INSIGHT: US manufacturing in decline - a bad thing?

22 October 2010 16:23  [Source: ICIS news]

By Joe Kamalick

A piece of rare earth ore with US penny for scaleWASHINGTON (ICIS)--The number of US workers engaged in manufacturing as a percentage of the overall workforce has been declining for 60 years, a top US economist noted in recent Senate testimony - but that’s not a bad thing.

Or is it?

US chemical companies and other manufacturing industries for years have complained that federal tax, energy and other regulatory policies are driving more and more US manufacturing capacity offshore, and that millions of US manufacturing jobs have been lost in the process as well. 

Further, if unchecked, the more or less steady decline in manufacturing jobs and manufacturing production in this county will undermine the entire economy. It is argued that no great economy such as the US can survive without a strong manufacturing base.

However, in testimony in early August this year before the Senate Banking Committee, Chicago Federal Reserve Bank senior economist William Strauss argued that the decline in the number of US manufacturing jobs is not necessarily a bad thing or a bad omen. 

On the contrary, he contends, the declining percentage of manufacturing jobs in the US overall workforce is a measure of increasing productivity.

Strauss notes that in 2006 there were about 14m US workers engaged in manufacturing - roughly the same number that were employed in that sector in 1950. 

But given huge growth in US population since 1950 and the growth of both domestic and international business since then, the tendency would be to regard the relatively static level of US manufacturing jobs as a decline - especially because manufacturing has grown by a robust 3.4% annually since 1950.

Manufacturing output in 2007, the recent peak year, was more than 600% higher than in 1950, Strauss says. And the number of manufacturing jobs in this country as a percentage of the total workforce has fallen steadily since the ‘50s.

The explanation, Strauss says, is productivity gains. What took 1,000 workers to manufacture in 1950 now requires only 184 (2009).  This is a good thing, he argues, and lies at the core of US economic dominance.

“One of the great strengths of the US economy is its ability to ‘re-invent’ itself over time,” Strauss said in his testimony.

“Industries that are experiencing rising demand are able to gain access to capital and labour, while those industries that are struggling are forced to either become more competitive or risk going out of business,” he said. “This is the model of our economy that has allowed the US to become the largest economy in the world.”

Strauss expects and predicts that the number of manufacturing jobs in the US will continue to shrink, both actually and as a percentage of the workforce, over the next decades as manufacturing efficiencies continue to improve.

He draws a parallel with US agriculture. “In 1870, just over half of employment was dedicated to agriculture. Farm output today is higher than ever before - agriculture output in 2009 was more than 400% higher than in 1950 - and yet we were able to produce all this output with only 1.6% of our employment dedicated to farming.”

So, does a relative decline in the number of manufacturing jobs (or the decline of manufacturing jobs as a percentage of the workforce) portend an eventual overall economic decline? 

Or, as Strauss contends, are those declines simply a symptom of ever increasing productivity in manufacturing?

Strauss is right, as far as he goes, says American Chemistry Council (ACC) chief economist Kevin Swift.

Swift and Strauss both serve on the board of directors of the National Association for Business Economics (NABE).

“In one sense, he’s right,” Swift said of Strauss’s testimony, “it does reflect productivity gains - but it doesn’t get to what could have been, what might have been” if the law of unintended consequences in tax, energy and other federal policies had not shifted much US manufacturing capacity to foreign shores.

“As a share of US GDP [gross domestic production], manufacturing has been declining in nominal dollar terms since the ‘50s,” Swift noted. 

In 1950, manufacturing accounted for 27% of US GDP in terms of nominal dollars (not adjusted for inflation), while by 2009 manufacturing represented only 11% of GDP, again in nominal dollars.

Swift noted that in constant dollars - using the value of the US dollar in 2005 to measure manufacturing across the decades - manufacturing was 12.4% of US GDP in 1950 and 11.9% of gross domestic production in 2009.

But whether measured in nominal or constant dollars, Swift contends that the US manufacturing sector might be bigger and stronger and employing more workers were it not for those unintended consequences.

“Maybe manufacturing’s share of GDP could have expanded, maybe it could be 15% or even 20% of GDP today,” he said.

