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Comment by lumost | Hacker News Reader

There was a general claim from the late 80s to 90s that the invisible hand of the market would eventually move Americans to higher paying fields while allowing low wage international competition in manufacturing.

As of 2020 the US has not seen these new jobs materialize outside the upper 5% of wage earners in the economy. The trend also shows that the US is losing the capability to manufacture high-end products such as iphones, planes ( 737-max), and trains. The manufacturing jobs which are returning tend to be making the same things that were made 3 decades ago with both inferior wages and quality to what those workers did previously (see American Factory).

While lifting billions of people out of poverty in China and the developed world is a laudable achievement, and the realization of competitive international products was nigh inevitable - the elimination of domestic manufacturing in the US was largely the result of policy choices which enabled businesses to move out of US environmental and labor regulations while still selling into the US market.

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> There was a general claim from the late 80s to 90s that the invisible hand of the market would eventually move Americans to higher paying fields while allowing low wage international competition in manufacturing.

Yeah, that was super short sighted. It boggles the mind that anyone could have believed that replacing many of the core productive bits of the economy with fluff like management (and ownership), finance, and hospitality would lead to anything but weakness. It's not like people in other countries are going to do most of the actual productive work and continue to let Americans lord over them indefinitely. Under that plan, America would just seem to climb until everyone else realizes there's no there there anymore, and then it will fall to a 3rd world economy who's main advantage is people there will be desperate enough to work for low wages for the new wealthy countries. Of course, some Americans will experience wealth over their lifetimes as that happens, but they're basically getting fat and happy by eating their family's seed corn.

Exactly. With supply chain gone, so is the pipeline of training and producing world-class engineers, and of course the ecosystem of innovating in multiple industries. Looking back 100 years, we can see that the British thought that Americans were manufacturing low-end and low-quality stuff, and the glory of their British empire could last forever if their elites could control finance and politics. Well, it turns out what matters is productivity and innovation, and why on earth would the smart people in a country who owns end-to-end supply chains would ask for innovation another country who owns merely "management"?

Building a plane is hard, but possible. With large enough a market, a nation will be able to afford, and more importantly will have every reason to, conducting millions of rigorous experiments to figure out all the key technologies, be it manufacturing process, optimal parameters for air dynamics, or materials.

BTW, in case someone forgets, manufacturing at low cost is the hallmark of industrialization. It makes no sense for Americans to snort that Chinese could make things at a fraction of the cost, just as it makes no sense for the British to despise what American could mass produce 100 years ago.

> Yeah, that was super short sighted. It boggles the mind that anyone could have believed that replacing many of the core productive bits of the economy with fluff like management (and ownership), finance, and hospitality would lead to anything but weakness.

I would add that the US's apogee was due to it's role on WW2, whose success was due to the US's preexisting industrial infrastructure, not only manufacturing capability but technical and scientific infrastructure that supported it.

Since then the US not only gave up on its main strategic asset but also handed it over on a silver platter to the next world power.

Yes, but not entirely as a policy of the government.

The industrial complex that was built up during world war II was unprecedented, and the post war boom enabled it to grow further, allowing for things like secondary supply chains, "related" niche industries, and creating many very large companies which went beyond manufacturing products into finance, among other things.

The thing is, after the first generation of management of those companies aged out, the second generation didn't have any idea about the unique circumstances that allowed that industrial base to be created.

They chose to believe it was because of American superiority, American know how, etc.

So when they couldn't sustain the levels of growth and profit their predecessors created, the industries started eating themselves, with mergers, acquisitions, corporate raiding (Private Equity) and regulatory capture to allow it all to happen. Achieving short term gains by shipping jobs offshore was just a necessary thing to "get theirs".

Boeing was once one of many, and now it's one of the last.

The US will be unable to rebuild that industrial base for the foreseeable future, because the unique combination of the post war boom, the government sponsored head start in the war, and the emergence of new technologies just don't exist any more.

Jobs going overseas aren't the problem, really, so them coming back makes little difference. The problem is that our huge head start after World War II is gone because it's eaten itself, and now we need to start over.

Was it even avoidable with global competition putting pressure on price and cost? Americans just don't want to work for the same wages some in China may accept.

The US chooses to allow unlimited competition from China. China allows limited competition from US companies with their nascent industries.

Switzerland is a fascinating example of a country which almost entirely bans foreign competition in anything they can reasonably produce domestically. Costs are high, but wages are higher.

