This thesis addresses most of the main concerns of economists like Paul Craig Roberts, but fails to mention that for some companies and industries, shifting to financial services---making money but by renting money---has helped accelerate deindustrialzation in the US. -----lee
Around 1970 the U.S. entered a new phase in which manufacturing, the engine of American prosperity, began to falter. The problem, felt particularly in the North, sometimes came with little warning to workers, as factories suddenly closed or moved to less unionized areas, such as the Sunbelt and overseas. More typically, however, there was a gradual reduction in Northern jobs as corporations failed to invest in improved plants and technology.
The U.S. lost 9 percent of its manufacturing jobs between 1967 and 2001, but in the industrial heartland--the Northeast and the Midwest--the loss reached more than 40 percent. Because of phenomenal increases in output per worker, manufacturing output rose sharply. But as the chart shows, a steadily decreasing proportion of American workers was employed in manufacturing. This process is markedly similar to the historical decline of farming, in which a progressively smaller number of people produced an expanding volume of goods.
The traditional argument for the cause of deindustrialization is competition from low-wage labor in developing countries. But according to a theory proposed by Robert Rowthorn of the University of Cambridge and Ramana Ramaswamy of the International Monetary Fund, deindustrialization is a natural consequence of economic progress in all developed economies. In their view, imports from developing countries have a relatively minor role; rather, faster productivity growth in manufacturing as compared with services plays the major part. Because factory procedures can be standardized more readily than those in the office and the store, manufacturing productivity rises far more quickly than productivity in the service sector. As manufacturing becomes more efficient, service industries absorb an increasing proportion of laid-off factory workers. This process is consistent with the tendency of middle-class consumers in affluent societies to spend an increasing portion of personal income on services as their appetite for goods nears satiation.
A theoretical implication of the Rowthorn-Ramaswamy thesis is that aggregate productivity growth of all sections of the economy could slow as workers shift to the less efficient service sector, a circumstance that could lead to a slowdown in the growth of living standards. A second implication is that as unionized factory workers shift to the service sector, which tends to be lower-paying and nonunionized, income disparities will increase--a result that apparently has happened.
Rowthorn states that in the U.S. the decline in manufacturing jobs has been unnecessarily accelerated by policy decisions, a position long held by American labor economists. Thomas Palley of the AFL-CIO, who accepts the logic of the Rowthorn-Ramaswamy thesis, believes that the absolute decline in U.S. manufacturing--2.5 million jobs in the last third of the 20th century--traces to, among other things, the perpetuation of an overvalued dollar, which makes it difficult for American goods to compete overseas, and to a U.S. policy that opens domestic markets while offering manufacturers incentives to move abroad.
Policy at the local level may have exacerbated the trend toward destabilization. New York City in the 1950s had the largest concentration of manufacturing jobs in the country, but the natural forces of deindustrialization were reinforced by the city's post-World War II policy of favoring "clean" businesses such as banks and brokerage houses. And so, instead of encouraging the preservation of well-paying factory jobs, the city promoted the biggest office-building boom on the planet. The number of manufacturing jobs, meanwhile, fell from almost a million in the 1950s to about 200,000 in 2001.
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