In the past couple of weeks, I have given several talks to groups of clients, and there have been a couple of common questions and themes in the discussions. The most popular theme is employment—when and whether we will be able to get back to an economy that provides good jobs for lower- and middle-class workers that allow them to buy homes and live a good life. This is really the key question for everyone who loves this country.
The answer I have been giving is that we are not going back to the 1950s. At that time, America was the workshop of the world—because most of the rest of the developed world had destroyed itself. Europe was in ruins, Japan was worse, and the rest of the world had never industrialized. We could sell everything we made because we had no competition. In fact, our policy was to build up the other areas of the world again.
That policy succeeded, and we have been reaping the benefits ever since. Now, though, instead of being the only economy in the world, we are one of many. Is there any hope for an average person to get a job that allows him or her to live like it’s the 1950s?
Let’s set the record straight. The U.S. is still a leading manufacturing power and manufactures most of what is sold here. Manufacturing here is still very strong. The reason the perception is so different is that manufacturing employment has declined so much over the past couple of decades. The reasons for this are complex, ranging from the good (increasing productivity) to the bad (poor management) to the mixed (offshoring of jobs). These trends have played out over decades, giving rise to the present situation.
Now, however, we have reason to believe the trends are changing. The good trends (increased productivity) continue, but the bad ones are abating or reversing. Where emerging markets had hugely less expensive labor decades ago, now the gap is getting much smaller. As U.S. wages have declined, Chinese wages have increased dramatically. The gap does not need to close entirely to make the U.S. the preferred manufacturing location—it just needs to get smaller. And it has.
The reason the gap does not have to close entirely is that the U.S. has multiple other advantages. Again using China as the counterpoint, the U.S. has significant advantages: lower shipping costs, a growing factor as energy costs ratchet up; faster time to market, a large competitive advantage; intellectual property protection, a growing issue; and fewer protectionist and governmental problems. Another offsetting advantage is the superior U.S. educational system and worker productivity.
The confluence of these trends has already started a “reshoring” trend, with many companies relocating manufacturing back to the U.S. I have discussed this before. We also have another trend that may render the U.S. even more competitive—low energy costs driven by the fracking industry. The conjunction of these two trends can be more powerful than either alone.
There is a good article today on the front page of the Wall Street Journal, “Cheap Natural Gas Gives New Hope to the Rust Belt.” The article leads with the fact that the U.S. can now be the low-cost provider for energy, as well as competitive in labor, resulting in companies deciding to locate many projects here rather than abroad. A Boston Consulting Group (BCG) study series I have mentioned before, Made in America, Again, makes the same point on a larger scale; it projects that by 2015, manufacturing in the U.S. will be as economical as manufacturing in China. Other studies have suggested the same.
Think about that. What drove the unbelievable expansion of manufacturing and economic growth in China over the past couple of decades was exactly that cost advantage. Wouldn’t it be nice to be on the right side of the trends that created millions of jobs in China, while at the same time having all of the advantages of the U.S.? If you are the low-cost producer and have the advantage of political stability and the rule of law and have direct access to the largest market in the world, that can be an unbeatable combination. BCG projects that these trends could result in up to five million jobs by 2020. Even if actual results are a fraction of that, this is a meaningful difference in total employment.
We are not going back to the 1950s. Other countries have rebuilt or developed and now compete with us. They also buy from us, though, and despite our smaller piece of the pie, it is a larger pie. Moving forward, the late 2010s and 2020s may not be the 1950s, but they might be just as good or even better.