- The Washington Times - Thursday, February 26, 2004

That was quite a brouhaha over the common-sense remarks of Gregory Mankiw, chairman of the White House Council of Economic Advisers. Mr. Mankiw rightly observed earlier this month that “outsourcing is just a new way of doing international trade,” whose wealth-creating and living-standard-raising benefits have been indisputable for centuries. Unfortunately, all the attention given to the-gaffe-that-wasn’t overwhelmed the consideration that should have been given to the contextual tutorial that Mr. Mankiw and his council colleagues provided in their examination of the U.S. manufacturing sector. It appears as Chapter 2 in the 2004 Economic Report of the President (ERP).

Noting that manufacturing employment’s share of total employment has been declining over the past half-century, the ERP reveals that real (inflation-adjusted) manufacturing industrial production has nonetheless increased more than sixfold between 1950 and 2000 (before falling during the latest recession). During those five decades, the annual growth rate of manufacturing industrial production averaged 3.8 percent, surpassing the 3.4 percent average growth rate of real GDP. Even during the 1990s, which followed the alleged “hollowing out” of U.S. manufacturing during the 1980s, the annual growth rate of manufacturing industrial production (4.6 percent) exceeded real GDP’s by more than a percentage point.

Such impressive long-term growth enabled the inflation-adjusted consumption of manufactured goods per person, excluding food and fuel, to more than quadruple, rising from $1,400 in 1950 to $6,000 in 2000. Despite the increases in output, however, manufacturing’s share of nominal GDP (unadjusted for price changes) actually declined from 29 percent in 1950 to 15 percent in 2000. How can this be? The ERP cites two factors. First, and most significant, dramatic and sustained productivity increases in manufacturing throughout this period generated a huge decline in the price of manufactured goods relative to the price of services. Second, capitalizing on the benefits accruing from international trade, consumers increased their purchase of imported goods, which reinforced the relative price decline of manufactured goods. Altogether, between 1950 and 2000, “the average price of consumption goods relative to services fell more than 50 percent,” the ERP reveals. Nevertheless, the large increase in the consumption of goods noted earlier was still not sufficient to fully compensate for the even bigger relative price decline. Hence, manufacturing’s nominal share of GDP declined as consumers’ purchases of services soared.

The ERP compares the decline of manufacturing’s share of total employment between 1970 and 2000 to the larger relative fall in agriculture employment between 1940 and 1970, when farming’s share of total employment fell from 19.4 percent to 4.4 percent. The similarities between these two industries “help put the long-term story of the manufacturing sector in context.” Elaborating, the ERP asserts: “In both sectors, a 30-year period of rapid productivity growth substantially reduced the share of the American workforce needed to meet demand for food and manufactured goods.” The resulting benefits are unmistakable: “The boost to real income from the relative price decline of manufactured goods [and food] has supported demand not only for these goods,” the ERP declares, “but also for services such as health care and financial advice.” The indisputable result has been a major increase in Americans’ living standards. Chapter 2 clearly deserves far more attention than it has received.

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