Is Manufacturing in the EU Is Manufacturing in the EU Disappearing and Does It Need Disappearing and Does It Need

Policy Intervention?Policy Intervention?

Robert J. GordonRobert J. GordonNorthwestern University, NBER, CEPRNorthwestern University, NBER, CEPR

Aspen Institute Italia, MilanAspen Institute Italia, MilanMay 9, 2011May 9, 2011

Outline of Brief Initial CommentsOutline of Brief Initial Comments

Is Manufacturing Declining?Is Manufacturing Declining?– Employment vs. Nominal vs. Real VA SharesEmployment vs. Nominal vs. Real VA Shares– EU15 vs. USEU15 vs. US

Manufacturing Productivity Growth in US and EUManufacturing Productivity Growth in US and EU

The Particular Problems of Southern EuropeThe Particular Problems of Southern Europe– Diagnosis of the problemsDiagnosis of the problems– Policy Recommendations and Warnings about Policy Recommendations and Warnings about

Murphy’s LawMurphy’s Law

Manufacturing Shares of GDP Manufacturing Shares of GDP for the US, 1977-2007for the US, 1977-2007

US- Hours v Nom and Real VA, Mfg as Share of Total GDP, 1977-2007

10

12

14

16

18

20

22

24

26

28

1977 1982 1987 1992 1997 2002 2007

Real VA

HoursNominal VA

Manufacturing Shares of GDP Manufacturing Shares of GDP for the EU-15, 1977-2007for the EU-15, 1977-2007

EU- Hours v Nom and Real VA, Mfg as a Share of GDP, 1977-2007

10

12

14

16

18

20

22

24

26

28

1977 1982 1987 1992 1997 2002 2007

Real VA

Hours

Nominal VA

Summary of RatiosSummary of Ratios

Employment ShareEmployment Share– US 23 to 12. EU 27 to 16. EU higher but similar decline.US 23 to 12. EU 27 to 16. EU higher but similar decline.

Nominal VA ShareNominal VA Share– US 23.5 to 14. EU 25.2 to 19. EU higher but smaller declineUS 23.5 to 14. EU 25.2 to 19. EU higher but smaller decline

Real VA ShareReal VA Share– US 18.1 to 17.5. EU 23.7 to 18.7. US almost unchanged, EU US 18.1 to 17.5. EU 23.7 to 18.7. US almost unchanged, EU

converges downwardconverges downward

Implications. EU implicit deflator hardly declines; US Implications. EU implicit deflator hardly declines; US declines massively. declines massively. – Annual rate 1977-07, US -1.8 vs. EU -0.3 Annual rate 1977-07, US -1.8 vs. EU -0.3 percent per yearpercent per year

Second Implication: Second Implication: RelativeRelative productivity growth in US productivity growth in US manufacturing rises much faster than EUmanufacturing rises much faster than EU– Annual rate 1977-07, US 2.2 vs. EU 1.0 Annual rate 1977-07, US 2.2 vs. EU 1.0 percent per yearpercent per year

Smoothed Labor Productivity Smoothed Labor Productivity Growth, US vs. EU, Growth, US vs. EU,

Total and Non-Mfg, 1997-2007Total and Non-Mfg, 1997-2007Total Economy and Non-Mfg LP Growth Rate, US vs EU, 1978-2007

0

1

2

3

4

5

6

1978 1983 1988 1993 1998 2003

US Total

EU Total

EU Non-Mfg

US Non-Mfg

Smoothed Labor Productivity Smoothed Labor Productivity Growth, US vs. EU, Growth, US vs. EU,

Mfg, 1997-2007 Mfg, 1997-2007 (note same scale)(note same scale)Manufacturing LP Growth Rate, US vs EU, 1978-2007

0

1

2

3

4

5

6

1978 1983 1988 1993 1998 2003

United States

EU

What Industries Contribute to What Industries Contribute to Productivity Growth Success or Productivity Growth Success or

Failure? Failure? Two next graphs compareTwo next graphs compare– US vs. EU 15US vs. EU 15– EU15 vs. Mediterranean (GR, IT, SP)EU15 vs. Mediterranean (GR, IT, SP)

Horizontal axis is TFP growth in EU-15Horizontal axis is TFP growth in EU-15

Vertical axis is TFP in US or Med Vertical axis is TFP in US or Med

Note zero vertical line, horizontal lineNote zero vertical line, horizontal line– Lots of negative TFP growth observationsLots of negative TFP growth observations

Comparing US with EU-15Comparing US with EU-15

EU TFP

US T

FP

Business

Services

Retail/

Wholesale

ICT

Mfg.

Finance

45º line

Real Estate

Nondurable

Mfg

Non-ICT Durable

Mfg.

GHI

Construction/

Utilities

Trans.

Ag./Mining

Communication

0.05

0.35

0.25

0.05

-0.05

-0.05 0.10

Comparing Med with EU-15Comparing Med with EU-15Mediterranean

Business

Services

Retail/

Wholesale

ICT

Mfg.

Finance

Real Estate

Nondurable Mfg

Non-ICT Durable

Mfg.

Construction/

UtilitiesTrans.

