Why is there so much gloom and doom in popular discussion of the economy? As the late President Lyndon Johnson once asked during an address to the nation: “I am not saying that you never had so good, but you haven’t, have you?”
President George Bush could say pretty much the same thing. The past four years have seen the fastest growth ever in the world economy. Much of that is attributable to the fact that China has been growing at an astonishing 9 percent per year and India is close behind, with something close to 6 percent during that time. The United States has benefited from this worldwide boom and has had the fastest economic growth among the larger Western industrialized economies over that same period, with an average of 3 percent growth, a rate that is likely to be repeated or nearly matched again this year. Contrary to the popular perception, despite all the outsourcing, and despite the fact that imports have claimed more than a third of the U.S. manufactured goods market, U.S. factory output has never been higher.
What then is the impetus behind the gloomy perception of the economy in general and manufacturing in particular? In a word, it is “employment.” We heard a constant drumbeat about job loss during the post-9/11 recession, with the popular media hammering home the fact that we had lost more than three million jobs in manufacturing. During the recovery general employment grew robustly; bringing the unemployment rate down to the 4 to 5 percent range. But in manufacturing employment – where the good-paying jobs were -- growth was quite anemic.
The answer to this apparent puzzle is simple, and it is, at least in part, a result of our industry’s impressive achievements. Post-recession productivity grew at a record pace, exceeding 6 percent in both 2003 and 2004. The surge in productivity was fueled by a combination of the continuing revolution in information technology and the purchase of ever more efficient machine tools. Productive new factory equipment was available to CEOs, and it made good economic sense to replace the old with the new.
A number of AMT members report that they produce machine tools today that are twice as productive as their 1990 models, with no increase in price. You don’t have to go to Harvard Business School to figure out the optimum business decision. Instead of taking the risk of hiring new employees, many CEOs opted for the purchase of more productive machinery instead. After all, as The Wall Street Journal has pointed out, new factory equipment does not come with a never-ending healthcare liability.
Thus, productivity ironically plays a big role in the misplaced gloom about the economy. Another big factor has been the migration of automobile production from the Great Lakes states to the South and Southwest. There are still jobs in the industry, but in the non-union shops of Toyota, BMW, and Hyundai they are not as high paying as United Auto Workers contracts. And everyday the American public is informed about the economic troubles of Ford and General Motors or told of another assembly plant closing in Michigan.
The great danger is that the new Democratic Congress will draw precisely the wrong lessons from the recent past.
Certainly there is much to be done to bring the unemployment rate down even lower and to make trade with countries such as China more fair. A number of East Asian currencies -- particularly China’s -- need to be adjusted. Current trade laws need to be enforced vigorously. But the key to our current trade problems -- and to future prosperity and employment growth -- is more trade, not less.
We need to pass the free trade agreements now before Congress. We need pass tax laws that encourage investment in productive equipment. And we need to realize that accurate analysis of a problem is the first step toward a solution.
