Can $12.1 Trillion be Boring? Thoughts on International Reserves

I knew that many countries were holding substantial international  reserves, but I hadn't quite realized how large those reserves have become. Edwin Truman explains: "At the end of 2011, international reserve assets alone amounted to 17 percent of world GDP and an average of 29 percent of the national GDP of emerging market and developing countries. ... Including the international assets of SWFs [sovereign wealth funds] and similar entities would boost those percentages substantially above 20 percent and close to 40 percent respectively. At a 5 percent total return, those assets yield 1 to 2 percent of GDP per year."

Truman has some additional "Reflections on Reserve Management and Inernational Monetary Cooperation" in remarks he delivered at a World Bank/Bank of International Settlements Conference earlier this month. I saw the talk posted at the website of the Peterson Institute for International Economics.  Truman compiled a useful table to show the rise in such reserves: here, I'll give a trimmed-down version of the table, along with some of the main patterns as I see them.

Here are a few of the patterns that jump out at me from the table.

1) International reserves have grown dramatically since 1990, and expecially since 2000, rising from $2.3 trillion in 2000 to $12.1 trillion in 2011. To put it another way, international reserves were equal to roughly one-third of world trade in 1990 and 2000, but equal to about two-thirds of world trade in 2011.

2) Most of this increase in reserves has come from the emerging and developing economies. The share of world reserves held by advanced economies was about 80% from the 1960s up through about 1990, but since then has plummetted to 40%. For the emerging and developing countries, their total reserves were about one-third of their trade from 1960 up through about 1990, but hen rose to half of their volume of trade by 2000 and to 104% of their trade volume by 2011.

3) Countries used to hold their reserves in the form of gold, but now are more likely to hold their reserves in the form of foreign exchange. Back in 1960, the advanced economies held 70% of their reserves in the form of gold, and the emerging/developing countries held 44% of their reserves in the form of gold. In the last decade or so, advanced economies had 70-80% of their reserves in foreign exchange, and emerging/developing countries had 94% of their reserves in foreign exchange.  (I trimmed from the table two relatively small categories of how reserves are held: special drawing rights and reserve position at the IMF.)

Truman offers a useful decade-by-decade sketch of how international reserves have evolved since the 1960s. For the most recent decade, Truman points out:

"The increased wealth in the hands of more and more governments has raised new concerns about the motivations, accountability, and transparency of the managers of that wealth. ... [E]nhancement of cooperative arrangements in this area is falling behind the need for them in the face of the explosion of the size and number of significant public investors, bringing in many non-traditional investors. This is a global issue. The notion that a country’s public investments are the exclusive concern of the country itself is analytically wrong and fundamentally dangerous. Two countries (at least) share an exchange rate. Similarly, two countries (at least) share the effects of cross-border public investments. ... The alternative to increased cooperation on public sector investment policies is a currency war. ... The greater risk is that restrictions and barriers will increase affecting not only cross-border official investments, but all cross-border financial transactions. Once we start down that path, a trade war would not be difficult to envisage, and the consequences for global growth and stability could be severe."

My own sense is that discussions of international reserves often seem to be deeply boring (if it's possible for discussions of $12.1 trillion to be boring!), but these financial flows are enormous enough to rock the world economy, and their management and purpose are often obscure. I suspect that, perhaps sooner rather than later, the ways in which these funds are managed and the choices they make will be the source of very prominent and not-at-all boring political and economic conflict.  

Elinor Ostrom on the Commons

Elinor Ostrom shared the 2009 Nobel prize in economics. Her contribution, as described by the Nobel committee, was that she "[c]hallenged the conventional wisdom by demonstrating how local property can be successfully managed by local commons without any regulation by central authorities or privatization." Last March, she gave the  Hayek Memorial Lecture at the Institute for Economic Affairs on the topic: "The Future of the Commons: Beyond Market Failure and Government Regulation." The IEA has now made her talk available as an e-book, together with some useful essays and commentary.

For example, Vlad Tarko offers some biographical and intellectual background on Ostrom. He sums up some main themes of her work in this way:

"The classic solution to the public goods problem has been to use taxes to pay for public goods, thus adjusting their supply level upwards (presumably towards the optimum). The classic solution to the ‘tragedy of the commons’ problem, provided by Hardin (1968), has been to transform the resource into a private good (either by privatising it or by turning it into government property with proper monitoring). One of the main reasons for which Elinor Ostrom received her Nobel Prize is the discovery that these classic solutions are not the only possible ones. What Ostrom discovered in her empirical studies is that, despite what economists have thought, communities often create and enforce rules against free-riding and assure the long-term sustainability of communal properties. Her ‘design principles’ explain under what conditions this happens and when it fails."

