Saturday, August 07, 2010

Anti-manufacturing bias in the economics blogosphere

The economics blog Vox claims that the U.S. will not be able to increase employment in the manufacturing sector through promotion of goods exports. The reason? Because manufacturing employment has been trending downward.

By this logic, policy can do nothing to reverse deflation, because inflation is trending downward. And policy can do nothing to reverse job losses, because unemployment is trending upward. In other words, policy is assumed to be ineffectual - no trend can be reversed! - and the conclusion is that policy is ineffectual. Ta-da!

Now, the Vox authors do give one piece of data to back up their assertion that the decline in manufacturing output is irreversible: increasing productivity in the manufacturing sector, which "translate[s] into a greater substitution of capital for labour, causing downward pressure on manufacturing employment." In other words, our machines are getting so good that we need fewer and fewer people in manufacturing.

I have several counterarguments.

1. Productivity in U.S. manufacturing also increased strongly from 1945-1970. During this time, U.S. manufacturing employment soared.

2. Productivity has also increased in the service sector over the past two decades, even as service-sector employment has soared.

3. Theoretically, there is no reason why increased multifactor productivity should reduce employment. If the manufacturing sector has constant returns to scale, employment should be independent of productivity.

4. An increase in productivity in manufacturing could be due not to technological improvements (as the Vox authors assert), but rather to some exogenous sectoral shift that forces less productive factories out of business (e.g. an undervalued Chinese exchange rate or a U.S. industrial policy that favors finance and other services).

Given these counterarguments, Vox's declaration that the downward trend in manufacturing is inevitable seems to be on very shaky ground.

Of course, they then go on to argue that promoting goods exports will create employment in the service sector, leading them to quietly declare that export promotion is a good idea anyway. This agrees with my idea that "industrial policy" is generally less effective than "sectoral policy" aimed at boosting exports.

But my basic point here is that the econ blogosphere seems to be biased against the idea of manufacturing. They seem to have decided that the shift from a manufacturing-based economy to a service-based economy is as desirable as the shift out of agriculture into manufacturing. But there is just not very much data to back up that idea; at least, not that I've seen so far. I'm skeptical that the trend is entirely good, and I'm skeptical that the trend is entirely irreversible.

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