It seems to really pain the Washington Post editors that retirees can collect Social Security checks that average just over $1,200 a month. The amount of ink that they have devoted in both their opinion and news pages to cutting benefits could probably fill the Great Lakes. They’re at it again today pushing a cut in the annual cost of living adjustment by adopting a chained CPI as the measure of inflation.
As expected, the piece uses more than a bit of sleight of hand to make its case. For example, it tells readers:
“Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures.”
Actually, economists do not know if this index is a more realistic measure of the rate of inflation experienced by the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index that has typically shown a rate of inflation that is roughly 0.3 percentage points higher than the standard measure of inflation.
This is just an experimental index and it is not “chained,” which means that it does not pick up the effects of substitution among items by the elderly, however if the Post’s concern is to have a “more realistic” measure of inflation then it would join the call of more than 250 economists for having BLS construct a full chained CPI.
This index may end up showing a higher or lower rate of inflation than the current index, but it would give us a better measure of the inflation rate experienced by the elderly. Congress’ intent in establishing the cost of living adjustment in the first place was to have benefits keep pace with inflation. An elderly CPI would do that, switching to a chained CPI is simply an underhanded way to cut benefits.
The Post also tells us:
“Adjusting those annual increments merely reduces the rate of growth in seniors’ benefits; it does not actually cut them.”
Yes, save this one for the Post’s Kids section. The cut reduces the real value of benefits. This is not an argument for adults.
It then adds:
“The immediate impact is negligible — just $1 billion in the first year. That gives future retirees time to adjust.”
Huh? Did anyone say that the cut in benefits would only apply to future retirees?
Once again the Post wants to cut Social Security benefits but does not have the courage to be honest about what it’s proposing. It must really bother them that workers can get $1,200 a month in retirement.
It seems to really pain the Washington Post editors that retirees can collect Social Security checks that average just over $1,200 a month. The amount of ink that they have devoted in both their opinion and news pages to cutting benefits could probably fill the Great Lakes. They’re at it again today pushing a cut in the annual cost of living adjustment by adopting a chained CPI as the measure of inflation.
As expected, the piece uses more than a bit of sleight of hand to make its case. For example, it tells readers:
“Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures.”
Actually, economists do not know if this index is a more realistic measure of the rate of inflation experienced by the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index that has typically shown a rate of inflation that is roughly 0.3 percentage points higher than the standard measure of inflation.
This is just an experimental index and it is not “chained,” which means that it does not pick up the effects of substitution among items by the elderly, however if the Post’s concern is to have a “more realistic” measure of inflation then it would join the call of more than 250 economists for having BLS construct a full chained CPI.
This index may end up showing a higher or lower rate of inflation than the current index, but it would give us a better measure of the inflation rate experienced by the elderly. Congress’ intent in establishing the cost of living adjustment in the first place was to have benefits keep pace with inflation. An elderly CPI would do that, switching to a chained CPI is simply an underhanded way to cut benefits.
The Post also tells us:
“Adjusting those annual increments merely reduces the rate of growth in seniors’ benefits; it does not actually cut them.”
Yes, save this one for the Post’s Kids section. The cut reduces the real value of benefits. This is not an argument for adults.
It then adds:
“The immediate impact is negligible — just $1 billion in the first year. That gives future retirees time to adjust.”
Huh? Did anyone say that the cut in benefits would only apply to future retirees?
Once again the Post wants to cut Social Security benefits but does not have the courage to be honest about what it’s proposing. It must really bother them that workers can get $1,200 a month in retirement.
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Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned.
Douthat is off on a few other points. He tells readers:
“In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.
“What’s more, the payroll tax as it exists today can’t cover the program’s projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent.”
The problem here is that we are not condemned to an era of “mass unemployment, mediocre wage growth and weak mobility.” This has been the outcome of inept macroeconomic policy and trade and regulatory policies that were designed to redistribute income from those at the middle and bottom to the top. Most people would look to reverse these policies rather than eliminate social insurance.
