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Don’t Glorify Manufacturing Jobs
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Don’t Glorify Manufacturing Jobs

Speaker: Martin Eichenbaum

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Martin Eichenbaum

Subject: Don’t Glorify Manufacturing Jobs
Bio
: Professor of Economics at Northwestern University
Reading: Factories Aren’t the Future is here

Transcript:

Larry Bernstein:

Welcome to What Happens Next. My name is Larry Bernstein. What Happens Next is a podcast which covers economics, politics, and international relations. 

Today’s topic is Don’t Glorify Manufacturing Jobs. 

Our speaker is Marty Eichenbaum who is a Professor of Economics at Northwestern. Marty wrote an Op-Ed in the Wall Street Journal last week where he argued that the focus on American manufacturing jobs is misplaced, and that our economy has moved on to services. Manufacturing jobs were good jobs in the 1950s but no longer.

Marty, please begin with your opening six-minute remarks.

Martin Eichenbaum:

What seems to be a universal theme in the election is that we need more high paying jobs in manufacturing. I wrote this article in The Wall Street Journal that the manufacturing share of non-farm employment is in secular decline.

It's not something that just happened in the last couple of years. The share of jobs in manufacturing was about 32% in 1947, and it's now down to about 8%. There are inflection points, and it's certainly true that when China entered the World Trade Organization in 2001, that you see an uptick in the decline. But when you view that against the long secular decline, it's second order. 

If you go back to 1900, most Americans were involved in agriculture and then, not because of nefarious forces, we got very productive at agriculture and people moved on to other things.

Has this decline in manufacturing been this catastrophe that everybody in the political sphere is talking about? And the answer is unambiguously no. If you correct for inflation in 1947 per capita income in the U.S. was about $15,000 and in 2023 it was $66,000. It's just not true that to be prosperous we need to have a lot of people in manufacturing. And it is like agriculture when productivity increased dramatically. 

We need less people to produce a car today compared to 2000, and the cars are better. There's this powerful force that's reducing employment, which is we don't need as many workers to produce the same amount. Manufacturing still contributed $2.3 trillion to US GDP. It's not trivial. 

So, what do we do? It's professional and business services; it's real estate; it's finance; it's healthcare.

They make up about 70% of US GDP. People are moving from manufacturing to where their labor is needed: Financial services, medicine, biotech, higher education. We export our education services to people coming from abroad to the university. 

I do want to make two caveats. National security is entirely legitimate for us as a country.  We cannot afford to take any chances with certain things that might be disrupted. That's not Coca-Cola bottles, but it might be computer chips. I'm sympathetic to it but that is not a call for undifferentiated tariffs or massive industrial policy.

I started at Carnegie Mellon in Pittsburgh. I have the fondest memories of that place, but change inflicts costs on real people. You take a guy who's 45 and retrain him, it's hard. I think we need the government to materially help those people find jobs in which they can take pride. Pride is very important. 

Parents and educators must give the kids the skills that they need to thrive. They must think about the arc of their entire career, which will require multiple changes. 

Larry Bernstein:

I'm going to start with a strike in U.S. ports. Their union leader successfully raised wages by 62%. And one of the things he was most adamant about preventing was new technology to reduce the number of workers at the port.

Tell me about what the union leader was saying in the context of your framework.

Martin Eichenbaum:

It is an ancient fight between incumbents who fear automation. Fewer workers will have jobs. I get the current generation of dock workers are upset. But to the extent that he prevents change, that industry will decline, and people will find other ways to get stuff into the country. It will make the ultimate cost to consumers unnecessarily high relative to what it could be if we were working efficiently. You're going to get a relatively small number of workers taxing everybody else. I'm not so happy about it.

I want to distinguish between the guy who gets fired and his kid. The guy who gets fired, he's got a real problem, and I get that, but over time, the composition of the labor force changes as people respond to the jobs that are high paying. 

Larry Bernstein:

You distinguish between young and older workers in the same industry. In your framework it would be a debacle for a new graduate to enter manufacturing because it's a declining field and he's going to face this retraining problem, and therefore we should actively discourage workers from entering manufacturing. 