Ostrom's essay is especially useful as a reminder of how determinedly pragmatic she was in her work, and how unwilling to be pigeon-holed. She wrote:

"Challenge one, as I mentioned, is the panacea problem. A very large number of policymakers and policy articles talk about ‘the best’ way of doing something. For many purposes, if the market was not the best way people used to think that it meant that the government was the best way. We need to get away from thinking about very broad terms that do not give us the specific detail that is needed to really know what we are talking about.

"We need to recognise that the governance systems that actually have worked in practice fit the diversity of ecological conditions that exist in a fishery, irrigation system or pasture, as well as the social systems. There is a huge diversity out there, and the range of governance systems that work reflects that diversity. We have found that government, private and community-based mechanisms all work in some settings. People want to make me argue that community systems of governance are always the best: I will not walk into that trap."

"There are certainly very important situations where people can self-organise to manage environmental resources, but we cannot simply say that the community is, or is not, the best; that the government is, or is not, the best; or that the market is, or is not, the best. It all depends on the nature of the problem that we are trying to solve."

So what was Ostrom's framework for analysis? She tried to look at what she called "social-ecological systems," which was a sort of check-list of different categories. Here's an example from her essay of what she called first-tier and second-tier categories. There were third-tier categories, too!

 
This kind of table helps to illustrate why I often found Ostrom's to be remarkably insightful and also frustrating at the same time. Her insistence on pragmatic analysis forced one to look at fine-grain detail in a way that often yielded fascinating insights. But in her approach, it often seemed hard to draw more general lessons, because it sometimes felt as if every individual study fell into its own category with its own rules. Ostrom acknowledges both reactions in her essay:

"I am going to warn you that when people see this for the very first time, there is a kind of worried reaction at its complexity. This looks very complex. ... Researchers can fall into the trap of pretending that their own cases are completely different from other cases. They refuse to accept that that there are lessons that one can learn from studying multiple cases. In reality, to diagnose why some social-ecological systems do self-organise in the first place and are robust, we need to study similar systems over time. We need to examine which variables are the same, which differ and which are the important variables so that we can understand why some systems of natural resource management
are robust and succeed and others fail."

Ostrom's work excelled at dispelling ideological certitudes: there was always an example to show that things might work differently. She had an extraordinary ability to postpone the easy answer, and to keep digging down into specific details.

The Pill Over the Counter?

The ability of women to access the contraceptive pill is mediated through the health care profession: in particular, the pill is a prescription drug. Almost two decades ago in August 1993, a doctor named David Grimes wrote in the American Journal of Public Health (footnotes omitted): "On public health grounds, oral contraceptives could be made available in vending machines and cigarettes by prescription only. ... Our society's approach to these two agents, both widely used by young women, is paradoxical. Cigarettes, which are readily available even to children, kill over a thousand persons each day. In contrast, oral contraceptives prevent unwanted pregnancy and improve women's health. Nevertheless, the medical profession poses numerous obstacles to this method of contraception, including a physical examination, a prescription, often a pharmacist, and an impenetrable package insert. ... [T]hese medical requirements neither serve nor protect women; they are merely impediments."

Some important voices in the health care profession seem to be coming around to this point of view. The Committee on Gynecologic Practice of the American College of Obstetricians and Gynecologists has now published its opinion concerning "Over-the-Counter Access to Oral Contraceptives." The committee begins:

"Unintended pregnancy remains a major public health problem in the United States. Over the past 20 years, the overall rate of unintended pregnancy has not changed and remains unacceptably high, accounting for approximately 50% of all pregnancies. The economic burden of unintended pregnancy has been recently estimated to cost taxpayers $11.1 billion dollars each year. According to the Institute of Medicine, women with unintended pregnancy are more likely to smoke or drink alcohol during pregnancy, have depression, experience domestic violence, and are less likely to obtain prenatal care or breastfeed. Short interpregnancy intervals have been associated with adverse neonatal outcomes, including low birth weight and prematurity, which increase the chances of children’s health and developmental problems.