This was probably working while the Swiss people were working and buying their products, but in Zurich Swiss people do banking and non-Swiss people engineering (and the number of non-Swiss people grow exponentially, now maybe 1% of people in Zurich is a Googler). They usually go to the German border for weekend shopping instead of buying the expensive Swiss products.

Do you have some references on how the bans work in Switzerland? I live in EU and have never heard about Swiss having some parasitic relationship with EU (meaning export to EU is ok, but import is not).

This article was on HN recently, and it does a pretty good job of explaining how we did this to ourselves by making the dollar the global reserve currency:

https://www.lynalden.com/fraying-petrodollar-system/

To be fair, American wages, outside of the bottom percentile jobs, are much higher than their counterparts in the developed world.

> It boggles the mind that anyone could have believed that replacing many of the core productive bits of the economy with fluff like management (and ownership), finance, and hospitality would lead to anything but weakness.

When the decision is largely made by the managerial and financier classes...

All of the "smartest people in the room" come through economics educations based on pat 2-line graphs and ricardian tables that make extremely grand claims about the world, and they all come out thinking the same way. They're not trying to be crooked, they're repeating what they were taught.

It's mind-blowing how wrong they have been and yet continue to be turned to for major policy decisions and thought.

They haven't been universally "wrong" - just wrong for large segments of the population. Equities in America (which are majority owned by the wealthiest top 1%) have done great and the wealth of those at the top has multiplied several times over.

Given that a quarter of all political contributions are donated by the wealthiest top 0.01% (no, not a typo - and 84% of politicians take more from the top 0.01% than all donors giving less than $200), it is entirely unsurprising to me that our policy reflects their priorities.

Who else you going to turn to? Someone who was drummed out of the club for questioning things that everyone knows?

It works well in the micro, but not the macro. Apple is a excellent example of this being ridiculously profitable: management, finance, R&D, engineering and all "high value" work is in the US, and the "boring" manufacturing stuff is handled offshore. This works very well for shareholders, management and skilled employees. The American machinists and die-makers (who don't get a say) lose out, and over time, their skills will be lost as the experienced workers retire without passing on their knowledge - then the whole industry suffers.

China's strategy was always to try to dominate the "boring" work on the low end of the value chain and then ratchet their way up the value chain, cutting out foreign competitors at every stage - first in the domestic market and then in foreign markets.

They've now almost reached the top of the value chain after about 30-35 years of diligently following this strategy. They can manufacture phones every bit as good as Apple's without help.

China used to need Apple more than Apple needs China. Now, Apple needs China more than Apple. Apple can't move its supply chain home without eye watering costs.

It won't be long before Apple phones start to lag Chinese phones technologically and it won't be long before China can start threatening sanctions that hurt the US more than they'd hurt China.

This has been apparent for a long time, but decision-makers in the US have greatly reduced the horizons of time-periods they care about (very little long-term strategic thinking both politically, especially the executive branch, and for company executives & wall street). So if a tactic works now and brings in results now to ensure the bonus or re-election, then it's implemented regardless of long-term harm, since someone else will deal with that at some point in the future.

China took advantage of America's growing individual greed and short-termism. American companies know this, but they can't help themselves.

The recommended way to “rise” has been to get a higher education. Or, as the Blair mantra had it: “Education, education, education.” Sandel homes in on a 2013 speech by Obama in which the president told students: “We live in a 21st-century global economy. And in a global economy jobs can go anywhere. Companies, they’re looking for the best-educated people wherever they live. If you don’t have a good education, then it’s going to be hard for you to find a job that pays the living wage.” For those willing to make the requisite effort, there was the promise that: “This country will always be a place where you can make it if you try.” https://www.theguardian.com/books/2020/sep/06/michael-sandel...

This manifested in an industrial policy which pushed millions of motivated citizens to mortgage their 20s in favor of english, philosophy, and psychology degrees. Education does not directly translate to remunerative employment.

Working on an automotive line still pays ~2-4x higher than being a manager at a Starbucks, with added benefits like a regular work week and weekends.

Once the job market for graduates started to saturate they told people they should go into STEM. Once the STEM job market saturated they said people should become programmers.

