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The Progressive Economics Forum

Stephen Gordon on Manufacturing

Over at Economy Lab, Stephen Gordon writes:

The fundamental problem facing manufacturing firms is that the [industrial] prices have been growing more slowly than consumer prices. CPI inflation has averaged 1.85 per cent a year since 2002, but the Industrial Price Index for all manufactures has only increased at a rate of 1 per cent.

His argument is that Canadian manufacturers have been squeezed because they must sell their output at industrial prices, but are expected to pay their workers according to consumer prices (CPI). This argument implicitly assumes that labour is the only input, or at least the largest one. In fact, wages are a fairly small fraction of total costs in most Canadian manufacturing.

Some more relevant figures were sitting right under Stephen’s nose. The Industrial Price Index shows that the price of basic materials (“First-stage intermediate goods”) increased far more than CPI since 2002. Meanwhile, the price of “Finished goods” (except food) actually fell slightly.

Manufacturers have indeed been squeezed by rising input costs, but the big increase was in basic materials rather than wages. In other words, manufacturing has been hit by soaring commodity prices, the “popular explanation” that Stephen set out to downplay.

Of course, the other half of this story is weak output prices. But simply pointing to a relative price change is not much of an analysis. Surely the real issue is why the price of manufactured goods has stagnated or declined.

Has global demand shifted away from manufactured goods? Has increased supply from China undermined prices, possibly through violations of labour and environmental standards? If so, should we do anything to remove or offset this unfair competitive advantage?

Stephen does not engage these questions. He simply asserts that “there’s nothing intrinsically important important [sic] about the manufacturing sector.”

Enjoy and share:

Comments

Comment from Travis Fast
Time: October 17, 2010, 5:27 am

Yep, and the comments over at WCI on his ‘article’ were equally glib. The basic thrust of the conversation was the unsupported claim that all those lost manufacturing jobs were replaced by more meaningful, intellectually challenging jobs.

I guess for a certain genre of economist the question as to a single double or a double double is a rather daunting intellectual puzzle so perhaps they were just being honest.

Comment from Andrew Jackson
Time: October 17, 2010, 8:06 am

Statscan has been pushing the line that there has been no deindustrialization, just a relative decline of manufacturing prices. Quite why this offsets the decline of manufacturing as a share of GDP and as a share of employment rather escapes me – so what if the output of the sector is relatively unchanged as a physical quantum?

Comment from xian
Time: October 17, 2010, 10:05 am

i understand that the difference between the rate of surplus-value vs. the rate of profit is lost on most mainstream economists, but here is a case in point. the expense of industrial materials is largely irrelevant to the profit rate since manufacturing firms – especially canadian manufacturing firms which have the highest ratio between merchandise trade vs. merchandise value-added, i.e., finished products vs. components, of all the major industrialised countries – must obviously purchase raw materials as well as resell them in modified form. whether this price is high or low does not impact profitability because low materials costs is a good thing when buying, but a bad thing when selling and vice versa for high prices. it balances out on either side of the ledger. the reason people like stephen gordon focus on wages even though they may be a small percentage of overall capital advanced is that labour is the sole source of profitability in manufacturing. this is very clear because the increase in value bestowed on these materials by working on them produces the only money that actually ends up in the hands of human beings and not reinvested in more materials. some of these humans are workers and some are owners of capital. the only way to increase the amount of this money going into the pockets of these owners is to decrease the proportion of it going to the people actually doing the work. this is the same old story of capitalism dressed up in ever-new clothes over the decades and it always seems like news to people. but really, it ain’t rocket surgery.

Comment from Paul tulloch
Time: October 17, 2010, 11:26 am

Why is Stephen given the keys to the economy lab? Armine you may want to be careful the next time in your lab, because is Stephen is in there anywhere near you, as he is quite obviously a danger to the lab and himself. Somebody needs to supervise him during lab time from now on- one kick at e can and he already blew up the lab, i remember idiots like that in chemistry class, turning on the gas lines five mimnutes ahead of time and then lighting a match.

I cannot even respond to his Article as he just obviously does not read anything but his own work, and maybe Nick Rowe’s once in awhile when he is bored, which is not saying much.

Comment from Paul tulloch
Time: October 17, 2010, 11:36 am

@andrew

There has got to be some kind of hitch with the data, never trust an unedited ratio- never ever- especially from the barn.

something is amiss. Not necessarily bad data but something is wrong.

Travis and I kind of got into this a bit but it was a bit of a head scratcher that needs further study. Outputs and inputs. I do know there aree many I-O analysis with the data for GDP estimates so potentially that is a start. However I do have a hard time believing outputs have not been dramatically affected given the substantive fall in employment.

More thought needed on this.

