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Successful economies need more manufacturing, not less, says Neville Bennett. Your view?

Successful economies need more manufacturing, not less, says Neville Bennett. Your view?

By Neville Bennett*

The West is no longer the dominant part of the world in GDP terms.

At the same time is has de-industrialised to a high degree.

Most economists think this process is inevitable and desirable, as the work force can move on into higher paid jobs in the tertiary sector.

Using the IMF as a proxy for economists, this view will be outlined later. But I remain uneasy.

I have doubts that everyone is so mobile. What do you do with a fitter and turner, aged 50, when Widget Co of Northland closes, unable to compete with Chinese widgets?

Chances are you pay him unemployment benefits for a long time. His skills wither.

It may make sense for the owners of Widget Co to close down, but their decision impacts on the community and even on the country.

As manufacturing jobs are lost, so are the chances of fresh innovation. Widget Co perhaps had R&D that will go to China. Young people in that area might have thought of new ways to make widgets but that avenue is closed. Young people no longer think of making new things.

Except for IT and even music, innovation is abating.

De-industrialization, or hollowing out, is a tragedy for youth and the blue-collar class. New Zealand has low growth; but youth and blue collar are in a deep depression.

Western economies are finding it hard to find work for younger people, and displaced experienced workers. Their unemployment is structural and their plight will be ignored although it is clearly linked remotely to the unrest now seen in the Middle East.

Vanishing Factories

Forks and spoons are no longer made in the USA. The last factory closed 8 months ago throwing many on the scrap heap. But cutlery had been a mainstay of many firms since the US’s inception.

A nation of 300 million will soon lack the skill to make cutlery. Not the end of the earth, but it is a symbol of change. The least sardine cannery has gone. So have stainless steel rebars (crucial in construction), vending machines, cell-phones, laptops and light bulbs.

Less apparently, US manufacturers use more imported components than previously. Once Boeing made everything, but now even the wings are brought from Japan. A New York Times article cites the chief economist of Moody’s analytics claiming “a diminished manufacturing sector will undermine our economy”.

The US is still innovative: hence the iPad and iPhone, but the next innovation might come from the Chinese who make them. This in not fanciful: China’s patent filings increased by 56% in 2010. China is now third in patent filing, Japan second and Korea fourth. The US leads but its filing has declined for three consecutive years. It is harder to be innovative when you are not making stuff.

I would suggest that countries like Germany, Japan, and Sweden are more resilient because they have a robust manufacturing base. The US, for example, has shed 8.1million of manufacturing jobs since 1979; and now has only 11.6 million in manufacturing.

US job-shedding

Bill Gross, co-CEO of Pimco, says that “over the least 20 years we have simply borrowed more money in order to prosper. We forgot that the more stable and safe way to go is to make things”. The US has “structural unemployment”, an army of permanently unemployed people who will be a drag on economic growth until they are retrained.

Meanwhile about 150 plants are closed each week, and the machinery is often shipped overseas. This is a patent hollowing out of manufacturing capacity. But the workers are not recycled. Many remain, bound to their family and community.

Manufacturing employs only 9% of the workforce, yet it accounted for 26% of the lay-off in the recent recession. 2.2 million manufacturing workers lost their jobs in the recent recession some workers found employment in construction which employed 7.7 million in 2006, but now the bubble has burst, employment is very tight in construction.

The official unemployment rate in the US stands at 8% but it is 19.5% for blue-collar workers. So this is a depression for blue-collar workers whose standard of living has been deteriorating since the 1970’s. The unemployed will be searching for work, but the jobs do not seem to be there. 41% of the unemployed have been jobless for 27 weeks of more. Their skills may be deteriorating, making future employment more problematic.

As in New Zealand, new employees are offered lower wages in most industry. Skilled steel worker might get US$12 an hour. Many are on the minimum wage of US$7.25. Many plants have a 2-tier system, where newer worker get much less than senior co-workers. This is the case at Caterpillar, the big three auto companies and Harley-Davidson.

Many car workers earned US$20 in the past but rates have been sharply eroded. Workers were middle class but now the minimum for middle class is defined at $20 p.h or $41,000 p.a. There is enormous pressure on wages to make the US competitive.

The IMF view

The IMF sees deindustrialisation as a successful feature of economic development. The pattern of trade specialisation explains why some countries deindustrialise faster than others. Future advances in the service sector will raise living standards in the future.

