Elections season is on us again. On the talk shows, I hear more and more callers, and often hosts, grossly misusing percentages in the service of fallacious claims. Politicians won’t be far behind. Here we go again, I am thinking; I have been here before. Got to explain again.
This time, I am taking names. And there will be a quiz, and it will count toward the final grade.
Pay attention; slow down.
It’s 2000, I, JD, earn $60 as a machinist. My wife K earns $40 keeping accounts for others with the help of some sophisticate software. I am earning what percentage of our joint income?
60/60+40 = 60%
It’s 2010, I, JD, now earn $90 as a machinist, My wife K’s business has taken flight. She uses more sophisticated software. She has more customers than she can handle. She earns $120.
My share of our new joint income is now:
90/90+120 = 42%
The percentage of our joint income that I produce has declined. It has declined a lot; it has declined by almost 1/3.
Has the value of my production declined? Slow down!
The answer is clearly “no.” The value of my production has increased by half (from 60 to 90). That’s not bad at all. At any rate, it ‘s obviously an increase.
Think it through. Do the arithmetic yourself. There is no trick. It’s the simple math you did not learn in third grade because you hated the teacher.
In the simple example above, my income represents the value of American manufacturing. My wife’s income represents the value of the mysterious and illogical category “services.”
The percentage of the value of manufacturing relative to the total GDP of this country has been going down steadily because the value of US services has gone up even faster.
The absolute value of American manufacturing has only gone up and up, and going up. America has not become “de-industrialized,” contrary to a common but false perception.
The misperception has two main sources:
1 Many media commentators and perhaps even more politicians don’t understand simple percentages. See above.
2 The number of manufacturing jobs has declined even as the value of that which they manufacture has gone up.
Here is a solution to the drying up of manufacturing jobs: Take away machine tools from one metal worker in three; give him a hammer instead. You want even more manufacturing jobs, lots of them? Remove the software from textile weaving plants. Program their machines by hand as they did in 1910.
You don’t like the idea? Time for a serious discussion.
Now let’s go back up a little.
The quite good rise in the value of manufactures and the even greater rise in the value of whatever services produce, these two things are related. Better and better, more and more efficient manufacturing provides the resources for more services. We can afford more waiters, more surgeons, more teachers, more acupuncturists, more therapists, more life coaches, more “color advisers” (I live in Santa Cruz, California) because, collectively, we produce more hard necessities much more cheaply than our close ancestors did. Hard necessities include cars, soap, oatmeal, shovels, bricks and nails. Why, nails used to be forged by hand! I own some hand-forged nails from making repairs on my 1906 house.
When you hear, for example, that manufacturing now contributes only 30% of US GDP, it does not mean that there is less manufacturing being done in this country. To figure out the reality, you have to get out of percentages completely. Period!
If my income used to be $60 and it’s now $50 then, yes, it has declined. If it’s now $65, my income has risen. Period! That’s true irrespective of percentage contribution to anything.
Tech note: Don’t get tripped by the separate issue of the changing value of money. There are inflation/deflation calculators on the Internet that do a good enough job of dealing with this issue. I recommend that you consider one train of thought at a time.
Nearly everyone is overestimating himself. That’s the problem.
Speaking of GDP (Gross Domestic Product), a National Public Radio chickie announced breathlessly a couple of weeks ago that China would soon pass the US in GDP. I could hear fearful emotion in her voice, as if some bastard had threatened to cut up her credit card.
Here is the truth: We may soon see the day when 1,400 million Chinese produce as much together as: 314 million Americans.
Personally, I can’t wait for the Chinese to do better, to make their percentage of global joint production much higher.
Question: When the Chinese GDP reaches 60% of world joint GDP, will I be poorer?