Felix Salmon

The sensible hunt for manufacturing jobs

By Felix Salmon
July 12, 2012

Michael Kinsley tackles outsourcing today, complaining that Barack Obama is a protectionist who doesn’t understand its value, and that Mitt Romney is keener to pander to protectionists than he is to defend free-market principles. He writes:

Romney or Obama? “I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany.” Early in the Republican primary campaign, China was the one subject Romney seemed genuinely agitated about. Imposing tariffs on Chinese goods was on the long list of things Romney said he was going to do on Day One of his presidency. Maybe he still is, but he doesn’t play it up the way he used to.

Meanwhile, if Romney is a free trader at heart, faking a bit of protectionism, Obama seems to be a protectionist at heart, faking a belief in free trade. That quote in the previous paragraph is from Obama, and shows a fundamental misunderstanding of how markets work. Trade is not a zero-sum game. There isn’t a certain number of manufacturing jobs that will either go to China or Germany, or come to us. We want China and Germany to have lots of manufacturing jobs. The more they have, the richer they are, the better off we will be as well. Beggar-thy-neighbor policies don’t work.

Kinsley is probably right on the politics, here, but he’s wrong on the economics. Here’s Obama’s quote, in context:

I was able to sign trade agreements with Korea and Colombia and Panama so our businesses can sell more goods to those markets. That’s why I’ve fought for investments in schools and community colleges, so that our workers remain the best you’ll find anywhere, and investments in our transportation and communication networks, so that your businesses have more opportunities to take root and grow.

I don’t want America to be a nation that’s primarily known for financial speculation and racking up debt buying stuff from other nations. I want us to be known for making and selling products all over the world stamped with three proud words: “Made in America.” And we can make that happen. (Applause.)

I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany. I want them taking root in places like Michigan and Ohio and Virginia and North Carolina. And that’s a race that America can win.

This, it seems to me, is an entirely coherent economic policy if what you’re trying to do is maximize the number of good working-class jobs in America. There’s no doubt that US employment, as a whole, is on a long-term secular trend away from goods and towards services. And at the same time, the two countries with the world’s biggest trade surpluses — China and Germany — are precisely the two countries with the healthiest manufacturing industries. What’s more, neither of them is suffering a jobs crisis.

So the question arises: should the US continue to accept the Ricardian bargain whereby it concedes to China and Germany the comparative advantage in manufacturing, while keeping for itself the comparative advantage in borrowing-to-consume and constructing synthetic CDOs? The answer is no, and not only because there’s something hollow and dangerous about an economy which is too reliant on financial whiz-bangery. There’s something more important at stake here, and that’s employment.

US manufacturing in fact is extremely competitive on a global scale; the problem is that output has lagged productivity improvements, with the result that we’re making more stuff with ever fewer people.

There’s no particular reason why that should be the case: when manufacturers in China and Germany become more efficient, that’s their sign to employ more people, rather than fewer. As each employee becomes increasingly profitable, it makes perfect sense to keep on adding more employees. Or at least it does in some countries. In the US, by contrast, capital is cheap and plentiful, and there’s much more incentive here to replace people with capital goods wherever possible.

But at that point, why even invest the money in the manufacturing industry at all? Everything becomes a question of opportunity cost, and if you can get higher returns in say the financial sector, then the rational thing to do is to start an investment bank, make lots of money from your trading desk, and then take the proceeds and spend them on manufactured goods from China and Germany. That’s how markets work: goods and money become interchangeable, and if you have money then you don’t need to be able to actually make things any more. Money gives you all the competitive advantage you need.

Except, that’s a strategy which works until it doesn’t. I’m reminded of this bit from Kurt Eichenwald’s piece on Microsoft’s Steve Ballmer in the latest Vanity Fair:

The Microsoft CEO used to proclaim that it would not be first to be cool, but would be first to profit — in other words, i would be the first to make money by selling its own version of new technologies. But that depended on one fact: Microsoft could buy its way into the lead, because it always had so much more cash on hand than any of its competitors.

No more. The advantage that Ballmer relied on for so long is now nonexistent. Google has almost the same amount of cash on its books as Microsoft — $50 billion to Microsoft’s $58 billion. Apple, on the other hand, started the year with about $100 billion. Using superior financial muscle won’t work for Microsoft or Ballmer anymore.

