Why Don't We Make Anything Anymore?

(This post is in response to a request from a friend.)

A couple months ago I was speaking with an acquaintance of mine who works for a major U.S. manufacturing company. We were discussing the state of the economy and he expressed very strong feelings about the subject stating, "We really don't make anything in this country anymore, at least not like we used to. Our economy is far too consumer driven and it will eventually come back to bite us if we don't go back to our manufacturing roots."

It is easy to understand why some long for a return to the days when the U.S. was the dominant manufacturer in the world and one can see why that idea might even seem intuitive. (Isn't it better if other countries are buying our stuff rather than vice versa?) People that embrace this way of thinking often focus too much on certain, select pieces of economic data (like manufacturing out put by country, trade deficit, manufacturing as percentage of the economy, or the decline in manufacturing jobs) and fail to put that data into a larger economic context.

While manufacturing jobs in this country have declined over the past several decades, that has not been due to an overall economic downturn or a failure of vital industries. In fact, it has been the result of the opposite. New technology made many of those jobs obsolete, while simultaneously making our manufacturing sector far more efficient and productive. This increase in productivity and efficiency has led to tremendous economic growth and increased standards of living. Which, in turn, led to the creation of tens of millions of new jobs over the last several decades. While it is true that several industries (like steel) have moved their operations overseas to cheaper locations, that is a product of our economic growth. As the economy grows, wages rise, education levels rise, and taxes rise. As a result, many blue collar industries move to ares where it is less expensive to do business. Certainly this type of change can be devastating to individuals who used to work in these industries but the only way to bring those jobs back would be to significantly lower wages or dramatically lower taxes (neither option is feasible). The only way to prevent manufacturing jobs from leaving in the future would be to (again) dramatically lower taxes on all "at-risk" manufacturing businesses, dole out huge government subsidies, and/or impose huge tariffs. These are all options that have been implemented in the past but with limited success and at a huge cost to tax payers and consumers.

While it is true that we are no longer the World's dominant manufacturer, it is not true that we no longer "make" anything. The truth is we continue to make a lot of things and will continue to do so. The fact is that much of our out put has shifted from low tech to high tech. This sometimes gives the false impression that our manufacturing sector is dying because most people associate manufacturing with low tech/blue collar/assembly line type of items. In reality we are world leaders in pharmaceuticals, high-tech medical equipment, nano-technology, etc... We really haven't stopped making stuff, we just don't make all the same things that we used to and that isn't necessarily a bad thing.

Another piece of evidence that commentators use to show an alarming decline in the manufacturing sector is manufacturing as a percentage of our economy. It is certainly true that our economy is less and less manufacturing based every year. But that is more a testament to the growth of our economy in other sectors than decline in manufacturing. In fact, over the last decade our manufacturing output has actually increased.

I remember during one lecture when someone asked my favorite economics professor about the trade deficit with China. He responded by calling it a meaningless statistic. He said unless such a statistic is accompanied by more detailed analysis to show a detrimental trade relationship with China the deficit is meaningless. He stated, China is as dependent (if not more so) on U.S. consumers as we are on their products. He also pointed out that our overall trade deficit is generally balanced out by foreign investment in the U.S. He explained we may buy more foreign made products but foreign investors put more money in the U.S. than anywhere else in the world.

Overall, concern about the demise of our manufacturing sector is overblown. My fear is that the sentiments expressed by my acquaintance will gain political traction during our current economic downturn leading to horribly misguided economic policies that could make our current economic troubles look like heaven.