Todd Bliman
The Big Picture

The Ever-Evolving Economic Engine

By, 11/09/2010

Three hundred years ago, British weavers, fearing for their jobs, bemoaned the development of the flying shuttle for weaving cotton. Eighty years ago, American factory workers fretted losing their jobs to machines. Today, many fear outsourcing to China or elsewhere is usurping their bread-and-butter. But in fact, it's the same force feared for generations at work—rising productivity.


How do we know? Exhibit 1 below displays US manufacturing payrolls divided by total nonfarm payrolls, and the declining share is unmistakable.


Source: Federal Reserve Bank of St. Louis,

But at the same time, our nation's manufacturing output has increased greatly (see Exhibit 2).


Source: Federal Reserve Bank of St. Louis,


Despite the big drop in manufacturing employment, the US is still the world's largest manufacturer—by quite a distance, no less. This is the long-term benefit of productivity: You get more by utilizing less. Since 1993, US manufacturing worker productivity has doubled—a strong positive force for our nation. Rising productivity frees up time for other valuable activities and generally raises the standard of living. But in the process, old jobs disappear, and displaced workers must redefine themselves, which can sometimes be uncomfortable and difficult. Our kneejerk reaction is to protect "traditional" jobs and resist change. But that's a dangerous path. The same thing happened in American agriculture in the early 20th century, and the protectionist backlash ultimately led to the misguided and hugely destructive Smoot-Hawley Tariff.


Today's protectionists hold China (and its pegged currency, cheap manufactured goods, and inexpensive labor) responsible for US manufacturing job "losses." Maybe the US has lost some jobs due to China's currency policy. But to blame a cheap yuan for a 60-year trend of declining US manufacturing employment is fantasy. Throughout much of the decline, China was quite literally an economic backwater. In fact, as US manufacturing payrolls declined in the 1950s and 1960s, China was in the midst of the Great Leap Forward and still early in its industrialization. And note, as it evolved into an increasingly important economic power from the mid-1990s through 2002, China shed nearly 16 million manufacturing jobs. In fact, rising manufacturing productivity is fully global.


Workers impacted by rising productivity are in an unenviable position. But if that was the end of the story, we'd have a huge and permanent unemployment problem—which, despite the press, we don't. Where do all these workers go? Simple—other industries. New ideas and technology swept away excess manufacturing jobs, but at the same time created new industries and companies to employ workers. The driving force of productivity growth is "creative destruction," or the competitive process of new, better, smarter firms displacing old, obsolete ones. These companies then produce more goods—of better quality—for all to consume at lower end prices. And that's good.


I'm old enough to recall growing up in Pittsburgh, Pennsylvania surrounded by a faltering steel industry. Unemployment ran high even though there were dozens of actively working mills in greater Pittsburgh. Today, the number of mills is zero. It was a difficult transformation, fraught with concerns surrounding pensions for steel retirees, 20% unemployment at times, and a region struggling with an imperiled identity. But in case you've not been to Pittsburgh recently, about the only thing faltering is their professional baseball team. It's now a vibrant city with unemployment lower than the national average and a quality of life (and quality of air) far improved from prior generations. In fact, it was recently named the top city to relocate to in the US.


Creative destruction and productivity growth come as naturally to humans as, paradoxically, our tendency to decry their short-term effects. And since we've just come through a recession, unemployment is a lightning rod issue today. But let's not extrapolate the near-term effect of recession-driven layoffs or even longer-term economic shifts into the creation of a permanently unemployed class and tarnished economy. That is to disregard history and shun plentiful evidence to the contrary.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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