A technology company’s ability to innovate is not a bad metaphor for an economy’s ability to manufacture things and employ people while doing so. If it’s lacking, then for a certain amount of time that hole can be patched with money. But not forever.

And so I think that Barack Obama’s push to bring manufacturing employment back to Michigan and Ohio and Virginia and North Carolina makes all the sense in the world. Trade is not a zero-sum game — Kinsley is right about that — but at the same time that’s no reason to feel sanguine when you see good working-class jobs get exported to countries where the idea of building a blue-collar career in the manufacturing sector is still a perfectly sensible and reasonable one. America does not have a jobs crisis among college graduates, even if the employment situation for recent graduates right now is grim. It does have a jobs crisis in areas where factories have closed and industrial skills are no longer valued.

If you run a company, one of your jobs is to ensure that your company’s money isn’t wasted. And similarly, if you run an economy, one of your jobs is to ensure that your country’s labor force isn’t wasted. There are far too many Americans, right now, who could be working and aren’t. That’s downright inefficient. Their skills are well suited to the manufacturing industry. And so, if new manufacturing jobs are to be created, somewhere in the world, it makes a huge amount of sense that they be created in places like Michigan and Ohio and Virginia and North Carolina: that’s where the low-hanging fruit lies, in terms of hard-working employees with enormous potential productivity gains.

Kinsley’s right that we want China and Germany to have manufacturing jobs. But here’s the thing: China and Germany have manufacturing jobs. New manufacturing jobs, at least in the short term, should move where there’s both a shortage of such things right now, and a large potential labor force willing to get to get to work tomorrow. Certainly it’s the job of the president to encourage precisely that. And if he succeeds, he will have built a powerful economic engine in a part of America which is not doing well at the moment.

Note that Obama talked about bringing those jobs to America not in any protectionist context, but rather in the context of a series of free trade agreements which, at the margin, make outsourcing easier rather than harder. His goal is not to steal jobs from elsewhere, but rather to make America a place where the infrastructure and workers are so attractive that companies around the world decide to source their manufacturing here. No one cares, any more, about the nationality of the employers in these states: a job is a job, whether your employer is American or Brazilian or Swedish.

The computer I’m writing this on was made by an American company in China, but there’s no particular reason why other items in my household shouldn’t be made by a Chinese company in America. If the US can create the conditions for that to happen — if Chinese companies voluntarily move some of their manufacturing here because that’s how effective the US manufacturing sector has become — then everybody wins. That’s what Obama wants. And wanting that requires no misunderstanding whatsoever of how markets work.

15 comments so far | RSS Comments RSS

The thing that no one ever challenges neoliberal pundits like Mike Kinsley or Matt Yglesias on when they just assert, over and over again, with no supporting data, that Ricardian free trade produces unalloyed good for everyone, is whether or not it is true for the present circumstances.

Ricardo was talking about trade in things like sacks of wheat. Not outsourcing service jobs like call centers relocating to India.

Neoliberal pundits and economists never, EVER can cite statistics on what China actually buys from us and how much in the aftermath of them being admitted to WTO and being given Most Favored Nation Status in 1997. They just shout with ever more religious fervor, “David Ricardo proved, PROVED, I tell you, that it produces an unalloyed good!”

I would submit to readers of Reuters that the bilateral trade being conducted with China today isn’t the same as Ricardo described, and certainly isn’t even the same as the present day trade being conducted with most nations in Western Europe. But Kinsley and his ilk have read somewhere the free trade is an unalloyed good, and they just think that everyone else is an idiot for being skeptical.

Most Americans, even those with no economics training, are skeptical for good reasons.

Posted by Strych09 | Report as abusive

“But at that point, why even invest the money in the manufacturing industry at all? Everything becomes a question of opportunity cost, and if you can get higher returns in say the financial sector, then the rational thing to do is to start an investment bank, make lots of money from your trading desk, and then take the proceeds and spend them on manufactured goods from China and Germany.”

