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Alan Tonelson: ‘The Insourcing Boom That Isn’t’

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Reposted from The Atlantic Magazine

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Alan Tonelson: ‘The Insourcing Boom That Isn’t’

James Fallows | December 14, 2012 | Atlantic Magazine

The current issue of our magazine (a subscription makes a perfect gift!™) has a two-part cover-story package. One is Charles Fishman’s “The Insourcing Boom,” which concentrates on GE and argues that U.S.-based manufacturing companies are finding it more attractive to do more of their work within our borders. The other is my “Mr. China Comes to America,” which says that increasing costs and friction of doing business in China, and shifts in technology that allow very rapid-cycle production close to the market inside the United States, will encourage new companies to do more of their manufacturing work here rather than outsourcing it to China.
Alan Tonelson, of the US Business & Industry Council, is a long-time friend with whom I have often agreed on questions of U.S.-Japanese trade frictions. He completely disagrees with the premise of these two articles. In the spirit of free-and-full discussion, I turn the floor over to him. I have a brief response at the end.
The Insourcing Boom that Isn’t
By Alan Tonelson
According to the two feature articles in December’s Atlantic, manufacturing in the United States is making an historic comeback.  In particular, changes in wages, energy costs, and technology around the world mean that China and other Asian locations no longer hold all the cards as manufacturing locations.  Even better, large and small American businesses increasingly are recognizing that producing – and innovating – back in the United States has become their most lucrative option.
Moreover, both “The Insourcing Boom,” by Charles Fishman and “Mr. China Comes to America” by James Fallows state that much more is involved than domestic manufacturing’s cyclical rebound from an historically painful recession.  As the former contends, the manufacturing revival “cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers.”  In the latter’s words, domestic industry’s outlook is better today “than at any other time since Rust Belt desolation and the hollowing-out of the American working class came to seem the grim inevitabilities of the globalized industrial age.”
Both authors provide numerous and seemingly impressive examples of insourcing and corporate start-ups that support these claims. They also present statistics on energy prices, U.S. and Chinese wages, and the post-2010 rise in American manufacturing employment.  But neither gives their readers the most important information they need to know about domestic industry’s current circumstances and future prospects – that virtually no national- or global-level data show that American manufacturing is even continuing its recovery from recession, much less stealing the march on Chinese and other foreign rivals.  Indeed, nearly all of the most comprehensive statistics portray U.S. industry as still slipping further down the international ranks.
For example, during an historically sluggish American recovery, a U.S. manufacturing sector in renaissance mode should be growing faster than the rest of the economy.  That was true in 2010 and 2011.  But the out-performance is already over.  This year, the entire U.S. economy has expanded by only 2.06 percent after inflation.  Manufacturing output, however, has actually fallen – by 0.54 percent.
A manufacturing sector engineering a big secular rebound should be gaining share in its own home market – the world’s largest single national market, and the one its companies should know best.  Yet new government data analyzed by the U.S. Business and Industry Council show that more than 100 advanced domestic manufacturing industries collectively lost American customers to imports worldwide last year.
In 2011, foreign-based producers supplied a record total of 37.57 percent of total American purchases in industries ranging from semiconductors to pharmaceuticals to ball bearings to machine tools and dozens of other capital-and technology-intensive sectors.  In 2010, when the industrial renaissance supposedly was stirring, the import penetration rate was 37.07 percent and in 1997 – the earliest data year – only 24.49 percent.   In fact, imports accounted for half or more of everything Americans bought in nearly a third of these industries, including construction equipment, metal-cutting  machine tools, laboratory equipment, turbines and turbine generator sets, and of course autos and heavy-duty trucks alike.
Companies losing market share rightly are almost never described as winners or viewed as promising.  Do industries losing market share deserve better reviews?
Nor is the growth of exports compensating for these losses.  Since plummeting during the Great Recession as American economic demand nosedived across the board, America’s manufacturing trade deficit has rebounded much faster than the economy as a whole, and indeed hit a monthly record earlier this year.  This shortfall’s strong comeback is an especially important and bearish indicator of U.S. industry’s global competitiveness, since mainstream economic theory teaches that trade flows are the means by which market forces create the optimal global division of labor.  In other words, the countries that trade a given product most successfully are those that eventually will produce it most successfully, and vice versa.
