Fixing Our Other Deficit 2

A country can forget manufacturing far faster than it can learn it.

Unless you are a member of the infamous 1%, you understand the concept of a personal deficit - when you spend more than you make.  How many of us find ourselves running out of paycheck before we run out of month?  That's a deficit.

Now, unless you want to starve for the last three days before your next paycheck arrives, you still have to spend money you have not got.  Modern credit cards make it all too easy to borrow the money and cover the deficit.

Alas, this money needs to be paid back plus interest, so next month is even worse.  It's far better to avoid a deficit in the first place by simply spending less!

In the first article in this series, we talked about a very specific kind of national deficit: our trade deficit.  Like your own personal deficit, it is the difference between what we spend and what we make, only on an international level.  The trade deficit is the difference between how much we spend buying stuff from other countries and how much other countries pay us to buy stuff we make.  The difference is covered by increasing levels of debt, and has been for decades.

Dollars and Sense

You might be expecting the customary comparison with family budgets and bankruptcy, but that's not really fair.  Countries don't go bankrupt the same way people do; the UN doesn't show up one day to throw all the Americans out of America and give the White House keys to the Chinese.

What's more, America enjoys the famous "exorbitant privilege" of accumulating debt in our own currency, which we control.  The Chinese lend us dollars with which we buy stuff from China, paying in dollars.  That leaves the Chinese with what?  Dollars, which are only useful to buy stuff from us, or from another country that wants those dollars to buy stuff from us.

A great many world commodities are priced in dollars and a dollar can bounce around the world for a long time before returning to the United States, but ultimately a dollar has whatever value we (the Fed, really) choose to place on it.

No, the problem with the trade deficit isn't really the debts we accumulate with our suppliers.  Those are just marks on a piece of paper.

It isn't that the Chinese can "buy us out" either.  What does that really mean?  In the 80s we were afraid of the Japanese doing the same thing, with Japanese corporations buying such American icons as the Rockefeller Center and MGM Studios.

They didn't schlep the Rockefeller Center home to Tokyo; it's right there in New York where it always was, filled with the same leftist ruling-class media elites it always has been, paying real estate taxes as it always has.

Japanese control of MGM was even better for us and worse for them: the experience was very costly for the Japanese, because our Hollywood accountants turned out to be better at fleecing them than theirs were at preventing it.  Hollywood is still as American-dominated as it's ever been.

So it doesn't matter when foreigners buy our businesses and assets?  In the case of non-portable things like real estate: not really.

Parts vs Paperwork

There's a problem, though, when we lose an entire industry to foreign competition because we lose the ability to participate in it.  In the 1980s many Americans were worried that the Japanese were killing Detroit.  Thirty years on, Detroit the city is about as dead as it gets, and both Chrysler and GM have recently cycled through bankruptcy.  Given their disdain for a $1 fix that would have made their cars a lot safer, one can argue that GM's death-dealing culture was bailed out for corrupt political ends and should have been allowed to die.

But for all those worries, there was never any risk of American auto manufacturing ceasing entirely.  Ford, for example, didn't go bankrupt after the crash and is ticking along quite nicely, not to mention the Japanese-owned auto plants throughout the South.

Unfortunately, that's not true for the other big 1980s fear-factor industry: consumer electronics.  American companies may design and market all manner of high-tech stuff, but next to none of it is made here anymore.  The last American TV manufacturer gave up and sold out to the Koreans in 1995, and Sony closed its last American TV factory in 2008.

Don't care about TVs?  How about computer chips?  In 2012, Intel tried to build a new chip fabrication plant in the United States despite concerns that regulation and labor skills would make it uneconomic.  Sure enough, just this year Intel suspended construction which means that, if there weren't enough American workers skilled in computer chip assembly before, there will be even fewer now.

Why does this matter?  Manufacturing a complex product requires a great deal of highly individual, personal know-how and experience.  The Japanese had been manufacturing cars since at least the 1920s but it took until the 1980s for them to be a serious competitor.  The Chinese have been making cars for twenty years now and they're still a joke, although every year they get better.  The Koreans trod the same path and now give the Japanese a frightening run for their money.

Manufacturing prowess takes decades to build, but it can be lost overnight.  Do we even have the capability of manufacturing consumer electronics anymore?  We do not, and it would take many years and countless billions of dollars to build it back.

Does this matter?  We manufactured electronics for decades; that knowledge fed into our design skills.  Design activity can move anywhere the Internet runs; we can lose our design infrastructure and all the high-paying jobs faster than factories can move overseas.

The problem is that manufacturing knowledge is not the same as management or professional knowledge, which can be taught in school.  There are a limited number of possible issues that an accountant will ever run into, and a four-year management degree can cover all the common ones and most of the rare ones.  So if America found itself with a shortage of accountants, well, we could fix it in a few years at most.

Manufacturing does not work like that.  Obviously there are common principles, but there are so many different materials and processes involved that the complexity is impossible for any one individual or a course of study to ever master.  The best that can be done is to teach the fundamental principles, and then for workers to gain skills over time through experience in their specific industry or better yet, in a specific plant or product line.

An accountant who worked for Ford could easily change jobs to work at Boeing with very little retraining.  A machinist will need a great deal of retraining because, although the machinery may be similar, the materials, processes, and tolerances are significantly different.  An engineer - well, he'd almost have to start over, because while the math will be the same, the requirements and design parameters are wildly divergent.

The Japanese are first rate at building cars and have been for years, but when was the last time you flew in a Japanese plane?  Actually, it might be more recently than you think - the Japanese are major subcontractors to Boeing.  Think about that for a minute: the entire industry had to basically apprentice itself to Boeing in order to learn how it's done.  They're still a long way from getting it down: Mitsubishi has been working on a commuter jet aircraft for nearly a decade and it's still many years from taking to the skies.

In fact, even Boeing grossly underestimated how long it would take the Japanese to learn how to build planes.  The Boeing 787 was famously late because the process of teaching all the subcontractors how to make their parts fit into the whole took a lot longer than anyone expected.

It's not because the Japanese know nothing about aircraft.  At the beginning of WWII, the Japanese Zero fighter was the best combat plane in the world.  After the war, though, the American occupation understandably did not trust the Japanese to carry on their expertise in that technology so it was intentionally lost.  Now it's taking decades to rebuild even with a highly experienced and motivated tutor, and basically infinite (Japanese) government money to back up the efforts.

Aren't there other things we can sell to other countries in exchange for buying manufactured goods?  After all, America is generally considered to produce the best management and marketing executives, and businesses in many other countries try to import American management expertise to improve their own performance.

True - but every year it gets less true.  Every year, Indian and Chinese business schools get a little bit better and their graduates and professors become a bit more experienced.  There is no equivalent of Harvard Business School or Carnegie-Mellon in Beijing, but it's not too hard to imagine that in another twenty years there will be.

What will we do when they've learned to how to push all the paperwork and we've forgotten how to tighten the bolts?

This is what the anti-Japanese agitators in the 1980s were afraid of.  Their fears turned out to be unfounded in the specific case of Japan and the auto industry, but they weren't at all wrong to be worried overall.

Fortunately, there is a way to fix the problem, and we'll get to that in the next article in this series - after we've examined some popular "fixes" that only make the problem worse.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
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