Leaving Manufacturing Behind

Bruce Greenwald of Columbia Business School has done a masterful job highlighting the Great Depression's role in manifesting a transition from agriculture to manufacturing. This topic is worthy of a book, not a blog post. Significantly, the Federal Reserve acted stupidly by tightening money punitively at a time requiring loosening. The results created WWII.

The current time is similar in terms of a huge transition out of manufacturing due to increased productivity. Politically, people believe that the issue is simply lower priced labor overseas. While that is partially true, the reality is that productivity gains mean that collectively we are capable of producing at higher levels than we can consume. Manufacturing based economies like Japan and Germany are experiencing deep challenges because it is difficult for them to leave manufacturing behind.

The U.S. economy is doing just that, and has for years. Despite all the political rhetoric and trade tensions, manufacturing is not coming back. It looks like the "services" area is growing and likely to do so for years. This transition affects everything. As a result, capital is less important and talent is more important. Productive capacity is less important and intellectual property is more important. National is less important, but local and global is more important. Conglomerates are less important, while companies that are "platforms" for services are more important.

One disturbing aspect of leaving manufacturing behind is the loss of good "middle class" jobs that allowed for fuller pursuit of the American dream. The transition to service, talents and platforms means that the disparity between the haves and have-nots increase without indicting capitalism. The answer seems to lay in a more radical tax structure that eliminates taxation at incomes below the median incomes. In this way, political structure can support the impact of leaving manufacturing behind, rather than pointing fingers at the wrong figures.