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What we lost when we lost our factories


Daniel Gros -- not to be confused with Daniel Gross -- has a sobering essay arguing that, in the long-term, America does have a skills problem: We need to eventually refocus our economy around exports rather than credit-fueled housing-and-tech bubbles, but that's easier said than done. It is difficult, Gros argues, to "transform unemployed realtors or construction workers into skilled manufacturing specialists."

The only country that has done this -- or at least something like this -- recently is Germany. But Germany was aided by a huge change in its currency level: "With the introduction of the euro, Germany had the advantage of pegging its currency to Southern Europe," writes Gros. This kept the Germany's currency lower than it would otherwise have been, which in turn made its exports cheaper and more competitive than they'd otherwise have been. Hence, the sector grew. By contrast, America's currency is tied to China, and it is keeping our currency higher than it would otherwise be, which is making our exports less competitive than they might otherwise be.

Back when I worked at the American Prospect, we used to run a ton of articles on the need to revitalize the American manufacturing sector. I even wrote one of them. But on some level, I considered the whole enterprise a bit quixotic: Those jobs were largely gone or going, and the next set of jobs would have to come from somewhere else. And they would. Creative destruction and all that.

It's now clear that I was wrong, and they were right: There was an urgency to rebuilding our industrial base, and we didn't do it in time. Richard McCormack tells you what happened instead:

For American manufacturers, the bad years didn't begin with the banking crisis of 2008. Indeed, the U.S. manufacturing sector never emerged from the 2001 recession, which coincided with China's entry into the World Trade Organization. Since 2001, the country has lost 42,400 factories, including 36 percent of factories that employ more than 1,000 workers (which declined from 1,479 to 947), and 38 percent of factories that employ between 500 and 999 employees (from 3,198 to 1,972). An additional 90,000 manufacturing companies are now at risk of going out of business.

Long before the banking collapse of 2008, such important U.S. industries as machine tools, consumer electronics, auto parts, appliances, furniture, telecommunications equipment, and many others that had once dominated the global marketplace suffered their own economic collapse. Manufacturing employment dropped to 11.7 million in October 2009, a loss of 5.5 million or 32 percent of all manufacturing jobs since October 2000. The last time fewer than 12 million people worked in the manufacturing sector was in 1941. In October 2009, more people were officially unemployed (15.7 million) than were working in manufacturing.

The thing about losing those jobs is that we've lost more than those jobs: We've lost those skills and that infrastructure, and the advances that would've been built on top of both. Now we want to get all that back, because what we tried instead didn't work. But we can't just call for a do-over. Like so much else in manufacturing, we need to build much of it from scratch.

Photo credit: Alossix/Flickr.

By Ezra Klein  |  September 7, 2010; 9:33 AM ET
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Gee, Ezra. You almost make it sound as if American manufacturing output has NOT essentially doubled over the past three decades. But it has.

Yes, the number of people we employ to manufacture things has dropped by about 40%, but that is a good thing. We're producing twice as much stuff with 40% fewer people than we were at the dawn of the 1980s. And it is rising productivity, not manufacturing employment or consumer spending or some other nebulous measure, that is the source of true prosperity.

Manufacturing does indeed have a sentimental value for Americans. Who among us hasn't looked upon photographs of 1940s/1950s/1960s industrial America with pride? But while those decades were when America truly established itself as the world's superpower, we are infinitely better off today than we were then precisely because fewer people, not more, are employed in such menial and difficult tasks as constitute most manufacturing.

Posted by: MDA123 | September 7, 2010 10:14 AM | Report abuse

American manufacturing could never compete in an age of cheap transportation even though it was located within the world's largest consumer market. One of the positive aspects of the end of cheap oil is that the transportation costs of sending stuff from China will rise, making American products more competitive.

Posted by: nathanlindquist | September 7, 2010 10:22 AM | Report abuse

Mfg has not kept pace with our population. Anyone who thinks our mfg base is healthy is either lying or ignorant.

Productivity is a boon to big business but harms labor and employment.

MDA seems to be speaking from a corporate executive POV and not an average American POV.

Posted by: lauren2010 | September 7, 2010 10:23 AM | Report abuse

I think MDA123 and lauren2010 are both a bit right, and a bit wrong, but lauren2010 comes closer to the mark.

We are producing more than we ever have, and that's great. It's also true, that the manufacturing sector as it existed for the middle third of the 20th century really isn't sustainable in the modern economy.

