Goodbye American Production (and Maybe Innovation, Too)

Discussion in 'Economics' started by ByLoSellHi, Dec 24, 2006.

  1. Goodbye, Production (and Maybe Innovation)

    Published: December 24, 2006

    AMERICAN manufacturers no longer make subway cars. They are imported now, and the skills required to make them are disappearing in the United States. Similarly, imports are an ever-bigger source of refrigerators, household furnishings, auto and aircraft parts, machine tools and a host of everyday consumer products much in demand in America, but increasingly not made here.

    Import penetration, as it is called, worried economists and policymakers when it first became noticeable 20 years ago. Many considered factory production a crucial component of the nation’s wealth and power. As imports gained ground, however, that view changed; the experts shifted the emphasis from production to design and innovation. Let others produce what Americans think up.


    Or as Mark Zandi, chief economist at Moody’s, put it: “We want people who can design iPods, not make them.”

    But over the long run, can invention and design be separated from production? That question is rarely asked today. The debate instead centers on the loss of well-paying factory jobs and on the swelling trade deficit in manufactured goods. When the linkage does come up, the answer is surprisingly affirmative: Yes, invention and production are intertwined.

    “Most innovation does not come from some disembodied laboratory,” said Stephen S. Cohen, co-director of the Berkeley Roundtable on the International Economy at the University of California, Berkeley. “In order to innovate in what you make, you have to be pretty good at making it — and we are losing that ability.”

    Mr. Cohen is a partisan. He was a co-author of the 1987 book “Manufacturing Matters,” one of the first to sound an alarm as imports began to displace domestic output. But even the National Association of Manufacturers, which is supportive of members like Whirlpool and General Electric who shift production abroad, agrees that sooner or later innovation and production must go hand in hand.

    Franklin J. Vargo, the association’s vice president for international economic affairs, sounds even more concerned than Mr. Cohen. “If manufacturing production declines in the United States,” he said, “at some point we will go below critical mass and then the center of innovation will shift outside the country and that will really begin a decline in our living standards.”

    As it is with global warming, the crisis is in the future. Manufacturing output is not likely to fall below critical mass, as Mr. Vargo puts it, in this generation — or perhaps for several generations. The United States is still a powerhouse in manufacturing, and the output of the nation’s factories continues to rise. The problem is that the craving for manufactured goods in this country is rising faster than output, and imports are filling the gap, particularly in crucial industries.

    Measuring this growing shortfall is imprecise. The government does not do the calculation, and outsiders must put together numbers from more than one federal database to make estimates. Mr. Zandi of Moody’s calculates that 20.5 percent of the manufactured goods bought in America last year were imported. That was up from 11.7 percent in 1992 and 20 percent in 2004. Only once since 1992 did the penetration rate slip — by four-tenths of a percentage point in 2001, a recession year.

    The other big industrial nations — France, Germany, Japan, England, Canada — also find themselves importing more and more of what they consume. In this comparison, the United States is not even high on the list, reflecting its preglobalization starting point in the 1970s as a much more closed economy than the others.

    But the country-to-country comparisons hide a disturbing trend. Alan Tonelson, a research fellow at the United States Business and Industry Council, argues that in this country, import penetration is rising faster in core industries like machine-tool building than it is in other countries. And these are the industries that are, or should be, centers of innovation and invention.

    “If you keep some production here, that is O.K.,” Mr. Cohen said. “But a lot of companies are not doing that, or slowly ceasing to do so. It is a complicated mosaic.”

    Mr. Tonelson’s efforts to document the exodus are part of his job. His organization represents small manufacturers who keep production at home much more than a General Electric or a Whirlpool. They suffer from import penetration more than the multinationals. The Business and Industry Council even favors tariffs as a protective measure — a red flag for many mainstream Democrats and Republicans, who shun any suggestion that they might be protectionist.

    Still, Mr. Tonelson, using the same data and the same methodology as Mr. Zandi, but delving into individual industries, finds that the United States is importing more than 50 percent — and in some cases close to 90 percent — of the machine tools used in this country, the aircraft engines and engine parts, the parts that go into cars and trucks, the industrial valves, the printed circuits, the optical instruments and lenses, the telephone switching apparatus, the machines that mold plastics, the broadcasting equipment used for radio, television and wireless transmissions. The list goes on.

    “It is hard to imagine,” Mr. Tonelson said, “how an international economy can remain successful if it jettisons its most technologically advanced components.”

    HIS alarm is not widely shared. Most economists and policy analysts say America’s growing service sector and powerful financial sector will eventually offset deterioration in manufacturing. In the short run, these optimists count on a falling dollar, particularly vis-à-vis the Chinese yuan, to put a brake on imports by making them more expensive, and to encourage exports by making them less costly in foreign currency. Thus will America gradually reverse its still-ballooning trade deficit.

    But implicit in this solution is the belief that industries gone, or nearly gone, will come quickly back to life, and that skills given up can be quickly reacquired.

    “Economists assume that the factors of production respond very quickly,” Mr. Cohen said. “They don’t. If you were a chief executive, would you build an expensive factory here on the strength of a shift in the exchange rate?”
  2. Tums


    China will take over everything
  3. hels02


    I totally agree with your article. But I don't believe it's too late.
  4. Wow, thanks for highlighting this article, and its importance.

