Thursday, December 17, 2015

The Decline of U.S. Manufacturing & The Rise of Income Inequality Part Two

As a reminder, what follows is not meant to depress, but merely to enlighten and educate those of us who do not or cannot understand what has happened to the once great U.S. manufacturing base.  


In order to get a better handle on this issue, this will be the first of a short series of articles sorting out this issue from the end of World War II to the present. We will need to look into what really goes on in our domestic economy. Normally such analyses start with a look at the real Gross Domestic Product and personal income on a per capita basis, particularly the “real” variety of this much published number. Here the inflation is removed from the overall incomes and values of the net sum of goods and services produced in this country.

The Wide-Angle View: Personal Per Capita Growth Mirrors US Real GDP Growth


As we can see, on a per capita basis, the size of the economy has consistently increased over last 70 years or so.  As these economic numbers indicate, our national average common incomes have increased even when all inflationary impacts have been taken into account.
However, the above graph does not disclose information on who can buy food and other goods with these annual income flows. The most revealing aspect of Figure 1, however, is the increasing gap between Real GDP/capita and real disposable incomes/capita as time goes by. Most of this gap is due to increasing government, federal, state and local fees and taxes which again pay, i.e., for food stamps.
More revealing are the various private goods and services producing industries’ contributions to the USD GDP as seen in Figure 2.

Divergence Between Goods & Services Industries' Contribution to US GDP

Although some service industries, such as the finance and insurance, are high wage sectors, most other elements in the service industries are notoriously low/minimum wage sectors. The goods producing sectors, mainly the manufacturing industries, have been a steady source of good paying employment for people with or without college degrees. The relative decrease in this element of the national economy means fewer and fewer middle class generating opportunities. A closer look at the manufacturing and finance industries will focus on this point, as seen in Figure 3.
This graph contrasts the hasty downfall of U.S. manufacturing with the slow but steady rise of the financial services sector.

The Rise of Finance and the Demise of Manufacturing
The somewhat increasing relative employment in manufacturing during the last five years is due to a relatively fixed workforce combined with some increases in employment as the manufacturing industries try to get back to its pre-recession levels.

In order to understand why the manufacturing industry has fared so badly it might be of interest to look a bit closer at the post-war economic history of manufacturing.

The rise of the U.S. manufacturing industries and the rise of the U.S. world military and political might are closely related. From a mostly agrarian nation that mainly attracted immigrants into agriculture and extractive activities, the nation went on, through its own inventions and the rapid implementation of technologies invented elsewhere, to become a major industrial power. By the beginning of the First World War, the U.S. was a force, although somewhat reluctant, to be reckoned with in international contexts.
The basis for this beginning of the U.S. global might was its ability to mass produce industrial and consumer goods on a scale never seen before. At the end of WWII, the U.S. was the world industrial leader both in output and diversity of industries.
As time went on, however, something happened on the way to the promised tide that would lift all boats. First the textile industries found their way to minimum skill countries with cheaper labor. Then the consumer electronic industries started on the same path followed by the auto industry and other high technology industries.
From the late 1970’s onwards this relationship continued to deteriorate. The background for this unfortunate state of the US economy is analyzed further below.

The income and wealth distribution index (the GINI coefficient) has by 2014 reached Third World levels, and there is no improvement insight.
Improved bottom lines should, of course, always be the goal of well managed businesses, but the flight of labor-intensive industries has a vicious downward spiral attached to it. As the labor intensive industries relocate to other countries, the opportunities and incomes for large swaths of the homeland population disappear and, unless new needs and wants are created or discovered in the economy, the purchasing power of the remaining population will over time deteriorate.

There are very solid theoretical, political and even rational arguments for free trade, from Adam Smith and David Ricardo to the McKinley tariff to Bertil Ohlin. 
Thus, the initial premise behind the policies of “free trade” -- and particularly the free capital movement -- was included to enable trade in goods and services and not simply to establish export machines. What we have today is just another implication of the “law of unintended consequences.”

As the above brief analysis has shown, there is a close adverse relationship between the manufacturing sector and the income distribution in the U.S. The outsourcing of industries cannot continue much longer before we, as an economic entity, will have such a deep chasm between the economic elites and the rest of us that it will not matter how cheap the imported goods are, as most of our population will not be able to afford the gadgets they put on their outlet shelves, be it at Wal-Mart, Target or Costco.

But let's hope that some of them begin to understand the relationships between the decline of the U.S. manufacturing industries, the generally lower disposable incomes and the propensity to consume the products they bring in from Third World countries.