Looking at college applications now and the struggles of students I'm talking to about it, plus the college admissions scandal, I really don't know if education is the silver bullet claimed. Graduating even with a STEM PhD from a mediocre state school means less than graduating from an Ivy league with a bachelors in literature. In order to get into a prestigious school you have to play an incredibly bullshit game- apparently one significantly influential university this year wanted to know how students would eat a raw potato.

To me, the relationship between education and class is a bit more insidious and doesn't necessarily flow the way that benefits society.

To be fair, deciding to get a STEM PhD isn’t a financial decision at all. At best of the distance between getting a job in that field vs not but you should be cognizant off there being other alternatives.

But if your goal Of to be an academic or researcher (in higher education or industry) the name of the school on your diploma masters. A mediocre Harvard PhD graduate will probably still have Job for life somewhere (depending in the field).

But choosing to get a no name PhD is certainly not a decision optimized for earning potential or job opportunities.

Turns out following exactly that line of orthodox (Comparative Advantage) is how you get a PhD in economics. The theory makes perfect sense and can be observed to be true in evidence across the world. Where it fails is that governments, politicians and central banks understand the theory as well and can use it to their advantage.

Namely this: you can bankrupt your competition by undercutting them - this is capitalism 101. Turns out you can do this at country-scale too! It is obvious but PhD economists cannot see it happen. They will hold onto their comparative advantage theory all the way to the poorhouse.

One supposed limiting factor to country-level jungle of capitalism is the Impossible Trinity. Quoting wikipedia: "It is impossible to have all three of the following at the same time: 1. a fixed foreign exchange rate 2. free capital movement (absence of capital controls) 3. an independent monetary policy"

Like an undying belief in Comparative Advantage, you cannot move up to the upper echelons of PhD Economist work without a bedrock belief in the Impossible Trinity.

In reality, turns out a dual currency structure is a great way to blow through the limitations of the Impossible Trinity. China is a spectacular success in lifting hundreds of millions of people out poverty. The Chinese people are hard working and innovative. One of their genius moves has been to create a dual-currency structure: the onshore and offshore yuan.

This dual currency structure is an absolutely brilliant solution - it affords the Chinese leadership tremendous opportunity to manage their own growth while circumventing the Impossible Trinity.

What is hard for me understand is why Econ PhDs with obvious evidence in front of them continue to disregard reality.

https://en.wikipedia.org/wiki/Comparative_advantage

https://en.wikipedia.org/wiki/Impossible_trinity

https://en.wikipedia.org/wiki/Internationalization_of_the_re...

Because of https://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_th... & https://en.wikipedia.org/wiki/Face_(sociological_concept)

> economy who's main advantage is people there will be desperate enough to work for low wages

That was Thacher's cunning plan. Break the unions and heavy industry. And then out compete Germany and France in the common market based on lower wages.

Did not work at all.

But didn't other developed countries like the UK make a transition from manufacturing to meta industries like finance/technology licencing/intellectual property?.

I'm not very familiar with the current economy of the UK, but a glance at the gini coefficient shows a similar trend.

I think crushing organized labor was higher on their priority list than maintaining America’s industrial capacity.

Manufacturing requires capital. We’ve had some of the highest effective tax rates on capital in the world for a while, and the Trump tax cuts didn’t help that much.

A California corporation has to pay roughly 30% of its profits to the state and federal government to start. Then it’s shareholders have to pay 25-30% of what’s left to their state and federal government. In practice that’s over a 50% rate, even if the shareholder is a low income retiree. There is little progressivity in taxing investment profits.

No wonder multinational US companies rarely bring profits from foreign subsidiaries back to the US.

Much of the EU has similarly high tax rates on capital. I haven’t found figures on China, but I have a hard time believing their growth is simply a matter of tax policy.

Arguing about taxes is a race to the bottom in any case. What matters is returns on capital invested, which of course is affected by tax rates but not exclusively by them. There’s a reason Silicon Valley exists and it’s not because it’s always been cheap to produce there.

It’s not a race to the bottom. Taxes on reinvested capital should be zero, you don’t eat your seed corn. Eating less of it than another country doesn’t hurt them or you.

We should tax distributions that aren’t reinvested, and do it progressively.

Maybe I don't understand, isn't that already true? Companies pay taxes on net (profit), not gross (revenue), outside of some state tax systems like Washington's.

Profit is the net result of investing capital. Revenues don’t matter.

If your startup turns a profit but still wants or needs to reinvest those profits in hiring more or more equipment, they still have to pay taxes on those earnings and only can reinvest half of them (there are some provisions to shield some reinvested profits from being taxed, but they are limited).