    This matter of foreign made consumer goods has crept in on the distribution channels so insiduously, that one enjoys looking for the foreign made brands on major appliances, whether with a German name like (Fisher Paykel), or Korean like (Samsung), or Japanese like (Sony, Toshiba, Toyota, etc.) to the point where its almost unnoticible.

    So, its called important penetration in economics, well, their product have certainly closed the reliability and innovative gaps and far exceeded what american products have offered on the shelves and retail outlets. General Electric, Hotpoint, Sylvania, Emmerson and others are names that no longer mean reliability, innovation, cutting edge technology and most of all value for the consumer's dollar.

    Somehow many of the american products have the bad reputation and expectation of built in obsolesence as well as built in faults so that at a certain time, they require expensive service and maintenance calls to the tune of complete replacement of the product.

    Another fault is the much discussed selling of service plans to warranty the work of the products purchased, as if one needs to insure these, and there will be some honesty in honoring those warranties when it comes time. Often times, the warranty goes forgotten, unprovable, as the original receipt or warranty purchase has faded from print on the receipt.

    These are areas where manufacturing has shifted to veiled fraudulent sales practices that has caused the consumer base to shift towards products that actually do what they were purchased to do. How many times do you hear discussed the 10 year old Oldsmobile that keeps on working, but rather the 10 year old Toyota / Honda / Nissan that keeps on working.

    Changes can be made....
  5. When I bought TRN as an investment I understood that they made railcars- it seems they have been farming out the work to Mexico- it's so sad. When Carrier Air Conditioners left upstate they took the town with them.
    We have no one to blame but ourselves, demanding ever cheaper crap and going on the internet and price checking left and right. There was a time you bought only GE as an appliance for your kitchen because they lasted forever- now even their quality has hit the skids in an effort to stay even with Asian imports. It's a mess. And yes the ultimate goal of our politicians is to render us a service economy- but it's not service with a smile it's service with a wistful look of America past when everything we built was the best and lasted the longest. My mother had an old 1960's Thunderbird it ran like a freakin' tank- there was more chrome and metal on that car than on a mine sweeper, I smashed it into a basketball poll she never noticed...Cheap labor = cheap goods. Ever wonder why you watch the same TV you have had for 20 years and then they tell you the new flat screens will explode in ten?
    Technology is amazing but it is also emasculating.
  6. I said it in other posts and its so obvious with all you read and see in what is happening out there. USA is slowly becoming a has been . Just like IH in the 70's-80's , blame it all on bad management/leaders , who have become sellouts.
  7. billdick


    As retired physics professor, I am no doubt biased, but think the root cause of US decline article fears is in the attitude of college students. Too many want the easy wealth being a corporate lawyer or Wall Street type, etc can bring and too few are willing to work hard in the science and technical areas. Perhaps this transformation of attitudes started in grade school, when learning had to fun and easy with audio/visuals etc.

    What ever the cause, it concerned me enough to write a cosmic horror story Dark Visitor as a vehicle to teach some physics to people who would never knowingly open a science book. I wanted to scare these “would be executives” that their world is soon ending. (By a physically possible change in the Earth’s Climate. - A new rapid-onset ice age, caused by a small black hole passing by the solar system.) The story is presented as a report from an astronomer, who has just analyses slight perturbations in Pluto’s orbit. The approaching black hole can not be seen as it reflects zero light. It is the gravitational companion of one that may have passed by solar system in late 1920s. That one could explain the perturbation observed in Neptune’s orbit, which lead to the discovery of Pluto. Pluto, with mass much larger than the Earth, was thought to be the cause for more than a decade, but now Pluto is known to be smaller than the moon, so Neptune’s perturbation is unexplained. This fact and fact most star sized black holes, like stars themselves, are gravitationally bound pairs is the foundation of my story.

    More details at including both how to read for free and a list of all the physics hidden in the book.

    If you know of young college student planning to become a high-paid executive* etc, instead of a very satisfying carrier in science, tell him/her of this site.
    *They will not if the US collapses economically.

  8. I'm an attorney, and I could not agree with you more.

    Match and science are the critical infrastructure of wealth building enterprise - not speculating and litigating.

    I fear for the future of the United States, while I am holding out hope that our flexibility can help us to adapt and improve - but we're only 200+ years old - so that much ballyhooed flexibility is more myth than reality.
  9. Yup, Allan Bloom's closing of the american mind, etc...

    What becomes of America? Either we emerge from the current crisis of impotence as a real crisis occurs and come out as a stronger nation (c.f. the fourth turning), or we take the long road down into a eurosclerosis. Neither are particularly terrible for you and yours personally, as long as you understand what is happening and plan accordingly.

    But I hope we reinvent ourselves. Too many neat new ideas in nanotech and biotech not to.
  10. The problem is, that now ANYTHING can be outsourced quickly. Our greedy multinational corps will outsource any significant biotech and nanotech industries quickly, IMO.
    #10     Dec 25, 2006