On the other hand, who's talking about maintaining the exact same manufacturing sector that we had decades ago. As Ezra's post discusses, other developed countries have managed to maintain healthy levels of employment in manufacturing while keeping their technology current. We don't have fewer people in manufacturing because nobody does manufacturing anymore, or because the only way to employ people in manufacturing is to pay them nothing. It's because we made a lot of mistakes that cost us a lot of ground in that sector. Germany got some good breaks with the Euro, but they also just made a lot of good choices, and we didn't.

Rebuilding our manufacturing sector doesn't mean going back 50 years. It means catching up to the people that passed us by.

Posted by: MosBen | September 7, 2010 10:35 AM | Report abuse


With respect, I don't think that "[keeping] pace with our population" is a relevant statistic. Output has doubled, while labor input has dropped 40%. That's relatively clear.

But let's say we were to compare growth in manufacturing output to growth in population, just for kicks. In 1972, our manufacturing sector accounted for somewhat less than $1.5 trillion in output. In 2010, it was about $3.2 trillion. So, we're producing 2.13 times as much, in constant dollars. Meanwhile, our population is only 1.47 times as large (209 million -> 308 million).

The best illustration of the benefits of higher productivity comes from agriculture. In 1790, 90% of our population was dedicated to farming. In 2000, it was roughly 2.6%. Nobody in their right mind would argue that our economy as a whole, our workers, or our food supply are worse off today than they were in 1790. We should be celebrating in the streets because we're able to produce so much more food with so many fewer people (relative to population as a whole).

Posted by: MDA123 | September 7, 2010 10:38 AM | Report abuse

Manipulating physical objects is never going to be as productive as creating and destroying billions of dollars with a few keystrokes.

Posted by: paul314 | September 7, 2010 10:38 AM | Report abuse

Does it matter to anyone that the United States is still the largest manufacturer in the world? To read this post and subsequent comments, you'd think that we were lagging behind China, Germany, and other countries du jour.

According to the United Nations, in terms of value added, the United States is the world's largest industrial producer: $1.83 trillion, to China's second place finish of $1.79 trillion.

That doesn't mean that we shouldn't hope and work for an even more vibrant economy, manufacturing included. But it certainly does mean that we are not "lagging behind" other countries by any meaningful measure.

Posted by: MDA123 | September 7, 2010 10:48 AM | Report abuse

"But on some level, I considered the whole enterprise a bit quixotic: Those jobs were largely gone or going, and the next set of jobs would have to come from somewhere else. And they would. Creative destruction and all that.

It's now clear that I was wrong, and they were right:"

You weren't the only one wrong here.

If you haven't read it, I'd recommend this.

Perhaps there may be a place for Mr. Grove in the administration if there is a mid-term shake up. I'd happily trade Larry Summers or Tim Geithner for him.

Posted by: jnc4p | September 7, 2010 10:53 AM | Report abuse

Does it really matter if the United States is the biggest manufacturer if we're also the biggest consumer? The U.S. is also the world's third largest oil producer, but that doesn't make our supply secure. If you consume twice what you produce you have a problem no matter how productive your are.

Posted by: tl_houston | September 7, 2010 10:55 AM | Report abuse

The crazy thing is, U.S. manufacturing output is (slightly) higher than it was 10 years ago.[1][id]=IPMAN&s[1][range]=10yrs

Manufacturing productivity has grown at 3.6% since the end of the last recession (2001Q4-2010Q2). Since 1987Q2, the growth rate has been 3.5%. Jobs have been lost, and will continue to be lost over time, due to productivity. The long-run trend rate of demand growth for manufactured goods isn't anywhere near 3.5%.

From 1987Q2-2007Q2, the growth rate for demand was 2.6% - so over the great moderation, we should have expected about 9 of every 1,000 manufacturing jobs to be lost to technology every year, despite decent growth in sector demand.

If the great moderation trend continues, we'll be down to 8.2 million manufacturing jobs by 2050, but manufacturing output will be 2.8x what it is today in 2010.

Even Germany couldn't create net manufacturing jobs from 2000-2008. Germany probably had the most favorable conditions to manufacturing and still was unable to grow the sector's employment. Not everyone can be Germany.

In 1973, there were 48.9 million manufacturing workers in Canada, Australia, France, Japan, Germany, Italy, the Netherlands, Sweden and the U.K., and in 2009 there were 30.9 million, a 37% decline (note - the 1973 total doesn't include East Germany but the 2009 one does). The U.S. fell from 20.7 million to 14.2 million, a 33% decline. So since 1973, the share of U.S. manufacturing employment between all of these advanced countries has actually slightly increased, from 30.0% in 1973 to 31.5% in 2009.