In the 23 most advanced economies, employment in manufacturing declined from 28% of the workforce in 1970 to about 18% in 1994. Meanwhile, the services workforce grew to absorb the displaced. The shift can be because of shocks, especially exchange-rate changes.

My view

My view is that we need manufacturing.

Unfortunately policy-makers tend to listen to the finance lobby rather than manufacturers. I was conscious of this as an undergraduate where I felt the north of the UK was being hollowed out by the high exchange rate favoured by the finance industry based on London.

I feel distressed when New Zealand manufacturers move off-shore because we lose a lot of skills which could be needed if we move to a period of lower exchange rates. Given the level of our overseas debt of close to 80% of GDP, a change in the valuation of the dollar is not impossible.

The high New Zealand dollar may be expediting the hollowing out of our economy. The economic mainstream, as represented by The Economist, views the global decline of manufacturing as inevitable. It says recent “economic miracles” were achieved by developing countries exporting manufactures to rich countries. The goods were produced “with developed-country technology but with emerging-country labour costs. This will no longer work”.

One wonders why Switzerland, Germany, Sweden and Japan do not read The Economist and close down their industry. The displaced could presumably work its beloved financial services. I see the “post-industrial economy” as a dangerous myth.

The US is a good example of a country recently reversing the trend and re-industrialising. In the last 2 years manufacturing has expanded by 10% and has added 300,000 jobs. US firms are moving jobs back to the US.

This is excellent news because it helps rebalance the economy away from consumption based on borrowing. It has also led to an increase in exporting. Manufacturing benefits not only the lowly skilled blue collar worker, it adds high-productivity, high value added jobs.

Manufacturing plays a disproportionate role in innovation as it employs a skilled scientific, engineering and technical workforce. Manufacturing contributes 11% of US GDP but it employs the majority of US scientists and engineers and accounts for about 70% of US R&D spending.

The Obama regime understands this and is promoting manufacturing by adopting measures to increase time spent in school, workforce training programs at community colleges, more basic research, infrastructure investment, and improved scientific, engineering and technical education.


* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.

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Jeez Neville you'll have the whole country bawling its eyes out next.

........ those were the days , my friend , we thought widgets would never end ..........
Bring back the rehabilitation workshops whilst we're at it ..... give those old goonies from NZ Rail a job again ..........

Around here we have created a new job, those involved are called Herbalists, they do well and always have lots of cash. The police create jobs for pilots flying around catching them, but not too good or they wouldn't have any work next year.

Note to self - send Neville a Christmas card.
Well said Neville.
Cheers, Les.

Making stuff is great, how about making stuff that lasts.  Quality is the new black, if you can make something that will last over 20 years it will sell.  Most people are still apathetic toward the short lifespan of goods, but this is going to change, increased scarcity, lower wages combined with reduced security, will drive people from the expendable toward the dependable.

+1. Be damned if I can find a decent pair of shoes these days.

Get yourself some McKinleys, made in Dunedin.

I had a few pairs of those on my student days. Great indeed! Bought from a long since disappeared cobbler in Wellington.

Very good. Bought a pair last year. Solid as.

Well done Neville - closer than most economists.
The West went on a blind bender, flogging the same things to each other, rinse and repeat, in the false assumption that we were getting 'rich'.
The disconnect with things real - reality - has obviously gotten pretty big. This happened in the '20's (read Harpo Speaks; Harpo Marx's autbio, about the Aljonquin crowd, and their 'investments'. Intelligent enough folk - none more so - , but no questioning of whether their bubble was sustainable, what underwrote it, and no subsequent questioning of fundamentals like "what is money?'.
What we need now, is not just 'manufacturing', that runs smack dab into the sustainability issue, and - temporarily - into the compete-with-slave-wages one. We need to ascertain what we will need in the future, what the scarcities will be, do a bit of mental triaging, and get stuck in.

A unique factor in American de-industrialisation, as compared with other G8/G20 nations, is the non-universal nature of the healthcare and pension system over there, which has traditionally ramped up industrial expenses which its fellow nations don't have to deal with as much.

I suspect the USA has the capacity to ramp up production very quickly. Look to WWII for lessons on that. Even Russia was flexible enough in those times to dismantle their tank factories and move them out of the way of the Nazi's.
New Zealand is another matter. The number 8 wire ability of our population has slowly been bred out through our female dominated educated system, who seem to think we can all be graphic designers. I don't think we do have a great capacity to gear up again. I mentioned several days ago that all our glass for the construction industry is imported as the local factory couldn't compete. How do you get that expertise back? How long to put a factory together to produce what we now import? Do we have the engineers required?
I think in a downturn globally that we will get caught with our pants down.

