Does Manufacturing Matter? A Tale of Four Cities


Following is an excerpt from Michael Lind's new book, Hell to Pay: How the Suppression of Wages is Destroying America.

Does manufacturing matter in a twenty-first century economy? A newspaper columnist or economics professor or business executive or politician will often snort and dismiss concerns about the health of the national traded sector in general, and manufacturing in particular, by snorting, “Most jobs in all modern economies are in the nontraded service sector.”

This is true. But the Dismissive Snorter ignores the fact that the industries with the greatest potential for market-driven growth tend to be in the traded sector, producing goods or providing services that can be consumed both at home and abroad. And the Dismissive Snorter also ignores the fact that high-value-added traded sector jobs like manufacturing jobs have important “spillover” effects that improve the kind and quality of jobs in the nontraded sector of the country—spillover effects that are not by-products either of traded sector jobs that are low value-added, like oil and gas drilling or tourist services, or nontraded sector jobs of all kinds.

The nature and quality of jobs in a country are influenced by the nature of its traded sector. To illustrate this all-important point, let’s imagine four cities, each with a different kind of traded sector: Factory Town, Professional Town, Resource Town, and Tourist Town. In each of these fictional local economies, 80 percent of the workers work in the local nontraded service sector, and only 20 percent of the workers work in the traded sector, whatever it might be.

Factory Town is home to an auto parts supplier that makes mufflers for multinational automobile companies. Although only one in five local workers is employed by the auto parts company, it shapes the economy of the city in two major ways.

First, the auto parts supplier brings in money from other parts of the U.S. and the rest of the world. As the global middle class grows, its members buy more cars and trucks. When cars and trucks that incorporate auto parts made in Factory Town are sold abroad by multinational automobile corporations, some of the money goes to the firm in Factory Town. The auto parts company acts like a siphon, draining money from Asia, Africa, the Middle East and South America and pumping some of it into the local economy of Factory Town, through the pay-checks of workers and managers and purchase orders for locally-provided goods and services.

While directly pumping foreign money into the local economy, the auto parts supplier indirectly shapes the kinds of jobs available to the 80 percent of Factory Town workers who labor in the nontraded domestic service sector. Inputs to the auto parts factory, and finished products, are shipped in and out of Factory Town with the help of local warehouse, trucking, rail and port workers (if Factory Town is on a navigable river or canal or ocean). Even if they are not unionized, these logistics workers, knowing how critical they are to the manufacturing and sales process, can demand decent wages and benefits from their employers, who in turn can pass their labor costs along in the form of higher bills to the auto parts supplier. And the auto parts supplier can pay for them, because of the profits it rakes in from an ever-growing number of national and global customers far beyond Factory Town itself. Meanwhile, in the local nontraded service sector where 80 percent of the workers in Factory Town are employed, the hair salon workers and restaurant workers of Factory Town, knowing how well-paid the factory, warehouse and transportation workers are, can charge more for haircuts.

Now let’s examine Professional Town. Once again, 80 percent of the local workforce is in the nontraded domestic service sector and only 20 percent works in the traded sector. But in Professional Town, the traded sector workers are found in the global services sector: software writers, providers of insurance and legal and management consulting services to national and multinational corporations and government agencies and nonprofits, movie and television and video game producers and scriptwriters.

In Professional Town the global services sector, just like the manufacturing sector in Factory Town, acts as a siphon, pumping money into the local economy from clients elsewhere in the nation and the world. But that outside money is distributed in Professional Town is a much less egalitarian way than in Factory Town.

The managers of the auto parts factory in Factory Town have an interest in keeping their own factory workers, and factory-adjacent warehouse and transportation workers, happy so that resignations or strikes do not interfere with production and sales. But for their global service businesses the professionals in Professional Town depend on secure Internet connections and reliable electricity, not warehouse workers, truckers and port workers. They must pay their office tech experts well to keep the internet from failing, but they will suffer no consequences if they minimize other direct labor costs by contracting out cleaning services to small local janitorial firms, who compete with each other to pay their own workers as little as possible.

In Professional Town, the revenues pouring in from the outside world are distributed locally mainly by way of the personal spending of the professional elite. Affluent global services professionals and managers spend lavishly on housing, dining out, entertainment, and personal services. As a result, most of the 80 percent of the nontraded domestic service sector workforce in Professional Town works directly or indirectly for the affluent professional elite, as construction workers, interior decorators, private security guards, drivers, maids, nannies, day-care workers, elder-care workers, gardeners, caterers, restaurant cooks and waiters, launderers, personal fitness coaches, yoga teachers, astrologers, manicurists, hair stylists, personal shoppers, dog walkers, massage therapists, female and male prostitutes and dealers in whatever contraband drugs are favored by the affluent professionals. Absent labor unions, these menial and easily-replaced luxury service workers lack the bargaining power to force the professionals to pay them higher wages or provide benefits.

Most of the charitable donations of the elite in Professional Town, moreover, go to institutions that benefit professionals as a class—the local university from which some of them graduated, and the local symphony orchestra and modern art museum, patronized chiefly by the college-educated, and bike lanes and hiking trails used mostly by affluent members of the local professional elite in their leisure hours.

