Saturday, December 22, 2012


Reading the executive summary of the McKinsey Global Institute's November 2012 report "Manufacturing the future: The next era of global growth and innovation," I was surprised to see that “overall in the United States, trade and outsourcing explain only about 20 percent of the 5.8 million manufacturing
 jobs lost during the 2000-10 period; more than two-thirds of job losses can be attributed to continued productivity growth, which has been outpacing demand growth for the past decade.”
The full report [minus the Exhibits / graphics, which the Y blog IT department could not transfer successfully] explains MGI’s approach:
Given the sharp decline in manufacturing employment in advanced economies
 in the past two decades, during which globalization opened up new, low-cost production capacity in developing economies, it appears that trade accelerated job losses. Indeed, from 1980 to 2000, US manufacturing employment fell by
1.5 million, or about 6 percent, but from 2000 to 2010, it fell by 33 percent—or by an estimated 5.8 million jobs.
By decomposing changes in employment levels, we can see more clearly the role that trade has played. In Exhibit 9, we look at three drivers of manufacturing employment: growth in domestic final demand, changes in net trade position, and differences in productivity growth. The results of our analysis show that productivity growth accounted for 3.7 million of the lost jobs.11 This estimate is reduced by 600,000 to correct for cost savings related to offshoring, which we believe national accounts incorrectly record as productivity gains.12 Those jobs are more properly grouped with the 700,000 trade-related job losses during the decade, bringing the total to 1.3 million. So we see that trade and offshoring explain around 20 percent of the decline in manufacturing jobs—still a significant force, but not the main driver of job loss.13
Footnote Number 11 provides a fuller explanation of how the MGI arrived at the conclusion I find so interesting: 
    11    Our approach takes into account analytical difficulties that have been the subject of
academic debate; in particular, it compensates for the vast measured productivity increases from performance improvements in computers and electronics and lower-cost offshored intermediate inputs. These measurement issues are the focus of an ongoing debate among economists about the measurement of value added, which uses hedonic deflation (i.e., adjusting for processing power and so on) in computers and electronics products and also includes profits from sourcing low-cost components. Metrics probably reflect the value delivered to consumers and businesses in mature economies reasonably well. But we take the position that this kind of hedonic deflation and accounting is not appropriate when looking at the number of jobs required to achieve a certain level of output.
Correspondingly, we use non-deflated data for computers and electronics, which leads to a conservative downward revision to the impact of productivity in this sector. We also estimate the impact that lower-cost imports of components have on measured productivity and show the effects as offshoring gains explicitly rather than mixing them with other productivity effects. Of course, there are further uncertainties inherent to the national accounts 
source data. For instance, specialization along the value chain within sectors would affect productivity of the sector; our analysis suggests that the effect is moderate in aggregate, as there is both a shift toward high-value R&D activities and lower-value customer care. While we are not able to fully resolve issues inherent to source data, we believe our approach suggests that the key findings are robust even within the constraints of the data.
See appendix for more detail on methodology. For a detailed discussion of measurement issues in manufacturing output, see R. Atkinson, L. Stewart, S. Andes, and S. Ezell, Worse than the Great Depression: What experts are missing about American manufacturing decline, The Information Technology and Innovation Foundation, March 2012.
.     If we look at only productivity and demand, we also see that the collapse of demand during the past decade was the key departure from previous trends and caused manufacturing employment to “fall off a cliff” (Exhibit 10). While productivity growth continued to increase gradually, demand growth—which had kept up with productivity in the previous two decades—did not keep up in the 2000s.
     To put the trade-related job losses in perspective, if the United States were 
able to eliminate the entire 2010 current account deficit (3.2 percent of GDP) by increasing manufacturing exports, about 2.2 million jobs would be restored to the sector. While this is a sizable figure, it would bring US manufacturing employment back to 2007 levels but no higher. 
This analysis is not intended to suggest that there is no need to strive to improve the competitiveness of US manufacturing. Competitiveness, particularly through innovation, should be a top priority for policy makers in high-wage economies that need to compete on factors other than cost. The thrust of manufacturing policy—if such policy is contemplated—should focus on value added, productivity, terms of trade, and efforts to build on the competitive advantages that manufacturing sectors have in the global economy.

Value added is an interesting term. I have no idea what it means to each company, but from a consuming class member's point of view it means, Why is it preferable for me to spend money on this product versus these other ones? Cost is not the only factor, I don't think, for educated consumers. 

One example:

Yesterday I spent $5.49 to purchase 100 yards of a “100% Vegan Waxed” dental floss made by Eco-DenT. It comes in a coated (is coated paper recyclable?) container and relies upon the consumer to assemble what I will call the flossery. First, one must open the “flavor-saving protective bag” of floss; then, one must thread the floss.

Here were the decisions that affected my purchase: purchase at an independent store, which anchors the street life of my local neighborhood; and purchase a product using minimal packaging that is aesthetically pleasing and, ideally, biodegradable. (The executive summary of the McKinsey report refers to on-the-ground research which informed a frustrated consumer products manufacturer attempting to enter an emerging market that "unlike in every other nation where it sold this particular product, consumers in this emerging market required packaging that could be reused for other purposes after the contents were used up." People really do have their preferences.)

The Eco-DenT packaging reminds me of a cleanup day I participated in several years ago, in Dobbs Ferry, New York. For hours we fished all kinds of mostly plastic debris from the Hudson River. I was very disturbed by the number of Styrofoam pieces sunken and floating along that shoreline. (After that day and a subsequent one spent at a Cooper-Hewitt exhibit viewing packaging materials, I began to pay more attention to which restaurants use Styrofoam takeout containers.] 

My Eco-DenT purchase perhaps relates to a piece of news reported yesterday by the Surfrider Foundation, about President Obama’s signing of the Marine Debris Act Amendments (Farr - H.R. 1171) into law on Thursday. Part of the Coast Guard Maritime Transportation Act (H.R. 2838), the Marine Debris Act Amendments “reauthorizes and amends the Marine Debris Research, Prevention, and Reduction Act to create a marine debris program to address the billions of pounds of litter that travel to our ocean every year.  Specifically, the bill requires NOAA to identify, determine sources of, assess, prevent, reduce and remove marine debris and address its adverse impacts on the national economy, the marine environment, and navigation safety.” How much of that debris is plastic? Quite a bit.

The McKinsey Global Institute (whose research, by the way, "is not commissioned by any business, government, or other institution") might classify plastic ocean pollution as one of the “societal challenges” manufacturers face year in, year out.

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