Sunday, November 19, 2017

A comment on "The Long-term Decline in US Manufacturing" by Jeff Frankel

Jeff Frankel guest posts over at Econbrowser about "The Long-Term Decline in US Manufacturing"

The 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:

(1) 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.

(2) 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.

(3) 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.

I 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 otherwise?
I 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.


  1. Look at the trend line again. It's on same trend since 1980 and 1990 as it was from 1960 to 1980 which was before NAFTA and before China. The answer can only be that

    a) international competition continues to increase but just with new competition if you will, and

    b) U.S. domestic mfg'ing has continued to automate at roughly the same pace as international competition has continued to increase.

    These are not coincidental occurrences or effects.

    Therefore there is no reason to suspect or suppose or believe that U.S. mfg'ing employment has to "flatten out sometime", as long as a) and b) are not in abeyance. It may flatten out at 10% of the current level, or 5% of it or 25% of it or go to zero. How many telephone switch board operators exist today? How many draftsman? How many miners? How many clerk typists?

    I see no reason for either a) or b) to be placed in abeyance as long as there are lower standard of living nations on the globe and competition for profits by reducing human labor costs via automation methods (aka also erroneously called robotics which is just an extension of what has always been automation).

    1. Thanks for this.

      OK, if the US were simply just exporting services (plus commodities), manufacturing could go all the way to zero. (Who cares if we are exporting financial services vs. textiles?) However, the official statistics suggest that the services share of trade has been relatively unchanged. It's not that the US is just exporting more services, and importing more manufactured goods. It seems exports of services has also been slow.

  2. Suggestion: For U.S. domestic mfg'ing

    Measure vehicles produced per person in the automobile industry over time.

    Measure tons of ore mined per minor over time

    Measure MIPS of compute power produced per person in the electronics industries over time.

    Measure textile square yards produced per textile worker over time.

    Measure tons of Aluminum (& Steel) produced per metal industry worker over time.

    Measure tons or volume of polymers produced per chemical industry worker over time.

    Articles of common clothing produced per garment industry worker over time staring with designers, pattern makers, utters, stitchers over time.

    What you will find is that the production per employed worker in units produced per worker has continued to drop and when it stops dropping at the normal prior rates, it shifts to offshore production at lower cost of labor. That's the effect of increasing automation due to competition (both foreign and domestic) followed by offshoring to maintain profits when capital costs of further automation at the time become less profitable than offshoring it.

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  6. I welcome the robots and mass automation. But, can we focus on automating agriculture first so we can stop paying farmers hefty subsidies and manage the land better.

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