Martin Eichenbaum:

No, that's too strong. What I'm saying is that workers that go into manufacturing should be different now. 25 years ago, you would go into a steel factory, and you would lift things. When that was my summer job, it was a hard job physically. If you go into a modern steel plant now there are lots of high-tech engineers, software people, they're high human capital working with very sophisticated machines, and it also means that the skills that they have are portable. If for some reason there's a change in the mix of capital and labor in the future, the guy working with computer programming will find a job in another area. 

It's one thing to work in a unionized steel plant when wages are artificially high, it's another to go work in a restaurant. That transition involves a big cut in pay. Yes, you can do it, but you're not going to get the same wage that you had as a union guy in a protected steel plant.

Larry Bernstein:

The key point that you’re making is that manufacturing workers previously had high wages and that in a competitive global marketplace, those wages can't be above market for very long. 

Just to follow the logic by metaphor, the quarterback of the football team had very high social status in high school and the high academic student had relatively poor status, and then over their lifetimes, their social status changed. Is that unfair? By its very nature one declines and the other one rises, and should good social policy try to help the quarterback as his relative stature declines?

Martin Eichenbaum:

There are relatively few quarterbacks and there's an awful lot of manufacturing people who lose their jobs and we're seeing the results in voting and a lack of trust in the system. So yeah, you're right. If it's just a couple quarterbacks, the heck with them, I didn't tell them not to study. 

There is an incentive problem. If people know that they're going to make bad choices and then we're going to bail them out, they respond to those incentives. The last couple of elections were about people like that being very upset and voting in ways that I personally think are not good for the country. 

If for example, we land up imposing 60% tariffs because of this political process, you and I are going to get hurt. We can say that it’s not fair or we can try and do something to address the concerns of the people who are going to elect someone who wants to have a 60% tariff on everything.

Larry Bernstein:

Let's do tariffs next. The tariffs that we are talking about is specific to China and they're not talking about tariffs to Europe, Japan or Australia. China happens to be perceived to be an enemy. 

If you're going to contemplate being at war with another nation, does it make sense to discourage supply chain interaction with that nation? There has been a belief that when countries become more integrated economically, it prevents war. It turned out not to be the case with World War I and World War II. 

It makes sense not to have your supply chains interlinked with your enemies if tariffs are localized to those nations who oppose the American project. 

Martin Eichenbaum:

If we were in World War 2, I don't think we should have had free trade with Nazi Germany. 

I don't think the people proposing tariffs now are going to stop at China. Canada is wrongfully not paying its NATO dues. I was born in Canada. I'm embarrassed. Canada should be living up to its obligations. I'm not sure that threatening Canada with massive tariffs is the right way to deal with that problem. 

There's a good narrow case for tariffs on the bad guys, but I don't believe it'll stop there.

Larry Bernstein:

The WTO was supposed to assist in trade negotiations. I was at a conference in London a couple years ago and an Indian woman who ran intellectual property theft gave a speech, and she said that no US firm had brought a case against a Chinese firm and therefore there isn't a problem. 

Martin Eichenbaum:

I don't believe that. I'm on your side with that one.

Larry Bernstein:

Sometimes these international institutions are toothless. How do you think about global trade institutions and their ability to monitor and rectify this situation?

Martin Eichenbaum:

I do believe that there are various forms of protectionism that are going on. Intellectual theft goes on and it's clear that cyber-crime is motivated by commercial considerations. I do not think that large multinational international organizations are well suited to dealing with that problem. If those organizations are useful for us, then use them. If they're not, we must pursue other alternatives. I don't live in this Panglossian view because there is a WTO that that's going to solve the problem. I'm not against American politicians dealing with unfair competition. That is a second order effect because manufacturing's been declining since 1950. It is not something that's a new phenomenon. China was doing nothing in 1950, and our manufacturing was already declining.