Comment from Bill Bell
Time: October 17, 2010, 1:10 pm

Can anyone guess why Professor Gordon would make that claim in the final paragraph above the comments here? I am not an economist. Is there something that people entering the work force soon or over the next decade or so should prepare for?

Comment from xian
Time: October 17, 2010, 2:13 pm

bill –

i myself can’t imagine why a professor of economics would say something like that unless he’s a bit of a moron. to claim that ‘there’s nothing intrinsically important about the manufacturing sector’ at a time when the western aetherial ‘knowledge’ economy owes china’s real productive one $2 trillion putting unprecedented leverage over our economy into its hands [china arguably helped persuade the u.s. treasury to recapitalize freddie mac and fannie mae instead of letting them fail] … beggars belief. seems you can get away with anything in the media these days as long as you advocate wage reductions.

[btw – was my above analysis clear to anyone?]

Comment from Travis Fast
Time: October 17, 2010, 6:50 pm

Andrew,
Manufacturing is now around 13% of total economy value added; in 1970 it was just above 21%. So sure maybe its output is equivalent to 1970 but like you say who cares.

Bill,
“I am not an economist. Is there something that people entering the work force soon or over the next decade or so should prepare for?”

Yes actually, over at Stephens Blog WCI there is an interesting post by Mike Moffatt here is the take away from his conclusion:

“But manufacturing is dying. What is to take it’s place? The obvious solution is ‘services’ – computer programming, logistics, research and development, graphics design, management consulting, etc. However, service companies typically only have two major types of expenses: labour and utilities (including rent). Both of which are demoninated (sic) in Canadian dollars. Instead of having a 70/30 U.S. dollar/Canadian dollar expense split, the ratio is closer to 10/90. If the company has the same exporting profile as our manufacturing company, they face a giant exchange rate exposure, with no obvious way to hedge against it.

If the Canadian dollar continues to rise, then we should not expect service exports to ‘pick up the slack’ – there is simply no comparative advantage there. Either our service companies will have to focus more on servicing the domestic market (or foreign markets other than the U.S.), or we will need to look to other industries for economic growth in southwestern (sic) Ontario.”

A fairly damning critique of the great continentalist gambit aka NAFTA.

Comment from Purple Library Guy
Time: October 17, 2010, 8:16 pm

Many services are at least as vulnerable to outsourcing as manufacturing is–perhaps more so. Most of the ones mentioned, for instance–computer programming, research and development, graphics design, management consulting . . . it doesn’t much matter where they are done. All you need is an educated workforce; currently it helps if they speak english. Lots of programming jobs moving to India, more and more research happening in China. To the extent that R&D has geographical tendencies at all, it tends to move to where the industry is.

That leaves us with non-tradable services, like serving those double-doubles, bartending, prostitution, security guarding . . . sure, there are some skilled professions in there, but we can’t all be chefs for five-star restaurants.

As to ‘there’s nothing intrinsically important about the manufacturing sector’ . . . Maybe I’m naive, but isn’t it kind of important to an economy that real things get made at some point? This kind of outlook sounds like the joke about the economists who get stranded on a desert island and by the time they’re rescued they’ve all become rich from trading hats with each other.

Comment from Paul Tulloch
Time: October 17, 2010, 8:33 pm

The knowledge/ information economy is wound up very tightly to the manufacturing assets throughout the economy. Potentially the hiving off of services makes up for some of the fall in manufacturing – hence the ratio of output to labour not dropping as much.

However- to believe that the information (and the sometimes knowledge) economy (see Zuboff on why I say this- hint- we do have more information in a very diffuse manner but actually using it is costly; the shop floor has proven to be a challenge and many barriers remain including management not wanting to let go of the knowledge- we still have a long way to go in making use of the information- that is pretty much her thesis and I truly believe we are at this historical point and will be for quit some time).

Sorry- my main point is, manufacturing has a huge downstream linkages within the value chain of high value adding service industry as well as the rest of the residual- and it still has a locality issue attached. (key point local) So when manufacturing dies off so too does the high quality services that go with it. On top of the original jobs- every sane economist knows that the heart of the economy is still manufacturing and Canada can and will make its way back into a new and transformed base- if we can get rid of the half baked wanna be policy steering idiots.

Yes Canada is an extractive economy, but we showed under the auto pact that we can and still do manufacture and with the highest of quality- which is highly correlated to our workforce education and workers.

Is there a shortage of markets for manufactured goods of high quality- never- as long as we pay the global worker a just wage- there will never be a shortage. So lets stop being short sighted ( must be nice to have a job where you can say whatever you like with no consequences Stephen- I hope you get invited to plenty of conferences to speak into the vacuum that you and the ivory tower dwellers find yourselves- have you ever been outside the institution Steve what age did you enter? Have you ever been inside reality?) and get on with the job of figuring our way forward- developing a manufacturing base- it is the number one objective.