Many factors contribute to the high rate of unintended pregnancy. Access and cost issues are common reasons why women either do not use contraception or have gaps in use. Although oral contraceptives (OCs) are the most widely used reversible method of family planning in the United States, OC use is subject to problems with adherence and continuation, often due to logistics or practical issues. A potential way to improve contraceptive access and use, and possibly decrease the unintended pregnancy rate, is to allow over-the-counter access to OCs."

Of course, it's easy to toss out some potential reasons why offering birth control pills over-the-counter might pose some unwanted tradeoffs. Would women be appropriately aware of possible side effects? Would women use oral contraceptives regularly and thus effectively if they were available over the counter? If women could get the pill over-the-counter, might they then have fewer doctor visits that could focus on preventive health care? How would an over-the-counter pill interact with insurance reimbursement? Would pharmacists be involved in some way? 

Just about every drug, including many over-the-counter drugs, can cause unwanted side effects for some people, or be be misused or ineffectively used. The appropriate dividing line here is not to require perfect safety, but to make a judgement that the drug is safe enough that people can self-medicate. That 1993 essay in the American Journal of Public Health argued that two decades ago: "More is known today about the safety of oral contraceptives than has been known about any other drug in the history of medicine. Thirty years of intense epidemiologic study have confirmed
that oral contraceptives are very safe." On the other side, the factors that limit women from having access to effective contraception pose real and immediate risks to their own health, and often to the health of their children.

When the Committee on Gynecologic Practice of the American College of Obstetricians and Gynecologists speaks up, it is essentially a group of doctors who specialize in this area, saying that with all the health risks taken into account, the available evidence suggests that over-the-counter access to the pill makes sense.

Many of the non-health-related arguments about making the pill available over-the counter are easily dismissed. For example, the concern that women with access to reliable contraception may not show up for preventive care is just old-style paternalism with a concerned face. Should we also require that condoms be sold via prescription, so that young men will be pressured to go to doctor's offices for their regular check-ups? Yes, figuring out how an over-the-counter pill would interact with insurance and with pharmacists is worth consideration. But surely, those factors should not be the central ones in thinking about whether a drug should require a prescription.

The contraceptive pill has been a society-shaking innovation. In the "millenium issue" of the Economist magazine back at the very end of 1999, the contraceptive pill was described this way: "But there is, perhaps, one invention that historians a thousand years in the future will look back on and say, “That defined the 20th century.” It is also one that a time-traveller from 1000 would find breathtaking—particularly if she were a woman. That invention is the contraceptive pill."

Among academic economists, probably the best-known work on the pill is a paper by Claudia Goldin and Lawrence F. Katz, "The Power of the Pill: Oral Contraceptives and Women’s Career and Marriage Decisions," published in 2002 in the Journal of Political Economy. The academic paper is available here; a write-up of the material for a broader readership in the Second Quarter 2001 issue of the Milken Institute Review is available here.  Goldin and Katz describe their work this way: "The fraction of U.S. college graduate women entering professional programs increased substantially just after 1970, and the age at first marriage among all U.S. college graduate women began to soar
around the same year. We explore the relationship between these two changes and the diffusion of the birth control pill (“the pill”) among young, unmarried college graduate women." While Goldin and Katz are careful to point out that many other factors were in play around this time, they make a compelling case that the availability of the pill played an important role, too. As they put it: "The Pill thus enabled a larger group of women to invest in expensive, long-duration training without paying a high social price."

 But while the pill has fundamentally altered the lives of women who have ready access to health care appointments and doctors who write prescriptions, there are also many women for whom the  requirement to see a doctor regularly and to get a series of prescriptions presents real logistical a nd personal barriers. It's time to stop using the contraceptive pill as a sort of carrot-and-stick to encourage regular doctor visits by women. It should be available over the counter.
 
Acknowledgement: I ran across the 1993 article in the American Journal of Public Health in a March 2012  Bloomberg column by Virginia Postrel called, "Fight Birth-Control Battle Over the Counter."

Why Lobbyists Get Paid

One theory of why lobbyists get paid, the one often proffered by the lobbyists, is that the legislative arena is a complex place, and having someone who knows the ins and outs is useful. An alternative theory, often proffered by critics, is that lobbyists are paid because they deliver access to top politicians--in other words, it's not what they do, but who they know.  Both theories doubtless hold some truth, but in the December 2012 issue of the American Economic Review, Jordi Blanes i Vidal, Mirko Draca, and Christian Fons-Rosen offer some fuel for the critics in their paper "Revolving Door Lobbyists" (102:7, pp. 3731-48). The AER isn't freely available on-line, but many academics will have access through a library subscription.

