Suppose a company produced 2 million computers in 1994 at $2,000 apiece and 3 million in 2002 at $1,000 apiece. Using nominal figures would make it look as though that company's production had gone down 25 percent, when in fact it went up by 50 percent.
I previously focused on the manufacturing component of the Fed's index of industrial production, rather than GDP, and that index also measures U.S. production only. It is constructed from physical measures, such as tons of U.S. steel, plus estimates for some industries based on their use of electric power and hours of work. Manufacturing accounts for 86.7 percent of industrial production -- mining and utilities for the rest. High-tech manufacturing of the sort typified by Silicon Valley accounts for only 7.1 percent of the index and 9.5 percent of manufacturing jobs. Yet high-tech equipment accounted for nearly half of the total growth of manufacturing growth in the '90s.
The long and strong 5.3 percent growth of manufacturing output from 1992 to 2000 would drop to only 2.7 percent if we left out huge increases in U.S. production by manufacturers of silicon chips, computers and communications equipment. The tech boom was not just in the stock market. It was quite real. And the recent rebound in tech stocks is real too: August production of computers and office equipment was up 22.2 percent from a year earlier; production of semiconductors and related components was up 19.1 percent. Manufacturers of more mundane products did not fare nearly as well as tech producers in the '90s, or in the past year.
Silicon Valley went through a classic boom-bust cycle. Some people from the area, including Kirschner, ask us to focus on the bust and ignore the preceding nine-year boom and recent rebound. It is true, however, that because of Silicon Valley's notoriously inflated cost of real estate and taxes, some of that area's plants have relocated to other states -- not to other countries -- leaving local unemployment far above the national norm.
Another common complaint concerns my use of International Labor Organization estimates that average productivity in U.S. manufacturing is 12 times larger than in China. Kirschner disputes the facts by saying Chinese plants are just as automated as ours. Because costly labor-saving machinery renders labor costs relatively insignificant, however, that claim undermines his premise that "cheap labor" (rather than proximity to millions of Asian consumers) is the main reason for being there. If cheap labor really mattered so much, then all U.S., Japanese and European factories would long ago have moved to Bangladesh and Chad.
What is missed by such anecdotal impressions about the efficiency of particular Chinese factories is that U.S. plants generally produce much more valuable products, such as cars and computers. World consumers are unwilling to pay much for, say, tiny black and white televisions regardless how efficiently they are produced. Products that can't command a high price generally can't pay a wage that would attract U.S. workers. The average productivity of all Chinese manufacturers is not determined by a few highly automated plants but rather by the sizable majority that produce inexpensive labor-intensive goods. Many of those goods are essential parts and materials that help to hold down U.S. manufacturing costs and consumer prices.
Some figures from the Federal Reserve Bank of St. Louis Review help put the unquestionably painful cyclical downturn in perspective. During the average postwar recession, industrial production fell by 7.3 percent. During the last recession, by contrast, industrial production fell by only 4.2 percent. During the average recession, imports fell by 4.5 percent -- but during the last recession, imports fell by more than 6 percent. Domestic manufacturing fared relatively well, as recessions go, while foreign exporters to the U.S. suffered more than usual.
To suggest that U.S. industries fared worse than usual during the recession of 2001 could be a mistaken impression due to short memories. But to suggest that U.S. industry went down because imports went up, as many now claim, is so far from the truth that something more devious than mere ignorance must be involved. Most likely this is just another veiled pitch for higher U.S. tariffs. But tariffs raise American manufacturers' cost of production and consumers' cost of living. Such higher costs would make us all poorer, not richer.