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Do We Even Have a Manufacturing Problem?

Matt Yglesias, among others, responds to my piece from Friday about the long-term decline in U.S. managers' competence when it comes to running manufacturing firms by questioning a basic premise of the piece: whether U.S. manufacturing is actually in such terrible shape. Matt notes that indsutrial production has steadily increased over the last few decades, save for the periodic recession (it's down sharply over the last few years, for example). He nicely illustrates the point with this graph:

Matt correctly points out that workers in the manufacturing sector have gotten much, much more productive over time, which is why this increase in output has coincided with an equally dramatic drop in manufacturing employment.

These are all very fair points. But they only really tell you what's going on in absolute terms. In relative terms, though, the U.S. manufacturing sector has experienced a pretty steep decline. That is, while we make more than we used to, we account for a steadily decreasing share of the world's industrial output--and, more importantly, of the output that American consumers and companies buy.

The easiest way to see this is via the trade deficit in manufacturing goods.

It doesn't look like the Commerce Department breaks out that figure explicitly, but I think I was able to piece it together by combining the trade deficit in capital goods (ex autos), autos, and consumer goods (ex autos and food), which the Commerce site makes available here. I don't have time to make a chart now, but if you just look at a few snapshots over time, you get the basic trend. In 1980, we had a trade surplus in manufacturing of $17 billion. In 1990, that had become a deficit of $77 billion. The deficit ballooned to $300 billion in 2000, and $433 billion last year. I'd say those are signs of a pretty remarkable decline.

But don't just take my word for it. Fed chairman Ben Bernanke is actually a manufacturing bull--he tends to similar data on output and productivity. But, when pressed during Senate testimony back in February of this year, even he conceded that the sector has some issues:

But I think it may be that part of the impact on our manufacturing has been the trade deficit, which has to some extent reduced -- has been associated with a reduction in manufacturing because trade is very much conducted in manufacture. So the movement in the trade deficit has been associated with greater imports in manufacturing, and that to some extent has been a competitive issue.

I'd say that's putting it mildly, but it's the right idea.

P.S. In fairness, I don't think Matt is saying there aren't competitive issues here. Just that we should be careful not to overstate them. Which is a point that's certainly worth heeding.

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