Matthew Yglesias: Man Of The People

I recently had a back-and-forth with a commenter who disagrees with my assessment of Matthew Yglesias: that he is a conventional, authoritarian thinker, and that his changes of mind regarding the Iraq war do not mean he is no longer an authoritarian thinker. In brief, I said that if the commenter wished, I would give Yglesias the same sort of critique that I give McArdle, although I acknowledged that he is not nearly as authoritarian as McArdle nor dishonest like her.

Let the games begin!

In R&D Following Manufacturing to China, Yglesias doesn't understand all the fuss about disappearing manufacturing jobs.

I’ve been urged on any number of occasions to worry more loudly about the decline of manufacturing employment in America, so here’s a link to Ed Luce in the FT:

[M]any of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

In addition to my oft-made point that US manufacturing output is not in fact declining, it’s worth noting that the alleged need for R&D to be proximate to manufacturing options (plausible) cuts in both directions.

Yglesias is right; US manufacturing output is not declining. The Sep. 2010 Federal Reserve Statistical Release on industrial production and capitalization utilization states:

Industrial production rose 0.2 percent in August after a downwardly revised increase of 0.6 percent in July. The downward revision in July primarily resulted from newly available data on the output of four industries within manufacturing: iron and steel, construction machinery, paper, and pharmaceuticals. The index for manufacturing output rose 0.2 percent in August after having advanced 0.7 percent in July; the step-down in the rate of increase reflected a fallback in the production of motor vehicles and parts, which had jumped sharply in July. Excluding motor vehicles and parts, manufacturing output increased 0.5 percent in August after having gained 0.2 percent in July. Production at mines moved up 1.2 percent in August, while the output of utilities moved down 1.5 percent. At 93.2 percent of its 2007 average, total industrial production in August was 6.2 percent above its year-earlier level. The capacity utilization rate for total industry rose to 74.7 percent, a rate 4.7 percentage points above the rate from a year earlier and 5.9 percentage points below its average from 1972 to 2009.

We are delighted for the owners of American factories, who seem to be doing just fine. Unfortunately for Yglesias and American workers, however, the job security of wealthy factory owners is not the issue. Why doesn't he look at the number of jobs, not the factory output?

Maybe this is why: From the Congressional Budget Office's Director's Blog:

Decline in U.S. Manufacturing Employment
CBO released an economic and budget issue brief today that discusses the factors underlying the decline in manufacturing employment over the past several years. The manufacturing sector of the U.S. economy has experienced substantial job losses since 2000. During the recession of 2001 and its immediate aftermath, employment in the manufacturing sector fell by about 2.9 million jobs, or 17 percent. Even after overall employment began to improve in 2004, the decline in manufacturing employment persisted. By the end of 2007, with the slowing of economic growth, employment in the sector had edged down further, by half a million jobs. And, as of November 2008, employment in manufacturing had fallen yet again, by slightly more than 600,000 jobs. A significant number of additional losses is likely given the current weakness in the economy.

Although the decline in manufacturing employment in recent years is not a departure from long-standing trends—the sector’s share of total employment has been falling steadily for more than half a century—the recession of 2001 hit manufacturing particularly hard. And, in sharp contrast to the pattern observed during previous expansions, employment in manufacturing (as reflected in the total number of hours worked) did not recover as it usually does following a recession.

The decline in manufacturing employment between 2000 and 2007 stemmed as much from an absence of new hiring as it did from layoffs of individual workers and downsizing. Rates of both job losses and job gains have been lower since the 2001 recession than they were in the 1990s. Workers who lost jobs, however, have typically experienced longer stretches of unemployment than did workers who lost jobs in the previous decade.

The steep decline in manufacturing employment since 2000 is associated with two interrelated developments: rapid gains in productivity (output per hour) in U.S. manufacturing and increased competition from foreign producers. Productivity in manufacturing has risen by about one-third since 2000, and growth in that productivity has consistently exceeded that of the overall nonfarm business sector.

Why didn't Yglesias think of the workers instead of the owners? No idea. Why doesn't Yglesias ever think of the people being affected by his little ideas?

Conventional wisdom is that manufacturing operations will all drift to low-wage countries.

"Will"? Most of it already has.

But if the USA is a better location for R&D than China, and if it’s strongly desirable to co-locate R&D and manufacturing operations, then many firms will want to retain manufacturing operations in the United States of America.

Why would R&D stay in the US? China has smart, educated people also, and that trend will increase in the future. Why would global corporations hire US workers at a higher salary than Chinese workers? Why are the educated class immune from globalization? Why does Yglesias think his class is indispensable?

So if this story is right, then more and better education for America is the key to retaining high-wage manufacturing jobs.

Surely China is saying the same thing?

Alternatively, if the obsolete Summers/Yglesias paradigm is correct then . . . more and better education for America is the key to replacing inevitably-vanishing high-wage manufacturing jobs with high-wage service jobs.

That’s not to say that Luce is wrong. But my read of Luce’s story is less as one about the alleged deindustrialization of the United States dragging down our R&D capacity as it is one in which failure to keep up with high-end technical capacity could drag manufacturing down.

Do we not have enough educated unemployed people to fill these jobs? If corporations are out-sourcing, it's obviously not for lack of people, it's to save money.

The other wrinkle here is that firms shifting R&D capacity to China may be lying to the press about why they’re doing it. I’ve had executives from a number of firms explain to me that they launched an R&D center in China primarily as part of an implicit bargain with PRC officials that doing so would help them win Chinese government contracts. That appears not to be the case with Applied Materials since they’re actually shifting operations rather than creating new ones. But it’s definitely part of the story.

Everybody lies because it's so easy to do. Most people will believe what they want to believe, so all you have to do is figure out what they want--which isn't hard--and give it to them. Yglesias wants to have a wise Exceptionally American ruling class. He should know better, considering he's part of that group himself.