, employ people with a great variety and range of skills. It is not uncommon for an employee to start at some very low-skilled position, and then, via a combination of experience and some additional education, often night school, to rise to higher positions. Factories have served as very effective ladders enabling people to better themselves economically. It should not be surprising that the closing of a factory is generally a devastating event in any community [Greenhouse].
The number of American workers employed in factories has fallen by about 5 million over the past decade [McCormack][Snyder]. This represents a continuation of a trend going back to about 1990. The proportion of US economic output represented by manufacturing fell from 28% in 1959 to 11.5% in 2008. This is not simply a case of advancing technology affecting people producing horseshoes or typewriters. There are actually fewer Americans employed in the manufacture of computers today than there were in 1975! Of course it has been a long time since any consumer electronics equipment has been produced on US soil. What is the explanation?
One factor is automation. Certainly, sophisticated machines have greatly increased output per worker. But this doesn't account for much of the overall loss of jobs. Automation increases productivity and much of its effect is in increasing output using the same size labor force. The result is increased sales due to lower costs and prices, and the manufacture of new products. The fact is a great many jobs have not been abolished, but rather have been moved elsewhere.
The elsewhere is outside the US, with China being by far the greatest repository of work formerly performed in the US. This is due to a combination of factors. Chinese workers are paid a small fraction of US wages and factories there can be operated at lower costs because they are more free to abuse the environment with waste products. This alone would not account for the one-way nature of "trade" with China.
Under true free-trade conditions, Ricardo's principle of comparative advantage would ensure that, whereas it would be profitable for the US to important certain items from China, there would be other items that China would want to import from the US. The Chinese deliberately impede this reverse flow by such means as artificially undervaluing their currency, imposing artificial restrictions on imports, and via government subsidies.
It is not simply a matter of US wholesalers importing goods made by Chinese companies. Many US companies have built costly factories in China to produce there what they formerly produced domestically [King]. For example, General Motors employs over 30,000 people in China to manufacture automobiles (as opposed to 50,000 in the US). Much of what is produced in these overseas US owned factories is sent to the US, some is sold in China, and some is sent elsewhere in the world. In addition to manufacturing, GM, as well as other companies such as Microsoft, IBM, Motorola, GE, Intel, and Dell have set up design and research laboratories in Asia, thus exporting jobs of engineers and scientists as well as of factory workers [Rampell].
While China is the biggest destination for disappearing American jobs, it is not the only one. Other Asian nations also play similar, tho lesser, roles as do some countries in the Western hemisphere. GM, Ford and Chrysler all have shifted much of their auto production to Mexico. A secondary incentive to move US manufacturing abroad, apart from the obvious one of reducing labor costs, is that there are tax incentives encouraging it.
An added factor depriving Americans of jobs in their own country is the importing of people from low-pay countries to work under conditions and for compensation well below normal US standards. This is done via various special visas such as H-2A, H-1B, L-1, issued for limited periods of time. The jobs involved range from agricultural labor, to nurses, engineers, and computer programmers [Unger1]. Also, there is a large amount of illegal immigration, usually from south of our borders of impoverished people who take low-pay jobs, such as yard work, in restaurants and hotels, and in meat packing plants. (I have elaborated on this matter elsewhere. [Unger2][Unger3]).
As matters stand, it is difficult to blame individual companies for exploiting this method of cost cutting. Under our economic system, the duty of corporate management is to maximize profit, regardless of the effects on the country as a whole [Friedman]. They can reasonably argue that, if they did not employ this tactic, they would be at a disadvantage with respect to competitors who did. What we can blame them for is their failure to demand that the government take action to halt this pernicious, destructive practice via legislation. (It is gratifying that Andy Grove, a founder of Intel who served as its CEO for many years, has recognized the problem and, in a recent article, proposed a solution [Grove]).
The short answer is, "no". On the contrary, I have the highest admiration for the Chinese, who achieved a great civilization, surpassing Europeans in every sphere from sculpture to literature, to science for most of recorded history. Much the same could be said for India. Perhaps more important, on a personal level, I have always had good friends, colleagues, and students from a variety of national and racial backgrounds, so that, on the basis of direct experience, I know that people cannot be characterized intellectually, or morally, by national origin or race.
So, while, for example, China's trade policies have contributed to the plight of the American people, my assumption is that the Chinese government is trying (possibly mistakenly) to promote the best interests of their own country, and that it is the US government that has failed to defend the interests of the great majority of Americans. Problems we are experiencing due to immigration from the south are not the fault of the immigrants, legal or otherwise, most of whom are decent people struggling to escape poverty. Again, it is our own government, dominated by big corporations, that is at fault.