Let me edit that for you so that its in the realm of reality:

But at that point, why even invest the money in the manufacturing industry at all? Everything becomes a question of opportunity cost, and if you can get FREE MONEY FOR THE FED WITH NO RISK, you WILL GET higher returns in the financial sector, using financial legerdermain, and you are reimbursed for all losses, and you keep all “profits” even though they are based on fraud and are ethereal, and the SEC, DOJ and all the other finanical “regulatory” agencies refuse, REFUSE to investigate you, then the rational thing to do is to start an investment bank, and LOOT, LOOT, LOOt your booty off and then take the proceeds and spend them on manufactured goods from China and Germany.

There, now we’re in reality…

Posted by fresnodan | Report as abusive

An interesting dilemma, fresnodan.

With the cost of funds low, banks can loan profitably at very favorable rates BUT are reluctant to assume any risk.

If the cost of funds were higher, then banks might need to charge a little more, but they would also face greater pressure to put their capital to work.

Perhaps the low interest rates are RESTRAINING growth in this environment?

On the other hand, higher interest rates would rapidly increase the carrying cost of the national debt.

Posted by TFF | Report as abusive

TFF, that’s the Austrian economics argument for higher interest rates that people like Peter Schiff are advancing. Needless to say, most of us don’t buy it, because it’s motivated reasoning.

The Fed can change the banks’ cost of funds whenever it wants to by, among other things, reducing the interest it pays on funds left on deposit. It hasn’t done this because keeping banks well capitalized is a higher priority for them than downstream, secondary effects like facilitating bank lending.

Posted by Strych09 | Report as abusive

WHY do you continue writing about things of which you clearly do not have even the most fundamental grasp?

I wrote this reply this morning in response to another commentator in Reuters, but it fits equally well with your article, so I am including it as it was posted.

Why is the response to economic crisis not more serious?

http://blogs.reuters.com/anatole-kaletsk y/2012/07/12/why-is-the-response-to-econ omic-crisis-not-more-serious/

Mr. Kaletsky, the problem is NOT simply “party politics” as you claim.

Instead, the problem is the wealthy class has once again gained control of the global economy and has caused it to crash solely by unrestrained speculation — just as they caused the stock market crash of 1929.

In the ensuing years of the Great Depression, due mainly to sensible banking and trade restrictions placed on the wealthy class, the damage to the US economy was contained — but not mitigated, which would have required significant changes in wealth distribution. This was never done, or the country would never have had to face the Great Depression.

In reality, it took the beginnings of WWII to provide the “natural bailout” which Bernanke, for example, has tried to do artificially since 2008.

It isn’t working, nor will it ever work.


Because the wealthy still retain ALL their ill-gotten gains, just as they did during the Great Depression, which is the real main reason the global economy languished for 10 years and did not recover until the “events” leading up to WWII forced a recovery.

The ugly truth is that until REAL DEMAND returns, by whatever means, there will NEVER be a recovery.

The eurozone bailouts will NEVER work because they are simply a continuation of the process of draining of the working class in each country to the wealthy class — this time, instead of “investment”, by increasing the debtload beyond the ability of any country to survive.

The problem is the wealthy class are doing just fine — just as they did during the Great Depression — the real truth about unemployment is that it is NEVER in their best economic interests to stimulate job growth among the working class.

Increasing real growth, which means decreasing unemployment, simply means more concessions that the wealthy class must make to the working class (e.g. the period of growth shortly after WWII saw an immense erosion of the wealth they had stored up from the excessive profits they had accumulated as a result of the artificial demand of WWII).

The object lessons of history are clear, if you care to read the lessons contained there. Increasing the power of the working class is NEVER good for the wealthy class, since it erodes their profits, mainly due to the demands of the working class for higher wages and benefits that are the basis of better living conditions for the working and poor classes.

The wealthy resent having to share their wealth with anyone, particularly the poor, since they don’t really deserve it — after all, if God had wanted you to live like a real human being (i.e. the wealthy lifestyle), He would have made you rich, either through birth or by rewarding your hard work (i.e. “entrepreneurship”).

The problem is that the wealthy don’t like to share their wealth, so this “up by your bootstraps” is mainly bullshit to keep the masses under control by giving them something to hope for, when in reality there is absolutely nothing to hope for for the vast majority of working class or poor behind the facade they project (e.g. the American Dream). Its ALL “smoke and mirrors” totally designed to keep you in your place and them in theirs, as God intended things to be.

