Make America Competitive Again

US manufacturing output may well attain new highs, but manufacturing employment probably won’t.

Guest post by Robert Gore at Straight Line Logic

After World War II, US industry and manufacturing reigned supreme. Most other countries’ industrial infrastructure had been destroyed and their economies were in ruins. Detroit and its car companies were emblematic of the time. General Motors was the world’s largest corporation, the big three dominated the US and many export markets, workers in their unionized workforces made wages that could sustain a family in middle class comfort, and Detroit was the third largest American city. This was the halcyon period that commentators invoke when they talk of a “rebirth” of US factories and restoration of manufacturing jobs.

But can there be a rebirth of something that never died? While the number of manufacturing jobs has been in a long-term decline, the output of manufactured products has not. U.S. factories produce twice as many goods as they did in 1984 with one-third fewer workers (“Opinion: Think nothing is made in America? Output has doubled in three decades,” Marketwatch, 3/28/16). Output, a substantial portion of which is exported, is close to the all-time high it reached just before the financial crisis and at 36 percent of US GDP is the largest sector of the US economy. Notwithstanding shuttered factories that have moved to lower wage jurisdictions (sometimes outside, sometimes inside the US, mostly the south), America’s industrial capacity is as high as ever.

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However, by the late 1960s the auto industry had a target on its back, for reasons that have general applicability. While a middle class lifestyle for assembly line work is great for the employee, it’s an opportunity for the employer’s competitors. If they can get the same work from the same number of workers at lower wages or fewer workers at the same or lower wages, or if they substitute capital for labor and automate, they can offer the same or better products at a lower price. The auto industry at first dismissed the competitive threat from Japanese car companies, but by the 1970s they were losing market share, especially in lower-end economy cars.

The mercantilist policies of the Japanese government undoubtedly helped their car companies, at the expense of the rest of Japan. At the government’s behest, its industrial conglomerates borrowed at preferential rates. Smaller, entrepreneurial firms could only access credit at much higher rates. Floating exchange rates allowed Japan to depreciate its currency, reducing citizens’ purchasing power, to further game the terms of trade for the car companies and other exporters. American car makers did not have reciprocal access to the Japanese market because of often hidden trade barriers. They complained loudly to Washington, and the Reagan administration got the Japanese to agree to “voluntary” trade restrictions. In response, the Japanese car companies brought their factories to the US, set up non-unionized shops offering about half of unionized wages, found plenty of takers, and continued to gain market share.

Nobody pines for the glory days of the 1870s when half the American workforce was agricultural. Now 2 to 3 percent of the workforce produces multiple amounts of the crops produced back then for the same reason two-thirds the manufacturing labor force produces twice as many goods as it did in 1984: increased productivity. Competition drives that productivity; the requirement to do more with less is relentless, especially when international trade means that competition is global. We are not moving to a post industrial society any more than we have moved to a post agricultural one. People still need food and manufactured goods, but the number of workers required to generate either will continue to shrink, as it has for decades.

Mercantilist governments like Japan’s depreciate their currencies, suppress interest rates, and restrict access to their home markets, screwing most of their citizens for the benefit of favored export industries. Take a look at how those policies have worked out. Its stock market topped just as Japan was supposedly going to take over the world at the end of 1989 (its main averages are still less than half of what they were then), and it has had multiple recessions since. It staggers under the developed world’s highest government debt load (as a percentage of GDP) and huge private debt, with an aging population and well below replacement birthrate. As debt continues to grow and opportunities dwindle, the Japanese are foregoing children.

China, whose mercantilist policies provoke Donald Trump’s wrath, is due a reckoning as well. Its credit outstanding has gone from $500 billion to over $30 trillion in three decades, a sixty-fold expansion. Much of its miraculous growth has been the same kind of “growth” you get when you run up your credit card. Because of its one-child policy, its demographics are almost as ugly as Japan’s. It has to cheapen the yuan to keep the export machine humming, but that’s spurring capital flight. It has gone beyond the point where a yuan’s worth of credit buys more than a yuan’s worth of output, but if it turns the credit spigot off or even raises interest rates, it tanks its economy, financial system, and housing market. The next few years should demonstrate that the brilliant bureaucrats in Beijing are no more brilliant than their counterparts in Washington, London, Brussels, or any other apparatchik-infested burg.

Trump’s recent Carrier deal is mercantilism: tax Indiana’s taxpayers to preserve Carrier jobs. His proposed 35 percent tax on American companies that move factories to foreign nations and then export to the US market is more of the same. He may keep US companies in the US, but the competition is global. Unless he’s going to impose across-the-board tariffs—more mercantilism—nothing stops foreign companies from availing themselves of the lower labor rates denied US companies and exporting to the US market.

No matter what tariffs and other trade barriers Donald Trump and team enact, in the face of relentless automation the halcyon days of manufacturing employment aren’t coming back. There will also always be competitors, including American companies, who actually compete, who drive productivity gains that both destroy and create jobs. If Trump wants to ensure that US companies and workers lead the pack, he has to make America competitive again. Counterproductive mercantilist gestures won’t do it. He has to tackle multiple Augean stables befouled by the government he will soon lead. It shall indeed be a Herculean task.

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