What can be done to stop our slide into third-world status? Suppose the US abandoned its slogan-based trade policy, and used tariffs and perhaps other means to restrict imports of goods produced by grossly underpaid people, or from countries that imposed all manner of barriers to imports from the US. Yes, I mean protectionism! The proposed changes should be carefully crafted so as not to affect such imports as Danish wind turbines, which are produced by reasonably paid workers in a country that does not try to restrict imports unfairly. They would have a major impact on imports from China, the source of most US consumer goods. We need not worry about retaliation, since exports to China constitute a small fraction of imports. Assume further that the influx of people from poor countries was also minimized, and guest worker programs of all kinds terminated. What would happen to our economy?
Suddenly, if eastbound freighter traffic across the Pacific slowed to a trickle, there would be a need to manufacture hammers, electric drills, sneakers, microwave ovens, DVD players, dehumidifiers—the list is endless. Companies previously producing such items would start rehiring skilled workers, new companies would start up and compete for able people. Former shop foremen would quit their jobs at Walmart to get back into industry. There would be a need for construction workers of all types to refurbish abandoned factory buildings and to build new ones.
In agriculture, it would no longer be possible to get the work done by impoverished people from south of our border. Wages would have to be boosted and working conditions improved (perhaps more machinery used) so as to attract American workers. In short there would be a major economic boom, not limited to financial manipulators, but having a major effect on ordinary Americans. There might actually be real labor shortages!
This would lead to increases in retail prices, but greatly increased income would easily compensate. It would not be practical to do this all overnite. A plan would have to be devised to phase in the changeover smoothly over a period of years. Of course there are many details to work out, and these are important. It is interesting that this simple, straightforward approach to what is widely acknowledged to be a very serious unemployment problem is not being discussed by mainstream politicians. Altho experts testifying before a senate committee pointed out the need to rebuild our manufacturing base, and admitted that the lopsided nature of our trade with China is a major cause of the problem, they seemed unable to propose the obvious solution, doubtless because it might require the use of that dreadful word, "protectionism" [RTTNews]. The best that the politicians can come up with are proposals to pressure China to stop artificially undervaluing their currency [Parkinson]. While a step in the right direction, I doubt that it will be pursued forcefully.
We should not rule out additional measures to rejuvenate our economy. A large-scale federal effort to repair and enlarge our degraded infrastructure (deteriorating bridges, inadequate sewage treatment facilities, etc.) and to jump-start green energy projects would, in addition to serving important needs, also get a lot of people back to doing decent work, and also stimulate large and small businesses. Terminating our massive war expenditures would be a big step toward restoring order to the federal budget.
BLS, "Employment Situation Summary", U.S. Bureau of Labor Statistics, October 08, 2010
Patrick J. Buchanan, "Death of Manufacturing: The rise of free trade has eroded America's industrial base and with it our sovereignty.", The American Conservative, August 11, 2003
Milton Friedman, "The Social Responsibility of Business is to Increase its Profits", The New York Times Magazine, September 13, 1970
Gallup, "U.S. Underemployment at 18.6% in August", September 2, 2010
Steven Greenhouse, "In Indiana, Centerpiece for a City Closes Shop", NY Times, June 19, 2010
Andy Grove, "How to Make an American Job Before It's Too Late", Bloomberg, Jul 1, 2010
Francesco Guerrera, "US bank profits return to pre-crisis levels", Financial Times, August 31 2010
Rabindra P. Kar, "Protectionism - Give it a Second Look!", WashTech News, July 23, 2009
Ian King, "Dell Plans More Than $100 Billion Spending in China", Business Week, September 17, 2010
Richard McCormack, "The Plight of American Manufacturing: Since 2001, the U.S. has lost 42,400 factories -- and its technical edge.", The American Prospect, December 21, 2009
Mybudget360, "Real Unemployment Situation: Approximately 26,000,000 Unemployed or Underemployed. Job Growth in $10 per Hour Jobs while $20 per Hour Jobs Disappear", My Budget 360, June, 2009
John R. Parkinson, "House Passes Bill to Crack Down Chinese Currency Manipulation", ABC News, September 29, 2010
Catherine Rampell, "Once a Dynamo, the Tech Sector Is Slow to Hire", New York Times, September 6, 2010
RTTNews, "Witnesses Say Healthy Manufacturing Sector Key To Economic Recovery", RTTNews, 7/17/2009
Nelson D. Schwartz, "Industries Find Surging Profits in Deeper Cuts", New York Times, July 25, 2010
Robert E. Scott, "The U.S. Trade Deficit: Are We Trading Away Our Future?", Economic Policy Institute, August 13, 1999
Michael Snyder, "19 Facts About The Deindustrialization Of America That Will Make You Weep", Business Insider, Sep. 27, 2010
Patrick Thibodeau, "Surveys: IT job satisfaction plummets to all-time low", Computer World, January 6, 2010
Stephen H. Unger-1, "Jobs", Ends and Means, August 4, 2007
Stephen H. Unger-2, "Immigration: Who wins? Who Loses?", Ends and Means, February 27, 2010
Stephen H. Unger-3, "The Immigration Struggle: Defending Arizona", Ends and Means, May 16, 2010
Comments can be emailed to me at unger(at)cs(dot)columbia(dot)edu
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