Monday, July 04, 2011

Does the US have enough manufacturing?

There is an interesting article on Huffington Post wherein David Henderson counters a series of posts from Ian Fletcher who argues US has less manufacturing that it needs. Overall, I am in Ian's camp but with differences. I wish to make some different argument about why US needs more manufacturing.

Manufacturing jobs vs. manufacturing output alone
Firstly, it is important to concern ourselves with manufacturing jobs rather than manufacturing output alone because jobs and employment determine the consumption level. 

Let us compare two polar opposites, an economy with 100 people employed in producing 100 units of GDP output vs. an economy where 100 units of GDP output is created by 1 person with 99 unemployed. We can imagine the difference in consumption patterns of the economies. 

That is why I believe, if consumption has to increase (reflecting on economy getting richer), not only does output have to increase but employment has to be high. 

Low cost capital reducing employment intensity of production
The reason why employment intensity of US manufacturing is reducing can be attributed to cheap capital. In most manufacturing activities, capital and labour are competitors. A higher capital intensity reduces labour intensity. 

The relative cheap capital flood of past two decades has come to haunt the US. The easy capital has reduced the employment intensity of its manufacturing and rendered thousands unemployed. Economists will argue that these unemployed are free to engage in other value-adding activity. But that is not easy.

Job and skill match
I have always believed that the job profile of the economy should match its skill profile. A nation of plumbers will need plumbing jobs, a nation of software programmers will need IT jobs. Each nations needs jobs that match its skill profile. I think US has lower manufacturing jobs than its skill profile requires.

Skill profile can be changed, but that takes time. Adaptability to different jobs itself is a skill, a very valued one at that. How adaptable is US workforce? This question must be answered relatively. Is US workforce easier to adapt than Chinese workforce? I have my doubts.

Hence, I believe, US needs more manufacturing jobs rather than simply manufacturing.

Selling rights as opposed to assets - FDI conundrum
The other argument often looks at the capital account surplus as a counterweight to current account deficit. I would not club all the in-bound investments into one. It matters what the US is selling. Is it selling rights as against assets? I refer to rights as rival assets (parallel to rival goods) while simple assets are those with non-rival quality.

[Note: Rival assets are those assets that can be duplicated. A building can be duplicated but not a port or a road. Technically assets are always rival but we need to make distinction to understand the quality of what is being sold. We can sell factories and recreate everything. But we cannot sell ports, roads, beaches, monuments etc. and expect to recreate it. Thus what is asked of Greece is selling rights not assets.]  

Thus, when we look at in-bound investments (FDI) we must look at what is being sold before we can comment if it is a fair deal.

In sum
I believe Us skill profile needs more manufacturing jobs rather than simply manufacturing output. So long as jobs are taken care of, it does not matter if US has enough manufacturing or not.