In truth, the US middle class is an anomaly never seen before in US history, and the wealthy are very jealous of “their wealth” being squandered on the middle class. As a result, they are busily destroying the anomalous US middle class and converting them into the ever-growing US poor class, which obviously is where they rightly belong.

Many of the US tax proposals are aimed directly at destroying the middle class, just so the wealthy do not have to share their wealth with them any longer.

While it is true that the US middle class once served a “purpose” during the phenomenal growth years after WWII — the “purpose” being mainly to enrich the wealthy class by deliberately creating a consumer society like the world has never seen before — hence, the beginnings of the growth in “easy credit” to the great unwashed, which the wealthy are now deriding as a fundamentally bad idea since these people cannot be trusted with debt.

This, of course, ignores the many decades of responsible handing of debt by the US middle class, until, that is, the US banking regulations grew lax (by the deliberate undermining of the banking laws by the wealthy) and the Great Housing Bubble that ate the world began. In truth, it is the wealthy class that cannot be trusted with debt, since every time they obtain easy credit, they cause a bubble through reckless speculation and the inevitable crash, which the poor end up paying for one way or another. Does this sound familiar? It should, since it describes quite accurately the US and eurozone “financial crisis” as it exists today.

Historically, the “Great Enabler” for the resurgence of the wealthy class was the reemergence of a global economy that is reasonably safe for investment — due mainly to the collapse of the “Evil Empire” and the global communist movement, which was their main threat for much of the 20th century — there appeared far more profitable areas of the world to invest in (i.e. the Holy Grail of China and the 3rd world Asian countries).

THIS is why they no longer want to invest in the US economy, and US corporations would rather sit on their cash than invest it in the US economy. They KNOW the US economy is a zombie economy — one which they created due to their greed — and they are biding their time until conditions for them improve.

What is truly ironic is that it was the US middle class that gave them the phenomenal growth in profits after WWII, but then it became more profitable to invest elsewhere in the world — this coincided with the rise of “free trade is good for” you that the wealthy continued to chant ad nauseam, while as a direct result of free trade the US economy continued to lose irreplaceable manufacturing jobs that were the real support of US consumer spending — thus the wealthy class began the process of draining the US middle class of what they increasingly saw as lazy and indolent, and certainly not worthy of the benefits they were demanding in terms of (especially) health care and retirement. For example, the wealthy began to worry about what would happen to all their investment capital pool from the huge buildup of IRA accounts the baby boomers were amassing to help them survive in their later years (since, unlike European nations, the US has NO socialized system to take care of anyone who falls through the cracks). In fact, this became such an obsession, the wealthy began openly “worry” that the US economy could not survive this massive drain of capital (by its rightful owners, who more likely than not would be in desperate need of that money), so it must be stopped somehow.

(This is NOT the same issue as Social Security, but they are related concepts in terms of how the wealthy view all that money just sitting there doing nothing, especially since they could make better use of it for themselves.)

So the wealthy began to hate the middle class for taking away their profits and giving nothing in return.

Most importantly to the wealthy class, the rise of the middle class is a “zero sum game” that erodes their power — ultimately, power is really the “name of the game” — so with the rise of the middle class they become hampered in their pursuit of free trade with no rules (i.e. they believe in the survival of the fittest, and that doesn’t mean the working class).


Basically, what is good for the working class is bad for the wealthy class, and vice versa. That is the REAL “inconvenient truth” they don’t want you to understand.

All I ask (if you bothered to read this at all) is to think for yourself for a change. The evidence is all there — even in the wealthy-slanted history given to school children so they can be ready to accept their place in society as good little “worker bees”, and cause the wealthy no problems. Its the wealthy interpretation drummed into you since you were a small child that is the lie that must be overcome to understand what is wrong. But you are not children anymore, or are you?

Why has the world fallen apart so dramatically from the promised new start after the disaster of WWII? (this is very complicated, but I have given you some clues above, which is all I can do given this venue.)

Why are the “solutions” proposed by the wealthy class not working, but in fact only making things much worse for everyone else. (This is relatively simple. The wealthy class were caught off guard by the collapse of the global economy — mainly because their greed blinds them to reality — and now they are desperately trying to make sure their ill-advised investments are safe. At your expense, of course.)