The China story told by these data also clash with that told in the December Atlantic articles.  As fast as imports worldwide have been grabbing share of U.S. advanced manufactures’ markets, the inroads being made by imports from China have been much faster.  And although these shipments started from a considerably lower base, they supplied more than six percent of all American purchases of these capital- and technology-intensive products last year.
As robustly as the overall U.S. manufacturing trade deficit has risen recently, the China deficit has recovered just as dramatically, and from a much shallower trough.  In fact, so far this year, the manufacturing trade gap with China has increased more four times faster than America’s global trade gap.
Signs of American industry’s weakness also emerge from comparing its growth rate with those of leading competitor countries.  Last week, the U.S. Labor Department reported that between 2009 and 2011, American manufacturing output expanded more slowly than industry in Germany, Sweden, Korea, Taiwan, and Singapore, and only slightly faster than manufacturing in Japan, whose industry is widely described as hemorrhaging competitiveness.  These years of course cover the period when the U.S. manufacturing renaissance allegedly was well underway.
Data for China were not provided in this survey of high-income countries.  Yet the consulting firm IHS reported this earlier year that in 2010 and 2011, America’s share of world industrial output not only has fallen behind not only China’s, but has been falling faster than that of the 27-nation European Union, whose economic problems are by now all too well known.
Other major problems with the articles revolve around insourcing claims themselves.  Do the new investments in U.S. manufacturing mean that outsourcing has stopped or has slowed significantly?  None of this essential context is presented.  But last July, a major Bloomberg News investigation spotlighted a study reporting that continuing outsourcing neglected by the news media has entirely offset the job creation credited to insourcing.
In addition, improved American competitiveness is far from the only reason for insourcing.  Scratch an instance of reshored manufacturing, and significant federal, state, and local government subsidies can often be found beneath the surface.  For example, according to GE official Kim Freeman, the $800 million Louisville appliance investment detailed in “The Insourcing Boom” was keyed by $100 million in such supports.  Over the last year, two New York Times articles have made clear that subsidies have been “increasingly important” spurs to new and retained domestic manufacturing investments.
Using taxpayer dollars to pay manufacturing companies to move or stay may make perfect sense in many cases.  And certainly most of America’s major trade competitors engage in such practices pervasively.  But relying substantially on government inducements is likely a losing proposition for domestic manufacturing advocates.  After all, industrial rivals like China, Germany, and Japan are financially strong.  The United States remains saddled with enormous debts – many owed to these very countries, and is unlikely to win a worldwide subsidy competition.
American manufacturing still retains many strengths.  Some of it, moreover, may boast considerable growth potential.  But no one should underestimate the continuing weaknesses and challenges made clear by the most comprehensive, most detailed data.  Without presenting this readily available big-picture evidence, accurately describing domestic manufacturing’s present circumstances and realistically assessing its prospects simply is not possible.
Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council, which represents nearly 2,000 small and medium-sized domestic U.S. manufacturers.  The author of The Race to the Bottom (Westview Press, 2002), Tonelson contributes to the Council’s AmericanEconomicAlert.org website, and can be followed on Twitter @AlanTonelson and on Facebook at Tonelsonontheeconomy. 
I will leave to Charles Fishman any response to the specifics in his article. For my part I will say that I don’t think Alan Tonelson engages the main point I was making.
As my article said, we have been through a relentless decades-long period in which every observable trend seemed to be, and was, working against the feasibility of manufacturing within the United States. Alan Tonelson and his USBIC have been in the vanguard in chronicling those pressures. But, I explained, people close to the factory-floor realities in both the United States and China told me that changes beginning to be visible now seemed likely to alter those pressures. I wrote the story because people whose track record and judgment about technological trends I have learned to trust, over the years, told me these changes were worth noticing. Since they were talking about shifts that are just getting underway, the early trends they were talking about would not be captured in past manufacturing statistics, even those from 2011.
If the pattern of decline that Alan Tonelson lays out still prevails in 2015 or 2018, then the people I quoted will prove to have been wrong. If the pattern changes, their explanations will be part of the reason why. Thanks to Alan Tonelson for laying out his case.