Blanes i Vidal, Draca, and Fons-Rosen point out that many lobbyists went through the "revolving door," meaning that they used to work for the federal government before becoming lobbyists. "
"One important characteristic of the US lobbying industry is the extent to which it is dominated by the “revolving door” phenomenon—i.e., the movement of federal public employees into the lobbying industry. For example, 56 percent of the revenue generated by private lobbying firms between 1998 and 2008 can be attributed to individuals with some type of federal government experience. ... Reflecting this, a recent ranking of the 50 top Washington lobbyists identified 34 as having federal
government experience ..."

The authors di\ide  nto those who formerly worked directly with a member of Congress, and those who didn't. In addition, for lobbyists who worked with a member of Congress, they can look at how the revenue generated by that lobbyis changes when the member of Congress with whom they are personally connected leaves office.  They write:

"Our main finding is that lobbyists connected to US senators suffer an average 24 percent drop in generated revenue when their previous employer leaves the Senate. The decrease in revenue is out of line with preexisting trends, it is discontinuous around the period in which the connected senator exits Congress, and it persists in the long term. Measured in terms of median revenue per staffer-turned-lobbyist, this estimate indicates that the exit of a senator leads to approximately a $182,000 per year fall in revenues for each affiliated lobbyist. We also find evidence that ex-staffers are less likely to work in the lobbying industry after their connected senators exit Congress. We regard the above findings as evidence that connections to powerful, serving politicians are key determinants of the revenue that lobbyists generate."

Along the way, they point out: "The average weighted revenue per lobbyist/year ranges around $349,000 for the subgroup of congressional staffers we consider. This figure is closely in line with
the reported salaries of lobbyists in this group. For example, the Washington Post reported in 2005 that “[s]tarting salaries have risen to about $300,000 a year for the best-connected aides eager to ‘move downtown from Capitol Hill’ ” .... Obviously, our estimates are not easily extrapolated to lobbyists with no government experience, although they help to explain the fact that these lobbyists generate substantially less revenue and are known to command lower salaries."

A policy implication here is that "cooling off" periods, in which people who leave government employment are banned for a time from becoming lobbyists, might diminish this business of trading on personal access. They write: "One common instrument to regulate the revolving door phenomenon is to impose “cooling off ” periods to officials leaving public office (Ethics Reform Act of 1989; Honest Leadership and Open Government Act of 2007; for a review, see Maskell 2010). The perishable nature of ex-staffers’ assets suggests that such restrictions could in fact be quite useful to
a legislator interested in significantly decreasing the attractiveness of a lobbying career for ex–government officials."

 Back in September, I posted on "Campaign Contributions vs. Lobbying Expenses." Basically, my theme was that we would be wise to worry more about lobbyists than about campaign contributions. Year in, year out, more money is spent on lobbying than on campaign contributions, and just what happens with lobbyists behind the scenes is far more focused and secretive than what happens with contributions to a candidate or a party. 

Supplemental Security Income: Where the Program Stands

I have sometimes said that Supplemental Security Income, or SSI, is the federal program to those who are both old and low-income. But while that was an OK if inaccurate shorthand a few decades ago, its no longer appropriate. SSI does cover the low-income elderly, but it also covers those who are low-income from ages 18-64 with disabilities, and also disabled children under the age of 18 in low-income household. Back in 1980, about half of those receiving benefits were in the over-65 low-income. But at present, only 25 percent of the people covered by SSI are elderly, and they receive only 19 percent of the payments from this program. The Congressional Budget Office offers this and other facts about the program in its just-released report: "Supplemental Security Income: An Overview."

Here a figure from CBO showing the three main groups in the SSI program, and how their numbers have evolved over time.

Given this shift in SSI toward those who are disabled, an obvious question is how SSI relates to the other other main federal program for those with disabilities, the Social Security Disability Insurance program. For a quick overview of that program with some suggestions for reform, see this post from August 2011 on "Disability Insurance: One More Trust Fund Going Broke." The CBO report explains the practical differences in this way:

"Social Security Disability Insurance (DI), the other major federal program that provides cash benefits to people with disabilities, uses the same disability standard for working-age adults that applies in SSI, but it differs from SSI in several respects. For example, DI is available only to adults (and their dependents) who have a sufficient record of work, but past work is not a requirement for SSI eligibility. DI also places no limits on beneficiaries’ income or assets, but SSI recipients must have low income and few assets. In addition, DI is funded primarily by means of a dedicated payroll tax, but SSI is funded out of general revenue."

