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Dr Peter Morici:
Barack Obama and his Republican challengers don’t agree about much, but they do
agree the US economy can’t be turned around, and middle class prosperity saved,
without a strong contribution from manufacturing.
Since 2000, the economy has grown only 1.6% annually—not its 3%
potential, as defined by productivity and population growth. It has not created
a single additional private sector job. But for the alarming increase in
prime-working-age adults choosing not to look for work, unemployment would be
close to 13%.
Economists agree weak demand for US-made products are the cause. Dependence on
foreign oil and manufacturing are at the center of the challenge.
The trade deficit is about $600 billion or 3.8% of GDP. Each dollar that
goes abroad to pay for imports but does not return to purchase US exports is
lost demand and lost jobs. Eliminate the trade deficit, GDP would increase $1
trillion, and 10m new jobs would be created.
Currently, oil accounts for 44% of the trade deficit, and manufactures
from China, Germany and Japan the rest.
Oil imports are about 8m barrels a day and gasoline consumption is about
the same. Increased domestic production from the Gulf, Alaska and other offshore
deposits could cut imports in half, and genuinely exploiting fuel efficiency
opportunities and better use of natural gas for transportation in cities and
heating could do much of the rest.
Manufacturing has been the bright star of the recent economic recovery,
recouping 470 thousand of the 5.3m jobs lost since 2000, but it could do
a lot better. Yet, so many bogus arguments are offered as to why it shouldn’t.
Improvements in productivity have certainly cut manufacturing employment in
Europe, the United States and China, but improvements in productivity occur in
all sectors, every year—those are the very essence of progress.
Agriculture dramatically improved productivity in the 20th Century
but Americans did not give up farming.
If the United States redressed three quarters of its $650 billion deficit in
manufacturers, someone would have to make that stuff, even if at higher levels
of efficiency than in the past. The US economy would be 5% larger and
policymakers would be worrying about a genuine shortage of workers.
China’s low wages are an advantage in labor-intensive activities, but US
technology should be an advantage in others. That’s how Germany remains a leader
in factory jobs and exports with a wage structure that is higher than the United
States—unless the Germans are smarter than Americans, we should be able to do it
America is a leader in service exports, but despite concerted efforts to
increase those through trade agreements over the last three decades, the US
export surplus in business services is about $80 billion—the United States is
not going to do much more than double that, even if it manages to crack the
highly protected Chinese and other Asian markets through diplomacy and new trade
Modern domestic economies may be dominated by services, but most of those
services don’t move in international commerce—consider movie theaters, dry
cleaners and plumbers. Whereas the international economy, like the US trade
deficit, is dominated by commodities and manufacturers. Wishful thinking by
academics, pundits and Wall Street financiers won’t change that.
Moreover, manufacturing contributes to the dynamics of growth in other ways. It
pays higher wages and supports two-thirds of all R&D, which generates the
intellectual property that supports America’s higher standard of living.
Without manufacturing, much of the innovation in services would not happen. For
example, were Intel and IBM not US-based companies, it is highly doubtful that
Apple, Microsoft and business solutions software companies—who do a lion share
of R&D in the services sector—would be American based firms today.
America’s principal rivals, the governments of China, Germany and Japan have
long recognized these facts, and managed their currencies, tax structures and
business incentives to ensure competitive manufacturing sectors.
In a perfect world, Americans would not have to compete with rivals that
interfere with the market, as those governments do, but alas this is not the
best of all possible worlds.
Messrs Obama and Romney both understand manufacturing matters, and Americans
must do what it takes to compete in the world as they find it.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone