Steve Rattner’s Manufacturing Muddle

January 26th, 2014 at 9:43 am

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.

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15 comments in reply to "Steve Rattner’s Manufacturing Muddle"

  1. Perplexed says:

    -”but the argument is confusing and unconvincing due to a pretty egregious omission.”

    Speaking of “pretty egregious omissions,” do you know what lies behind the omission by virtually all economists of the role that the 1914 Clayton Act plays in this undercutting of U.S. competitiveness? (Or am I “jumping the gun” and it will be in tomorrows article?) If labor was not exempt from anti trust protections and thus denied access to equal protection under the law, all “suppliers” of labor would be sharing the costs of the output gap created by this currency manipulation. What then do think the politics would be around policies that put U.S. labor at any kind of disadvantage vis a vis foreign competition? What do think would happen then to any legislator that failed to address the problem and restore competitiveness? Equal protection under the law wasn’t meant to be a suggestion, it was meant to be the law of the land. The impacts of denying it appear in many places; this is just one more. Denying equal protection prevents laborers from “pooling their risks” of unemployment thus undercutting their bargaining power, it also drastically undermines the collective political power of laborers to effect policy through legislation by concentrating all of the output gap losses on a small, politically and economically powerless minority.

    -”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?”

    Why not start with legislated, un-Constitutional, undermining of U.S. laborers’ economic and political power?

    -”…But he can’t ignore it.”

    Why not? Economists have been “ignoring” the destructive effects of the Clayton Act for 100 years now to support the empowerment of employers over laborers. Why should Rattner be denied something available to all economists? This “equal protection” stuff has some strange implications doesn’t it?


    • smith says:

      Why do you hide your anti-union stance?
      It is a strange task to repeatedly lay fault with anti-trust legislation because it exempts unions without actually making that point clear. One presumes you actually don’t have a problem with anti-trust enforcement on businesses, but you would like to prevent unions from enforcing collective bargaining agreements.
      Again, if you feel union agreements aggravate conditions of unemployment, by preventing labor lowering wage bids, just say so. Since only 6% of private industry employment is covered by unions, you might be surprised to find the effect on the economy is actually negligible. Instead, wage stickiness, downwardly nominal wage rigidities in a recession, highlighted numerous times by Krugman among others, seem a fact of life. Wages stagnate, unemployment jumps.


      • Perplexed says:

        -”Why do you hide your anti-union stance?”

        Why do you continue to try to make this about unions and deflect the discussion away from the impacts on the other 90%+/- of labor that is 1.) at the mercy of “at will” employment and employer coercion; and 2) denied the protections of “risk pooling” that would result from their having access to protections from anti-trust and equal protection under the law. The act exempts “labor,” not unions. Has it not occurred to you that the threat of treble damages from excluded “providers” of labor might have an effect on “wage stickiness,” “downwardly nominal wage rigidities in a recession,” and “wage stagnation”?

        -”you might be surprised to find the effect on the economy is actually negligible…”

        If that’s the case, there shouldn’t be any problem with restricting the exemption to only union contracts if they choose to use it then should there? Let other providers of labor sue for treble damages if they are denied access to the market just as any other producer of any other commodity, product, or service that is provided would do if denied their rights to equal protection from anti trust.

        “…seem a fact of life…”

        “The sun goes around the world;” “the world is flat;” “people can’t fly;” “you can’t sail into the wind;” are all “facts of life” at some point. Your “evidence” is that “Krugman among others” say it so it must be “a fact of life” seems pretty analogous to the evidence for all of these other “facts of life.” Just what period or country where labor had access to enforced protections against anti-trust served as the “control” for the experiments that generated these “scientific” facts?

        -”Wages stagnate, unemployment jumps.”
        Only an employer or an economist could believe there are no other likely explanations for this, or that there are no other alternatives. On the other hand, maybe the world is really round and revolves around the sun; maybe “workers are stripped of their rights to equal protection under the law, so unemployment jumps,” is a much better description of the underlying dynamics of what is occurring.

        Why would anyone in America be opposed to equal protection under the law? Do you deny the possibility that certain “political coalitions” might be benefiting financially and politically from the unequal protection? Do you think protections against tyranny of the majority were included in the Constitution as a suggestion, or do you think it might have been possible that these kinds of tyrannies of the majority were in fact anticipated and that the viability of a democracy itself would be threatened if these possible tyrannies weren’t protected against in the Constitution?


        • Pinkybum says:

          As you said: “Why would anyone in America be opposed to equal protection under the law?”

