Thursday, December 22, 2011

The Economic Optimist: One American Still As Good As Ten Chinese

By CanSpeccy

Economics has been called the dismal science, but over at Carpe Diem, Professor Mark J. Perry's "Blog for Economics and Finance," it is the feelgood science. Whenever the markets slump I head over there for a dose of unrelenting economic and financial good cheer. Here, for example, are the topics of a recent handful of posts

The Magic and Miracle of the Marketplace. Yeah!
Mortgage Rates Fall to Fresh Historic Record Lows. Yeah!
Leading Economic Index Points to Ongoing Growth. Yeah!
US GDP tops pre-recession high. Yeah!
Jobless Claims Fall to Lowest Level Since Mid-2008. Yeah!

But here's the one I really like:

China Is Now World's No. 1 Manufacturer. Uh-oh!

Image Source

But don't worry. As the text is quick to explain, this reflects no great credit on the Chinese -- far from it:
China's manufacturing workforce is estimated to be around 100 million and could be as high as 120 million, compared to America's manufacturing employment of about 11.5 million. Therefore, China is producing roughly the same manufacturing output as the U.S. but Chinese worker productivity is so low it needs 9-10 workers for every one American factory worker.

Or, rather LOL.

For if Americans produced for themselves what the Chinese produce for them, for example, iPads, computers and car parts, those things would cost many times what they cost now.

In other words, Americans produce only what the Chinese don't, e.g., F-35 Fighter jets at $110 million per copy and rising, plus large civilian aircraft, missiles, cluster bombs, etc., patented drugs, lumber, leather, minerals, cement, steel and other bulky building products for home consumption, all of which can be sold at prices reflecting American wages because there's no Chinese competition.

True, in dollar terms, China produces only slightly more than America while using a much larger workforce to do it. But that reflects China's competitive advantage. Where China competes with America it provides massively better value.

Which explains the trajectory of growth in Chinese manufacturing. US post-recession manufacturing has barely recovered to the 2006 level. In the same period, China's manufacturing output has approximately doubled.

In a globalized economy, wages in the West are converging with those in the Rest. As they do so, prices of manufactured goods from China will rise. But by then it will be the Chinese who have the bulk of the World's manufacturing plant and the workforce skills to out-compete the West even on a level playing field.

Oh well, enjoy it if you can. It takes ten Chinese making iPads to produce the same dollar volume of output as one American sawing lumber or building rockets, which truly goes to show how smart we in the West are.

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