August 17, 2003

Factories Move Abroad, as Does U.S. Power

ANUFACTURING is slowly disappearing in the United States. That does not mean we should rush to preserve the remaining factories as historic landmarks. America will still be a manufacturing power in our grandchildren's lifetime, but that status is gradually eroding.

Why does this matter? Well, the essence of a great world power is its edge in producing not services but manufactured products that other people want — Boeing's airliners, for example, Intel's semiconductors and Caterpillar's earth-moving equipment. To the extent this output passes to foreign manufacturers, or even to Americans operating abroad, we lose the means to buy what we, in turn, want from others.

More than half of the manufactured goods that Americans buy are made abroad, up from 31 percent in 1987. If we continue on our path of ceasing to make merchandise that others want to buy from us, the danger is that these imports will be unaffordable for our descendants.

For that to happen, "you have to assume that manufacturing will continue to disappear," said David Heuther, chief economist at the National Association of Manufacturers. He does not make that assumption himself. He contends that America's high-tech advantage and its ingenuity will sustain the nation's manufacturing base.

Maybe. Right now, however, the exodus continues, at a stepped-up pace, government data show. The proportion of the work force employed in manufacturing has fallen to 11 percent from 30 percent in the mid-1960's. Two of the 19 percentage points disappeared in just the last 28 months. On another level, manufacturing's share of real gross domestic product — representing all the goods and services produced in the United States — has edged down, even including in the count the output of foreign manufacturers operating here. The share of real G.D.P. has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950's.

Given manufacturing's importance in maintaining our status as a world power, the downward trends are alarming. The public, nevertheless, focuses only occasionally on the dismantling. It does so when lots of people are suddenly hurt, as they were in the early 1980's, when an onslaught of high-quality foreign imports coincided with a severe recession. The combination forced plant closings and layoffs on a scale not experienced since the Depression.

"Rust belt" and "deindustrialization" were coined in the bitter debate that surrounded that frightening national experience. Those were the years when wage inequality became too persistent to ignore. Blame fell partly on the destruction of factory jobs, and the relatively high wages earned by those workers.

Two decades later, the shrinking manufacturing sector is again a source of public agitation, this time because so many American manufacturers are decamping to China and India, where they employ increasingly skilled but inexpensive workers to make merchandise that is then shipped back to the United States, swelling imports and subtracting jobs at home.

What's to be done? Many economists bank on the marketplace for a solution. They note that the growing volume of imported merchandise would not be possible without loans from abroad to buy these goods. As this debt balloons, foreigners will lose confidence in the United States as a place to put their money, these economists reason. As foreigners retreat, their demand for dollars to lend to America will drop off, and so will the dollar's value.

 
HAT will make imported manufactured goods prohibitively expensive, while merchandise exported from the United States will fall in price, when sold in yen or euros. Responding to this price incentive, manufacturers will rebuild in America, says George A. Akerlof, a Nobel laureate who is an economist at the University of California at Berkeley. "Manufacturing has to come back," he said. No other sector is likely to be as responsive to dollar devaluation.

For Mr. Akerlof, retooling is the easy part. Other experts disagree. Too many products are no longer manufactured here, they argue, and the skill to make them has disappeared. Resurrecting that skill is difficult. Dollar devaluation does not easily overcome that barrier. Nor does it easily woo back American companies that have invested huge sums in large, modern facilities abroad. Getting them to abandon those facilities and rebuild in the United States might require an outsized 60 percent devaluation of the dollar as an incentive, says Daniel Luria, an economist at the Michigan Manufacturing Technology Center in Plymouth.

The fallout would be painful. The Nissan Maxima, made in Japan, that I bought in 2000 for $25,000 would cost at least $40,000 to replace. That's over my head.