10 Responses to “Alan Tonelson: ‘The Insourcing Boom That Isn’t’”

  1. Mo says:

    The reason the US would have a hard time winning the subsidy game is because total savings in the US is low compared to China, Japan, and Germany. The US has been consuming capital and resources on malinvestments and wars. To pay for things like war the US has been exporting the cow and then has to import the milk.

    Usually higher interest rates would stimulate savings but this can’t be done without extreme pain considering the huge amount of gov’t debt that has to be serviced today.

    To illustrate how high savings allows countries to maintain a stable manufacturing sector lets look at China. China has total savings equal to around 50% of GDP. So when China creates credit to subsidize their exporters, the high savings helps to cushion inflation. If there wasn’t high savings, just creating credit to subsidize exporters would actually make them less competitive as wages and input costs rose sharply.

    Policies in China that subsidize exporters and manufacturers benefit at the expense of the buying power of workers wages, bank depositors and savers. Because of high savings, China can recapitalize their banking sector every decade or so when malinvestments are revealed after bubbles. What happens is that non-performing loans are moved off gov’t championed banks balance sheets to bad banks with the non-performing loans being guranteed by the state. The state would not be able to recapitalize the banking sector regularly without high savings.

    To understand how China’s banking sector works read the book Red Capitalism by Carl E. Walter and Fraser J.T Howie.

    References:

    The China Model is Unsustainable
    http://mises.org/daily/5698

    • Will Wilkin says:

      Mo, “Savings” in the economists’ sense amounts to a drop in consumption, which by itself signals to investors a smaller market with even fewer opportunities for profitable investment in production. There is plenty of corporate cash on hand for investment in the USA but they choose not to put it here because they get more total sum of incentives elsewhere. The consumption base is shrinking here too and that is why the multinationals are increasing oriented to other consumer markets.

      • Mo says:

        A drop in consumption means resources that go into retail can go into other stages of production. Consumption it has to be remembered is just one stage out of hundreds and maybe thousands in the economy. So if savings increase then C in GDP may decrease but I in GDP should increase if the banking system is stable. All that a drop in consumption means is that consumers want to consume in the future usually a larger quantity of goods. So for example, if savings increase then profits in the retail stage may decline, but resources will be freed to be employed in other stages at cheaper prices. Resources being freed up may now make it cheaper to produce a larger quantity of luxury consumer goods that were not affordable to most people before.

        It has to be stressed that the economy is much more complicated than a 2 stage model of just consumption and production. A lot of models economists use is based on this simplified two stage model of the economy where the assumption is always made that if you increase consumption than production increases which increases GDP. Yes consumption is important in the sense that it allocates factors of production to produce goods people want but if consumption is artificially increased with inflation then it severely distorts the structure of production by increasing input prices and squeezing profit margins for other industries not receiving the new money.

        Additionally the consumer goods, producer goods and raw materials industries all compete with each other for capital and savings. Also investments for new cutting edge technology compete with investments to expand existing technology. As a result the demand for consumer goods does not always lead to an increased demand for producer goods. A lot of times increasing consumption leads to increased unemployment as input prices and profit margins get squeezed in other branches of industry.

        The consumption base in the US is shrinking because the propping up of malinvestments by inflation has resulted in consumers having to pay more for consumer staples and has made it harder to service debt. Additionally alot of businesses are finding profit margins being squeezed because of rising input prices like commodities and a decline in demand as consumers are having to spend more on staple goods.

        Yes some large corporations have large cash balances on their balance sheet because some have received favorable gov’t investments and subsidies as well as some have made large profits form operations that were offshored. It has to be remembered that operations from offshoring are most profitable when the country offshored to has high savings. A country with high savings means input prices are stable. In the US, the wars, increased consumption, the real estate bubble and bailing out of the malinvestments have all been financed by inflation which has thus continued to distort the US capital structure of production.

