MFG 2.0

Is Manufacturing Getting Its Mojo Back?

After weeks of railing against the big bank bailout and clueless auto execs, I'm still trying to wrap my head around a positive thought, so bear with me a moment.

I just read a BusinessWeek story, entitled "Engineering: Suddenly Sexy for College Grads," that says that the financial meltdown is driving smart science and math grads, who once were lured to the "financial engineering" (read: voodoo economics) are now considering jobs in actual engineering instead.

This reminded me of a concept I learned about in economics class, coined by the Economist and called Dutch Disease, in which (as described on Wikipedia) bad things happen to a country despite huge inflows of cash:

". . .an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests."

While it was coined to refer to Holland in the 1960s, in which natural resource discovery quickly and grossly distorted the economy, it can also refer to “any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment.”

There are also many other harmful effects often associated with Dutch disease, such as corruption and protectionist policies for affected lagging sector industries.

Jerome a Paris at the European Tribune (and the always excellent Oil Drum blog) has updated this theory with a version called the Anglo Disease, which he describes as follows:

In the 70s, the Economist coined the label "Dutch Disease" to describe the economic travails of the Netherlands as the country's export-oriented industrial sector struggled with the increased exchange rates caused by the rapid growth in gas exports that followed the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.

Today, we can observe a similar phenomenon on a large scale around the financial industry, whose high profitability for many years has also caused weakness for other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I would propose to label this the "Anglo Disease."

While the Dutch managed to avoid the "oil curse" that has struck many oil exporting countries, I will also argue that the Anglo Disease carries its own curse, whose early symptoms are reflected in the current financial crisis.

The dominance of the financial world can be readily seen in the growth of the share of financial firms in total corporate profits (from below 20% in the 70s to above 40% today), in the capture by the richest few - most of them directly working in the financial industry, or benefitting from financial investments - of a large chunk of the net growth in total incomes. . .

Financiers, with their ability to monetize today future revenue streams, are able to generate instant profits which can be captured by them and, to a lesser extent, their clients and employers. That capacity to create apparent wealth out of thin air cannot be matched by any other sector in the economy, and sucks in talent, resources and money.

http://www.eurotrib.com/files/3/050619_financial_profits.gif

The current travails of the Big Three aside, could we be seeing an upswing in workforce attitudes, as well as revenues, back towards manufacturing? (Especially if you subtract out all that government cash from bank balance sheets?) As the world of high finance takes a bath in the public consciousness, it'd be nice to think that some of that brainpower that's been working the levers of New York voodoo economics could be brought to bear on solving real problems at real companies that manufacture something other than total BS for a living. Now if we can just survive the ill effects of the Anglo Disease and use the crisis to reset some expectations on both the management and labor sides of the table, the manufacturing sector may emerge stronger for the experience.

If that didn't cheer you up, here's a quote from The Onion's recent headline story "Recession-Plagued Nation Demands Another Bubble To Invest In" that should do the trick.

A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

"What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution."

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