From 2000-2009, the other industrialized nations lost 24% of their manufacturing workers, the U.S. 28%. A slight underperformance but not drastically different from the other industrialized nations.

So this isn't just a U.S. phenomena - it is occuring throughout the developed world, and it's been going on for generations. It's the same thing that happened with agriculture - rapid productivity growth means fewer and fewer manufacturing workers are needed.

**note - this bls table uses a slightly broader definition of manufacturing relative to the measure Ezra cites, given that it counted several million more U.S. manufacturing jobs in 2009.

Posted by: justin84 | September 7, 2010 11:02 AM | Report abuse

I worked in industrial automation back in the 90's, writing software that was used to replace people. That's where a lot of the jobs that disappeared went.

Any job that just requires doing the same thing the same way over and over again can be automated. And many of them have been.

Posted by: wiredog | September 7, 2010 11:03 AM | Report abuse


Whether or not we're the biggest consumer is neither here nor there, in the context of the debate on manufacturing. Ezra and several commenters seem to be making the argument that American manufacturing is on the decline (which it's not) and that America lags behind several other countries in manufacturing (which it doesn't). Our consumption doesn't really play into that.

However, to deal with your point, I'll use an analogy. Is it a problem that, in all likelihood, you consume more food than you produce? Assuming you're not a farmer, you (as an individual) probably have an astronomical "trade deficit" in food. By your own definition, your food supply would seem to be far from "secure," yet I doubt that procuring sustenance is even the faintest of concerns for you (assuming you have the resources to pay for it, that is). You can walk into any grocery store or market and easily purchase what you need, and that's precisely because trade in food is largely free.

Trade between nations is not so different from trade between individuals, or between cities, counties, or states. We trade with others because we value their products/services more than we value the money required to procure them. They trade with us because they value our money more than the products/services they've created. Why placing a national border between traders somehow causes people to abandon the free trade that serves them so well on an individual, city, county, and state basis is beyond me.

Posted by: MDA123 | September 7, 2010 11:10 AM | Report abuse


This book may even be older then you and it gets it right on this subject. I am amazed that more people don't understand this.

Posted by: Napoleonfromthemanorfarm | September 7, 2010 12:10 PM | Report abuse


Have you checked the unemployment rate lately?

And can you figure out how that rate would be affected if we stopped shipping entire industries overseas?

OF COURSE mfg has increased in the US. But so has the population in leaps and bounds. The question is, has it risen enough to keep everyone employed, and the obvious answer is it hasn't.

Do you know why the Apple products are made in China? It's because we are exporting pollution (cleaner here to make it there, and Apple doesn't have to pay for costs of having clean factories in China) and to a lesser extent because of labor costs.

Starting under Reagan, we began a wholesale effort of eliminating trade obstacles for importing to the USA even as the China's and Japan's and SK's of the world made it harder for us to sell over there.

Reagan and subsequent presidents basically fixed what wasn't broke, and undid several hundred years of Alexander Hamilton style trade barriers to protect American jobs and industry. Google for the words "Alexander Hamilton Thom Hartmann" to read an article about Hamilton and trade protections.

Dr. Robert Reich currently has a blog entry that discusses the effects of productivity on our economy, which I gather he thinks is one of the most important reasons we have lost jobs. Although I agree with him on productivity effects, Reich is a pro-free-trader who hasn't yet come out of denial that Nafta, GATT, and free-trade in general (all of which he supports and helped strengthen) has significantly harmed our jobs outlook and mfg base.

Posted by: lauren2010 | September 7, 2010 12:49 PM | Report abuse

MDA123, you're right insofar as I've heard waaaay too many people talk about how "we don't make things any more." That's patently untrue and you point it out well. That's actually sort of beside the point though. People who talk about this as a problem don't really mean (or they shouldn't) that there's a decline in the amount of things we produce, but that there's a decline in the amount of people employed in producing things. As justing84 points out, quite helpfully and convincingly, this is a problem across most developed countries.

But as Ezra points out, the idea was that these high paying jobs would be replaced with something comparable, and they haven't. We had a middle class build on the manufacturing sector for the bulk of a century and now we have a situation where the upper management/owners have increased their production levels and made tons of money while the middle class has seen declining wages for decades.