  2. Bruce Bishop says:

    Manufacturing is not coming back. Manufacturing will NOT be coming back. China can produce anything we can produce at one-third to one-tenth the cost. Now, India has entered the picture, with Mahindra tractors.

    The “progressive” left is delighted that manufacturing is gone. They spent decades running up taxes and regulations in an effort to drive manufacturing OUT of the United States. Now that they are firmly entrenched in Washington, they will make sure that it stays gone.

    Of course, the Democrats must pay lip-service to “bringing the jobs back,” because of the huge debt they owe to the unions. The mainstream media serves as the propaganda arm of the Democrat Party. They will dutifully report to the people that the jobs are coming back. The Republicans seem to be clueless about the whole job-loss issue.

    I see no reason to be hopeful for any sort of “manufacturing revival” until this march toward socialism has run its course. As we saw with the Soviet Union, this could take decades.

    • Maggie says:

      The globalist “free traders” came to dominate both parties and got us all caught in a deadly bipartisan “compromise” trap that was hardy a compromise at all, but true belief in simplistic academic theory that ignores systemic risk and financial contagion driven by trade. I believe these two articles are lipstick on a pig coverups to convince us that the status quo is just fine and dandy and that things will automatically work themselves out and that the policy makers are not to blame. The “Insourcing Boom” and “Mr.China comes to America” (to take control of our industries?) smell like media puff propaganda.

  3. Will Wilkin says:

    Bruce, the Soviets built domestic industry in their country. The free traders have zero comparability to the Soviets. The Republicans have exceeded the Democrats in writing and especially voting YES for all the FTAs. The Balanced Trade Restoration Act of 2006 was sponsored by Senators Byron Dorgan (ND) and Russell Feingold (WI), two Democrats in the United States senate. Feingold was one of the most “left” Senators in memory. I feel compelled to remind you these things because your hatred for the left seems to blind you to reality. And I am no friend of the Democrats, just amazed at your blindness to the bipartisan nature of our ruin, and the role the Republicans have had in it, and the small amount of resistance that has come has been more from the left.

    I composed a lengthy reply to you on this before, maybe you missed it because you never responded. Click here and scroll down to my comments that begin with “Hello Bruce, Sorry to belabor this point…”

    http://www.tradereform.org/2012/12/time-to-reset-us-trade-policy-for-the-21st-century/

    • Bruce Bishop says:

      Hi Will,

      Sorry I missed your previous response to my anti-”progressive” rant. I’m not sure what you mean by your first two sentences. I recall reading that the tractors manufactured in the Soviet Union were worth more as scrap metal than as tractors.

      When I argue for “Balanced Trade,” I usually mention that Dorgan and Feingold introduced a balanced trade bill. I don’t know what to make of that, and haven’t spent much time on it since it didn’t amount to anything.

      As to Republicans supporting “free trade” agreements, there are several contributing factors:

      1. Fifteen years ago, the “experts were saying,”We don’t need manufacturing. We are going to be a service economy.”

      2. The promise of the “free trade” agreements was mutually beneficial FREE TRADE, not exporting our jobs to cheap-labor countries. Of course, China repaid our “free trade,” with mercantilism. We accept their stuff, but they don’t accept our stuff. We are getting the shaft.

      3. I have no doubt that members of Congress from both parties are subject to undue influence from multinational corporations. These multinationals feel no loyalty or obligation to the United States and I can sympathize with that point-of-view. The “progressive” left and the liberal media have created a climate hostile to manufacturing for as far back as I can remember.

      4. Many of the Republican members of Congress are NOT conservatives. They don’t understand or support the free market or, if they do, they don’t have the backbone to defend it.

      I am not a fan of the Republican Party. I think they have failed us by allowing (or helping) the Democrats to run up an unsustainable debt and by not addressing the entitlements which are likewise, unsustainable.

      Thank you for the feedback.