The implication of this comment, that we would somehow be able to make up substantial funding shortfalls from cutting taxes on low and middle income people by taxing the wealthy more also is not very plausible. Given the enormous political power of the “job creators” (as demonstrated by the fact that people are not laughed out of town for using this term), it is unlikely that substantially more money will be raised from the wealthy to pay for Social Security. This means that in Douthat’s dream world we would be seeing large cuts in benefits.
He also is wrong with his arithmetic. The payroll tax certainly can cover the program’s expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level.
Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income (e.g. protectionist policies for higher paid professionals, stronger patent and copyright monopolies, subsidies for too big to fail banks etc.), not Social Security.
It is worth pointing out that when Douthat proposes “means-testing for wealthier beneficiaries,” his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney. There are a small number of very rich people, cutting some or all of their benefits won’t make any difference to the program’s finances. In order to have any appreciable effect on Social Security’s finances it would be necessary to cut benefits for people who earned $40,000 a year or thereabout.
Finally, Douthat refers to “changing the way benefits adjust for inflation.” Douthat is not interested in “changing the way benefits adjust for inflation,” he is interested in reducing the way that benefits adjust for inflation. The most widely touted proposal would be equivalent to a 3.0 percent cut in lifetime benefits. This would have a larger impact of the income of most beneficiaries than the ending of the Bush tax cuts would on the after-tax income of most of those affected. For this reason, it is understandable that there would be resistance just as there is considerable resistance to “changing” the tax rate for high income taxpayers.
Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned.
Douthat is off on a few other points. He tells readers:
“In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.
“What’s more, the payroll tax as it exists today can’t cover the program’s projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent.”
The problem here is that we are not condemned to an era of “mass unemployment, mediocre wage growth and weak mobility.” This has been the outcome of inept macroeconomic policy and trade and regulatory policies that were designed to redistribute income from those at the middle and bottom to the top. Most people would look to reverse these policies rather than eliminate social insurance.
The implication of this comment, that we would somehow be able to make up substantial funding shortfalls from cutting taxes on low and middle income people by taxing the wealthy more also is not very plausible. Given the enormous political power of the “job creators” (as demonstrated by the fact that people are not laughed out of town for using this term), it is unlikely that substantially more money will be raised from the wealthy to pay for Social Security. This means that in Douthat’s dream world we would be seeing large cuts in benefits.
He also is wrong with his arithmetic. The payroll tax certainly can cover the program’s expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level.
Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income (e.g. protectionist policies for higher paid professionals, stronger patent and copyright monopolies, subsidies for too big to fail banks etc.), not Social Security.
It is worth pointing out that when Douthat proposes “means-testing for wealthier beneficiaries,” his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney. There are a small number of very rich people, cutting some or all of their benefits won’t make any difference to the program’s finances. In order to have any appreciable effect on Social Security’s finances it would be necessary to cut benefits for people who earned $40,000 a year or thereabout.
Finally, Douthat refers to “changing the way benefits adjust for inflation.” Douthat is not interested in “changing the way benefits adjust for inflation,” he is interested in reducing the way that benefits adjust for inflation. The most widely touted proposal would be equivalent to a 3.0 percent cut in lifetime benefits. This would have a larger impact of the income of most beneficiaries than the ending of the Bush tax cuts would on the after-tax income of most of those affected. For this reason, it is understandable that there would be resistance just as there is considerable resistance to “changing” the tax rate for high income taxpayers.
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There is a large economic literature that shows how trade protection, which might raise the price of products by 15-20 percent, leads to political corruption. The argument is that the beneficiaries of this protection will use their political power to try to maximize the rents they get from this protection.
For some reason economists have not shown the same concern over the granting of patent monopolies which can raises the price of the protected product many thousand percent above the free market price. This is especially an issue in the case of prescription drugs. Drugs that would sell for $5-$10 per prescription as generics in a chain drug store instead sell for hundreds or even thousands of dollars per prescription because of the government granted patent monopoly. The matter is complicated further by the enormous asymmetry in knowledge: the drug company knows much more about their drugs than doctors or patients.
The Washington Post has an excellent front page story that documents how drug company abuses in the research process have been a growing problem over the years. Unfortunately when discussing solutions it does not consider the idea of just taking the financing of clinical trials out of the hands of the industry as proposed by Nobel Laureate Joe Stiglitz. This idea was introduced into legislation earlier this year by Senator Bernie Sanders.