Posted by: MosBen | September 7, 2010 1:13 PM | Report abuse

lauren2010, I think you and MDA are talking passed each other a little bit. He's saying that manufacturing as a percentage of the economy is as large as ever. You're saying we're losing manufacturing jobs. He's talking money, you're talking jobs. He's right that we not only make as much stuff as we ever did, we in fact make more. He's also right that this means that the idea that we don't have a manufacturing sector (of the economy) or that our manufacturing sector (of the economy) is in decline is also untrue.

But you're right that the manufacturing sector (of the jobs in this country) is in decline. Now, automation is a problem world-wide, as justin84 discussed, so it's not just something that's happening here. Still, I think you're hitting on the real problem here. It's not that we don't make things, it's that we've lost a ton of good jobs and they haven't really been replaced with anything comparable.

Posted by: MosBen | September 7, 2010 1:22 PM | Report abuse


Your use of Apple products as an example is a perfect illustration of my point. If we had it your way and erected legal barriers that forced Apple to manufacture those products in the United States rather than China or some other Southeast Asian country, each and every one of those products would be dramatically more expensive to produce as a result.

If an iPod cost $500, rather than $250, you can bet that many fewer people would purchase them. If many fewer people purchase iPods, then Apple will earn less in profits and will employ fewer people. Furthermore, and this is extremely important, there is the opportunity cost of that extra $250 in retail price that the higher labor costs necessitated. Instead of spending $250 on an iPod and the other $250 on, say, new clothing, a consumer would be forced to spend that entire $500 budget on just the iPod.

The end result of such a situation is likely to be FEWER Americans employed and fewer iPods, which have improved the quality of our lives because of their wondrous technology being available at achievable prices.

This isn't a binary question: population increases, therefore manufacturing employment must increase at the same rate or else we're losing ground. When looking at our broader economy, there has been a decades-long (really, centuries-long) trend away from labor-intensive, back-breaking work like farming and manufacturing and towards services. There is nothing inherent about manufacturing, as a sector of our economy, that makes it more desirable to pursue than telecommunications or some other industry.

Posted by: MDA123 | September 7, 2010 1:23 PM | Report abuse


Thanks for the helpful comments. Ezra echoed your point on Twitter, saying that the problem is that we "haven't figured out what can replace [manufacturing jobs]". That may or may not be true, but that's not really the thrust of his post, even if he meant it to be.

He writes above of the "urgency to rebuilding our industrial base." Perhaps I'm crazy, but I read that as an implicit support of the kinds of taxes, subsidies, regulations, and trade barriers that many liberals have been proposing for years as a sort of grand "industrial policy".

While he does mention lost skills and infrastructure, it's mostly as an aside to the main point of the post, which seems to be that American manufacturing is on the decline and we need policymakers to step in to reverse that decline.

I wouldn't disagree with the notion that finding a way to retrain people who have lost manufacturing jobs is of the utmost importance, though I might disagree with Ezra on the specifics of doing so. I would, however, absolutely disagree with the fact that we need policymakers (most of whom are hopelessly incompetent) reshaping our manufacturing sector in pursuit of what I regard as an inaccurate and nostalgic view of industrial American history.

Posted by: MDA123 | September 7, 2010 1:34 PM | Report abuse

Even if we could 'rebuild' a substantial segment of our lost manufacturing base, it wouldn't mean much, employment-wise, because most of the work is now done by robots.

That's why 'worker productivity' has doubled with less than half the human workforce - not because humans are working twice as hard, but because efficient robots are working 24/7 without lunch, sleep, coffee breaks, kid soccer games, health insurance, worker's comp, etc.

Soon, robots will replace most retail and fast-food cashiers, a large percentage of doctors and nurses and soldiers and pilots and stock brokers and any other Corporate job a human used to do.

Face it - we've achieved the so-called 'American Dream' - a roof over every head, a chicken in every pot, a car in every driveway. The 'easy life.' Problem is, we never planned on what comes AFTER achieving said 'American Dream'...

Posted by: frank1569 | September 7, 2010 1:50 PM | Report abuse

"lauren2010, I think you and MDA are talking passed each other a little bit."

yes. see my first post to him. I am aware of the different perspectives. MDA seems content with the situation (what CEO wouldn't?) despite the current dearth of jobs and wage issues, etc..

Posted by: lauren2010 | September 7, 2010 3:37 PM | Report abuse


You are assuming that the per-component markup (if we made it here instead) is significant (e.g. double the price in your comment).

However, I've heard but can not verify that an iPhone would cost as low as $5.00 more if it were made in the USA instead of China. Where Apple benefits is from the economy of scale. I am willing to believe that $5.00 may be inaccurate. But I am also unwilling to believe it would be double, as you implied. My figure of $5.00 is way closer to being correct than your doubling of the cost.