The answer lies in an indigenour fibre, Scarfie.
You take Linum usitatissimum, and compress it into a cube.
Then you can rent out your block of flax.

The USA has no energy scarfie....its energy gets more expensive that impacts cheap glass from Indo is no longer that point we will see glass factories here again....An example is chinese steel, apparantly the USA is making steel again because to make it in the USA and use it there is cheaper than shipping it all around the pacific......
I dont know where u get female dominated from, but anyway yes there are a lot of ppl who have specialist skills and education that will see them pulling out carrots along side the unskilled...IMHO...

I hope you are planning to pay me for the use of that idea, I have been saying for a long time that the only way out is be making stuff, and those exact words as well. How do I get a job as an economist, a bush one, no doubt, but I am beginning to think that maybe I DO know what I am talking about

As someone who has 'IP', and does "make stuff" I have to poor rain on this a little.
You can make stuff yes, sell and export stuff yes, but when the ability for people to buy your 'stuff' runs out OR your stuff becomes to expensive to produce OR........the DEBT fueled monetary system collapses due to excessive ........ah........DEBT! 
then we have a problem, a serious one.

Absolutely, and it will happen.
But having the skills is having the skills. Forget the money side of it, at the end of the day, either you can or you can't. It's better you can.

USA have it sorted.  Their economic policy has recognised this need for increased manufacturing/exposting and supported it by quantitative easing.  The Chinese wouldn't increase their currency value so America just printed to deflate theirs.  If Bollard has tools for controlling property bubbles why is he not using them and reducing the OCR to help our exporters?

I dont agree, the USA is a dead man has no cheap abundant energy.....and  way too much debt, and its set to get worse.....
Bollard has few tools....he gets what the Govn allows him and his remit is one thing, controlling exporters...its up to the Govn to help exporters..............sure give him some tools and some policy, Im all for taking such out of pollies hands.

I agree with the importance you place on energy Steven, but I don't think the USA has played all its cards yet (compared to us anyway).
Think of it in terms of a pie. Yes the size of the pie is shrinking, but what is really important is how big a slice of that pie you get. The US still has natural gas that can be easily used for transport fuel and to fuel agriculture, if anything the depleting aquifers might pose a bigger problem.  I still see all those aircraft carriers as being a big piece of leverage. He who controls the oil controls the world for now.

I dont agree, we have not played our cards as we have raw materials....or enough for our own needs.  ie the pie isnt all in one place....its geologically diversified...
There are two issues with the US's gas supply... US's natural gas cannot be that easily used, Picken's plan (worth watching on youtube) lays out the issues...its scale....and time...then their assumptions on gas is based on shale technology which is pretty dubious to say the least, and estimates of how long it will last depends on usage...once you start to use it for hvy vehicle transport that projection will shrink hugely....Then throw in that much of the US's oil needs are for petrol and its just a mind boggling project management issue.
Aircraft carriers, there are only 3 or 4(?).....and they need jet fuel or they are one big target....and their escorts need fossil fuel as well.....
"He who controls the oil" I agree sort of, but its one thing to "own" the well and another to get it across the pacific....thats a long way and just cant be defended....and the tankers cant zig zag.....too big......Also India and China are on that name but two.
Hence why I think NZ has cards....we have quite a bit of raw materials here and we have a small consumption is not that fast and our raw materials are of sucha small quantity and distance that its not worthwhile coming to get it. Where we lose is shipping the good coal etc to India.....that has to stop at some point....maybe 5 years off yet, but it will stop.......we need the energy and not worthless $USD......

Your comment re 3 or 4 carriers is where you come a bit short in you otherwise sound comments.
The US has 11 out of 21 in service worldwide, but you could realistically add in the UK one as well since oil is the objective. Remember Britains Navy allowed it to rule the world, funny thing is ancient Greece did also. WWII transformed military domination to the air.
What is more important in that list is the opposition carriers with the only one being Russian, which is a short take off to boot. The charts here shows that the odds could improve further in the favour of UK/US when reserve and under construction are added in. I am sure there would be a few more on the US side that are mothballed that could be recommissioned as well. 
The US has a desert full of decommisioned aircraft where the dry air keeps them in working order.
Bottom line is that the sea lanes could be protected fairly well as submarines and surface ships are vulnerable to aircraft, as the Falklands excercise demonstrated. 