“That gets us back to why manufacturing didn’t expand, and that is a tax regime and a regulatory regime that has fostered a loss of manufacturing jobs and plants,” he added.

“Go driving through the Midwest and the Rust Belt and you can see all the shuttered factories,” he said. 

The Rust Belt (formerly known as the Factory Belt) is the name given to a broad stretch of US territory from western New York State to Chicago, Illinois, an area that from the mid 19th century until the 1970s was the core of US manufacturing and production - but which has since been in steep decline, characterized by rusted factory gates.

One chemical sector example of poor policy choices is the sharp reduction in US ammonia production in the 1990s when fast-rising prices for natural gas, an ammonia feedstock, forced shutdown of about 40% of US ammonia production.

That productive capacity and related jobs, Swift noted, moved to natgas price-advantaged countries such as Trinidad and Tobago. As a consequence, US farmers have to import more nitrogen-based fertilizers from abroad.

That spike in natural gas prices came about when policymakers promoted the use of cleaner-burning gas instead of coal for electric power generation - but simultaneously barred expansion of offshore drilling for gas and oil along 85% of US coasts.

“So the supply of gas was fixed, demand was expanding, and electric utilities can outbid chemical makers for the gas because power companies can simply pass their higher fuel costs on to consumers,” Swift said, “but chemical producers have to compete in a global pricing environment.”

Similarly, Swift said, a large proportion of US pharmaceuticals production began to move offshore in the 1990s, especially to Ireland, because the US has among the highest corporate taxes of the 33 developed nations of the Organization of Economic Cooperation and Development (OECD).

“Our corporate tax rate is 35%, Ireland’s is 12.5%, so a lot of the production of finished pharmaceuticals is now in Ireland,” he noted.  Do the math. “Taxes represent a big cost item.”

This week The New York Times reported that China has begun barring shipments of rare earth minerals and metals to the US and Europe, expanding an export ban that Beijing has maintained for a month on sale of the critical manufacturing minerals to Japan.

The 17 chemical substances called rare earths are crucial to the manufacture of a broad range of electronic products and weapons and space systems, including super conductors, high-end magnets and batteries, refining catalysts, lasers and fibre optic communications, to name but a few.

They are not actually rare - most of them are found in almost any soil around the world - but extremely rare are those areas in which these metals and minerals can be found in concentrations that make mining them economically possible. 

In fact, there are only three places in the world where they can be found in such commercially viable concentrations: Inner Mongolia in China, a remote part of Australia, and in Mountain Pass, California. (Much smaller resources are in India and South Africa.)

The US used to produce all the rare earths it needed up until 2002 or thereabouts when the Mountain Pass rare earths mine was shut down, due to high federal and California corporate taxes and tough California environmental laws that made the mine economically unfeasible.

Now the US is dependent on China for those critical rare earths - and the Times says that Beijing has just cut off the supply.

So, in these and other chemical or broader manufacturing areas, “what might manufacturing and manufacturing jobs be now if tax and energy and other regulatory policies had been right”, Swift asked.

Charlie Drevna, president of the National Petrochemical & Refiners Association (NPRA), worries that poor legislative and policy choices in Washington and in state governments are driving “a disturbing trend of exporting more and more jobs and importing more and more products”.

“Our manufacturing base has eroded so badly that the consulting firm IHS Global Insight has forecast that in 2011 China will replace the US as the nation with the largest manufacturing output in the world - a position the US has held since the 1890s,” he said.

“Politicians never tire of expressing their love and devotion for American workers and for preserving and creating American manufacturing jobs,” Drevna said.

“But this is meaningless rhetoric if it is contradicted by job-killing policies of excessive taxation and overregulation that worsen the exodus of jobs from our country,” he added.

“The continued loss of manufacturing jobs will result in a weaker American economy, increased costs for American consumers, and less tax dollars going to government - all pain and no gain,” Drevna said.

To discuss issues facing the chemical industry go to ICIS connect
Paul Hodges studies key influencers shaping the chemical industry in his Chemicals and the Economy blog
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: Joe Kamalick
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