Paul

Comment from Glen
Time: October 18, 2010, 9:16 am

Could someone please point out to to me a successful / healthy post industrial economy? This whole Floridian , knowledge based economy, is a ruse. My thoughts are fully aligned with Ralph Gomory’s (the best economist no one has ever heard of) ….

“Vague talk about future innovations, about a post-industrial society, or of an enormous explosion of services exports to where they can balance the manufacturing trade deficit is not the stuff on which to bet the prosperity of a nation. This vagueness disguises our real situation and the need to rethink both our fundamental economic goals and how they can be attained.

Manufacturing should not be given up but rather rebuilt, as G.E. CEO Jeffrey Immelt has recently advocated. We cannot afford to get out of manufacturing unless and until there are new things that we are good at and that add up to the same scale. But today that condition is nowhere near being met.

Manufacturing is both high-wage and R&D intensive, and comparative advantage in manufacturing is not a gift of nature but something that is mainly man-made. All of this strongly suggests that we should be aiming at building a strong manufacturing sector rather than wishing it away.”

Further to Ralph’s comments is Dean Baker’s position that if our service industries were forced to ‘compete’ as manufacturing must, we would quickly see nearly all jobs disappear.

I shared with Dean some information showing that Ontario Radiologist were far more protectionist than unions. Even thought there is a shortage of radiologist, they protested the use of Canadian trained radiologist in India. So despite there being insufficient Radiologist to fulfill demand here, with an implication for public health, it is wrong to ‘offshore’. In manufacturing, despite there being millions (Canada and US) of unemployed workers, it is considered protectionist to try and protect local jobs.

By any measure, Union’s attempts to be protectionist pale in comparison to that of Ontario Radiologist.

http://www.cmaj.ca/cgi/content/full/176/1/21
http://www.nationalpost.com/news/story.html?id=1217434

Comment from xian
Time: October 18, 2010, 12:54 pm

there seems to be a consensus here about the importance of manufacturing in creating sustainable value in a world economy, but comments such as these:

‘Statscan has been pushing the line that there has been no deindustrialization, just a relative decline of manufacturing prices. Quite why this offsets the decline of manufacturing as a share of GDP and as a share of employment rather escapes me – so what if the output of the sector is relatively unchanged as a physical quantum?’

and

‘Manufacturing is now around 13% of total economy value added; in 1970 it was just above 21%. So sure maybe its output is equivalent to 1970 but like you say who cares.’

show a remarkable misunderstanding of the fundamentals of political economy. if there are less workers producing the same quantity of product, then that quite obviously goes to show that, due to technological innovation, the productivity per worker has increased. the overall outlay of capital will be much greater for the means of production relative to that for wages. for example the globe’s report on business article on the vale inco strike said:

‘… in 1969, there were 17,000 employees; when the strike began at Vale Inco last summer, the head count was down to about 3,000, but nickel production was the same as 40 years ago. The work force has dwindled over the years, in large part because most of the work is now done by sophisticated machinery, and the hard-rock miners are now technicians.’

far more capital is then needed to squeeze profits out of the work of far fewer people. the ratio of profit to total capital advanced goes way down and manufacturing become less attractive to especially western investors who want very fast and high returns to post on the market and hence manufacturing dwindles. manufacturing is far more stable than other made-up forms of value, but capital is capital and, even if largely fictional, bigger faster chunks of it will devour slower smaller ones. a huge symptom of this was the junk bond phenomenon in the 80s, where manufactures were bought with bond money and then their employees sacked and their assets immediately sold off in order to pay back the interest to the bond-holders, devastating manufacturing. finance capital and industrial capital are inimical to one another to the very core of their being.

this is writ larger than ever on the world stage with the unprecedented economic ‘cold war’ between china [manufacturing] and the u.s. [finance], with the balls of the latter firmly in the grip of the former. i agree that [climate change oriented] manufacturing needs to be greatly increased in canada, but that this project is no longer compatible with capitalism as we now know it. this means we need to put a lot MORE care into what and how much is actually physically produced beyond profit rather than LESS.

Comment from Kelsey Kirkland
Time: October 20, 2010, 2:09 pm

I have not seen any discussion on WIC or PEF about the food crisis considering Klaus Schwab founder/chairman of World Economic Forum pointed out food and water shortage as a top social challenges over the economic crisis which he says was a structural crisis.

http://www.charlierose.com/view/interview/11244

The bid on Potash by foreign global concern has only validated this projection.

Skeptics should do research on the engineered Ukranian famine in 1930’s and the coverup of the crime by a Pulitzer award winnning journalist Walter Duranty. Minister Tony Clement bringing up the Liberal record on takeovers does not absolve ReformCons from their dereliction of their present duty, in reality their hands off approach only serves to highlights their indifference to how the electrorate feels about divesting of critical resources.

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