I am not advocating a total abolishment of free-trade BTW. We just need to keep things balanced and reasonable (and please don't ask me for specific solutions). We should look to our northern neighbors for some solutions. Canada's lumber/forest industry for example is thriving and those socialist bastar&s are eating our lunch.

Posted by: lauren2010 | September 7, 2010 3:47 PM | Report abuse

"However, I've heard but can not verify that an iPhone would cost as low as $5.00 more if it were made in the USA instead of China. Where Apple benefits is from the economy of scale. I am willing to believe that $5.00 may be inaccurate. But I am also unwilling to believe it would be double, as you implied. My figure of $5.00 is way closer to being correct than your doubling of the cost."

China gets about six bucks from the sale of each iPhone. Why on Earth would we want to bother bringing the low value add stuff back here?

The workers making the iPhone are paid less than a dollar an hour. Call it $0.90. A decent manufacturing job here would probably require at least $20/hr in total compensation. Somehow I think that raises the cost of assembly by more than $5. Unless of course, its an automated American factory building the iPhones, but if the automated factory builds them, that doesn't do a whole lot of good for American labor.

So at the end of the day, to provide tens of thousands of middle income jobs for Americans, we end up taking away tens of thousands of jobs in China where people are much poorer and the social safety net is weaker, we increase prices for tens of millions of American (and foreign) consumers, and reduce Apple's sales, profits and high wage creative employment.

There ain't no such thing as a free lunch.

Posted by: justin84 | September 7, 2010 4:37 PM | Report abuse

You forgot to mention the unions' impact on job loss in manufacturing.

Posted by: soma_king | September 7, 2010 4:45 PM | Report abuse


I just threw $500 out there as a way to illustrate the problems I see with your desired policy solutions. Those problems still exist at $255, or $300, or $400, but to a lesser degree.

FWIW, somebody tried to calculate what an American-made iPod would cost and came up with $308: That's a 23% premium over its current retail price, which is not insignificant in my mind.

I'm not sure what "balanced and reasonable" means in the context of trade and manufacturing policy. Only the most extreme of individuals advocates for a "total abolishment" of free trade, i.e. banning all exports or imports, so we're really all just arguing about what that reasonable balance is. I happen to believe that the proper balance is with few, if any, restrictions on trade. I am joined in that view by an extraordinarily wide variety of economists both liberal and conservative.

BTW, I won't respond further to your snide dismissal of my "CEO" views (I must be the lowest-paid CEO in the world!), and simply point out that none of my comments suggest (or are meant to suggest) that I'm unworried about issues of unemployment or labor market restructuring. 9.6% unemployment is a massive problem, and the manufacturing sector is a big part of that. I'm simply saying that Ezra's/your implied solutions of higher taxes, greater subsidies, increased regulation, and more restricted trade are ill-advised and ultimately destructive.

Posted by: MDA123 | September 7, 2010 4:51 PM | Report abuse

I think this may be one of those areas where we really should leave it up to the free market. I don't think any economist could a priori tell you the right mix of manufacturing vs services vs whatever, &c. I can assure you that my guess would probably be worse.

We liberalized trade with China and it cost us lots of manufacturing jobs, but our overall manufacturing output is higher, and many imported goods are cheaper.

Yes a disproportionate amount of the benefits probably go to the CEO class; we should have a redistributive income tax, not subsidize our manufacturing sector.

And yes, the environment probably took a hit in that move; we should have a carbon tax, not subsidize our manufacturing sector.

And really, if it were profitable to manufacture in the US, I'm sure the Chinese would love to come over here and build factories and employ Americans. That might even be the best of both worlds -- American CEOs are way more expensive for similar performance -- so we'd get manufacturing jobs for hardworking Americans, but not waste the money on American CEOs!

Posted by: JasonFromSeattle | September 7, 2010 4:55 PM | Report abuse

I am shocked by the collapse of the agricultural employment sector. Oh, maybe we can't get back to the halcyon days of 90% of the population earning a living through the honest sweat of their brow, but at least we should aspire to 50% of our working force so engaged.

MDA123, thank you for bringing this tragedy of epic proportions to my attention.

Posted by: robbins2 | September 7, 2010 7:19 PM | Report abuse

It is extremely foolish for our country to be importing millions of low-skilled laborers at the same time as we are exporting (or mechanizing) millions of low-skilled laborer's jobs. Discuss.

Posted by: MaryJessel | September 12, 2010 11:21 PM | Report abuse

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