I’m all for taxing dividends and capital gains when investors cash out, I’m just saying don’t do it on profits that are reinvested.

> We’ve had some of the highest effective tax rates on capital in the world for a while, and the Trump tax cuts didn’t help that much.

Source on any of this? I don't think this is true - both effective and statutory corporate tax is lower. When factoring in things like the estate tax on capital, capital gains tax, etc. - all is much lower than during the 20th century.

> In practice that’s over a 50% rate, even if the shareholder is a low income retiree.

Among equity held by American households, the richest 1% own more than 50% of that equity - and the top 5% owns the lion's share (upwards of 3/4s). The "low income retiree" narrative is overstated. Moreover, that retiree could count paid dividends as ordinary income, which is taxed progressively (10% or less effective tax rate) if they are low-income.

Meanwhile, the estate tax is much lower than it was during the majority of the 20th century, despite the fact that more than half of all wealth is not earned but inherited by the wealthiest 5% of all American households (ie. the median dollar in the economy is inherited, not paid as a wage or from capital gains)

The US is literally printing capital right now, and local governments are willing to hand Billions to corporations which promise to create manufacturing campuses.

Why is lowering interest rates not resulting in increased manufacturing capacity as it did prior to recent years?

Because China can simply point and say ‘whatever the price is there, it will be cheaper here’ because their population is willing to take huge hits to their purchasing power (because they were recently so poor).

Dollars aren’t capital. The fed can double the dollars in circulation tomorrow, but that doesn’t change the amount of manufacturing machinery in the country.

> Manufacturing requires capital. We’ve had some of the highest effective tax rates on capital in the world for a while, and the Trump tax cuts didn’t help that much.

IMHO, that's mistaking a boogeyman for a cause. The real cause here is any policy that allows important productive capability to be moved away in search of short/medium term profit increases. The idea that you'd replace those jobs with higher-paying fluff was just a little sugar to make the poison taste better.

Also, I can't remember exactly where I read it, but some well-known successful businessman candidly said that lower taxes actually make it less likely for him to invest profits back into his business.

I think the degeneration of the salary condition of the working class (including engineers) has two reasons:

1) The decline of Soviet Union. Since the largest opponent is gone, elites of US did not need to suck up the working class as they did not need that many manufactoring power any more, and they could finally throw the working class under the bus because they didn't need to virtual signal their "higher living standard of the working class".

2) The rise of competitive investment banking, including predative M&A and other "unethical" stuffs that blue blood bankers did not do (much) during the 50s and 60s.

>> There was a general claim from the late 80s to 90s that the invisible hand of the market would eventually move Americans to higher paying fields while allowing low wage international competition in manufacturing.

A friend of mine was in business school in the 90s. She told me all that low end production was going to be outsourced to lower cost places, and that the US would be mostly management.

I was stunned that not just a person, but a school could be so stupid. What, did they think the Chinese could make shit but would never learn how to manage things or design them? Worse yet, they can now do design, production, logistics, and the US no longer knows how to make a lot of things.

I've even read that Krugman now sees that as a mistake.

Way to go, followers of Jack Welch.

"We'll export the factories, but keep all the manufacturing expertise here", is not something you'll often hear, from a manufacturing engineer. I once asked a Harvard Business School professor, how such nonsense could have been believed - did no one ask? He replied, I taught that... "the ideas were in the air".

I've wondered, whether the concern for foreign propaganda, targeting US communities disconnected from reality by group-think, is perhaps misguided, in its focus on populists. Sure, sometimes you target propaganda at troops. But the usual and higher-leverage target for deception, is leadership.

> planes (737-max)

Huh? That plane had a design issue, not a manufacturing issue. While the loss of life was tragic, it also wasn't a major design blunder; it's the sort of thing you can fix with a new sensor and a software update. On the other hand, the 787 shows that the US can build planes.

> trains

Bombardier still makes trains in North America, and Alsom builds some trains in the US.

I actually agree with your point, but tech manufacturing moving to East Asia is the bigger story. There's also an argument that the jobs didn't materialize because the workers weren't educated enough for better paying jobs and were too expensive for manufacturing jobs.

> the elimination of domestic manufacturing in the US was largely the result of policy choices which enabled businesses to move out of US environmental and labor regulations while still selling into the US market.