  4. Will Wilkin says:

    Bruce how do you explain so many Democrats now poised to cut Social Security and Medicare? What is so “socialist” about that? Just yesterday:

    “Nancy Pelosi Says Social Security Cut Proposed By Obama Would ‘Strengthen’ Program”

    http://www.huffingtonpost.com/2012/12/19/nancy-pelosi-social-security_n_2333285.html

    Just yesterday:

    “Democratic lawmakers mostly fell in line yesterday behind President Obama’s proposal to cut Social Security payments as part of a fiscal-cliff deal, despite outrage from the party’s liberal base.”

    http://www.nypost.com/p/news/national/democrats_caving_on_soc_sec_vcTGBlHR1WTWnHLF00qKNJ

    • Tom T says:

      Part of the “fiscal cliff” is an acknowledgment that SS is no longer subsidizing federal spending to the degree it has in the past. Overages in the SS taxes have been spent by politicians. Its total amount is the amount of U.S. treasuries that are held by SS.

      Because the economy has been restructured by bad policy, politicians will now have to finance their overspending by either cutting spending or taxing the “wealthy” more. The people above 250K in earnings (SS taxes end at about 115K of W-2 earnings) have had their income and investments to themselves while SS taxes have been collected on lower amounts and not on any investment income. Thus, the subsidy of the over all budget by SS over payments is coming to an end. We can’t keep selling parts of our economy to China because we actually need the tax base to pay for our government.

      Perhaps all of this will mean that the politicians will have to do a better job managing the economy, not just selling their power to those who are paying them off. The economy could depend on it.

      Tom T.

  5. Tom T says:

    As important as bringing manufacturing back to America is, it is only one part of fixing our structural problems. The economy has seized because there is imbalance between incomes for the average person have not kept up with inflation and demand for labor via manufacturing is only one part of that structural problem. Others include a mistaken perception that corporate efficiency or worker productivity which is not shared with the actual workers in the economy is economic efficiency. It is not. Economic efficiency is based on the idea that resources in the economy are shared based on competitive markets and its role in efficiently allocating resources. By off-shoring manufacturing and decreasing the bargaining power of labor (and the economic activity that manufacturing brings) has allowed an inefficient allocation of resources where the government picks up the inefficiencies through government spending. At the current rate and past history it is being borrowed, much from foreigners.

    I have no problem with the Chinese building up their economy to be self sustaining. Our trade policies and warped idea of free trade (corporate pushed advantages) have deteriorated the balance between corporate efficiency and economic efficiency. Labor has taken the brunt of these policies and the economic base of the country has been eroded.

    My hope is that China will stop manipulating its currency to play the mercantilism game and start allowing its own economy to develop on its own merits, not scarfing off of the U.S. economy. It doesn’t seem that our political leadership in the U.S. is smart enough to run an economy with the appropriate rules for economic efficiency and instead substitute corporate efficiency for economic efficiency. The whole economy has suffered. This idea that capital is more important than labor has allowed a class of capitalists who can influence public policy of the public subsidizing their losses and for them to be able to capture all gains. These are structural problems that transcend manufacturing losses although manufacturing losses are certainly part of the problem as is a Chinese manipulated currency.

    As Bernanke has stated, there is only so much the fed can do to fix the economy. These structural inefficiencies can not be solved only by increasing tax rates on the rich (which helps) or Fed actions. Our Congress has to quit selling economic efficiency of the economy out for corporate efficiency and the grease they give to the political system.

    The miracle of capitalism is an efficient allocation of economic resources in an economy. Capitalism has been largely subverted by corporatism.

    “In popular usage
    Contemporary popular (as opposed to social science) usage of the term is more pejorative, especially when used in the shorter form corporatism (corporativism usually implies only the Italian construct indicating public rather than private organizing), emphasizing the role of business corporations in government decision-making at the expense of the public. The power of business to affect government legislation through lobbying and other avenues of influence in order to promote their interests is usually seen as detrimental to those of the public. In this respect, corporatism may be characterized as an extreme form of regulatory capture, and is also termed corporatocracy, a form of plutocracy. If there is substantial military-corporate collaboration it is often called militarism or the military-industrial complex.”

    http://corporatism.askdefine.com/

    I differ from Mo in that I don’t think it is just a gold standard issue, but an issue of ideology, and of a policy biased towards money and power (mammon) over principles that make capitalism work as an efficient allocation of resources in an economy.

    Tom T.

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