Friday, December 18, 2015

Made In the USA

Bill Gates' favourite author Vaclav Smil has written a book about the rise and fall of manufacturing in the US, titled Made In the USA. The book delves into the history of US manufacturing, essentially starting from the shift from crafts-made products to mass production that vaulted the USA to the top of the productivity charts, and ending with the job losses in the aftermath of the Great Recession.

Smil's main idea is that manufacturing is important, and that we can't let manufacturing jobs shift overseas at the rate we have, because it's not good for the country. Smil argues that manufacturing's history demonstrates how important it is, and that its loss is contributing to income inequality and the loss of well-paying jobs.

I had a lot of problems with Smil's arguments, so I'll go into a few of them. First, I'll stipulate that manufacturing has been an important part of the economy in the past (and still is, but to a lesser extent). But for me that's not a compelling argument that we should therefore cling to it in the future. The economy has evolved a great deal over the past couple of centuries. To pick one sector and say we need more employment there (at the expense of everything else, of course, since 95% of people are already working at something, presumable something their employer deems worthwhile) is beyond the ability of anyone to assert. Agriculture is a very important industry; after all, we can't eat without it! But no one is claiming we need to jack up agricultural employment because it was a source of huge gains and productivity growth in the past.

As for income inequality, the causal link that Smil provides with respect to the manufacturing didn't make a whole lot of sense to me. On the one hand, he argues that manufacturing provides jobs for low-skill workers, and on the other hand, that the loss of these jobs is contributing to income inequality. Low-skill work doesn't pay a lot (and its the lowest-skill stuff that moves overseas), so how can the loss of these jobs make income inequality worse? I would argue that Smil should focus more on policies that increase the skill level of low-skill workers, rather than on those that curry to a particular industry.

Smil also takes a shot at China, which cheats (through currency fixes and subsidies) its way into a huge current account surplus with the US. I don't quite agree that the US should be bothered by stuff like this. If someone wants to provide you goods/services at a ridiculously low rate, take 'em and do something else! When a store nearby has a liquidation sale, I take advantage of it, I don't shun it and decide I should be making my own shoes when I could be doing something more productive. The US has adapted wonderfully to changes to its economy over the centuries, and it is precisely this ability to react to change that makes its economy so great. Smil is not ignorant, though. He knows all of these arguments, and cites them as the view of economists. He just doesn't agree with them.

From a global point of view, however, which Smil doesn't get into at all, I think this free trade system is highly beneficial. Someone in a poor country who would have had no shot at anything above a subsistence level in a previous generation can find work that doesn't require a lot of skill. Someone here would need to be paid a lot more to do the same job, because there are other industries willing to offer him work that pays nearly the same amount. The price of the product goes down because the labour cost is lower, and so the consumer ends up with more money to spend after they have bought the product, which creates demand for a new product. The world ends up better off; just looking at the impact to low-skill Americans clouds that view.

One area where I do agree with Smil is that the US tax system is punitive to manufacturers. The rest of the world has shifted to tax systems that tax consumption but lay off of production, but the US is woefully behind in this regard. A revenue neutral shift to a different tax system would likely be able to employ more people for the same amount of deficit, as American goods/services would be more competitive at lower business tax rates. A consumption tax can be just as progressive as the current tax system, through rebates. (At least, this is how it's done in Canada.) Political bickering has let the country down on this front, in my opinion.

If you're like me, you may not agree with the whole book, but the education on the history of manufacturing is nevertheless interesting, and the book will make you think! Enjoy!

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