There is a large economic literature that shows how trade protection, which might raise the price of products by 15-20 percent, leads to political corruption. The argument is that the beneficiaries of this protection will use their political power to try to maximize the rents they get from this protection.
For some reason economists have not shown the same concern over the granting of patent monopolies which can raises the price of the protected product many thousand percent above the free market price. This is especially an issue in the case of prescription drugs. Drugs that would sell for $5-$10 per prescription as generics in a chain drug store instead sell for hundreds or even thousands of dollars per prescription because of the government granted patent monopoly. The matter is complicated further by the enormous asymmetry in knowledge: the drug company knows much more about their drugs than doctors or patients.
The Washington Post has an excellent front page story that documents how drug company abuses in the research process have been a growing problem over the years. Unfortunately when discussing solutions it does not consider the idea of just taking the financing of clinical trials out of the hands of the industry as proposed by Nobel Laureate Joe Stiglitz. This idea was introduced into legislation earlier this year by Senator Bernie Sanders.
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People who are familiar with the Commerce Department’s National Income and Product Accounts know that consumption as a share of disposable income is high by historic standards, not low, as shown in the beautiful graph below.
Source: Bureau of Economic Analysis and author’s calculations.
As can be seen, consumption as a share of disposable income is higher than at any point in the 60s, 70s, 80s, and even most of the 90s until the stock bubble generated a consumption boom. It is lower than at the peak of the housing bubble, but that’s what happens when you lose $8 trillion in housing wealth. (Adjusted disposable income has to do with the treatment of the statistical discrepancy in the national accounts.)
Given the actual path of consumption over the post-war years, readers of the Post editorial were undoubtedly shocked to see its conclusion:
“Housing is healing, albeit slowly, as are household balance sheets. Deutsche Bank economist Joseph LaVorgna estimates that households are on course to wipe out the excessive leverage of the bubble years within 15 months. This sets the stage for renewed consumer spending.”
The Post seems to be expecting bubble levels of consumption without bubble levels of wealth. That would truly be surprising, especially in a political environment in which all the serious people in Washington are openly plotting to cut Social Security and Medicare. What economic theory would tell us that we should see saving rates fall to levels that are far below normal in such an environment?
The other bizarre part of this story is that the Post seems to think that consumption is an on/off switch, telling us that households reaching some ill-described threshold of paying down of debt:
“sets the stage for renewed consumer spending.”
That makes no sense. The paying down of debt is a process in which tens of millions of households are paying down debt, while tens of millions are acquiring more. We reduce aggregate debt when the former exceeds the latter. We don’t hit some magic threshold and suddenly get a burst of consumption, rather we should be a seeing a continuing rise in the ratio of consumption to disposable income if the debt paydown is having the predicted effect (we haven’t).
Access to the Internet could help to address the Post’s misunderstanding about current consumption levels. I’m afraid that they will need some additional training in economics or logic to clear up the confusion about how debt could affect consumption.
People who are familiar with the Commerce Department’s National Income and Product Accounts know that consumption as a share of disposable income is high by historic standards, not low, as shown in the beautiful graph below.
Source: Bureau of Economic Analysis and author’s calculations.
As can be seen, consumption as a share of disposable income is higher than at any point in the 60s, 70s, 80s, and even most of the 90s until the stock bubble generated a consumption boom. It is lower than at the peak of the housing bubble, but that’s what happens when you lose $8 trillion in housing wealth. (Adjusted disposable income has to do with the treatment of the statistical discrepancy in the national accounts.)
Given the actual path of consumption over the post-war years, readers of the Post editorial were undoubtedly shocked to see its conclusion:
“Housing is healing, albeit slowly, as are household balance sheets. Deutsche Bank economist Joseph LaVorgna estimates that households are on course to wipe out the excessive leverage of the bubble years within 15 months. This sets the stage for renewed consumer spending.”
