The Retirement of Joe Lunchbucket Jude Wanniski January 18, 2005

Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: The Decline of Manufacturing

If you sign up for Lew Rockwell’s excellent website, you will get steady doses of libertarianism and Austrian economics. He also picks up my memo on the margin from time to time. More cross-fertilization occurs when I spot one of Gary North’s “Reality Check” commentaries and post it here when I think it is especially good. He sometimes worries too much about things that are not that worrisome and sometimes doesn’t worry enough about worrisome matters, but so do I. In this piece about the decline of the American manufacturer, his economics is just fine. The politics is just a bit more worrisome than he lets on. Still, a very good read.

 
Gary North's REALITY CHECK
Issue 413 January 18, 2005

The Retirement of Joe Lunchbucket

There is a constant lament in the media about the demise of American manufacturing. The trouble is, the critics don't always make clear what his specific concern is. If the critic is a trade union organizer, his lament is based on the fact that he doesn't have many people to organize these days. If the critic is a manufacturer in an industry, such as textiles, that cannot compete with low-wage Asian producers, then his lament is based on the fact that American consumers can get a better deal from Asia. If the critic is a retired industrial worker who sees that his sons cannot earn as much as he did, which was possible way back when because of union rules and restrictions on entry into the union, then his lament is based on the fact his sons will have to learn skills different from his.

I see no reason to worry about these issues. Progress has brought with it changes that benefit consumers at the expense of producers with obsolete skills. This is the universal price of economic progress.

There are other reasons to be concerned about the decline of American manufacturing. One is that intellectual property is more easily pirated than physical property. A piece of equipment must be manufactured somewhere. The authorities can trace the sales to a manufacturer. A patent on physical property is more easily enforced.

Of course, patents need lawyers to enforce them. Large companies have been able to steal patents from private inventors for decades. But in terms of mass production, it's easier to defend title to a physical invention or process than it is to defend title to digits on a disk. Thus, America's specialization in digits -- music, movies, software -- is at risk.

Also, innovation of digit-based products is far cheaper than innovation in physical production, at least so far. So, America's competitive advantage is at risk.

THE AUCTION FOR BRAINS

In the worldwide competition for brains, America is now falling behind. Other nations are becoming freer. They attract mobile people whose capital is in between their ears. This has always been true. When Spain expelled the Jews in 1492, the Netherlands benefited from the resulting immigration. The same thing happened when France expelled the Protestant Hugenots a century later.

Because of homeland security rules, the government is making it more difficult for foreign graduate students to come to the United States. For decades, we have been skimming off very bright grad students in science and engineering, who want to stay here, where the money and opportunity are. By March, 2004, reports from 19 research universities indicated that almost half of them had enrolled fewer foreign grad students. This chart is ominous:

http://chronicle.com/free/v50/i27/27a02101.htm#applicants

In a 2004 article in "The Chronicle of Higher Education," the author described the shift.

Last year [2003] colleges saw the smallest increase in the enrollment of international students in nearly a decade, only 0.6 percent, after their numbers had grown by 6.4 percent in each of the two previous years.

Even worse, recent Congressional hearings and statistical data confirm a chilling trend that college officials have warned about for nearly two years: Heightened security put in place after September 11, 2001, is persuading more foreigners, particularly prospective graduate students, to not even bother applying to U.S. colleges.

Students are "starting to vote with their feet and presumably will pursue plans" in countries with less-restrictive policies, says Victor C. Johnson, associate executive director for public policy at Nafsa: Association of International Educators. Two recent surveys found that at least half of all U.S. colleges have seen graduate-student applications from overseas drop since last fall. In addition, the Educational Testing Service found that one-third fewer international students have applied to take the Graduate Record Examinations this academic year. The statistics also show a precipitous decline in students from China and India, which supply nearly one-third of all U.S. graduate students.

When Chinese and Indian graduate students in science are opting for universities in their own nations, America's economy is in trouble. While most foreign students do return home, America has tended to retain the entrepreneurs. Those are the students who make a difference. Think of Andy Grove of Intel. An Andy Grove is worth a lot of money to any nation that can attract him. The United States has begun to fall behind in this crucial competitive arena.

Last week [March 2004] the Council of Graduate Schools released its own survey of graduate-student applications. Its findings were much grimmer: More than 90 percent of all responding institutions have seen international applications drop, a 32-percent decline from the fall of 2003.

Brain drain is bad for the nation that suffers it, but good for the nation that is the final destination. For well over a century, the United States was the final destination for risk-takers with brains. A shift is in progress, and it does not bode well for the future of the United States.