As these examples show, high-value-added traded sectors in an economy can produce quite different occupational structures and wage rates in the local nontraded service sector of the same economy, depending on whether the high-value-added sector is globally-traded manufacturing or globally-traded professional and managerial services. Factory Town produces lots of good blue-collar jobs in the nontraded service sector; Professional Towns, mostly low-wage servant and service jobs.

What if the traded sector in an economy is a low-value-added industry or set of industries? To answer this question, we visit two other cities: Resource Town and Tourist Town.

In Resource Town, the local traded sector industry involves the mining of rare earth ores that can produce oxides used in magnets that are incorporated into many manufactured goods. The mining process is highly-mechanized, and the mine workers tend to be paid well, like the factory workers in Factory Town. But unlike the manufacturing industry in Factory Town and the global services industry in Professional Town, mining is a low-value-added industry. Most of the added value comes from refining the ore, which is done far from Factory Town. And in our scenario many countries are competing to sell rare earths, so the global price is low. As a result, a large quantity of ore exported from Resource Town is needed to earn the same profits that a limited number of auto parts exported from Factory Town can generate.

Not only do the rare earth ores bring in relatively little income to Resource Town, compared to manufacturing for export or global professional services, but also very little of that money stays in Resource Town. Much of the profit goes to shareholders who live elsewhere in the U.S. or the world. The mine managers and workers are well-paid, and they spend money on local housing and services. But because the ore is quickly removed from the area, by being put on trucks, rail cars or into slurry pipelines, there is nothing like the complex of warehouses and transport operations that have sprung up around the auto parts suppliers in Factory Town, paying decent working-class wages.
To make matters worse, the boom and bust nature of the global rare earths market means that even well-paid mine workers, if they are prudent, must lower their consumption and hoard savings, for fear of being bankrupted during the next bust. And that means even less consumer spending that could go to the 80 percent of the local workers in the nontraded sector.

Finally there is Tourist Town. This is the poorest of our four imaginary cities. The U.S. government defines tourism as an “export industry,” and it is indeed a traded sector industry that brings in money from outside. The money that it brings in is consumer spending by tourists who descend on Tourist Town to have a good time.
The jobs in Tourist Town resemble those in Professional Town—lots of workers in restaurants and entertainment and luxury services. But the same kinds of workers in Tourist Town are worse off than in Professional Town, because tourism is seasonal. The local luxury service economy booms when hordes of tourists—rich or middle-class or working-class, as the case may be—invade the area and then collapses when they leave and the outside income stops pouring in. Tourist destinations during the off season often are poor, miserable, desolate communities.

As these parables suggest, the quality of nontraded domestic service sector jobs depends in part on the nature of the local traded sector. I sense that a reader has raised a finger and is wagging it furiously, exclaiming, “But what about automation? Doesn’t that make your contrast of the four cities obsolete?” No, Wagging Finger, it does not. Put your finger down and allow me to explain.

Economies are not automated; economic sectors are. That means that our four-sector model based on value added and traded or nontraded activity remains valid, even in an age of advanced robotics. Our four towns will still be quite different in their employment and class structures because of the different nature of their globally-traded sectors and their different relations to the global economy, even if there are more industrial robots (Factory Town), software professional assistants (Professional Town), robot mining machines (Resource Town) and robot tourist greeters in the form of cartoon characters or local mascots (Tourist Town).

In reality, of course, countries—even small countries—are made up of cities and regions and provinces of different kinds. The U.S. economy can be envisioned as a patch-work of Manufacturing Towns, Professional Towns, Resource Towns and Tourist Towns.
This schema helps us to understand the evolution—or rather, the decline—of the U.S. economy in the last half-century. Thanks to a combination of corporate offshoring and imports from low-wage countries, large parts of the U.S. manufacturing sector disappeared between the 1980s and the present, and with it a lot of manufacturing-adjacent industries that generated good jobs with good wages and benefits. At the same time, the global market for many high-value-added services which (for now) can be performed only in the U.S. and a few other places has expanded. So Detroit became a wasteland with neighborhoods that look like Berlin when it had been bombed into rubble at the end of World War II, while the Bay Area, home to the tech services industry, and the New York area, home to global finance, became sybaritic versions of Professional Town. The rich tech and finance industry people pumped money into tourist economies with their lavish luxury spending, when they vacationed in Aspen or Jackson Hole, Wyoming, or engaged in orgies of sex, drug use and wasteful destruction of property in the potlatch known as the Burning Man Festival in Nevada.

Meanwhile, the fracking industry—independent of control by the tech and finance plutocrats, and thus hated by them and targeted for destruction in the name of saving the earth from climate change—brought prosperity, if only temporary prosperity, to rural regions in South Texas, North Dakota and other places where new Resource Towns sprang up overnight.

Recent American economic history, then, serves as a warning: if you don’t like Factory Town, the alternatives are worse.

(Michael Lind’s newest book is Hell to Pay: Hello to Pay: How the Suppression of Wages is Destroying America. He is a columnist at Tablet and a fellow at New America).