The Post seems to be expecting bubble levels of consumption without bubble levels of wealth. That would truly be surprising, especially in a political environment in which all the serious people in Washington are openly plotting to cut Social Security and Medicare. What economic theory would tell us that we should see saving rates fall to levels that are far below normal in such an environment?
The other bizarre part of this story is that the Post seems to think that consumption is an on/off switch, telling us that households reaching some ill-described threshold of paying down of debt:
“sets the stage for renewed consumer spending.”
That makes no sense. The paying down of debt is a process in which tens of millions of households are paying down debt, while tens of millions are acquiring more. We reduce aggregate debt when the former exceeds the latter. We don’t hit some magic threshold and suddenly get a burst of consumption, rather we should be a seeing a continuing rise in the ratio of consumption to disposable income if the debt paydown is having the predicted effect (we haven’t).
Access to the Internet could help to address the Post’s misunderstanding about current consumption levels. I’m afraid that they will need some additional training in economics or logic to clear up the confusion about how debt could affect consumption.
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News stories have been filled with reports of managers of manufacturing companies insisting that they have jobs open that they can’t fill because there are no qualified workers. Adam Davidson at the NYT looked at this more closely and found that the real problem is that the managers don’t seem to be interested in paying for the high level of skills that they claim they need.
Many of the positions that are going unfilled pay in the range of $15-$20 an hour. This is not a pay level that would be associated with a job that requires a high degree of skill. As Davidson points out, low level managers at a fast-food restaurant can make comparable pay.
It should not be surprising that the workers who have these skills expect higher pay and workers without the skills will not invest the time and money to acquire them for such a small reward. If these factories want to get highly skilled workers, they will have to offer a wage that is in line with the skill level that they expect.
News stories have been filled with reports of managers of manufacturing companies insisting that they have jobs open that they can’t fill because there are no qualified workers. Adam Davidson at the NYT looked at this more closely and found that the real problem is that the managers don’t seem to be interested in paying for the high level of skills that they claim they need.
Many of the positions that are going unfilled pay in the range of $15-$20 an hour. This is not a pay level that would be associated with a job that requires a high degree of skill. As Davidson points out, low level managers at a fast-food restaurant can make comparable pay.
It should not be surprising that the workers who have these skills expect higher pay and workers without the skills will not invest the time and money to acquire them for such a small reward. If these factories want to get highly skilled workers, they will have to offer a wage that is in line with the skill level that they expect.
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If they are, the paper should charge more for its subscriptions. Come on folks, a sentence that tells readers:
“once the target numbers are settled, negotiators would have to come up with a down payment on deficit reduction to show the world’s financial markets that Washington is serious.”
has no place in a serious newspaper. Someone obviously told the NYT reporter that it was necessary to have a “down payment” to convince world financial markets that “Washington is serious.” The NYT did not get this tidbit from the financial markets themselves. We want names; who said this? How often has this person (persons) been completely wrong in their assessment of the economy over the last 5 years?
In the same vein, can we leave the philosophical discussions out of the budget reporting, as when the NYT tells us:
“arguments over the fallback [the default budget provisions if a second round of negotiations scheduled for 2013 fails to reach an agreement] reflect a philosophical divide.”
Where does philosophy fit into this picture? We are talking budget negotiating strategies by politicians. Are we next going to hear that this involves competing recipes for preparing duck?
The piece also makes two major substantive errors. It reports on a plan to phase out the lower tax brackets for high income people, the article quotes “one aide familiar with the idea” as saying:
“It would not impact the top marginal rate, and no one would have an effective rate over 35 percent.”
Actually, some people would face a marginal tax rate above 35 percent as the phase out of the lower tax rates would push the effective rate in the zone of the phase out above 35 percent. Of course, very wealthy people whose income pushed them above the phase out zone would only see a marginal tax rate of 35 percent.
Finally, the piece begins by saying:
“Congressional negotiators, trying to avert a fiscal crisis in January…”
Congressional negotiators are not worried about a fiscal crisis in January. They are worried about an economic downturn that would result if a deal is not reached to prevent scheduled tax increases and spending cuts from taking effect. There is no fiscal crisis in this picture.
