David R. Henderson  

The Republican Candidates on Manufacturing

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Life in the USSA... Reductio Ad Absurdum...

During the Republican debate in New Hampshire on Monday, Mike Patinsky asked how the candidates planned to return manufacturing jobs to the United States. Ron Paul answered first, claiming that we have exported our jobs. He connected it with Federal Reserve policy. I did not understand him.

He answered:

[E]verything we've done in the last 20 or 30 years we've exported our jobs. And when you have a reserve currency of the world and you abuse it, you export money. That becomes the main export so it goes with the money.

You have to invite capital. The way you get capital into a country, you have to have a strong currency, not a weak currency. Today it's a deliberate job of the Federal Reserve to weaken the currency. We should invite capital back.

First thing is, we have trillions of dollars, at least over a trillion dollars of U.S. money made overseas, but it stays over there because if you bring it home, they get taxed. If you want to, we need to get the Fed to quit printing the money and if you want capital, you have to entice those individuals to repatriate their money and take the taxes office, set up a financial system, deregulate and de-tax to invite people to go back to work again.

But as long as we run a program of deliberately weakening our currency, our jobs will go overseas, and that is what's happened for a good many years, especially in the last decade.


The other candidates did a poor job too. All of them seemed to see the lack of manufacturing jobs as a problem per se.

Here's what I would have answered:

It's unlikely that we'll have more manufacturing jobs. The story of economic progress is one of doing more with less. This has been especially true in U.S. manufacturing, where the value of manufacturing, in inflation-adjusted terms, reached an all-time high before our current recession. And while that has happened, we've had fewer and fewer people becoming more and more productive. Moreover, every major manufacturing economy, including China's, has lost manufacturing jobs.

UPDATE: Tim Worstall has an excellent piece on this on Forbes.com.

UPDATE 2: In response to Mark Brady's comment below, here's what I found:

Manufacturing employment declined from the mid-1990s to 2002 in a number of countries whose economies are rapidly developing, including China, Brazil, and South Korea. In fact, China, Brazil, South Korea, and Japan had steeper percentage declines in manufacturing employment over that period than the United States.

This is from Economic Report of the President, 2004, p. 76.


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CATEGORIES: Labor Market



COMMENTS (19 to date)
John Jenkins writes:

I'm no economist, but wouldn't a weaker dollar create a larger market for U.S. manufactured goods overseas since they would then be relatively cheaper for overseas buyers?

David R. Henderson writes:

@John Jenkins,
Exactly. It was seeing that part of his answer live that caused me to go to the transcript. Now, Ron Paul could argue that the weaker dollar is due to higher inflation in the United States than in other countries (although that would be a tough argument because inflation is about the same here as in Canada, the main U.S. trading partner, and is lower than in China.) But if higher inflation is the culprit, then the exchange rate adjusts for that and the net result is no change in the price of our goods in other countries' currencies, not an increase.

J Oxman writes:

John Jenkins,

That's one part of the equation, but because so much of U.S. manufacturing is higher up in the value chain, much of the raw materials and intermediate goods must be imported. That becomes more expensive with a weak dollar. Which effect dominates would be an empirical issue.

caveat bettor writes:

David: Are you referring to the currency exchange rate in your comment? If so, the adjustment of rates might be a bit, um, problematic, at least when it comes to the CNY vs USD.

I agree that "It's unlikely that we'll have more manufacturing jobs."

But then what? We use jobs to get access to what we manufacture. In historical terms, manufacturers' dependence on other people's rank-and-file employees as customers is a fairly new fact of life. (The "big deal" about the Model T was that the guys who made it could afford it.) Consequently, aggregate demand is tied to aggregate good employment, so displaced factory workers must not only find new jobs, they must find jobs that enable the people holding them to buy what the foreigners and robots have to sell. That's not an easy thing for our service economy to do, especially with so many displaced workers seeking work.

Alternatively, we need to shrink the number of people who want work without shrinking the number of people who can afford to buy things. That's not an easy thing for our political system to do.

But we need to do one of these things. Otherwise, demand will never return, and we will stop being the market of choice for those who want to sell things cheaply in volume.

Richard A. writes:

Mike Patinsky asked:
Well, for the candidates I’d like to know how they plan on returning manufacturing jobs to the United States .
This is a distorted question. It implies that the net loss of manufacturing jobs in the US was caused by those jobs leaving the US. The real cause of job loss is due to the dramatic increase in labor productivity in manufacturing.

Diana Weatherby writes:

Lawrence Kramer- What is wrong with service jobs? When a small number of people learned to produce enough for the whole country to eat then we had all this human capital to produce manufactured goods. If a small number of people can produce all the goods we need then that will open up more human capital to provide services to one another or perhaps some else we haven't thought of yet.

dullgeek writes:

I don't mean to sound like I'm being an apologist for Ron Paul. But I wonder how much of this can attributed to being on the spot and giving an answer that, upon introspection, he would rather change.