Ag./Mining

Communication

GHI

-0.10 0.05

0.05

-0.15

0.15

-0.25

0.10

Diagnosing Problems: Diagnosing Problems: Italy Viewed from the 2010Italy Viewed from the 2010

LIGEP ReportLIGEP ReportNordic, UK, Ireland (until 2007) have not Nordic, UK, Ireland (until 2007) have not appreciably lagged the USappreciably lagged the USItalyItaly– The problem is that the firms are too smallThe problem is that the firms are too small– Their main ambition is to keep control within the Their main ambition is to keep control within the

family, so there is no interest in individual or societal family, so there is no interest in individual or societal wealth building through IPOs.wealth building through IPOs.

– Smallness fostered by “Worker’s Statute” in 1970. Smallness fostered by “Worker’s Statute” in 1970. Must have union representation if >15 employeesMust have union representation if >15 employees

– Constraint on growth has shifted Italy from being a Constraint on growth has shifted Italy from being a star growth performer in EU-15 before 1990 to a star growth performer in EU-15 before 1990 to a laggard after 1990laggard after 1990

Initial Thoughts on PolicyInitial Thoughts on Policy

There is nothing special about manufacturing There is nothing special about manufacturing that would warrant policies to protect its GDP that would warrant policies to protect its GDP shareshare– US manufacturing has not added anything to US manufacturing has not added anything to

employment in last two decades but has not lost GDP employment in last two decades but has not lost GDP share and its productivity soared. share and its productivity soared.

Reasons to question industrial policy to raise Reasons to question industrial policy to raise manufacturing sharemanufacturing share– Why resist comparative advantage?Why resist comparative advantage?– Manufacturing is not the only home of innovation and Manufacturing is not the only home of innovation and

technologytechnology

Innovation Outside of Innovation Outside of ManufacturingManufacturing

Arguably other sectors are as dynamic or more dynamicArguably other sectors are as dynamic or more dynamic– Mobile telephones, retailing and supply chainMobile telephones, retailing and supply chain– Retail, wholesale, finance, and business services are Retail, wholesale, finance, and business services are

the key sectors in which US outperforms Europethe key sectors in which US outperforms Europe– Use Use of ICT innovations is as important as the of ICT innovations is as important as the

manufacturing of ICT equipment.manufacturing of ICT equipment.The value-added of China in the iphone is only $6.50 out The value-added of China in the iphone is only $6.50 out of a retail price of $499. of a retail price of $499. – Less than the $11 of components exported from US Less than the $11 of components exported from US

to Chinato China– Way less than the $100+ that Apple adds as its mark-Way less than the $100+ that Apple adds as its mark-

up for intellectual property developed in the U. S.up for intellectual property developed in the U. S.

Final Comments on Industrial Final Comments on Industrial PolicyPolicy

Decades of Italian investment in the South has not paid offDecades of Italian investment in the South has not paid offSimilarly, UK has not been able to revive its northeast, Germany Similarly, UK has not been able to revive its northeast, Germany has poured trillions into East Germany which still lags, and US has poured trillions into East Germany which still lags, and US has not been able to revive Detroit or the Appalachian stateshas not been able to revive Detroit or the Appalachian statesInequality of policy conception and administration can create Inequality of policy conception and administration can create rather than solve problemsrather than solve problems– Further example than just Italy imposing union legislation on Further example than just Italy imposing union legislation on

employers > 15 employees.employers > 15 employees.– US trade union laws have led all transplant foreign-owned US trade union laws have led all transplant foreign-owned

auto plants to located in the southauto plants to located in the south– Have hollowed out the city of DetroitHave hollowed out the city of Detroit– US devolution of power to the states leads to a wasteful US devolution of power to the states leads to a wasteful

competition of subsidies to lure new firms and keep old firms competition of subsidies to lure new firms and keep old firms (Illinois’ recent $100 million to Motorola Mobility)(Illinois’ recent $100 million to Motorola Mobility)

Controversial ThoughtsControversial Thoughts

The analogy of Detroit to Southern Italy raises many interesting questions:The analogy of Detroit to Southern Italy raises many interesting questions:The history is different. Southern Italy is an age-old problem, Detroit has The history is different. Southern Italy is an age-old problem, Detroit has become a problem last two decadesbecome a problem last two decadesPolicy indirectly created Detroit problem while Italian policy didn’t fix South Policy indirectly created Detroit problem while Italian policy didn’t fix South problemproblem– Murphy’s law (unintended consequences of well-intentioned policies)Murphy’s law (unintended consequences of well-intentioned policies)

Unions killed Detroit because they weren’t enforced in SouthUnions killed Detroit because they weren’t enforced in SouthManagement killed Detroit by falling behind Japanese management Management killed Detroit by falling behind Japanese management & quality& quality

– Italian policies ineffective because of legal system, corruption, cultureItalian policies ineffective because of legal system, corruption, culture– Culture also played a difference in Detroit: white flight from a black Culture also played a difference in Detroit: white flight from a black

majoritymajorityIs there a difference in labor mobility? Flight from Detroit, century-long Is there a difference in labor mobility? Flight from Detroit, century-long emigration from Southern Italy?emigration from Southern Italy?