If they are, the paper should charge more for its subscriptions. Come on folks, a sentence that tells readers:
“once the target numbers are settled, negotiators would have to come up with a down payment on deficit reduction to show the world’s financial markets that Washington is serious.”
has no place in a serious newspaper. Someone obviously told the NYT reporter that it was necessary to have a “down payment” to convince world financial markets that “Washington is serious.” The NYT did not get this tidbit from the financial markets themselves. We want names; who said this? How often has this person (persons) been completely wrong in their assessment of the economy over the last 5 years?
In the same vein, can we leave the philosophical discussions out of the budget reporting, as when the NYT tells us:
“arguments over the fallback [the default budget provisions if a second round of negotiations scheduled for 2013 fails to reach an agreement] reflect a philosophical divide.”
Where does philosophy fit into this picture? We are talking budget negotiating strategies by politicians. Are we next going to hear that this involves competing recipes for preparing duck?
The piece also makes two major substantive errors. It reports on a plan to phase out the lower tax brackets for high income people, the article quotes “one aide familiar with the idea” as saying:
“It would not impact the top marginal rate, and no one would have an effective rate over 35 percent.”
Actually, some people would face a marginal tax rate above 35 percent as the phase out of the lower tax rates would push the effective rate in the zone of the phase out above 35 percent. Of course, very wealthy people whose income pushed them above the phase out zone would only see a marginal tax rate of 35 percent.
Finally, the piece begins by saying:
“Congressional negotiators, trying to avert a fiscal crisis in January…”
Congressional negotiators are not worried about a fiscal crisis in January. They are worried about an economic downturn that would result if a deal is not reached to prevent scheduled tax increases and spending cuts from taking effect. There is no fiscal crisis in this picture.
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We know that because he writes that in a budget deal it is really important that:
“everyone has to take their castor oil — the rich more, the middle class some — make them feel that it will enable us all to get stronger.”
People who know about the recession would likely feel the middle class has taken plenty of castor oil. Many have been without work or involuntarily working part time over the last five years. They have also seen much of their wealth disappear with the collapse of the housing bubble.
Friedman also seems to have a bizarre belief that the country will be better off if more people give up good jobs and use their life savings to start businesses that will fail. Friedman has apparently misunderstood research on start-ups, which shows them to be large net job creators. He thinks that more start-ups will therefore mean more jobs.
This of course does not follow, since the marginal start-up that we can induce through more start-up friendly policy is virtually certain to do worse than the average start-up. If we divert resources from existing businesses to have 50 percent more start-ups, there is no reason to believe that this would increase job growth or improve the economy’s performance, since the overwhelming majority of these start-ups will be out of business in less than a decade.
We know that because he writes that in a budget deal it is really important that:
“everyone has to take their castor oil — the rich more, the middle class some — make them feel that it will enable us all to get stronger.”
People who know about the recession would likely feel the middle class has taken plenty of castor oil. Many have been without work or involuntarily working part time over the last five years. They have also seen much of their wealth disappear with the collapse of the housing bubble.
Friedman also seems to have a bizarre belief that the country will be better off if more people give up good jobs and use their life savings to start businesses that will fail. Friedman has apparently misunderstood research on start-ups, which shows them to be large net job creators. He thinks that more start-ups will therefore mean more jobs.
This of course does not follow, since the marginal start-up that we can induce through more start-up friendly policy is virtually certain to do worse than the average start-up. If we divert resources from existing businesses to have 50 percent more start-ups, there is no reason to believe that this would increase job growth or improve the economy’s performance, since the overwhelming majority of these start-ups will be out of business in less than a decade.
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A Morning Edition segment with a CEO working with the Peter Peterson funded group, the Campaign to Fix the Debt, implied that the economy would go into a recession if a deal is not reached by January 1. There is no economic forecast that shows the economy going into a recession if a deal is not reached by January 1.
The forecasts showing the economy going into a recession assume that there is never a deal reached so people are paying higher taxes all year, emergency unemployment benefits are not extended at all, and a lower rate of spending is in effect throughout the year. None of this is implied by the failure to reach a deal by January 1, 2013. Virtually all political analysts agree that if a deal is not reached by the beginning of the year then it will be reached shortly afterwards.
