The Neglected U.S. Depression
At the end of the 1980s, when it seemed inevitable that our technological superiority and important production capabilities would be lost to Japan and possibly the Asian “tigers,” many observers argued that manufacturing in the United States mattered. Production fed other economic sectors, sustained the nation’s defense and assured that no country could gain an edge in a key technology that might cripple our economy or military advantage. Losing manufacturing was akin to hollowing out the core of the U.S. economy.
Today, while experts debate whether the U.S. economy is nearing recession, the nation’s manufacturers are in full-blown depression. In the last year, 837,000 production jobs were lost, and more than 1 million since 1999. Yet, beguiled by a still-expanding service sector, few economists seem deeply concerned by the nation’s production tailspin.
Does manufacturing really matter?
The sharply differing fortunes of America’s service and production sectors were highlighted again last week. The government reported that U.S. service productivity had “surged” by 2.8% since the first quarter of the year while service employment modestly rose. Manufacturing industries lost 49,000 jobs in July, and productivity fell by 0.2%. Stock-market and economic analysts generally cheered the result as proof that America’s New Economy is still on track. As long as overall U.S. productivity and job growth stays positive, it seems, it’s of no concern if manufacturing sectors collapse.
Others, like Gerard Jackson, editor of The New Australian and one of the few who correctly discounted the U.S. tech-stock bubble, are less sanguine. “There is no such thing as being half pregnant,” he contends, “just as there is no such thing as having half a recession.”
Jackson views the huge disparity between America’s service and manufacturing sectors as troubling evidence that U.S. priorities remain dangerously skewed toward consumption rather than production. He believes that the Federal Reserve’s relaxed monetary policies over the last 10 years have severely distorted global investment patterns. Asia, in particular, overinvested in manufacturing capacity while the United States went on a consumption binge. As dollars were diverted from wealth creation to consumption, America’s manufacturing base quietly eroded.
More recent Fed interest-rate reductions have intensified America’s consumption bias. When U.S. car and computer makers suddenly found themselves with warehouses full of unsold inventories, they cut investment, closed plants, fired workers and heavily discounted their products. Manufacturing productivity and employment plummeted.
But spurred by cheap money, consumers were induced to keep going to car lots and electronics stores. Retailers maintained or even added staff to sell bargain-basement products, and service productivity and employment sluggishly continued to improve.
Jackson and other skeptics worry that this artificially stimulated economic imbalance is unsustainable. Manufacturing is a key source of wealth creation on which service sectors depend. Even if interest rates drop to zero, as they did in Japan’s unsuccessful effort to avoid recession in the early 1990s, consumer spending will eventually stall, and manufacturing’s weakness will spread to the rest of the economy.
That may be happening. Last week, the Federal Reserve sent the stock markets reeling when it reported that manufacturing weakness had “spilled over to other businesses” with no end in sight.
All this highlights just how crucial manufacturing is to America and how important a role it has played historically. The country simply can’t expect to regain its economic vitality until its industrial decline is reversed, for many reasons.
Manufacturing has helped equalize U.S. income distribution by creating relatively well-paid jobs for America’s less educated but motivated workers. Service industries, especially investor-driven New Economy companies, have thus far been unable to play a similar role in maintaining a balanced labor force.
According to a February 2000 White House report, more than half of all production workers either have a high school diploma or did not graduate from secondary school. Nevertheless, manufacturing employees receive about 20% more compensation than service workers and are much more likely to have health, disability and life insurance, retirement plans, vacation and sick leave.
Most income groups in the U.S. are doing better now than in the past, but there has been a marked decline in middle-tier work opportunities. U.S. wealth is increasingly divided among a fast-growing, smaller class of high-end wage earners and slow-growing, low-wage workers. As the industrial economy has declined, income inequality has risen.
Manufacturing is also the lifeblood of national defense. No great power can survive unless it can defend its interests with top-of-the-line ships and aircraft. Yet, while the U.S. obsessed on e-mail, stocks and websites during the 1990s, other countries continued to develop defense-capable technologies. Should America’s post-Cold War dominance fade, it may well face sophisticated threats based on technology it neither understands nor can replicate.
There has been, however, remarkably little public concern about America’s manufacturing implosion. Even after the dot-com meltdown, much more political attention has been focused on incomparably less significant issues, like a proposal to tax Internet sales, than on production industries.
To be sure, newly minted Senate Commerce Committee chair Ernest “Fritz” Hollings, a South Carolina Democrat with strong union ties, promptly declared himself a “protectionist” upon taking the gavel last month. Yet he, like the rest of America, has done nothing to constructively address the nation’s mammoth $400-billion trade deficit, almost all of which affects manufacturing. A good place to start would be to insist that the labor, health, regulatory and environmental rules that Americans impose on their domestic producers be observed by our trading partners, too.
Similarly, there is little appetite among state and federal leaders to combat the anti-manufacturing bias that increasingly animates local land-use politics. Even the few Southern and Midwestern states that openly courted factories in the last few decades are now shifting their business-development efforts to lure service enterprises.
If the skeptics are right, America’s wasteful investment decisions over the past several years have undermined U.S. manufacturing’s capabilities, a malady that even the most robust consumer spending won’t cure. Now, faced with one of the worst manufacturing setbacks in history, it seems our only comfort is to hope that production declines were, in any case, inevitable. As the nation ponders more interest-rate cuts and a stubbornly stagnant economy, we may well come to realize that, even in the Information Age, manufacturing mattered far more than we thought.