          As Anatole France once said: “In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets and steal loaves of bread.”


        • smith says:

          You are again being unclear. You do not identify
          “excluded ‘providers’ of labor”, but the unemployed are by definition excluded. In the United States, there is no legal right to a job, you can’t sue a prospective employer because they control the means of production, and employment, and won’t hire you. Laws like the Sherman AntiTrust and Clayton Antitrust are designed to prevent an overwhelming concentration of power in just a few companies, who might otherwise control of a whole industry, and thereby, employment. So the law you rail against, the Clayton act, actually is designed curb the power of big business and monopolistic power over employment.

          So again, who are unemployed laborers supposed to sue? Big business? Labor unions? Anyone denying them a job? Are you attacking at-will employment? France has all sorts of problems because they don’t have at-will employment (high unemployment, and contract and term employment replacing permanent positions)

          Antitrust is about concentration of market power and collusion, but it is not about employers deciding to lay off workers, and equal protection doesn’t mean the unemployed are entitled to a job.

          Maybe we just need an example, say Joe the worker, or ex worker, and he does what…


          • Perplexed says:

            -”You are again being unclear.”

            Just switch “labor” with “soybean producers” or “oil producers” or “auto producers” or “steel producers” or “plastic producers” “anything other than labor producers” and ask yourself what would happen if any of these producers were denied access to the “market” for their products. They would sue and collect treble damages under the Clayton act for manipulating the “market,” and they would sue anyone participating in any way in denying this access. Then the government would also step in with criminal proceedings and impose criminal penalties & jail sentences. Now, can you provide a clear explanation of why, because your “product” is labor, you should be denied equal protection under the law, and participants in the so-called “market” for labor should be allowed to continue to transact business at prices above what you’d be willing to sell your “product” for, without considering your “bid” for the work? Then explain why they should not then be accountable to you, their victim, for treble damages, and why the perpetrators are not facing jail terms. Then think through the implications of what would happen if we actually enforced the Constitution and had equal protection. What choices would exist outside of dividing up the available work across the available “suppliers” of that work? There’s a reason unemployment in Germany is so much lower than ours and its not due to overwhelming demand for German labor. Think through how real markets work, you know, those with bid and ask prices and spreads and that actually clear. What’s the difference between that and a so-called “market” for labor? Its known outside of economic “science” as “tyranny of the majority.”

            Then think through the politics. What would happen to politicians who supported currency manipulation or off-shoring of labor if all “producers” of labor were bearing a proportionate share of the output gap? How long do you suppose they’d last under those circumstances?


          • Perplexed says:

            -” there is no legal right to a job”
            Unless of course you consider actual enforcement of the Equal Protection Clause. If it was enforced, no one could deny you access to the “market” for work you were capable and willing to do. A soybean farmer cannot be denied access to soybean markets, he thus has “a legal right” to sell his product; the same “right” exists for ALL other producers of ALL other products and services EXCEPT labor. Something being “equal” shouldn’t be such a difficult concept for an economist to understand, they do, after all, have some training in mathematics. If ALL other producers, with the single exception of “labor” have protection from coercion under the anti-trust laws, then equality doesn’t exist; just do the math, or, alternatively, do the logic, its called a paradox. So, if you do have a right to equal protection under the law, you do have a right to sell your services just as the producers of any other product or service has.

            -”Antitrust is about concentration of market power and collusion…”

            It certainly seems like its “clear” to you what the intention of anti-trust laws are, its a bit unclear to me how you can’t see the connection between denying one single group of “producers” from anti-trust protections exposes them to the concentration of market power and collusion of those who buy their products. Think through what would happen if you were denied the ability to buy auto insurance, do you think that might have any impact on the market for automobiles? Then think through the implications of no access to insurance, and then being FORCED to drive without insurance as an alternative to homelessness and starvation. That’s the position that “producers of labor” are ultimately in, those are their choices.

            -” …but the unemployed are by definition excluded. In the United States, there is no legal right to a job, you can’t sue a prospective employer because they control the means of production, and employment, and won’t hire you…”

            Wrong. The unemployed by lack of access to equal protection are excluded, not by “definition.” And, you can’t sue a prospective employer because the Clayton Act prevents it, not because “they control the means of production and employment.” “Employers” control the means of production but watch what happens if they “exclude” “at will” producers of oil, or steel, or electricity, or chemicals, they’ll get sued and pay treble damages, and get fined and face possible imprisonment. Maybe you can be “clear” and direct me to place in the Constitution that enumerates these powers of employers to coerce only “producers” of labor?

