Tuesday 17 Jul 2018 | 17:38 | SYDNEY
Tuesday 17 Jul 2018 | 17:38 | SYDNEY

Three factors in US economic decay


Hugh White

2 September 2011 13:27

Thanks to Sam for asking, and Matt for addressing so effectively, the question at the heart of my op-ed a couple of weeks ago about manufacturing and the future of American power.

I'm not by any means a confirmed 'declinist' about America. Like many others, I have long assumed that the US remains, despite passing problems, an essentially very dynamic and productive economy. I argued in Power Shift that America's declining power relative to China is a story of Chinese strength, not American weakness. I still think that is probably true, but due diligence requires us to examine our assumptions with a detached eye. Might something fundamental be changing?

Matt's post argues that it is not. He argues that US manufacturing output has continued to grow strongly, and that the number of people who work in the sector has fallen because manufacturers have become more efficient, which is a good thing. He blames the downturn in output over the last few years on falling demand rather than Chinese competition, and implies that we should expect US manufacturing to continue to grow strongly once demand recovers.

So, business as usual? I have three doubts — about employment, output, and value. Start with employment, and its impact on politics. Jobs in US manufacturing started to decline forty years ago. New industries have emerged to replace manufacturing – most notably finance and IT – but they employ many fewer people who are paid much more. The result has been a revolution in income distribution: median incomes in the US have gone nowhere for decades, and there seems no reason to expect that to change. 

So it's not just that the manufacturing jobs have shifted from the old industrial heartland to the south and west. Manufacturing no longer provides large numbers of high-wage jobs for middle-class Americans, and no new sectors are emerging to offer such jobs in its place. America keeps getting richer, but most Americans do not.

Why does this matter for the future of American power? If, as I believe, strategic weight is more than anything a matter of GDP, why should it matter to America's global role that income distribution in the US changes, as long as GDP overall keeps trending up? 

The answer is the impact on politics. One of the ideas I floated in my op-ed was that US politics has got scrappier, and government less effective, because the political choices have become harder as income distribution has become less equal, and the US political system does not seem to be able to cope. Perhaps history will judge that the Founding Fathers' handiwork, so good at managing a fast-growing and evenly-distributed economy, is not so good at managing a slower-growing and increasingly unequally-distributed one. 

If so, we'd better get used to the present dismal state of US politics and government. That has implications for American power, and how it is used. In particular, I think it may be that the seemingly intractable politics of the fiscal deficit has it roots in divergent interests between rich and poor which the US system finds hard to handle.

Second, I'm not as optimistic as Matt that US manufacturing can continue to compete with China in the long term by continuing to innovate. I fear the story may turn out to be that US manufacturing output remained high in the 80s and 90s thanks to productivity gains, as US firms became leaner to compete with Japan and others, but that more recently output started a long-term decline too, because of the new competition from China. 

This has happened because, while productivity gains could help US firms compete with highly-efficient but high-wage Japan, they can't keep them competitive against reasonably-efficient and low-wage China. Productivity gains can only go so far without new major technological breakthroughs, and we haven't seen any of those since the first wave IT revolution, which is now a decade or two ago. IPads are nifty, but they are not productive; they may even be counterproductive. 

Of course, something may turn up, but we should not simply assume it will. There seems to me to be a real possibility that China (and other low-wage, high-quality manufacturing exporters) will either drive much more of US manufacturing offshore or out of business, or drive US wages way down.

My third reason to worry has to do with the elusive concept of value. Over the past few decades we have all bought the idea that the shift in the centre of gravity of the US economy from manufacturing to finance and software has no negative implications for America's overall economic weight, because the value created by the new sectors is as great or greater than those they replaced. 

How do we know? Simply from the value the market puts on them. But has the market got it right? Has the US finance sector really added as much value to the US economy over the past decade as prices suggest? Does the marginally more efficient allocation of capital via the latest exotic derivative-of-a-derivative financial 'product' really add more value to the US economy than, say, 1000 new bulldozers? Does Facebook really add three times more value to the US economy than GM? 

Is it possible that the growth in the US economy based on the value added by these industries might be illusory – a reflection of the market's irrational exuberance?

Photo by Flickr user akoray