I’m a small business owner. The small business I own deals in manufacturing, mostly. I don’t manufacture anything but I work for those businesses that do. I’m an industrial contractor which means I fix things that make things. I also build things and design things and consult on the design, building and fixing of things that make things. I work across industries in plastics, recycling, machine parts, etc. I have been in the manufacturing environment for about 15 years and my father and his father and his father were in it for long before that. I know a little about American manufacturing.

It’s funny, I go in a manufacturing plant and talk to the people and hear a lot of the same things from them. I hear about how the US isn’t “making” anything anymore. How the Chinese “make” everything nowadays and how this is the “exact thing” that will spell the downfall of the US. This used to concern me because when unemployment was around 4% I wondered if 96% of 300 million people are either working or being supported by someone who IS working in the US, and few of these people are “making” things, what is the root of the wealth creation that fuels our paychecks? I’m a curious guy so I decided to look into it. Something seemed not to be adding up.

I once heard that if you have a question that seemingly cannot be answered, examine your premises – at least one of them have to be wrong. I have also come to the realization that since most premises are based on “conventional wisdom”, and since there are so many things out there that just do not make sense, that the premises, and therefore the ‘conventional wisdom” is usually wrong. My experience is that about 90% of conventional wisdom is wrong.

So I start out with these premises: 1) Us manufacturing is declining. 2) The US doesn’t make much of anything anymore. 3) The “Sweat Shop” nations are making almost everything now. 4) The “Sweat Shop” nations exploit their people to make stuff by paying substandard wages to decrease production costs. 5) Foreign countries “subsidize” their manufacturers to further defeat our pricing structure.

The first premise; ” Us manufacturing is declining”. I go to the Institute For Supply Management Manufacturing Report On Business ® and download their historical data (in Excel format) since Jan 1948. I use Jan ’48 as a baseline and assign it a value of 100.  I put in a formula that adds the current month’s increase or decrease to the aggregate total. For instance: 1/48 = 100. Manufacturing shrank by a factor of 2 in 2/48 so 2/48=98. Then in 3/48, it dropped another 10 so 3/48 = 88. And so on. I then charted these values. Where the line goes up, manufacturing is expanding. Where it goes down, it is contracting. This is the chart I came up with.

I truly apologize for the freaky looking window thingy. You might have to scroll to the side to get it all. WordPress will not let you just insert a graph into a document. It’s either a link to the graph file or this Scribd whatchamacallit.

Anyway, you’ll notice the overall upward trend of the line. This means that with some dips and jumps, US manufacturing has pretty much been increasing steadily for the last 60 odd years. Yes, we’ve had some declines but we are far from declining.

So, first premise is wrong.

Second premise: “The US doesn’t make much of anything anymore”. We go to Nationmaster.com for this. Really neat graphical representations. I’m not gonna try to put it in here so go look for yourself. It is set to open in another window. What it shows is that the US accounts for 22.4% of the worlds value added manufacturing. That puts us at #1 with Japan in second with 13.9%. So we are far and away the biggest manufacturer in the world. Maybe we don’t make tee shirts as much as we used to, but we can make a helluva jet engine. I like jet engines – they’re cool.

So the second premise is flawed, also. I’m starting to see why so many things don’t make sense.

Premise #3: “The “Sweat Shop” nations are making almost everything now”. Again, look at the link above – it’s not happening.

Premise #4: “The “Sweat Shop” nations exploit their people to make stuff by paying substandard wages to decrease production costs”.  This is a complicated one to noodle out. According to the Bureau of Labor Statistics “International Labor Comparisons” (new window, again), manufacturers in some of the countries like Vietnam and Thailand do pay what would be a substandard wage if paid over here. But look at it from the point of view of the manufacturer and the worker. If the prevailing wage in an area is $1.00/hr. and a new plant opens up and offers $1.25, that’s a good deal to the potential worker.  Of course, it’s a good deal to the manufacturer, too, but the next manufacturer to come into the area is going to have to offer $1.35 or so to attract workers. Now, if Acme Manuf. is already there paying $1.00 and Widget Manuf. comes in with $1.25, Acme is either going to lose workers or have to raise it’s wages. Most of these places have super high unemployment so until the potential workforce is more fully employed, wages will be low. When those manufacturers have to compete with one another to get workers, the checkbooks will come out. Until then, as far as the worker is concerned, a $1.25/hr. job is better than no job at all. And in many of those places, a guy can live a much better than substandard life on $50 or $60 a week.

We could make the same comparison state-to-state as we do nation-to-nation. In New York City, a secretary may make $100,000 a year while her equal in Mississippi may make $35,000 a year. That secretary is also paying about $2500 per month for an apartment while the Mississippi one is renting a house for $500 per month. The point is, you have to figure the standard of living and not just look at wages in a vacuum.

So premise #4, while not dispelled, seems to be something of a red-herring. Yes, the effect of low foreign wages on the US worker is negative in the aggregate, but that guy over there is not building jet engines while the guy over here very well could get a job doing so. The lesson to take away from this is, don’t bet your nice suburban lifestyle on a job in manufacturing that can easily be given to a guy that can’t write his name. And if you see your industry trending to overseas outsourcing, consider a new industry and picking up some new skills. I know even a lot of higher value jobs are moving overseas, also, but they are often connected to lower value products and services where the whole organization is moving operations over seas. Raytheon will not move a jet engine plant to Thailand just to get cheaper engineers and then have to deal with production guys who can’t build jet engines. But Hanes will move a tee shirt plant over there to get cheaper production guys and they’ll make do with the engineers they can get or transfer some from here.

Premise #5 has always amused me. “Foreign countries “subsidize” their manufacturers to further defeat our pricing structure”.

So let us say that without these “subsidies”, a tee shirt from China will cost $5.00 to produce and not the $3.00 the China based manufacturer is selling it for. The shirt comes here and Mr. Wal Mart sells it to me for $7.00 instead of the $9.00 he would have to charge for the same profit without the subsidy. Then this means that the Chinese government is helping ME buy my underwear. They are ultimately subsidizing the consumer by lowering the production costs of the manufacturer. I pay no Chinese taxes. I am indebted to the Chinese government as an American tax payer who funds the debt service on the bond instruments they hold against out foreign debt, but that won’t change depending on their subsidies to their own countrymen. So basically, the Chinese government is allowing me to keep $2.00 in my pocket funded by what I owe them. I just don’t see that as a bad thing. It is the money we send them coming BACK HERE. It all boils down to the fact that if a tax subsidy is the deciding factor in moving a plant from here to there and our wages are going up while their’s stay flat, that plant will move soon with or without the subsidy. Maybe next year or two years from now but it is as good as gone. You don’t want to work there.

There is a lot of manufacturing that is leaving the US that I really hate to see go, but in the long run, this is the human condition. If you fight it, it is like trying to catch the wind. You can thwart market forces for a certain amount of time, but the time spent fighting them is used by the market to build up momentum to knock you on your ass that much harder when it overpowers your attempts to reign it in. As a farmer, you can curse the changing of the seasons, or you can learn to plant cold weather vegetables. Which choice to you think will work out best in the long run?

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