Why are the wealthy prospering when everyone else is dying — the irrefutable proof is the stock markets which have made a truly miraculous recover — yet NO single economy (except China, where most of the wealth has gone) is showing ANY signs of recovery. (Because the wealthy totally control the global banking system, which by definition is beyond any control by any one country, thus it has become the complete unfettered free trade of the 1920s all over again. The solutions then, as now, are to regulate banking and trade so that it reverts to what it should be — a factor in growth for the economy — and not what it is now.)

The short answer to these questions, and a whole lot more of the world’s economic problems, if you stop to think about it, is simply: “IT’S THE WEALTHY, STUPID!”.

Mr. Kaletsky’s answer that this is “party politics” is only rational if you view the wealthy class as vultures picking apart what remains of the global carcass they managed to kill through their unremitting greed.

Posted by Gordon2352 | Report as abusive

“When manufacturers in China and Germany become more efficient, that’s their sign to employ more people, rather than fewer.”

Felix, that’s factually incorrect on a macro level for Germany. I can’t locate data to prove or disprove that point for China, so it may or may not be correct there.

This international comparison of manufacturing employment for 1990 to 2009 includes Germany – http://www.census.gov/compendia/statab/2 012/tables/12s1353.pdf . Note that all 11 listed developed countries are showing the same trend of declining manufacturing employment and hours over time, including Germany. There is some difference in the magnitude and timing of the decline, but the trend is downward across the board. Also, note that the trends are similar for an endpoint of either 2005 or 2008, so it’s a secular trend, not the cyclical impact of the recent recession.

Information for China is tougher to locate – I could not find anything up-to-date. I do see widely cited figures from an Alliance Capital Management study saying that Chinese manufacturing employment dropped by 16 million between 1995 and 2002, even as output increased. The world lost 22 million manufacturing jobs during that time frame according to the same study. Note that of the 11 developed countries on the Census chart above, only Canada increased manufacturing employment from 1995 to 2002, so that’s good evidence that developed world manufacturing employment is falling secularly independent of anything happening in China. China may impact the pace of that decline, but not the direction. I’ll add that the amount of labor used in China is a decision made within the context of Chinese wages and health and safety laws, so manufacturing processes that simply throw a lot of labor at the production process can make sense in China. We wouldn’t view these sorts of manufacturing jobs as “good” jobs in the U.S., which is fair based on wages and work conditions. The corollary, however, is that if we built these products in the U.S. we’d do so with vastly more automated processes that use far less labor, and we would then increase automation and decrease labor over time.

Ultimately, getting upset over falling manufacturing employment is just as off-base as getting upset over falling agricultural employment would have been 100 years ago. Manufacturing output has grown and will continue to grow, but productivity has grown faster and will continue to grow faster, so employment will fall over time. That’s ultimately a great thing. It means that we can produce more with fewer people. The issue is helping people transition to other fields, not railing against a trend that is a continuation of what’s been happening since people rose above subsistence farming and that is the reason why we have a great standard of living today.

Posted by realist50 | Report as abusive

The fundamental problem of equating manufacturing with service jobs in the US is that we cannot survive on a service economy, which is a major reason the US economy is collapsing.

For example, to dramatically simplify the problem, Hawaii can survive as a service economy, but the US economy as a whole cannot. The US does not, unlike Hawaii, have anything that cannot be reproduced cheaper and better somewhere else.

To compensate for the loss of external revenue, the US liberalized its “free trade” policies to the point where no one living here could afford to do so, except those recipients of that excessive flow of profits — the wealthy class.

If you care to understand what Adam Smith really said about free trade, you would know this is not free trade at all, but EXACTLY the sort of conditions and people he warned us against in his “Wealth of Nations” (1776). In fact, on the face of it, this CANNOT be free trade because real free trade requires both parties to benefit. The last time I looked, we are getting totally screwed by this version of free trade.

We mortgaged the “American Dream” by going further and further into debt each year, until the underlying real estate debt burden became so large and inflated that it could no longer be sustained. Thus the US real estate market crashed in 2007, soon taking the rest of the global economy with it. ALL of it aided and accommodated by our virtually unregulated banking system, which is basically back to where we were during the Roaring 20s right now.

