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The Productivity Paradox

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In a perfect world, no economist who has never visited a modern industrial workplace or spent time with real world business executives would be allowed to write commentaries about the state of manufacturing.

Alas, we do not live in a perfect world. Over the past decade and counting, as U.S. manufacturing shed 5.7 million jobs, I have listened to one economist after another, many of them in prominent government positions, explain that this phenomenon was merely a result of leapfrog gains in productivity. They contended we were producing more with fewer workers. These are generally the same people who insist we are shifting into a post-industrial society built upon service industries, and that this is nothing we should worry our pretty heads about.

Now the Information Technology & Innovation Foundation (ITIF) has released a new study that challenges that assumption. The study points out that in 2010, 13 of the 19 U.S. manufacturing sectors, employing 55 percent of manufacturing workers, were producing less than in 2000. According to this study, government statistics overestimate growth in the computer and electronics sector, and also overstate overall productivity because of the way manufacturing imports are measured. Measured accurately, the authors say, U.S. manufacturing output actually fell 11 percent over the last decade while overall GDP increased 17 percent.

ITIF says also that manufacturing productivity grew by just 32 percent over the last decade, not the 72 percent reported by the Bureau of Economic Analysis. If manufacturing output had grown as fast as the rest of the economy, there would be 3.8 million more manufacturing jobs today, and millions more from the multiplier effect. The ITIF concludes that the loss of most manufacturing jobs stems not from gains in productivity, but rather from loss of output due to our inability to compete more effectively in global markets.

All of which brings me back to the countless reports I have heard from friends and associates in manufacturing over the years that they are losing market share and shutting down operations, not because of increased productivity, but because foreign competitors - often the Chinese - show up on our shores selling finished products for less than we have to pay for raw materials. Lower wages are only one factor in this process. Illegal trade practices like subsidies, trade barriers and currency manipulation are the primary culprits.

The ITIF contends we can rejuvenate the manufacturing jobs machine with prudent policies in the four T's: taxes, trade, talent and technology. Manufacturing may never again be the jobs machine it once was, but it remains the engine of economic growth where real wealth is created and it is the seedbed of innovation. We cannot have a viable economy built on taking in each other's laundry. It is imperative that we recognize what is going on, and make manufacturing a national priority.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.