Ah yes, 10 ~ 11...funny but I thought I read pieces on them not having all of them on the go at once.....and were limited to 3 or 4....might have to dig a bit....if i get time.

Sorry Neville, your article is a good piece of writing, but like all before it on this matter, it will be kept in the usual place....the wastebasket.
1. There is no way NZ can produce anything in this world cheaper at NZ$13.50 per hour minimum when the Chinese guy in Shenzen can do it at NZ$1.50 per hour (an we are talking about Foxcomm workers)
2.There is also no way Kiwis will willingly pay more than the cheapest possible price for is a fact, I am in the retail business. To ask Kiwis to pay a little more because it is "Made in NZ" is simply silly....ask the Greens what happen to their "buy NZ" campaign ?
3. By the way, Apple do not even make the engineering drawings for the iPad and iPhone....all they do is give the "idea" to Foxcomm and Foxcomm comes up with all the designs possible and Apple chose the ones that it likes most..... 
4.Western countries has been spending their forward earnings for the past two decades.
It has now reached the stage of payback. The imputed forward earnings of their economies has been exhausted. Westerners has to learn to live with less and do with less (which has been masked all these  decades by welfare and borrowings).
And politicians need to be honest with their population and tell them the truth.....the good times are over and they and their children lives is not going to be as it was ....    

1. Real world example where you are wrong, its cheaper to make steel in the USA than import it across the pacific from china. This is because bunker fuel is now relatively expensive.
2a. See 1. above.....and I personally try and buy made in NZ or at least made in OZ as much as I can...I never buy made in the USA....
2b. retail as we know it is toast anyway....'consumerism" is past its sell buy date.
4. Agree, except the assumption was and is, there is a way to pay it do that we need growth better than the last decade and we have no oil to do it it or most of it wont be paid back.
"as it was" too truw, but any pollie who says this is toast.....if nothing else look at Winston Peters as a opportunist counter example.  ie if National, Labour or the Greens say it like it is they will get panned in an election...especiilay when WP's promises keep coming....
Right now however no pollie is saying a thing....lemmings the lot.

Consumerism and greed.
Neville - it is much easier and comfortable for western societies to consume, filling up shelves and sell houses to each other then building up a long term, modern, working production sector.
We simply don’t have the mentality/ culture for that here in New Zealand.
We are after all very, destructive creative:
Simple solutions: ... but no !

Quite right Walter. This is one of the more important pieces to grace the pages of but look at the pathetic response it generates if you compare it to threads on the price of houses.(notice I said price not value). 
I am afraid the consumerism will continue until it can't and as I point out above I worry that we don't have the expertise left to gear up for local manufacture.

"a long term, modern, working production sector." no such thing without fossil Richard H says....its over...

Steven –  when making comments- please inform yourself – don’t make “cheap shots” otherwise there is no way of making progress in debates:
Recommended for everyone interested in our economy: listen to part 2, 3, 4, also 5 and 6  (even more important).
Good morning PM - Minister S Joyce,  G. Brownlee, D. Carter, all the policymakers, economists and town- planners !

Kunst this isnt a cheap shot, in fact its you who appear deluded if you think we are in any shape or form "business as usual"  Its quite simple our economy and the manufacturing aspect of it are going to change a lot.....I suspect it will be mostly for local (NZ) consumption and if it isnt made importing is going to hurt.

Good on ya Stevo.......!

Waaaaaaaaaaaaaalter...tsk tsk, you are naughty..! hope your keeping well n selling plenty, or enough to keep mum in hats anyway.

Most of our time in our daily life's is now on 20m2 - a small world, but without to be prisoners of others.

Dear Neville
Thank you for writing this. Kin's points stack up under the current setup...IE looking at individual areas of economic output without viewing the whole.  Our problem is that we reject working conditions that we see as abhorent in our own country yet we promote them as models of 'efficiency'  as practised by other countries.  That's bad enough, but we then measure our own performance against this new global imperative.
By the way, that Icelandic volcano I can't pronounce caused havoc with transport and trade for a while.  Anyone wondering what happens when more than a tiddler decides to disrupt the world economy? Get ready, get through I reckon.
Where's the political vision in this country?  We often hear that  the old 'number eight wire' skills on the decline.  What we forget is that number 8 wire used to be our second best skill, way behind our real talent:  The ability to imagine shit happening and preparing for the inevitable BEFORE it bites us in the arse. That comes from remembering personal suffering when the cavalry doesn't arrive, not from the constant erosion of legislation written by those who did remember, now deceased.
Thank you, again ,Neville.

haggis, no kin's points do not stack up...whole as in the world and the energy it uses.
"The ability to imagine shit happening and preparing for the inevitable BEFORE it bites us in the arse."
Sorry but when I talk about Peak Oil etc no one knows how to deal with it....except head in I odnt its perfectly possible that once we finally accept this inevitable NZers/NZ will be the most agile nation on earth....the Q is will even that be fast enough....

