NYT contributor Steve Rattner makes some good points about the state of US manufacturing in an oped this AM but the argument is confusing and unconvincing due to a pretty egregious omission.
The good points are generally about the weak wage trends (I’m writing about wage trends for an NYT Economix column hopefully out tomorrow) though here’s where the major omission comes in, especially for a finance guy like Steve. If our manufacturing wages are so low relative to both their past levels and some of our advanced economy competitors (he mentions Germany), why are we not more globally competitive in the sector? According to Steve, it’s not productivity differences—our advanced manufacturers are highly innovative, he claims. It can’t be just China undercutting us on price—again, look at the German trade surpluses.
The key omission in Steve’s analysis is thus the value of the dollar in international markets, or exchange rates. Dean Baker was all over this well before me this AM.
Rattner never once mentions the value of the dollar. This happens to be huge. [Data show]…that manufacturing employment first began to fall in the late 1990s, even as the economy was booming, after the dollar soared due to the botched bailout from the East Asian financial crisis. The run-up in the dollar had the equivalent effect of placing a 30 percent tariff on our exports and giving a 30 percent subsidy for imports. Under these circumstances, it is hardly surprising that manufacturing employment fell and the trade deficit soared.
There’s no question that manufacturing employment and output in advanced economies are declining as other developing competitors come on line. And it would be foolish to pin one’s hope for a full employment recovery on any one sector. The interesting question is not “will a manufacturing revival ‘restore the US economy’”? Though some politicians go there, Steve’s attacking a straw man–this is an area I work in a lot, and I’m not aware of any economists who think of the sector that way.
The important question is: what distortionary factors are holding the sector back from achieving its potential? More technically, why does the US have both low growth in unit labor costs in manufacturing (compensation relative to productivity growth) relative to our competitors and persistent, large deficits in manufactured goods? These are some of the key questions for economists working on US manufacturing.
In this regard, it’s simply not credible to pontificate on manufacturing’s decline without acknowledging the role of the dollar, exchange rate manipulation, and our persistent trade deficits in manufactured goods. There’s solid, widely known and cited research on the issue, and if Steve doesn’t believe it, he needs to explain to readers why it’s wrong. But he can’t ignore it.