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  • Krugman Blunders on Analysis of U.S. Manufacturing

    Paul Krugman recently lamented the fact that in recent years, “manufacturing, once America’s greatest strength, seemed to be in terminal decline.” His analysis, though, misses the mark.

    He reached this conclusion because “in the 1990s, U.S. manufacturing employment was more or less steady. After 2000, however, it entered a steep decline. The 2001 recession hit industry hard, while the bubble-fueled expansion of the decade’s middle years — an expansion marked by a huge rise in the trade deficit — left manufacturing behind. By December 2007, there were 3.5 million fewer U.S. manufacturing workers than there had been in 2000; millions more jobs disappeared in the slump that followed.”

    But while the number of workers in manufacturing has declined over the past few decades, manufacturing production has gone up. In fact, we continue to produce the most in the world.

    Taking a look at another graph, we can see that productivity has actually increased more quickly over the past decade.

    Why is the fact that we’re producing more per worker a bad thing? Similarly, would anyone argue that because manufacturing has overtaken agriculture, resulting in fewer agricultural workers than we had 100 years ago, that we’re worse off? After all, as economist Mark Perry shows, increased productivity is the reason why prices of goods have fallen:

    Between 1970 and 1990 the price of goods relative to services fell 22.9% percent.  Goods have become cheaper primarily because productivity in manufacturing has grown much faster than in services.  The growth has been passed on in lower consumer prices.

    Dr. Krugman’s conclusion that U.S. manufacturing was in “terminal decline” simply because the number of workers in the industry has declined is a very poor way to measure the health of manufacturing or of any industry, for that matter.

    Indeed, Dr. Krugman’s logic falls into the same line of thinking that the great economist Milton Friedman so aptly exposed when visiting a developing country. He observed workers using shovels to build a bridge. When he asked why the workers were using shovels rather than machinery, his host responsed, “because using machinery would result in fewer jobs in the construction industry.” “Oh,” Dr. Friedman replied, “I thought you were interested in building a bridge. If you want to create more jobs, why not give the workers spoons instead of shovels?”

    Posted in Economics [slideshow_deploy]

    4 Responses to Krugman Blunders on Analysis of U.S. Manufacturing

    1. Dave H, Culver City, says:

      Increased productivity is a good thing, but not everything that causes an increase in productivity is necessarily a good thing. Increased productivity inevitably results from increased unemployment as, in times of economic uncertainty, companies shed payroll by laying off less productive workers and redistributing their job tasks to existing employees at the same payrate – a process that both sheds unproductivity and forces increased productivity in those who remain employed. Therefore, increases in productivity do not necessarily correlate historically to positive economic growth or even sound economic policy.

    2. Tim, Seattle, WA says:

      David-

      Nice post, but I'm not sure you're addressing Krugman's point. Krugman is focusing on the manufacturing trade balance, but you are not. It might be true that manufacturing output is high in the United States, but our country as a whole actually imports more manufacturing products than we export, which negatively impacts GDP and employment growth. That's why it's important that European manufacturers and other firms like Caterpillar are starting to move production to the United States: if the products they make here are sold to foreigners (as opposed to making them abroad and shipping them to the US as imports), it improves our manufacturing trade balance, which is good for employment growth. So unless you're arguing that having a negative trade balance is a good thing, you aren't really disagreeing with Krugman.

      The point of the Krugman's column was to suggest that the main reason why the manufacturing trade balance has improved is because the US dollar has remained weak. A weak dollar has, in turn, allowed US products to be relatively cheaper in foreign markets. Without that, it's not clear that the cost advantages of producing manufacturing products in the United States would be nearly as large. So the real question is: why are so many members of the GOP pressing for a "stronger dollar"?

    3. Bill Waddell says:

      Your point would be a good one if it were founded in reality. Unfortunately the statistics you cite are from the Bureau of Labor Statistics, which has acknowledged they cannot distinguish productivity from offshore outsourcing of components.

      If the chair manufaturer lays off all the people who make the legs, seats and backs, and only keeps the final assembly of the chairs in the United States, all the BLS knows is that the total value of chairs manufactured in the USA stayed the same, and that fewer people were employed to do it.

      They call that a 'productivity gain', and cannot distinguish it from another chair manufacturer who might have actually found ways through automation or better work methods to actually do the same amount of work with fewer people.

      The result is that the productivity figures are artificially inflated, as is the GDP – and no one knows by how much. It is not a coincidence, however, that the big upward productivity spike on your graph during the last ten years coincides with the huge push to offshore manufacturing to China during that same time period.

    4. Mark Nark, Chicago, says:

      Prof. Krugman mentions in his op-ed that jobs were lost in the manufacturing sector of our economy. That is a fact. Nowhere does he state productivity is an evil. To frame your argument to assert that Krugman somehow "blundered" is an intentional misreading of his article. How stupid do you think you readers are?

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