A blog about Manufacturing, International Trade, Monetary Policy, and replication by an academic economist.
Sunday, November 19, 2017
A comment on "The Long-term Decline in US Manufacturing" by Jeff Frankel
Frankel guest posts over at Econbrowser about "The Long-Term Decline in US Manufacturing"
theme is a familiar one on this blog. He posts some interesting data, and I agree with him about the determinants of the long-run decline. He shares my "favorite" graph:
However, I also had a few other thoughts:
If you extrapolate forward on the US Man. Emp. as a share of total, it becomes
negative within several decades. Obviously, it can’t be negative, and thus the
slope needed to flatten out at some point. Instead, in the early 2000s, it
looks to have been below trend. By contrast, the pace of decline for
agriculture did flatten out. But, since there is no clear counterfactual, I’m
not sure this series tells us that much, in the end. Another problem is that
the sudden loss of 3 million manufacturing jobs may have been part of the reason
for the slow growth in overall employment after 2000, which is the view of Ben
Bernanke. If Detroit loses 80% of its tradable-sector jobs, and as a result,
80% of its retail and government jobs, then it’s share of tradable-sector jobs
wouldn’t change. Then we could conclude that the loss of manufacturing jobs is
not what hurt Detroit.
I think it would be good to separate factors affecting the long-run decline as
a share of employment, which is mostly fast technological growth and to a
lesser extent sectoral shift toward services, and factors affecting the level
of manufacturing employment in the early 2000s. The recent decline in the level, which happened alongside the trade deficits, is probably what the public is more concerned with. Trade really does seem to be a
dominant factor in the collapse of the level in that period. And the shock does
seem large enough to have had macro effects and helped push the economy into a
liquidity trap, as Ben Bernanke seems to think.
If you do another international comparison, between US manufacturing output as
a share of world output, things don’t look as good. Especially vis-a-vis countries
like Germany and Korea, much less China.
agree with Jeff that protectionism now isn’t the right policy solution.
However, US-China relative prices have been set in Beijing for the last 30
years, with China having a clearly undervalued exchange rate during much of
that period. Why wouldn’t we have been better off with a free trade regime,
with prices set by market forces? Also, if you believe prices matter, why
wouldn’t this undervaluation have caused a decline in tradable sector jobs over
this period? And, after a long period of the US being overvalued, why do you
think the US tradable sector wouldn’t be smaller than it would have been
discussed these issues on this blog previously, and on my own blog:
Lastly, Brad Setser links to an interesting NYT article on the new rise in China's protected automotive industry. It's a great reminder how the US and China do not have free trade in practice, but also to the extent which the Chinese government has internalized Hamiltonian infant-industry protection.