Bring back protectionism. We are tiny and vulnerable. 

Yay Vanderlei..! now your seeing it....Although our new best freinds may have to squint a little more to notice if we did.....
Oh we are still making stuff.....well not us really, but the cows....then we get busy making ideas to make more stuff out of their stuff...then we even hedge against  the stuff....and it all rolls along the beautiful Milky Way. 

The only thing I have about protectionaism is really it moves a cost from one sector to another.    Its really welfare...For instance say shoes......if we make them here they would be, what? $300 each?  import them and they are $ the semi/un-skilled working in NZ show factories keep poorly paid jobs while the rest of us kee them employed....makes no sense.
Now once the cost of importing a show from china gets expensive due to transport fuel costs then making shoe's locally becomes "economic" in the sense we will pay $300 no matter which case we might as well make it here.

Good on ya Stevo.......!

I was being semi-facaetious, but we really dont want to end up in a situation where our only expertise is making filthy rivers....

me too Vanderlei.............semi facaetious I mean.... well maybe not semi....
 however the U.S. will find it's way back there under it's own steam....uh

The Germans..! now there's a story Neville.  Manufacturing again....with a deliberation and a will to do so far the most exspensive of chainsaws( eg.) but  has not hurt the demand for quality in good to see a follow up story on the revival of their manufacturing industry....who is sthil (tee hee) buying goods and why ...their labor costs are not lower than ours as I understand it.

Germans very clever. They created the euro to devalue the mark and boost their export sector.
They've used their high savings rate to vendor finance the buying of those exports by southern Europe.
Plenty of Porsche Cayennes driving around in Greece bought with money borrowed from Germany.
Now Germany has its factories humming and unemployment down to two-decade lows.
Worked very well for the Germans.
And they can now buy assets cheaply in Greece. Or even better, just demand them for free in lieu of debt repayment.

Thank you Bernard......but is it really how they saw it on the factory floor level...? or did the hilighted plays come into effect to fertilise the ground post the will to return to manufacturing..? For many years industry of that nature lay in the doldrums in Germany the committment was not there to persue manufacturing I understand it.. it was not just the hi mark that put it to bed in a coma...
 I should like to hear more on this ...yes I think  I would. 
 Don't misunderstand me, I liked what you had to say  I just felt it came with an economist bias as to outcomes....and I'm not sure it was that simple.
 The Germans are nationalistic by the Americans were say in the 50's..the collective will to respond with conviction to crisis is not lost on them...
 But of course ...Don't mention the War.

I can not believe that you write this article  as though you have just thought of it. It has been obvious for years that if you off shore all your manufacturing work the local population will have less jobs, In Asia there is no OSH, pollution controls, ACC or other compliance costs which is why they can make the goods so cheaply, plus there are millions of people to work there at low rates of pay.
 Our exchange rate  is artificially high so no local business can survive and compete with Asian manufacturers.
The eventual outcome is the NZ local workers either work for less pay or have no work at all.
It is not rocket science.
People are at least starting to see the light, vintage clothing and goods are becoming more popular and are loved because of the good quality which is unheard of now. All the cheap toot made in China has less and less  value. 

Could not agree more Neville.  Trouble is that just about every poplicy setting in our country is set against it, as opposed to those in China. 

Manufacturing per se doesn't cure a economic problems like poor banking regulation or over spending through loose monetary policy.
Unless you want to work for that same hourly wage as the asian worker anything with a significant labour cost isn't going float here.  Even the freight costs of getting stuff in and out may kill you.  Crying about the old days won't change that.
It is also worth pointing out that the most de-industrialised economy in the world might be Hong Kong, where manufacturing makes up only 1.8% of GDP.  Services make up some 92.9%.
Although HK have a massive trade deficit in goods they more than make up for it in exported services that in the net calculations give them a trade surplus of 4%.