Larry Bernstein:

In the 1980s. I worked at Salomon Brothers and Chrysler was one of our clients, and I had the chance to meet with some of the executives, and they told me that they had to shrink the business, and they would do it based on seniority. The more senior employees could stay, the younger employees could leave that had college degrees, expertise in software and robotics and the like. But the union prevented the hiring of those college graduates. How do we think about a changing world where the old dogs run manufacturing?

Martin Eichenbaum:

As an old tenured professor, I'm very sensitive to that issue. Progress comes from young people challenging accepted paradigms, coming in with new skills, whether it's academia or the steel industry; this is not a new problem. It's been going on for about 2000 years and there are things that the government should do to weaken the power of the incumbents of the old guys. But I don't think there's a magic bullet here. 

I don't want the government to tell Chrysler who to fire and who not to fire. I don't want the government to tell young people to go into manufacturing or not. I want us to give skills for them to make the right choice. But this tug of war between generations and declining industries has always been an issue. And the government can help young people, but I want to be careful to do it in a way that doesn't get the government involved in micromanaging the decisions in particular industries.

Larry Bernstein:

As a kid, I used to go to the Field Museum in Chicago, and they have a video of life in a 1950 manufacturing plant. It's unattractive. It wasn't so much hauling stuff; it was dirty; it was loud; it was dangerous. Why do we have this belief in the golden age of manufacturing?

Martin Eichenbaum:

I wanted a car when I was in high school and I asked my dad and he said, what's stopping you? And I said, I don't have any money. He got me a job in a steel plant, and I used to drive 65 miles from Montreal where I grew up and work in a steel plant. And it was exactly as you describe it, it was loud, it was dirty, it was hard. People were exhausted At the end of the day, the old line about how there's two kind of jobs in life, people who take a shower at the beginning of the day and people who take a shower at the end of the day, well this was a job where you took a shower at the end of the day, but did these guys make pretty good wages in the end?

Did they feel like they were taking care of their family? Yeah, you worked hard, but you came home with pay and you felt good about that. That's what you did as a man in the 1950s. And despite everything that's changed, most people still want to say at the end of the day, I worked my rear end off. But I took care of my family, and I had respect from my peers. A guy that has got to work for 7/11. That's tough. That's quite a change in status. But there is a lot of mythology about the quality of life in those days. Think about coal mining. It’s hard to think of a tougher job and there are people who made a myth of the coal miner and how we're destroying the coal industry and that played out in the last election. 

People romanticize the past and I think you really want a job in medicine or financial services for your kids not working in that steel plant because it wasn't a very good place. I agree with you, but I think you're dealing with mythology.

Larry Bernstein:

During COVID, there was a natural inclination to hoard resources like pharmaceutical products and ventilators. And now you care where these products are built. How do you feel about which industries we should encourage? The Biden administration, for example, engaged in industrial policy to support building semiconductor chips in the United States. How should we think about which manufacturing jobs or which plants or materials should be built in the United States?

Martin Eichenbaum:

Sadly, we lived through the COVID experience. The United States economy managed. It was precisely this flexibility that was our strength. Nobody starved and the market worked. When you look back of all the failings on COVID, there were some supply side issues, but none of them were life or death. We need to be able to produce food. Your example is an interesting one because as we look forward to the next crisis, I have no idea what will be crucial. That's the fog of war.  The government is not particularly good at forecasting. What we really want to be prepared for is the flexibility to adjust to the unknown when it becomes realized. And that's a separate discussion that we must produce a specific product right now.

Larry Bernstein:

I am surprised by your opening comments supporting requiring that the US government purchase military equipment domestically. Most of this stuff is bought with long-term contracts. There isn't a rush to get it. Why do toilets on an aircraft carrier need to be made in the US. Why not have military equipment made by the most efficient firms in allied countries? 

Martin Eichenbaum:

I want to distinguish between the fog of war on defense and the fog of war of unknown viruses. We will always have enemies, and I know the list of bad guys for the next 50 years. So that's very different than the virus that I don't know is coming. 

The other difference is if we were talking about toilet seats, yeah sure, I'm happy to get them from India, but I'm not sure that I want to have computer chips coming from only from Taiwan. That's such a central element and it's an undiversified source. If we had computer chips from 10 different countries, I'd probably be with you on that, but we don't. They're all overwhelmingly in Taiwan, which is next to a bad guy. I don't think that's a smart situation. Other stuff that's diversified and non-essential, sure, I don't care. 