 Here's a quick overview of eligibility rules for the three main groups in the SSI program. For those in the single largest category of age 18-64, low-income, and disabled, the rules look like this:

"To qualify for SSI, those recipients must demonstrate that their disability prevents them from participating in “substantial gainful activity,” which in 2012 is considered to mean work that would produce earnings of more than $1,010 a month. (That amount is adjusted annually for average wage growth.) Older adults are more likely than younger adults are to receive payments: Fewer than 2 percent of people between the ages of 18 and 29 receive payments; slightly more than 3 percent of people between the ages of 50 and 64 do. Especially among younger adults, eligibility for the program is determined most commonly on the basis of mental disability: Three-quarters of participants ages 18 to 39 were awarded payments primarily because of a mental disorder. That share declines with age, as conditions such as spinal  disorders and heart disease become more prevalent. Among SSI recipients between the ages of 60 and 64, for example, one-third receive payments because of mental disorders, one-quarter receive payments because of musculoskeletal disorders, and one-tenth receive payments because of circulatory disorders ... The share of adults ages 18 to 64 receiving SSI payments has increased over time, rising from slightly more than 1 percent of the population 30 years ago to more than 2 percent today."

For children to qualify for SSI, here are the standards:

"Children who qualify for SSI must be disabled and, in most cases, must live in a household with low income and few assets. To be considered disabled, a child must have a physical or mental impairment that results in marked and severe functional limitations and that is either expected to last for at least 12 consecutive months or to result in death. Most child recipients—three-quarters of recipients
between the ages of 5 and 17 and one-third of those under the age of 5—qualify because of a mental disorder.

And for the elderly, the rules for SSI are based on low income. The low-income elderly rely less  on SSI than they used to in part because of broader participation in Social Security -- for example, more women with an earnings history that brings non-negligible amount of Social Security payments--and also because of how Social Security benefits have been indexed to rise with inflation over time.

"People age 65 or older can qualify for SSI on the basis of low income and assets alone; they need not be disabled. As a result, people in that age group are more likely than younger people are to qualify for the program; about 2.1 million, or 5 percent of the elderly population, do. (About half of those recipients qualified as disabled recipients before they turned 65.)

"The share of the aged population that receives payments has fallen by more than half since 1974 because of the increase in the share of that population eligible for Social Security and because of the real (inflation-adjusted) increase in the average Social Security benefit. Many more women now have had sufficient earnings to qualify for Social Security benefits based on their own work. In addition, the Social Security benefits that each new group of beneficiaries receives are linked to average wages in the economy, which generally increase faster than SSI benefits, which are linked to prices. As more people qualified for Social Security benefits and as the benefit amounts rose, fewer people met SSI’s income standard."

The SSI program will cost about $53 billion this year. Over the last 20 years or so, spending on the program expressed as a share of GDP is fairly flat.

As with any program oriented to those with disabilities or with low incomes, I'm sure there should be a continual process of re-considering just how "disability" is defined and what incentives to work at least part time are being provided by the benefit structure. But this program isn't one where I would expect even a fairly rabid budget-cutter to find substantial spending cuts.

Cautionary Details on U.S. Manufacturing Productivity: Susan Houseman

There's a basic and often-told story about output and employment in the U.S. manufacturing sector: I'm sure I've told it a time or two myself. The story begins by pointing out that the total quantity of U.S. manufacturing output has actually held up fairly well over recent decades, although it hasn't grown as quickly as the services sector. However, productivity growth in manufacturing has been rising quickly enough that productivity growth. However, manufacturing productivity has been rising quickly enough that, even though manufacturing output has remained fairly strong, the number of jobs has been falling. The standard historical analogy is that just as rising agricultural productivity meant that fewer U.S. farmers were needed, now rising manufacturing productivity means that fewer manufacturing workers are needed.

That story isn't exactly wrong, at least not over the long-run, but Susan Houseman has been digging down into the details and finding arguments which suggests that it is a seriously incomplete version of what's happening in the U.S. manufacturing sector. Houseman presented some of these arguments in a paper written with Christopher Kurz, Paul Lengermann, and Benjamin Mandel, called  "Offshoring Bias in U.S. Manufacturing," which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available courtesy of the American Economic Association.) In turn, their JEP paper was a revision of a more detailed Federal Reserve working paper in 2010, available here. However, Houseman offers a nice overview of her arguments in an interview recently published in fedgazette, a publication of the Federal Reserve Bank of Minneapolis.

