Friday, March 1, 2024

More truth about manufacturing, productivity and free trade

Must read

With a presidential election looming, international trade is back in the news, fueled by misconception and more than a few lies.

To clarify this, I begin with two questions I often ask groups with whom I speak.

The first is: What year did inflation-adjusted manufacturing production peak in the United States (and in Indiana)? Answers range from 1944 to the 1990s, with the 1960s dominating the responses.

The next question I ask is: At what year did manufacturing employment in the United States (and in Indiana) hit its peak?

That causes a lot of puzzled looks in the audience since most folks assume that employment and production peaked at the same time. They did not.

The correct answer to the first question is that inflation-adjusted manufacturing production peaked last year. Both Indiana and the United States hit real manufacturing records in 2022, which is the last year for which we have data.

My hunch is that 2023 and 2024 will both be new record years as well.

But what about employment? Factory employment in the U.S. peaked in 1979, while Indiana’s manufacturing employment peaked in 1973.

At this point, most folks in my audience start to figure out what has been happening.

The loss of factory employment in the U.S. is dominated by productivity growth. A little data helps this explanation.

What took 100 Hoosier factory workers to produce in 2000 could be manufactured by only 68 workers in 2021. That growth in productivity was even larger in the last half of the 20th century.

Sure, there could be some measurement error in these data, but the economists and statisticians doing the measuring are the world’s experts on this sort of thing. It would be astonishing if they were wrong by 5% in either direction. This would mean what took 100 factory workers to produce in 2000 could now be done by closer to 66 or 70 workers, not 68 as the official data reports. That level of error is irrelevant to understanding what is happening.

The reason all this matters to trade is that many Americans believe that foreign trade reduces employment.

That supposition is based on feelings, not evidence.

Most of us judge the world around us from our visual cues. If we see fewer cars parked in a factory lot, we might assume that some of the jobs went to Mexico or China. There’s a better way to think about trade, either at home or globally.

Like many men my age, my father taught me a lot of auto repair, and I learned considerably more about engines as a soldier. So I’ve changed cylinder heads and transmission bushings. Not very sophisticated stuff, but more complex than changing an oil filter.

About 30 years ago I stopped making these repairs and hired someone to fix my cars.

Folks, this is trade in its purest form.

It did not destroy any jobs; in fact, it creates jobs. Obviously, it created some job opportunities for my local mechanics. But it also creates jobs in other places, in a very subtle but critical way.

Instead of taking weeks to repair a car, I can spend that time doing what I do best. Because I’m better at something else, the actual cost to me of having a skilled mechanic do car maintenance is lower than it would be for me to do it.

Now, the mechanics at my local shop are better at car repair than me, but even if they were not, it’s still cheaper to hire them than to do the work myself.

You see I’m a better economist than I am an auto mechanic. So every hour I spend fixing a car is an hour I cannot spend doing what I’m best at.

Because I can “outsource” my auto repair to someone else, I produce more value at the job I’m good at. That allows me not only to create employment opportunities for mechanics, but also allows me to earn enough to hire folks to fix my plumbing or have lunch at a local restaurant. It also makes the mechanic, plumber and the restaurateur more productive.

This is trade at its purest essence. But does it scale to international trade, or is something else going on?

China and the United States don’t actually trade with one another. Businesses and consumers in China trade with businesses and consumers in the U.S. They do so because it provides them the same benefit I get from hiring a mechanic to fix my car. And, it has precisely the same effect — it creates jobs, both for the folks directly involved in trade and all those who benefit from the increased productivity of both countries.

Ironically, China and the U.S. are perfect examples of why trade is beneficial. But not in the way the anti-trade folks suppose.

The U.S. is a rich nation with a highly productive workforce. The GDP per capita in the U.S. is more than $70,000 per year. There are several reasons for this, beginning with our Constitution that made the U.S. the world’s largest free-trade zone.

China is a poor country, with a very unproductive workforce. Even if you believe their highly dubious self-reported data, GDP in China is roughly $13,000 per person. That’s less than 20% of ours.

To put it in clearer terms, it takes roughly five Chinese workers to produce the same value of goods that each American worker produces. One big reason for the disparity is simply that Americans have been generally engaged in free trade for 250 years, and the Chinese still do not.

To be clear, the benefit of trade is not that it allows us to make a profit on sale or take some market share.

Adam Smith and later David Ricardo debunked that more than two centuries ago.

The benefit of trade is that it allows us to be more productive; individually, within our region or nation and globally. That growth of productivity raises the standard of living for everyone.

Still, opponents of trade will point to the Rustbelt and hollowed-out communities across the U.S.

These are just as apparent as empty factory parking lots and with the same explanation.

The real culprit is simply that these places were full of low-productivity jobs. These jobs became redundant in a world where productivity was rapidly rising. There are ways to help these communities revitalize and experience job growth. However, no tariffs or handwringing about trade will bring these jobs back.

Michael J. Hicks, Ph.D., is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.

Latest article