I don't know, of course. But - in addition to the fact that no one would vote for me - one of the reasons that I don't participate in any run for political office (at any level) is that there's so little room for changing your mind, or realizing your error.

All politicians suffer from this problem. Not just Paul. For example, I wonder how much the President would like to retract or change the statement he made on NBC, but can't because it would politically weaken him.

I'd personally like to cut all politicians a little bit of slack and give them permission to admit their own mistakes. I think we, as an electorate, make politicians even worse drains on society than they already are, when we accept nothing less than perfection from them. We give them an incentive to lie rather than admit a mistake.

David C writes:

dullgeek, except that Ron Paul has been doing this for years. He finds a way to tie every economic question into the actions of the Federal Reserve. According to Dr. Paul, if we eliminate the Fed, we'd never gain weight, hault the aging process, get all the free ice cream in the world, and get free trips to Disneyland on the weekends... with no lines.

Mark Brady writes:

"Moreover, every major manufacturing economy, including China's, has lost manufacturing jobs."

I'm sure it has but has it lost manufacturing jobs on net?

David R. Henderson writes:

@Mark Brady,
Yes, that's what I meant to say: on net. It was in an Economic Report of the President from Bush II's second term. Can't find it now. Will check.

David R. Henderson writes:

@Mark Brady,
Here's the result of a quick search.

Mark Brady writes:

Thanks, David for the intellectual ammunition and the link.

Sean writes:

I believe that the discussion on this issue is a perfect example of a logical fallacy. Ron Paul is saying that a fiat world reserve currency (F) causes capital investment to be sent overseas (O). Henderson is claiming that manufacturing job losses are due to increases in productivity and division of labor(P).

(1) Paul says If F then O; F, therefore O.
(2) Henderson says If P then O; P, therefore O.

It is quite obvious that (2) does not refute (1) unless (2) is to be taken as a biconditional, 'iff' (if and only if). A refutation would have to state that P and only P causes O (if and only if P then O) or that F cannot cause O

Numerous other commentators have made the same argument as Rep. Paul made, including Peter Schiff at various times and Bill Bonner and Addison Wiggin in "Empire of Debt".

At any rate because economics involves complex phenomena any facts observed can have multiple causes (call me an orthodox Hayekian/Misesian on that issue). So why exactly is it either impossible or not the case in this situation that a fiat reserve currency has contributed to manufacturing job losses in the U.S.?

LibertyLibrary writes:

Ron was asked a similar question in a town hall meeting before the debate:

http://www.youtube.com/watch?v=ZSgNXehimRM#t=29m

HTH!

Doc Merlin writes:

Paul is describing a Dutch Disease only instead of exporting raw materials we are exporting dollars. Its a perfectly valid argument. The question then becomes an empirical one.

Scott writes:

If we'd like to get lost in a productivity argument, then I'd suggest lets talk about manufacturing capacity and forget about #s of manufacturing jobs. It doesn't take a learned economist to see that real manufacturing capacity has diminished in the United States. Without the manufacturing capacity(read wealth generating capacity) we should expect large deficits in every form from governmental to personal budgets to fill the standard of living gap. That is exactly what we have in America. It is only a matter of time before the financed way of life is no longer possible and the American standard of living worsens, that is unless we increase our manufacturing capacity.

America lost the capacity because its goods began to cost too much. We have to reduce the cost of doing business by reducing corporate taxes, reducing excessive regulation, reducing frivolous litigation, change government policies to increase workers' demand for jobs, and reconsider free trade just to name a few. Free trade is just another way to export your standard of living. It's the producer of real goods that ends up ahead in the long run.

Vangel writes:

Let me defend Dr. Paul here. I think that he is right when he claims that the primary export of the United States has been money and jobs.

I also believe that the argument that he makes for capital formation is valid. Wealth is created from capital formation, not money printing. In order to encourage capital formation the government needs to protect property rights, keep regulations simple, and ensure that the currency is not depreciated by the printing of money every time someone gets in trouble. I believe that the objective evidence supports his contention that the Fed is deliberately trying to weaken the currency.

I think that where many otherwise intelligent and rational people fail is by looking at the reported inflation-adjusted output and assume that it reflects reality. Clearly it does not. The methodology used to calculate inflation was changed so current output is not properly compared to the output of the past. A better approach is to look at unit output first and then adjust it for inflation using the same methodology. I would argue that when we use such an approach we will find that the per unit output of Americans has dropped significantly over the past few decades.

Sorry but the BLS serves to obscure reality in the service of the political regime that employs it. The sooner we see things as they are and try to do something about them the better off we will be. If we just go along and ignore the reality the USD will be toast and the US will follow the EU over the unfunded liability abyss much sooner than most think.

joecanuck writes:

1) productivity/wealth/jobs are created by investment

2) printing trillions of dollars scares investors

There would be more manufacturing jobs in America if:

-Regulation was a little more business friendly (Boeing got absolutely skewered by the National Labor Relations Board)

-The currency was stable enough for investors to feel secure

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