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Frank Bernheisel: The View From Here
Frank Bernheisel
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Frank Bernheisel
Posted 08.21.16
Just Outside Washington

FRANK BERNHEISEL

Never underestimate the power of a bad idea

In our current American political campaign there has been a drumbeat about manufacturing and manufacturing jobs being shipped overseas; both Hillary and Donald have had much to say in their speeches. The implication is that nothing is manufactured in the U.S. of A. today. The result, so goes the political story, is that shipping of manufacturing jobs overseas has resulted in HUGE layoffs and unemployment.

To help look at this issue, I have enlisted the help of the Federal Reserve. The graph, red line, shows the relative manufacturing output adjusted to 2009 and corrected for inflation, hence the label "real." The graph shows that the manufacturing output of the U.S. has risen steadily since 1989, except for the recessions, indicated by the grey bars. As the graph shows, the 2008 recession was a really big hit! It shows a drop in manufacturing of almost 30 percent.

The graph also shows that the employment in the manufacturing sector stayed pretty steady from 1989 until the 2000 recession, after which it declined. The 2008 recession cause a drop in manufacturing employment of about 15 percent, only about half of the percentage drop in output. Clearly, there is something else going on.

chart

Below is the Federal Reserve graph showing the output of manufacturing workers (all persons including managers, secretaries, etc.) over the same time period (1989 thru 2015) that we have been considering. This chart is also a relative index based upon manufacturing employment in 2009. The output for the workers, i.e. productivity, has risen steadily during the time period, except during the recessions and has leveled off since 2012.

chart

Conclusion: U.S. manufacturers are producing more stuff using fewer people. What does that look like?

In 2001 Chrysler invested about 44 person hours to manufacture each automobile. The industry parlance is man hours per vehicle (MPV). In 2007 Chrysler announced that its manufacturing productivity had improved by 31.4 percent reducing the MPV to an average of 30.4 hours.

This includes all the major operations to build a car or truck, including stamping, assembly, engine and transmission manufacture. The MPV varies among manufacturers in North America. According to Harbour Consulting; Ford Motor Company was at 33.88 hours; GM was at 32.29 hours; and Honda was at 31.33 hours. All pretty close.

In 2015 Ford and GM had reduced their MPV to 22.85 and 30.32 respectively; and Chrysler's MPV had risen to 32.15. The actual assembly runs about half of the total MPV and varies by plant. Who is doing the work? Robots, as in the assembly line below.

robots

Automobile manufacture and employment or unemployment is more complicated, especially if you live in Detroit. The auto manufacturing employment in Michigan fell from over 100,000 in 1990 to 34,900 in 2010 and from 40,000 to 18,100 in Ohio. However, in Alabama it rose from 400 to 10,200 but that in no way offsets the employment loss in the other two states. Alabama is pleased to have Mercedes located in the state. Other southern states have benefited from new automobile plants as well: Toyota in Mississippi, Kentucky, Texas, and Alabama; Volkswagen in Tennessee, and BMW in South Carolina.

The steel industry is a second example. Steel production in the U.S. has stayed reasonably constant since 1975 ranging from 81 to 109 million metric tons per year until the 2008 recession, see chart below. Note: the time scale of the first three points on the chart is greater than the one year for the remainder of the data. Further, imports of steel into the U.S. have stayed pretty constant, between 20 percent and 25 percent of U.S. consumption.

chart

Employment in steel production is a totally different matter. In 1975 the steel industry employed 610,700 workers; this dropped by 76 percent to 147,000 in 2015. This is amazing but not just the result of productivity; there has been a productivity increase and new integrated steel mills are more efficient than the old ones.

However, the big change is due to recycling.

Recycling of scrap steel -- shredded cars, salvaged steel beams, etc. -- to make new steel. This is done in mini-mills, which are much more efficient, smaller, cheaper, and require fewer workers than the integrated mills. According to the American Iron and Steel Institute (AISI), in 1970, mini-mills produced 15 percent of U.S. steel production; in 2015 it was 63 percent. This is HUGE!

I am not saying that no manufacturing jobs have left the U.S. Whenever I go to the hardware store to buy a pruning shear, hose, sprinkler or almost anything, it is made in China. Also, Ford is building a big new plant in Mexico just like Donald Trump said.

The problem is the federal government is not playing its part. In the past, government invested in infrastructure and in education that was appropriate for the needs of the country. It also provided incentives for industries -- think railroad land grants -- and education -- think land grant collages and research grants. Today, government investment in infrastructure and education is insufficient for the country's needs and to some degree misguided.

Finally, never underestimate the power of a bad idea.

Idea: the government should not have any debt and balance the budget. The U.S. was moved from the Articles of the Confederation to the Constitution by the efforts of George Washington, Alexander Hamilton, James Madison and John Jay. Hamilton lead the charge, the issues centered on money and banking, getting things done, and the new federal government assumed the debts of the states incurred in the Revolutionary War. Hamilton was the Man; see the show.

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