Thursday, October 15, 2009

Some Optimism

orgtheory brings up what I'll dub the cassandra litany: America doesn't manufacture things anymore because all the jobs are going to China, while the US keeps declining in relative influence. Life will be horrible for the next generation.

You hear these things often enough that it's worth pointing out that these claims are misleading at best.

Start with manufacturing. America produces more manufacturing goods than ever before. Even the share of manufacturing goods, as a percent of GDP, has remained roughly constant over time at about ten percent. The recession obviously has hit manufacturing, as have every previous recession, and particular states--Michigan--may have lost some manufacturing plants for good. But other, Southern, states will likely pick up the slack in the coming years, as they have in the past.

It's true--manufacturing jobs are disappearing, even as manufacturing remains strong. But this is a worldwide phenomenon happening not due to trade, but because technology allows for capital to replace people in factories. China is losing millions of manufacturing jobs. So are Japan, Brazil, and many other countries. Don't take my word for it--ask that incorrigible conservative Robert Reich.

Ultimately, this is why things like tire tariffs and industrial policy are wrongheaded. Not because they're bad ways to keep manufacturing jobs in America--though that's true, too. But because in the long run, factory jobs are going the way of farm jobs. Sometime in the next few decades, we'll need about five percent of the population to produce all our food and goods. Everyone else will need to become a service worker, in one way or another, no matter what we do now.

Nor is the US doomed to obsolescence. America has declined in global economic importance, but the big hit was after WWII. At the end of that conflict, America controlled something like half of the world economy. That went down to about a fifth of world output until after Japan and Western Europe recovered. But the US share of output has held up remarkably well since then.

The real story, as the Economist helpfully shows, is that the economic rise of Asia has been parallel by a corresponding fall in Europe's relative position.

If you're a Republican, you say that Regan's tax cuts and deregulation kept America going while Europe started to lag. High immigration and high fertility (the result of big homes, an easier work-life balance for working mothers, and a more abundant economy) have also given America a demographic boost enjoyed by only a few European countries. In fact, most European countries, were they were American states, would rank among the bottom in living standards.

This is likely to remain so for the future. As long as America hosts the world's best Universities, attracts the world's best talent, remains innovative and so on--it will likely not only keep growing, but keep up with the world in relative terms as well. We don't need Summers and his technocrat buddies to figure out where new jobs--green or otherwise--are going to come from. Despite all their progress, India and China would love to have America's problems rather than the ones they currently have. The news tends to focus on growth rates, so it's easy to forget that America's per capita GDP is sixteen times higher than China's, with a similar level of income inequality.

People still focus on the stagnating middle class, two Americas, etc. Leaving aside the issue of whether that's an accurate description, there's a real issue here. Class mobility is low, and the collapse of manufacturing has left fewer good jobs for unskilled workers. But CEO pay and income tax cuts for the rich are minor points in this story. To the extent that policy can fix any of these issues, education reform and encouraging family stability have to top the list.

But we'll make more progress on the tough stuff by doing less China India hysteria, less angst about trade, less nostalgia about manufacturing, and less doomsday talk about what is, after all, the world's best system for wealth creation.

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