By Alan Reynolds
The Wall Street Journal's December 1 "Ahead of the Tape" column, by Kelly Evans, says "manufacturing is a relatively small part of the economy; It employs about 9% of the work force and accounts for about the same percentage of GDP." Actually, manufacturing accounts for about 12 percent of nominal GDP. But that, too, is misleading.
Chicago Fed economist William Strauss explains why neither U.S. manufacturing's share of employment nor its share of GDP captures the actual strength of manufacturing:
Between 1950 and 2007 (prior to the severe recession), manufacturing output was just over 600% higher while over the same period growth in real GDP of the U.S. was only a slightly lesser 560%. Yet, the manufacturing share of GDP declined markedly over this period as measured in current dollar value of output. In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector's goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector's declining share of GDP.
Those who imagine "we don't make anything anymore," as Donald Trump claims, don't grasp the magnitude of America's industrial productivity gains.
In reality, the U.S. is by far the world's largest manufacturer, with China trailing by 22 percent according to U.N. data for 2008 and arguably much more when we're not in recession.
A Wall Street Journal Column Understates the Size of U.S. Manufacturing is a post from Cato @ Liberty - Cato Institute Blog
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