Saturday, June 14, 2008

Economically Illiterate Populists?

In a response to our article on American Thinker, AL wrote:
>Three things to note for economically illiterate populists.
>First, US manufacturing output was increasing with steady pace over last two decades.

There are a variety of arguments contra "economic populists" concerning US manufacturing. There is a grain of truth to them, but also they must be taken with plenty of salt.

One argument is that US manufacturing output is growing. While manufacturing output shrank for quite a time in the early part of the current decade, the broader claim is also misleading.

Alan Tonelson takes on this argument in the link below.

Another argument, versus China in particular, has to do with the relative share of worldwide manufacturing production in the US and China. As this analysis from the Heritage Foundation discusses, China's manufacturing output once adjusted for Purchasing Power Parity (PPP) is larger than that of the U.S.

Another argument is that the U.S. share of global manufacturing has held largely constant since the early 1980s. The share of output statistics are deeply misleading because changes are often driven by exchange rates rather than anything more real. Our borrowing to finance the trade deficit (driving up the value of the dollar) makes us look like the manufacturing powerhouse we aren't. And the way these numbers are used is also deeply misleading. The U.S. share was well above 20 (or 22) percent for almost all of the interval. It is now, and only now, back down in the range it was when Reagan beat Carter.

>Second, loss of manufacturing jobs is due to increasing productivity; China is loosing manufacturing jobs also.

Increasing productivity does diminish the number of manufacturing jobs, and this is a good thing because it allows each worker to produce more and it thereby raises living standards. However, as we discuss in chapter 1 of Trading Away Our Future, several million manufacturing jobs do not exist in the US because of the trade deficit. The exact number depends on how you do the calculation and how you assume the trade deficit would be resolved. At the low end it is about 3 million, and at the high end about 7.5 million.

>Third, fast-tracking of Chinese economy is producing 1.5 billion of new consumers of US manufacturing goods, like aircrafts and i-phones, to name a few.

The Chinese population of 1.3 billion is a huge potential market. I sincerely hope that the U.S. can expand exports to China at a pace that at least matches the increase in China's exports to the US. I believe that China is in no hurry to let this happen, let alone encourage it. Lets start with airplanes. China imports passenger aircraft. However, the days of big orders forBoeing are probably near an end. The recent Chinese deal with Airbus included expanded requirements for Chinese parts sourcing on top of Chinese assembly for Airbus planes. (

The i-phone has a long supply chain, like most manufactured products in our globalized world. But nearly all of the parts are produced in Asia, and the phone is assembled in China.

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