from Follow the Money

The post-industrial economy?

September 3, 2007

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Buried in a column on iconoclastic  (and fashionista) tax policy expert Lee Shephard is this little gem:

"“The whole Midwest was engaged in metal-bashing of some sort back then[when she was growing up],” she said. “Now they make loans instead of cars.”

Michael Pettis would disagree.   He thinks the stereotype of that the US economy produces "spread and correlation products" -- i.e. debt -- rather than real products needs to be revised. He approvingly cites CATO's claim that the value-added in the US manufacturing sector is the world's largest. 

Peter Goodman of the Washington Post similarly emphasizes the size of the US manufacturing sector: 

"The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation -- three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

With less than 5 percent of the world's population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing."

I am a little more skeptical.   The US manufacturing sector is bigger today than in the 1950s because the US economy is bigger today than it was then.   And since the US has the world's largest economy by a factor of around 3 -- and remains remains more than four times larger than China's economy (at market exchange rates) --  the US should also have the world's biggest manufacturing sector.  It certainly has the world's largest service sector, the world's largest retail market and the world's largest mortgage market.  

But I still wouldn't claim the US manufacturing sector is in rude health -- even if overall manufacturing output is rising and exports have picked up recently.

Exports are now growing faster than imports for the first time in a long-time.  But the US still doesn't export nearly enough goods to pay for its large import bill for imported Asian goods and African, Latin and Middle Eastern oil.    And it doesn't export enough services to pay for these imported goods either.   

The BEA indicates that the US exported $270b worth of goods in the first quarter, while importing about $470b -- for an overall deficit of around $200b (6% of US GDP).  $70b of that deficit comes from energy and fuel, but $130b comes from manufactured goods (agriculture is in rough balance).  

Some of that is offset by a $25b services surplus.   But the service surplus could equally be applied against the roughly $25b transfers deficit.  Roughly $15b of that deficit comes from remittances and private transfers, which could be thought of as the  external price of importing the services of migrant labor.   Net US exports of financial services -- $10b -- just covered the $6.5b bill for US remittances to Latin America, and fell far short of the United States $35b (quarterly, net) bill for imported automobiles ... (data from the BEA)

The Eurozone, by contrast, exports enough goods to pay for its imports.  It runs a surplus in both goods and services trade right now. Morgan Stanley reports that the EU -- led by the Eurozone -- now exports significantly more to both Asia and the oil exporting economies than it exports to the US (hat tip, Econocator).  European -- and particularly German -- capital-goods producers have benefited far more than American capital goods producers from the investment boom in China and the oil exporting economies. 

But with a strong euro and strong growth, the broader EU-25 ran a euro 45b goods deficit in q1, offset in part by a euro 15b services surplus for a modest overall deficit.  In q4, the goods deficit was euro 25b and the services surplus was euro 20b -- the swing into deficit is fairly recent.

The EU's combined economy is now larger than the US economy (in dollar terms), so the EU was treated as a single economic block rather than a confederation and if the EU's manufacturing value-added is equal to US manufacturing value-added as a share of GDP, it would have the world's biggest manufacturing sector in the world.

And my guess is that manufacturing value-added in the EU is larger, relative to EU's GDP, than manufacturing value-added in the US.   

Let's go back to that trade deficit.  The US runs a 6% goods trade deficit -- with a deficit in both manufactured goods an in oil.   The EU-25 -- even if the q1 deficit is annualized -- runs a goods deficit of only around 1.5% of its combined GDP.   That suggests a bit more manufacturing value-added.   Europe isn't exporting commodities to pay for its imports of Asian goods and Middle Eastern, Russian and North African oil.

I read in the NYTimes book review that the Democratic party hasn't adapted to the post-industrial economy.  But unless the US can -- over time -- find a way to export enough post-industrial goods and services to pay for its "old economy" imports, I am not convinced that the United States post-industrial economy can be sustained in its current form.   

True, selling ads linked to search to the entire world is a great business.  But so is selling oil that can be pumped out of the ground for $5 for $70.   Last I checked, Google's exports didn't cover the US oil import bill.  

The (net) sale of debt securities certainly has been far more central to the United States ability to pay for its (net) imports of goods than the (net) sale of services. In the first quarter, the US exported $210b in long-term debt securities to the world v. $240b  of goods.   That suggests to me that manufacturing of debt for sale to central banks and others really has been a big part of the United States post-industrial economy.   The US certainly exports far more debt than goods and services to China.  

But just as selling debt to pay for industrial goods imports wasn't necessarily a viable long-term strategy for a pre-industrial economy, I am not sure it will prove to be a viable strategy for a post-industrial economy.  

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