- The Washington Times - Tuesday, June 16, 2009

OPINION/ANALYSIS:

The massive, continuing loss of U.S. manufacturing jobs has figured prominently in the national debate on overcoming the economic crisis - and not just because union voters helped send Barack Obama to the White House.

In recent decades, these jobs have been among America’s best-paying and productive on average. For a debt-saturated economy desperately needing to base its affluence on income and earnings again rather than on borrowing, removing them from the endangered species list should have obvious economic advantages.

Unfortunately, these advantages won’t be reaped without solving a more fundamental problem - sluggish recent growth and now contraction in the manufacturing industries that create these jobs. Moreover, new government data and new research indicate that this problem keeps worsening, and that the economy therefore keeps moving farther away from real recovery - as opposed to the government trying to reinflate the bubble.

The conventional wisdom surrounding manufacturing lately has emphasized the sector’s continuing strength, and portrayed naysayers as know-nothings and especially antitrade Luddites. As endlessly observed, before the recession, U.S. manufacturing output had reached an all-time high. And virtually all economists attributed the job loss overwhelmingly to strong productivity growth. That is, most factory workers were being replaced by technology, not foreigners.

For years, however, fatal flaws in both arguments have been knowable to even the minimally curious. Principally, manufacturing’s growth since the early 1990s was owed largely to the dot-com-fueled stock market bubble and the housing and credit bubble that have dominated the U.S. economy for 20 years. The first encouraged production in high-tech hardware in particular that was completely unjustified by market forces - and therefore literally should not have taken place. The second created an economic tide that lifted domestic manufacturing and all other economic boats for even more spurious, less sustainable reasons.

Worse, even that bubble-ized manufacturing sector was growing unimpressively. Washington was pouring peacetime record amounts of stimulus into the economy, in the form of interest rates kept at multidecade lows, an unprecedented peacetime swing in the federal budget balance from surplus to deficit, and of course the housing frenzy. But neither overall economic growth nor manufacturing growth rates hit anything close to records. Clearly, America’s engines of wealth creation were faltering.

The productivity story has been unraveling as well. In particular, the government’s main productivity statistics have overlooked increased manufacturing offshoring. The growing foreign labor content of U.S. manufactures is simply not counted in the calculations purporting to show how many workers are producing given levels of output. Thus when American industry replaces domestic workers with foreign workers, the Bureau of Labor Statistics simply assumes that the overall headcount has shrunk - and that new technological or managerial wizardry is the reason.

New Commerce Department data show just how inadequate manufacturing output has become. From 1997 (when the government’s main system for slicing and dicing the economy was introduced) through 2008, annual U.S. manufacturing grew by only 29.8 percent in inflation-adjusted terms, despite all the bubbles and stimulus. Last year, moreover, was especially discouraging. Even though the overall economy eked out 0.74 percent real growth, manufacturing output declined by 2.74 percent.

Other parts of the economy shrank last year as well - and faster. Inflation-adjusted output in finance and insurance fell by 3.03 percent. Construction collapsed by 5.61 percent. But their bubble-ization was much greater than manufacturing’s. If American industry’s fundamentals really were solid, why wasn’t growth that much stronger?

Even these manufacturing figures, however, are probably exaggerated. New research recently summarized by Michael Mandel of BusinessWeek strongly suggests that flawed government methodologies have overstated U.S. industrial output big-time at least since 2000. The main problem: an unwitting but serious undercounting of imports.

Indeed, the latest international trade data also point to continuing weakness in manufacturing output as well. In April, the overall U.S. trade deficit rose by 2.21 percent, to $29.16 billion. But the deficit in manufactures jumped 7.75 percent.

Even though the recession has cut U.S. consumption enough to drive down the manufacturing deficit by nearly 23 percent during the last year, it still approaches $144 billion so far this year. Since official data portray trade deficits as detractors from gross domestic product, and because manufacturing dominates both U.S. trade flows and deficits (accounting for 80 percent of the latter last year), manufacturing’s trade shortfall is clearly contributing to its struggles - and to the economy’s predicament.

The new data point to other trade-related problems. For example, although the sectors of the economy most heavily affected by the global economy (agriculture and mining, along with manufacturing) shrank by a combined 2.48 percent last year in real terms, much U.S. growth was generated by sectors virtually unaffected by that global economy - like health care (up 4.57 percent last year) and government itself (up 1.90 percent) These patterns held for most of the last decade as well.

In fact, it’s hard to imagine solving the manufacturing output problem underlying the manufacturing jobs problem - and thus restoring genuine health to the economy - without much better U.S. international trade policies. After all, the amount of manufacturing production required is not only higher than today’s literally recessed levels. It must be much higher than the level of imports we buy with borrowed money. Only then can we replace debt-generated wealth with income-related wealth.

The United States has not achieved this goal for decades, underscoring the role a major trade policy overhaul will surely need to play. Settling for less would simply result in a bigger debt-addicted economy, not a healthier economy - and set the stage for the Mother of All Bubbles and its even more disastrous bursting.

• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 1,900 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s Web site at www.AmericanEconomicAlert.org.

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