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Krugman Blunders on Analysis of U.S. Manufacturing

Posted By David Weinberger On May 24, 2011 @ 2:30 pm In Economics | Comments Disabled

Paul Krugman recently lamented [1] 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 [2].

Taking a look at another graph, we can see that productivity has actually increased [3] more quickly over the past decade.

[4]

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 [3], 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 [5] 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?”


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/05/24/krugman-blunders-again/

URLs in this post:

[1] recently lamented: http://www.nytimes.com/2011/05/20/opinion/20krugman.html?_r=2&ref=opinion

[2] we continue to produce the most in the world: http://mjperry.blogspot.com/2011/01/we-should-take-more-pride-in-our-global.html

[3] has actually increased: http://mjperry.blogspot.com/2011/05/decreases-in-manufacturings-share-of.html

[4] Image: http://www.foundry.org/wp-content/uploads/productivity.jpg

[5] health of manufacturing: http://www.heritage.org/Research/Reports/2010/10/Technology-Explains-Drop-in-Manufacturing-Jobs

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