Made in USA: productivity and competitiveness in manufacturing.

• Author: Baily, Martin N.

If a serious attack is to be made on the budget deficit, support of technology provides one way to return the economy to trade balance with a strong dollar

To all appearances, America's once-vaunted manufacturing sector is in trouble. The picture painted by Donald L. Bartlett and James B. Steele in America: What Went Wrong? is stark: U.S. factory workers are vanishing; manufacturing companies are shifting operations overseas; and foreigners are taking over American companies. Growth in wages and company profits has faltered badly over the past 20 years. Auto workers have lost thousands of jobs. Huge losses have buffeted the apparel, consumer electronics, and steel industries.

While many American workers and manufacturing companies have had rough going over the past two decades, U.S. manufacturing as a whole is showing clear strength. Some of the things that may seem most worrisome - job losses and plant closings - actually are signs of health.

A successful manufacturing sector will have high and growing productivity. It also, as a corollary, will experience unsettling turnover as less efficient plants close down. When manufacturing is participating actively in international trade, production will move around and many jobs will be lost. That is what is happening in U.S. manufacturing today.

For the past 10 years, productivity has grown briskly. Even so, the manufactured goods trade balance has been heavily in deficit.

The U.S. is competing effectively with Europe over all, although its surplus with the European Economic Community (EC) conceals a substantial deficit with Germany. The trouble lies in the deficit in trade with Japan and the newly industrialized countries of Southeast Asia.

U.S. manufacturing performance in trade has varied enormously by industry over the past 10 years, with strong surpluses in capital goods, commercial aircraft, and chemicals. Some high-tech products, such as computers and semiconductors, where one might have expected strong surpluses, actually show declining surpluses or even small deficits. The large deficits have been in apparel, other consumer goods, and automobiles.

The explanation for America's trade deficit, however, does not lie in the over-all health or productivity of its manufacturing sector. Instead, it largely is the result of a shortage of national saving. Economists long have been sounding the alarm about how the Federal budget deficit reduces national saving and hence tips the trade balance into deficit. For the foreseeable future, the over-all trade deficit will be driven by the balance between domestic saving (the part of national income that is set aside as a nation by refraining from consumption) and domestic investment (the amount businesses buy of new equipment and offices plus the amount that households put into new housing).

The nation could solve the over-all trade deficit by...