            -”Are you attacking at-will employment?”

            Is there a more obvious, glaring example of lack of unequal protection? What is the justification for providers of “labor” to be denied rights to protections under contract law that are available to all other providers? Why is any agreement for any buyer of “labor” not a “contract”? How much more support for coercion is needed? Then economists wonder why labor has no power to make sure they share in productivity gains? More economic “science” right?

            -”Maybe we just need an example, say Joe the worker…”

            Or maybe we just need equal protection under the law and for economists to stop standing in the way of it to promote empowerment of employers over workers. The scam has gone on long enough and employers have benefited tremendously from it at the expense of workers. Maybe what we really need is for workers to understand how the coercion is “legalized” by denying them rights supposedly guaranteed to them under their Constitution.


          • Perplexed says:

            Correction: “Is there a more obvious, glaring example of lack of unequal protection?” should have been:

            Is there a more obvious, glaring example of lack of equal protection?


  2. Larry Signor says:

    Secular taxation. You heard it here first. Devalue the exorbitant profit potential of foreign labor (while at the same time raising the value of foreign labor) by taxing it away. No more indefinite tax “deferrals” or labor differential exploitation or foreign tax credits. If our tax code makes the US the most profitable location, business will come. This is not a plea for lower corporate taxes, indeed they should rise because of the community impact and risk associated with them. We need a sensible tax code which devalues the dollar internationally while supporting it at home. Now that’s an economic conundrum wrapped in…


  3. purple says:

    Germany is no United States when it comes to the world economy as you well know. Triffin’s Dilemma comes into play here and frankly is a contradiction that cannot be resolved if the capitalist world wants the U.S. to act as a superpower and global arbiter (which it mostly does.)

    Strip away a global arbiter with military muscle and this house of cards collapses quickly. Bancor ? Let’s be real.

    The final point being the U.S. is going to continue rot from the inside because elite interests demand it – they enjoy the trappings of global dominance. Detroit will be the norm, and heck, it already is for many many areas. This is all baked in.

    Life will be good for the corrupt royalty, venal or very smart and even better for those who can manage all three.


  4. Rima Regas says:

    The piece to read is Ambrose Evans-Pritchard in yesterday’s The Guardian.

    “Apple’s new Mac Pro will be made in Austin, Texas. Robots have rendered the labour cost irrelevant. The BRICS and mini-BRICS can longer under cut on price.
    “Wages don’t matter any longer. Off-shoring was just a way station.” We are back to reshoring, but without jobs. Welcome to our brave new world.”

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10596788/Will-the-2nd-Great-Machine-Age-be-a-frightening-jobless-dystopia.html


    • Perplexed says:

      Wow, this is great news! Now, if we just remove the government granted monopolies and restore capitalist competition, the prices of Mac-pro like devices will fall to around their marginal cost (will it be above or below $20 if we get rid of the software and hardware patents on the robots as well, hard to say?) Then all of the additional government provided income that now goes to Apple and the producers of robots & robototics software will be available for the “customers” (victims) of Apple’s monopoly prices to spend on other things thereby raising demand for those products and the jobs they provide and reducing wealth concentration! This is going to be great; all of those people who previously did something robots can do will be able to spend their time doing something only humans can do! Is all of the research done yet? Do we know everything there is to know now? Maybe there’s still will be some work for humans in the future if we can get our economics “system” out of the way.


  5. Robert Buttons says:

    The aggregate word “manufacturing” is actually so diverse it is nearly impossible to make blanket pronouncements on “what’s good for manufacturing”. (Except lower taxes, which is good for everything—except the ones doing the taxing) Mankiw even makes the (ironic) case that McDo takes raw materials and “manufactures” hamburgers.

    The goal of government should to make peoples’ lives better, which is not necessarily a direct correlation to the # of manufacturing jobs. For example, the Chinese people have plentiful manufacturing jobs, but their standard of living suffers because of an artificially weak currency.

    Econometric analysis, too many times, takes the myopic view that we can change one variable (eg. Interest rates) to move the next variable (eg GDP) in a favorable direction, with a failure to realize the potentially negative broad reaching side effects. In medicine, this is the classic intern mistake of “treating the lab values, not the patient”.


  6. save_the_rustbelt says:

    One of the great disappointments of my life is that both of our political parties have been willing to throw blue collar workers on the trash heap of history.

    Next – dump 30+ million legal and illegal aliens into the mix.


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