November 22, 2010

Trust and Confidence in Manufacturing

Justin Katz

Accurately or not, windsurfing — an activity that I tried during summer camp once, some twenty years ago, on a windless lake — comes to mind as a metaphor when trust is needed. Sometimes, you just have to lean back and trust that the wind is there to hold you up and move you forward. That, at least, is the advice that I vaguely recall from the failed expedition, and it comes to mind upon reading this paragraph from Kevin Williamson's recent article arguing that the United States has been unduly worried about China:

Despite all the new competition, the United States remains a manufacturing powerhouse — in fact, the total value of manufacturing output in the United States today is far, far higher than it was in the 1950s. Measured by revenue, profit, or return on investment, U.S. manufacturing is unparalleled, and our factories' output is more than twice China's. But it is true that many manufacturing jobs have been "lost." They were lost not because U.S. manufacturing can't compete with that of feckless Third World rivals, but because U.S. manufacturing is, to use the technical economics term, awesome. The real productivity of U.S. businesses overall grew at an average rate of 1.5 percent a year from 1973 to 1995, which is a really robust number. But the productivity of U.S. manufacturing businesses grew by 2.5 percent in those same years, which is enormous. As Martin Wolf puts it in Why Globalization Works, that growth in productivity alone would have reduced significantly the number of manufacturing jobs in the United States. Add in the fact that people in affluent societies spend relatively less of their disposable income on manufactured goods and relatively more on services, and that reduction becomes even more dramatic. And so it was. There is an obvious parallel: In very poor societies, large numbers of people are employed in agriculture, and people spend most of their money on food. As they get richer, relatively few work in agriculture, and they spend proportionally little on food. Manufacturing, as Wolf sees it, is the new agriculture. In historical terms, it was not that long ago that 75 percent of the U.S. work force was engaged in farming. Now it’s less than 1 percent. But who laments the loss of good farming jobs? (Mostly people who have never worked on a farm, that’s who.)

Increased productivity collects greater wealth, and (in theory, at least) the more-efficient economy will create new and better paying occupations to replace those lost. The fear arises in the inability to predict what those occupations will be. And the alternative is to promote economic inefficiency by holding too tightly onto obsolete jobs, which leads toward the inevitable flaw that Williamson sees in China's economy (emphasis added):

... One of the benefits of running a jackbooted totalitarian regime high on nationalism is that you can do things like enforce a substantial rate of saving and a low level of consumption, or conscript large armies of industrial workers out of the agricultural classes. This sort of transformation is hardly unprecedented in the Communist world: It is precisely what the Soviets accomplished in the decades after their revolution, and a lot of American nincompoops thought they were geniuses. Modern China, having the benefit of a highly globalized economy and sophisticated modern finance, did a decidedly better job of its transformation than did the U.S.S.R. — a lot more carrot, a lot less stick, post-Mao anyway — but, for its day, Soviet industrialization was every bit as impressive a show of force — which is precisely what it was and what China's transformation is. For all the rhetoric about liberalization, China remains a hierarchical, centralized, command-and-control economy, one in which the military takes a very strong hand in many industrial enterprises. China is not the future model of capitalism, but the contemporary model of socialism. And like all socialist enterprises, it is hamstrung by the misallocation of economic resources, a fact that is ameliorated, but only in part, by its willingness to incorporate itself into the global economy and avail itself of the benefits of efficient capital markets.

Thus, "according to World Bank figures, China’s imports in 2005 were 32 percent of GDP; America’s imports were exactly half that: 16 percent of GDP."

What ought to happen, if the government weren't in the habit of erecting barriers to entry for new companies to compete with old, is for increased productivity to enable price-dropping competition to move up the ladder. When companies streamline, those on the losing end have an opportunity to apply their expertise so as to create alternative brands, which would create incentive for innovation and drive out the excess wealth now collecting at the top of the heap. The market may currently create obscene salaries for CEOs, but automation and the ability to find less expensive labor in a global society ought to enable folks with the same executive competence to offer the same products for a lower cost.

It's a balancing act, to be sure, but I, for one, continue to doubt the ability of central planners to operate the controls, and I expect those with power to find ways to twist well-meaning regulations into protections against competition.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Thus, "according to World Bank figures, China’s imports in 2005 were 32 percent of GDP(how much of that was raw materials that increased in value and left the country); America’s imports were exactly half that: 16 percent of GDP (how much of that was finished goods which remained in the country and depreciated in value)."

Is this "apples and oranges"?

Posted by: Warrington Faust at November 23, 2010 12:22 AM
Post a comment

Remember personal info?

Important note: The text "http:" cannot appear anywhere in your comment.