Crony Capitalism will not Help U.S. Manufacturing Jobs

Job loss in manufacturing derives primarily from technological change, not from trade. Manufacturing’s share of U.S. production is quite stable, but its share of employment has declined at a steady rate because productivity growth in manufacturing is higher than in services.

This trend can be observed in all of the advanced economies, including ones such as Germany that have large trade surpluses. Manufacturing’s share of employment in Germany declined by 15.5 percentage points during 1973-2010, very similar to the U.S.’s 14.7 percentage point decline.

If the U.S. were to run a trade surplus, as Germany does, there is likely to be a one-time gain in manufacturing employment, but then the trend decline will continue.

In the event of a surplus, we would consume less of our GDP (and consumption is mostly services) and export more (U.S. exports are mostly manufactures).

Hence, there would be a one-time shift of capital and labor from services to manufacturing. Then, the trend decline of manufacturing employment would continue as long as productivity growth in manufactures is faster than that in services.

If we are going to have continuing productivity growth through technological advance, then we need policies to help workers retrain and adjust to changing labor market demands. Trying to lock the old jobs in place is not going to generate prosperity.

Second, the broadest measure of the trade balance, the current account, is equal to savings minus investment. Countries with a trade deficit, like the U.S., are borrowing from the rest of the world to support investment.

In thinking about policies that affect the trade balance, we certainly do not want investment in the U.S. to go down. There is general agreement that we need more public investment in infrastructure and private investment to spur growth.

It is not clear what policy package will emerge from the new Congress and administration, but plans under discussion for a tax cut and infrastructure spending are likely to increase investment in the U.S.

The effects on savings are unpredictable — private savings may rise in the face of better investment returns, but a larger fiscal deficit means a reduction in government savings. It is quite plausible that the net effect will be an increase in the trade deficit, i.e., investment rising more than savings.

I heard one investor characterize the tax-cut plans as “making the U.S. the new Ireland.”  There is likely to be a big net inflow of capital that appreciates the dollar and increases the trade deficit.

Source: Global economic forces conspire to stymie U.S. manufacturing | Brookings Institution

Print Friendly, PDF & Email