In other words, greed.

We can't overlook that the 80s and 90s were 30 years ago and a lot happens in 30 years. The entire political zeitgeist of the US for the last 30 years has not been a focus on building wealth or general prosperity. The government has official policies and occasionally rhetoric that excessive savings are a problem.

Furthermore, speaking for my observations of the West, most of the political focus has been on progressing redistributive and environmental policy. Resisted every step of the way by people screaming that the policies are economic disasters. Mining and manufacturing is simply not easy in the West and doing what China does would be flat out illegal - so it isn't so strange if the States starts falling behind.

There have been a lot of changes in the US for the last 30 years. Are there any that can honestly be said to have been pro-free-market, or even experimentally proven to be good ideas? China has been running constant experiments with free market policies in places like Shenzhen and has been building engines of manufacturing wealth and prosperity. Running experiments with an open mind is a great way to figure out what works.

Both the US and China are good at running experiments. How they handle larger and larger experiments that fail is where both blunder.

>Furthermore, speaking for my observations of the West, most of the political focus has been on progressing redistributive and environmental policy.

I have literally no idea where you're getting this from, at least from the US's perspective. The EPA has been gutted by the GWB and Trump admins, and the courts blocked anything serious the Obama admin tried to do. There was "welfare reform" in the 90s which reduced redistribution. Taxes on the wealthy have fallen a bunch. The bankruptcy reform in the mid 2000s was a disaster.

So do you know anything about what you’re talking about? Assembling iPhones is trivial. If that’s your idea of high end manufacture then I have news for you.

> Assembling iPhones is trivial

I think it might be you who doesn’t know what they’re talking about.

Many startups have tried to enter the consumer electronics space because they thought assembly would be “trivial”, only to find that once the first EVT samples start coming back from China it is anything but trivial.

The tolerances on an iPhone are some of the best around. People don’t always appreciate just how strict the tolerances are for hardware assembly until they’ve tried to do it themselves.

Not to mention the scale of the operation allows them to fit parts with varying tolerances together in a way that causes the best fitment when put together while having less waste.

I think the size and complexity of FoxConn speaks for itself. Manufacture and assembly of an iphone with its constituent parts requires high precision, volume, high quality control, and massive supply chains - hence Tim Cook does not believe it could be done in the US.

They would figure it out if they had to. The technology is not lost and for all the hate it garners the military industrial complex keeps the seeds of industry alive in the US. They would grow if there was an economic demand niche to grow into. Nobody has the stones to make it happen, though.

The labor & environmental arbitrage mafia won the war, so fixing the problem is going to be an uphill battle, rather than merely preventing the market from rolling downhill.

> The labor & environmental arbitrage mafia won the war

https://www.youtube.com/watch?v=cyJfOPSS2Uc

The problem seems to be that there was a loss of focus on high end manufacturing in the US. Germany and northern Italy are the counter examples but even those countries were not immune to globalization.

Also, it may be that globalization is coming for them next but that they are higher up the hierarchy.

There seems to be a reawakening towards manufacturing in the US with electric cars and rockets. It’s not just Tesla and SpaceX. It’s Rivian, Rocket Lab, Virgin Galactic, etc... I hope it strengthens.

The US has always done high end manufacturing. The difference from the 70s is that it requires a lot fewer humans. Manufacturing output in the US is up ~75% from 1998-2017:

https://www.macrotrends.net/countries/USA/united-states/manu...

Yet employment is down ~4 million people in the same period:

https://fred.stlouisfed.org/series/MANEMP

Edit: Here's a FRED blog post talking about the same thing: https://fredblog.stlouisfed.org/2014/12/manufacturing-is-gro...

I hope Rivian thrives. Downstate IL (where their factory is) is struggling and needs the manufacturing jobs to come bac.

Assembly != Manufacture. The US is not able to produce the screens or processors for a modern smartphone. Those are far from trivial.

Steve Jobs himself said these jobs aren't coming back to America

https://www.heraldtribune.com/article/LK/20120123/News/60519...

But Tim Cook said he would try, with details & results unclear:

https://money.cnn.com/2017/05/03/technology/apple-tim-cook-a...

This would be a good place to share that news. Right now all I see is a low-effort dismissal in response to a comment that might be flawed, but at least has some effort behind it.

Interestingly, many other parts of an iPhone are built in China. Is each of them trivial?

Lol

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