Saturday, May 28, 2016

Productivity gains don't explain the demise of US manufacturing jobs - By Sierra Rayne

At the Financial Times, Martin Wolf purports to provide a prescription for "How to defeat rightwing populism."  Beyond the all too typically mindless bashing of Donald Trump (see, e.g., "This is why Mr Trump is so danger
us: he has no notion of the foundations of US success" and other quotes therein), Wolf provides the following insight:
If rightwing populism is to be defeated, one must offer alternatives. In a forthcoming article Dartmouth College's Douglas Irwin notes that protectionism is quack medicine. Productivity growth accounted for more than 85 per cent of the job losses in manufacturing between 2000 and 2010.

This is very wrong.

The Federal Reserve has kept records of real output per hour of all persons in manufacturing since 1987:

If productivity growth between 2000 and 2010 accounted for 85% of all job losses in U.S. manufacturing, then we would expect to have seen some type of break (aka a tipping point) in the historical trend of productivity growth in 2000, signifying a transition to a much faster rate of productivity growth that then links to a historical relationship between employment losses and increased productivity.
Instead, we see nothing of the kind.

From 1990 to 2000, the index of real output per hour increased by 25 units, and manufacturing sector employment was relatively constant (technically declining by only 3.9%, but there was effectively no substantive change in the number of manufacturing employees from the mid-1980s to 2000).
And then, from 2000 to 2007, the index of real output per hour increased by another 25 units.  What happened to manufacturing employment over this time?  It declined by a massive 20%.

If we take the entire period from 2000 to 2010, the index of real output per hour increased 36 units, and manufacturing employment dropped more than 33% – trends entirely out of step with the productivity-employment relationship during the 1990s.

We see the same trends, even more clearly, for real output per person in manufacturing.

The fatal flaw in the productivity argument comes from looking at just two years: 2000 and 2001.  From 2000 to 2001, real output per hour was unchanged, and real output per person actually declined slightly.  And yet, the U.S. lost 824,000 manufacturing jobs (or nearly 5% of total sector employment) between 2000 and 2001.

What happened between 2000 and 2001 – and subsequent years – that is a more likely cause of most of these job losses?  China's accession to the WTO.

Looking back at the historical data for American manufacturing just doesn't support the notion that modest gains in productivity will lead to the type of large-scale sectoral layoffs seen since 2000.  Certainly some small numbers of job losses are due to increasing productivity, but not 85% of them.

The United States was founded on manufacturing protectionism and became wealthy off it, owing much to Alexander Hamilton's Report on Manufactures.  Many of the most prosperous periods of American history are labeled protectionist periods, including the 1980s economic boom under Ronald Reagan.
Theodore Roosevelt was clearly not a fan of free trade:

Thank God I am not a free-trader. In this country pernicious indulgence in the doctrine of free trade seems inevitably to produce fatty degeneration of the moral fiber.

Neither was Ulysses S. Grant, who made a prescient prediction:

For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.

Nor was William McKinley:

Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man.

Efforts to rewrite history will inevitably fail.  The only question is how much damage the free traders will be allowed to do in the meantime.  If protectionism is quack medicine, then all of well established U.S. economic and political history is quackery.