We have only a fraction of the once much vaunted “Made in USA” labels that shipped all over the world with pride in our country, thus bringing in revenue to support everything else. It would be a MASSIVE mistake to even talk about the US in terms of an export economy at this point.

Increasing mechanization, and the “Great Enabler” of “free trade”, which is anything but free, PLUS the paradigm shift of the internet, which allowed/encouraged global investing with virtually no risk in “real time” is what cost the US manufacturing jobs that can never be replaced — and increasingly, service jobs, as well.

The ugly truth is we are being bled to death by our own wealthy-controlled government that now cares more for “globalization” than for its own nation.

This is NOT sustainable, nor is it ANY kind of economics. It is just “good old fashioned greed”, pure and simple. Anyone who says this is economics is either a fool or a liar, or both.

“Globalization” exists only in the fevered imagination of the wealthy, who are so blinded by their greed they cannot see that they are sowing the seeds of their own destruction.

Unfortunately, they are about to take the rest of us with them because most people are either too stupid, disinterested in anything that does not involve the latest sex scandal, or the pursuit of “more equality” that never existed anyhow to pay attention to what really matters.

Posted by Gordon2352 | Report as abusive

This is a current article posted on reuters.com: http://www.reuters.com/article/2012/07/1 2/us-autos-europe-idUSBRE86B1BF20120712. It describes in part about how Opel is seeking concessions from its German workers in return for not closing an (unneeded) plant for another five years. Surely you’re not recommending that the US start a manufacturing welfare program such as this?

Posted by Curmudgeon | Report as abusive

What about the skillset sources needed for some of these jobs? Thomas Thwaites’ Toaster Project is worth a read.
What happens when the masters and journeymen all retire?

Posted by thispaceforsale | Report as abusive

“There’s no particular reason why that should be the case: when manufacturers in China and Germany become more efficient, that’s their sign to employ more people, rather than fewer.”

They do? The only reason Germany has as many people in manufacturing as it does (and it’s still a small part of their economy – 24.6% in industry versus the US’s 20.3%) is because of their labor laws. Whenever the economy downturns, their labor unions get wage cuts instead of fired employees.

China’s not a great example, either. They only had so much manufacturing because labor was super-cheap, and is still quite cheap compared to the US. Even then, Foxconn just bought a ton of machines for their factories, so don’t be surprised if they lay off tens of thousands of people in the next couple of years.

Posted by Brett__ | Report as abusive

Economics without the concept of supply chains is really hopeless.

Contrary to neoclassical economics, money cannot manufacture objects.

Posted by rootless_e | Report as abusive

I think when most people say “we need more manufacturing” what they really mean is “we need more exports” because only by exporting more will the Trade Deficit go away. That’s why people look at places like Germany and China, because they have a net Trade surplus. So when people pick on some aspect of Germany they don’t like and suggest that’s the sole ingredient that HAS to be copied so you’d better not do that, at best they are disingenous, at worst, fools. Of course they’re playing a manipulative form of politics, which nearly always comes down to self-interest based around fear and ignorance.

Curmudgeon so easily forgets Ford’s 11 years of no profits before they and GM and Chrysler had to run to Washington in their Executive Jets claiming they’d run out of money and needed a handout. The US already has run “Manufacturing Welfare Programs”.

Posted by FifthDecade | Report as abusive

Fifth, point taken. I still shake my head when I remember the year (I believe it was 2006) when GM sold the most cars ever, and lost $10 billion.

Posted by Curmudgeon | Report as abusive

Felix, you should hear an agitated Russ Roberts struggling against a harmless Barry Eichengreen to understand this basic inapplicability of the comp adv argument to a situation with 8% unemployment.
http://www.econtalk.org/archives/2011/06  /eichengreen_on.html
The reflexive conservative responses here are frighteningly obtuse. Why is that?

Posted by mw1 | Report as abusive

“It hasn’t done this because keeping banks well capitalized is a higher priority for them than downstream, secondary effects like facilitating bank lending.”

A few years ago, I might have agreed. Now? The banks’ balance sheets are healthy enough that getting the economy going again is a greater priority.

Posted by TFF | Report as abusive

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