Manufacturing is key to U.S. economic recovery

By PETER MORICI, UPI Outside View Commentator   |   April 13, 2012 at 6:30 AM   |   0 comments

COLLEGE PARK, Md., April 13 (UPI) -- U.S. President Barack Obama and his Republican challengers don't agree about much but they do agree the U.S. 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 percent annually -- not its 3 percent potential, as defined by productivity and population growth. It hasn't 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 percent.

Economists agree weak demand for U.S.-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 percent of gross domestic product. Each dollar that goes abroad to pay for imports but doesn't return to purchase U.S. exports is lost demand and lost jobs. Eliminate the trade deficit, GDP would increase $1 trillion, and 10 million jobs would be created.

Oil accounts for 44 percent of the trade deficit and manufacturing from China, Germany and Japan the rest.

Oil imports are about 8 million barrels a day and gasoline consumption is about the same. Increased domestic production from the Gulf of Mexico, 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 470,000 of the 5.3 million 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 didn't give up farming.

If the United States redressed three-quarters of its $650 billion deficit in manufacturing someone would have to make that stuff, even if at higher levels of efficiency than in the past. The U.S. economy would be 5 percent larger and policymakers would be worrying about a genuine shortage of workers.

China's low wages are an advantage in labor-intensive activities but U.S. 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, too.

America is a leader in service exports but despite concerted efforts to increase those through trade agreements over the last three decades, the U.S. export surplus in business services is about $80 billion -- the United States isn't 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 pacts.

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 U.S. 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 research and development, which generates the intellectual property that supports America's higher standard of living.

Without manufacturing, much of the innovation in services wouldn't happen. For example, were Intel and IBM not U.S. companies, it is highly doubtful that Apple, Microsoft and business solutions software companies, which do a lion share of R&D in the services sector, would be American 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 wouldn't have to compete with rivals that interfere with the market, as those governments do, but, alas, this isn't 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.

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(Peter Morici is an economist and professor of business at the University of Maryland School, and a widely published columnist.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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