MOVING OFF-SHORE

In the world economy, manufacturing moves from developed countries to developing countries. This is as it should be. Most manufacturing involves skills that can be learned within a year. This isn't to say that a year will make a person a highly skilled performer. It will make a typical person with an IQ of 100 or less a competent worker.

Capital equipment does most of the routine tasks. The worker must master the machine assigned to him. With team production, he has to master several. But most of the money invested in manufacturing is tied up in equipment. The workers are easily replaceable. The equipment isn't.

This is why the blue-collar worker is doomed in manufacturing in a white-collar economy. He is so easily replaceable. I'm not talking about repairmen, such as plumbers. These people don't master their trades in a year. It take many years. They are highly skilled workers who must be versatile on the job. I'm talking about the man who makes the pipe, not the man who repairs it.

The percentage of the U.S. economy involved in manufacturing stays constant at about 30%. The number of workers employed in manufacturing keeps falling. It is now in the 13% range. As manufacturing gets more efficient, the number of workers falls.

We have seen this before: the development of modern agriculture. Manufacturing drew millions of farm laborers into cities, 1840-1940, just as it is doing today in China, where the numbers are in the hundreds of millions. Agriculture got more efficient, freeing up workers. This was not a step backward. It was a step forward. Fewer people than ever before could feed more people than ever before. That was a great thing. We no longer face starvation and famine.

The problem is not reduced employment in manufacturing. The problem is loss of the competitive edge in the capital goods industries. It takes brains, liberty, capital, and freedom from regulations to compete internationally. Low-wage laborers give the advantage to countries that produce low-tech items, such as textiles and toys, and small-scale technology, such as computer motherboards. These are low-value-added products. Let the masses of Asia produce such items.

The wealth advantage lies with manufacturing processes that rely on skilled workers, high capital investment, high rates of thrift, and innovation. This means entrepreneurship: the willingness to take risks. Here, America had the advantage for over a century. This is what we are now losing, as regulatory bureaucracy expands and as the tax-funded schools steadily produce millions of illiterate graduates and even more would-be bureaucrats.

So, it's not that America is losing manufacturing as such that threatens our economic future. It's that we are losing high-value-added manufacturing through tax policy, regulatory policy, and a declining percentage of students with top-flight educations that will enable them to move into high-technology manufacturing. In other words, it's not that there are too few workers in manufacturing. It's that there are too few innovators and too many bureaucratic restrictions on the deployment of new industries.


KEEP YOUR COMPETITIVE ADVANTAGE

If Wal-Mart sells it, don't produce it unless you have a lot of money and a lot of skill. Mass-market items are best produced by mass-market, low-wage workers. That means Asia. If your employer sells services locally, you're probably safe. A Chinese company can't enter your market easily to underbid you.

Assuming that your profession is not threatened by computerized machines run by 25-year-old techies, you're not going to lose your job. But as American businesses lose their edge competitively, you may not receive the raises that you are hoping for, the promotions, and the retirement package.

You can use your income from your job to meet normal expenses. Your savings must be invested so as to provide the future cushion. If you switch your thinking from retirement to production, this will make all the difference. If you can find something that you really like to do, and you then work an extra seven to ten years after age 64, the difference in your lifestyle and health will be positive, and your portfolio gets an extra period to grow.

I tell people to find something they want to retire into. It needn't be high income. It needs only to provide a sense of accomplishment and enough money to pay the bills. Cut back on spending now. This will get you in practice for retirement. Then don't retire….

I tell people they should find a way to convert their experience into extended earning power. I have used this example before, but it's worth repeating. It impressed me as a teenager. My maternal grandfather was an engineer. He worked for a large meatpacking company. He was forcibly retired when he reached age 65. He was not about to quit working. He joined the sales force of a company that sold meat packing equipment. He could talk to buyers as an expert, since he had spent his career in the industry. I think he was 80 when he retired. He earned an extra 15 years of income. He did what he liked doing. He died within a year or two after his retirement. He outlived his wife.

He made a late career switch: from equipment user to equipment seller. That's an obvious switch. I imagine that he worked strictly on commission. He was useful to the company that hired him: low risk, low expense. A good salesman who works 100% on commission is a cash cow for any company. He was also presumably useful to the companies he sold to. He went back to them year after year. His job kept him alert. He kept up with technology in the industry. About the only bad thing was his driving. He tended to ignore red lights.

People ask me, "What should I invest in?" There is no single answer that fits all people. But the best answer that I can think of is this: "Invest in whatever education or tools that will enable you to keep working after your peers have retired or died." This reduces your risk. I think it keeps you healthier. It lets you leave a larger inheritance to your children and wife.

Alzheimer's is the great threat, but it's a threat to everyone, not just people who have jobs in their old age.

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