For background, here are four figures created by the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The first shows level of manufacturing output, which since the official end of the recession in 2009 has recovered to the level in 2000. The second shows manufacturing employment, which has dropped off substantially over that time. The third shows annual rates of change in manufacturing productivity, which is volatile, but seems often to be rising at 2-3% per year. And the fourth shows levels of manufacturing compensation, which hasn't been rising since 2000--as one might have expected based on rising productivity in thus sector.

 

After reading Houseman, when you hear the standard story about how high productivity in manufacturing is leading to reduced employment, the following thoughts should rattle through your head:

1)  Most of the productivity growth in manufacturing is computers. Houseman: "First, a very important fact, but one I find most people don’t know—including some people who write a lot about the manufacturing sector—is that manufacturing growth in real [price-adjusted] value added and productivity wasn’t that strong without the computer and electronics industry. The computer industry is small—it only accounts for about 12 percent of manufacturing’s value added....  But we find that without the computer industry, growth in manufacturing real value added falls by two-thirds and productivity growth falls by almost half. It doesn’t look like a strong sector without computers."

2) Most of the productivity growth in manufacturing computers is because computers are becoming so much faster and better over time, and government statistics count that a productivity growth, not because an average worker is producing a dramatically greater quantity of computers. Houseman: "The standard argument is that the rapid productivity growth in computers is coming from product innovation. This year’s computers and semiconductors are faster and do more than last year’s models. And that product innovation essentially gets captured in the price indexes the government uses to deflate computer and semiconductor shipments. The price indexes for most products increase over time—that’s inflation. But, for example, the price indexes used to deflate computer shipments have actually fallen by a whopping 21 percent per year since the late 1990s. Those rapid price declines largely reflect adjustments for the growing power of computers. And that extraordinary decline in computer price indexes translates into extraordinary growth in real value added and productivity in the computer industry as measured in government statistics. So, in some statistical sense, today’s computer may be the equivalent of, say, 13 computers in 1998. ... The reason jobs in computers have been lost is not because productivity growth has crowded them out; not at all. It’s because much of the production has gone overseas...."


3)  A sizeable share of what looks like growth in manufacturing productivity is actually from importing less expensive inputs to production. Houseman: "[T]here’s been a lot of growth in manufacturers’ use of foreign intermediate inputs since the 1990s, and most of those inputs come from developing and low-wage countries where costs are lower. We point out that those lower costs aren’t being captured by statistical agencies, and so, as a result, the growth of those imported inputs is being undercounted. ...  Suppose an auto manufacturer used to buy tires from a domestic tire manufacturer. Then it outsources the purchase of its tires to, say, Mexico, and the Mexicans sell the tires for half the price. That price drop—when the auto manufacturer switches to the low-cost Mexican supplier—isn’t caught in our statistics. And if you don’t capture that price drop, it’s going to look like, in some statistical sense, the manufacturer can make the same car but only needs two tires. ... Our statistical agencies try to measure price changes, but they miss them when the price drops because companies have shifted to a low-cost supplier. So because we don’t catch the price drop associated with offshoring, it looks like we can produce the same thing with fewer inputs—productivity growth. It also looks like we are creating more value here in the United States than we really are."

4) If productivity in manufacturing rises because of automation, then those gains in productivity may benefit the owners of the machines--that is, benefit capital rather than labor. Houseman: "And then another standard story has to do with automation. Basically, capital is substituting for labor. Automation can lead to job losses. And the returns from automation, or higher capital use, won’t necessarily be shared with workers."

5) If low-wage labor-intensive manufacturing tasks are now more likely happen overseas, an higher-wage tasks remain in the U.S., then it may appear as if the productivity of an average U.S. manufacturing worker is higher--but it's just a shift in the composition of U.S. manufacturing workers. Houseman: "Then, finally, there’s probably been some shifting in the sorts of production that occur here. In particular, less of the labor-intensive production is done in the United States, and that would result in job losses and higher labor productivity. Again, the gains from that productivity growth aren’t necessarily going to be shared with remaining workers. So part of the answer to the puzzle is that even if productivity gains are real, there’s really nothing that guarantees those gains will be broadly shared by workers."

Add all these factors up, and the condition of U.S. manufacturing looks more ominous than the standard story of high productivity and resulting job losses. For more on the future of global and U.S. manufacturing, see this November 30 post on "Global Manufacturing: A McKinsey View."

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