This means that NPR is frightening its listeners with a scenario of its own invention. It would also be helpful if NPR used more neutral language instead of the “fiscal cliff” terminology used by those trying to create a sense of crisis around the budget standoff.
A Morning Edition segment with a CEO working with the Peter Peterson funded group, the Campaign to Fix the Debt, implied that the economy would go into a recession if a deal is not reached by January 1. There is no economic forecast that shows the economy going into a recession if a deal is not reached by January 1.
The forecasts showing the economy going into a recession assume that there is never a deal reached so people are paying higher taxes all year, emergency unemployment benefits are not extended at all, and a lower rate of spending is in effect throughout the year. None of this is implied by the failure to reach a deal by January 1, 2013. Virtually all political analysts agree that if a deal is not reached by the beginning of the year then it will be reached shortly afterwards.
This means that NPR is frightening its listeners with a scenario of its own invention. It would also be helpful if NPR used more neutral language instead of the “fiscal cliff” terminology used by those trying to create a sense of crisis around the budget standoff.
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A Washington Post blogpost, whose headline told readers that manufacturing jobs are not coming back, gave an incredibly misleading rationale for this assertion. It told readers:
“Manufacturing contributed 20 percent of the growth in global economic output in the decade ending in 2010, the McKinsey researchers estimate, and 37 percent of global productivity growth from 1995 to 2005. Yet the sector actually subtracted 24 percent from employment in advanced nations.”
Note that the first two figures refer to global growth, as in whole world. The third number refers to growth in advanced nations. This matters in a huge way. The trade deficit in manufacturing goods that advanced countries ran with the developing world expanded hugely in this decade.
This was conscious policy in many countries as they removed barriers to trade in manufacturing goods while maintaining or increasing barriers to trade in many services, like physicians and lawyers services. Apart from the political implications of this policy (even greater inequality, as a small group of sheltered professionals gain at the expense of the rest of the workforce), there is also the economic problem that trade deficits cannot expand indefinitely.
At present, China and other developing countries are effectively willing to subsidize U.S. consumption of their manufacturing exports by buying up U.S. government bonds that pay negative real interest rates. It cannot be too long before these governments figure out how to create demand by spending money domestically, rather than paying U.S. consumers to buy their stuff. When this happens, manufacturing, which continues to dominate world trade, is likely to flow back to the advanced countries.
In contrast to the decade from 2000 to 2010, when they were losing shares of world output, advanced countries will then likely be gaining shares. This will almost certainly mean substantial growth in manufacturing employment unless productivity growth, and therefore GDP growth, turns out to be much higher than is generally projected.
A Washington Post blogpost, whose headline told readers that manufacturing jobs are not coming back, gave an incredibly misleading rationale for this assertion. It told readers:
“Manufacturing contributed 20 percent of the growth in global economic output in the decade ending in 2010, the McKinsey researchers estimate, and 37 percent of global productivity growth from 1995 to 2005. Yet the sector actually subtracted 24 percent from employment in advanced nations.”
Note that the first two figures refer to global growth, as in whole world. The third number refers to growth in advanced nations. This matters in a huge way. The trade deficit in manufacturing goods that advanced countries ran with the developing world expanded hugely in this decade.
This was conscious policy in many countries as they removed barriers to trade in manufacturing goods while maintaining or increasing barriers to trade in many services, like physicians and lawyers services. Apart from the political implications of this policy (even greater inequality, as a small group of sheltered professionals gain at the expense of the rest of the workforce), there is also the economic problem that trade deficits cannot expand indefinitely.
At present, China and other developing countries are effectively willing to subsidize U.S. consumption of their manufacturing exports by buying up U.S. government bonds that pay negative real interest rates. It cannot be too long before these governments figure out how to create demand by spending money domestically, rather than paying U.S. consumers to buy their stuff. When this happens, manufacturing, which continues to dominate world trade, is likely to flow back to the advanced countries.
In contrast to the decade from 2000 to 2010, when they were losing shares of world output, advanced countries will then likely be gaining shares. This will almost certainly mean substantial growth in manufacturing employment unless productivity growth, and therefore GDP growth, turns out to be much higher than is generally projected.
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