Larry Bernstein:

You mentioned the transitional problems associated with changing jobs. I understand that AI is going to get a lot better and that will put pressure on certain types of employment. I recently heard a speech by Sam Altman, and someone asked what was the top job that was going to get eliminated and he said call center employees. 

Maybe manufacturing is the wrong place to have this discussion? It sounds like service workers are going to take full brunt of the new AI revolution.

Martin Eichenbaum:

There are winners and losers from technological change. And the first generation, the incumbents will take a hit. The wages in that occupation are not high. And we've outsourced a lot of the brute force jobs to India to a third world country. 

There has been much chatter about the potential for AI to lead to massive increases in productivity of services and that could result in massive changes to the employment picture. 

Airplanes don't go any faster now than they did in the seventies, right? AI may change things a lot or not. Who the heck knows? FinTech was going to change everything. Then Bitcoin was going to change everything. There's always something. 

Larry Bernstein:

How can we help students develop skills so that they will have the flexibility to change jobs to a different industry?

Martin Eichenbaum:

When I used to teach MBAs, they always wish to know how to fix a tire, practical stuff. Whatever I taught you that was ultra-specific would be worthless by tomorrow. What I can give you are the tools that you can adapt to different situations. And that's a frustration. There's a push pull between students and faculty that's true at every MBA program in the world and even in high school. 

You want to give people the skills to adapt because they're probably going to have to go from industry A to industry B to industry C. If people don't have those skills, they're just going to have to take their muscles and go elsewhere. That is a form of flexibility. It's just that we don't want that for our kids. But inevitably they're going to be some people where that's the only flexibility they have.

You want to make sure that people have general human capital, which will let them have pretty good jobs in different industries. It's impossible to predict over the course of a lifetime, we know you're going to change your job and your industry. You better have the skill to adapt, or you're going to land up working long hours in convention centers and restaurants. And some people will be, that's what their life's going to be. And I'm sorry about that, but I don't know how to guarantee anything else.

Larry Bernstein:

I end each podcast with a note of optimism. What are you optimistic about the US economy?

Martin Eichenbaum:

I want to be optimistic about the U.S. If you draw a graph of the growth rate of per capita real GDP in the United States, it's unbelievably smooth. There's a bump in the Great Depression, a bad one, but just draw a straight line. It looks like we grow at about 2%. And that's been true for about 200 years. So that's an extraordinary feat. 1.02 is a big exponent that means the difference between being poor and being rich. Despite all these shocks and changes and all the things we've talked about, we somehow adapted.

We adapted during COVID. We adapted during World War 2. We adapted in the fifties. That is the great strength of a capitalist economy with sound institutions. 

We also deal with the political consequences in the short run of that change. Somehow the U.S. has muddled through by doing just enough so that we don't have a revolution. And that's going to be an ongoing tension that's not going to go away. We do have an incredibly open, flexible society. It is not an accident that most technological advances in the world are where people want to go. I have enormous optimism that we'll continue to generate massive increases in the quality of life and the growth rate of income. 

Larry Bernstein:

Thanks to Marty for joining us today.

If you missed our previous podcast, check it out. The topic was What is Putin Thinking?

Our speaker was John Sullivan who was formerly the US Ambassador to Russia during the Trump and Biden Administrations. John has a new book entitled Midnight in Moscow: A Memoir from the Front Lines of Russia’s War.

John explained why Putin decided to invade Ukraine. Why Putin’s fears of NATO encirclement are a canard, and why Biden’s Afghanistan withdrawal debacle encouraged Putin to attack.

John also explained why the chance for peace negotiations with the Russians and Ukrainians are unlikely any time soon.

You can find our previous episodes and transcripts on our website whathappensnextin6minutes.com. Please follow us on Apple Podcasts or Spotify. Thank you for joining us today, goodbye. 

Check out our previous episode, What Is Putin Thinking, here.

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