Question

Manufacturing jobs in the United States have been declining. How has this shift away from industry affected your local economy? Your local identity?

Answer 1

The U.S. economy has been shedding manufacturing jobs since 1998, with the current level of manufacturing employment at its lowest point since 1958. Some have argued that this could be the manifestation of changing demand patterns and rapid productivity growth in this sector. This argument is often linked to admonitions against those who would blame international trade flows for the loss of manufacturing jobs in the United States.

It is premature to shift responsibility for the struggles of the manufacturing industry away from international trade. Demand for manufacturing output, properly measured, remains in line with the historical average of the past couple of decades. There has been no long-term shift away from the relative share of manufacturing goods in total demand. Furthermore, the domestic factors influencing manufacturing employment (demand and productivity) cannot by themselves explain the scale of job loss in manufacturing—rising trade deficits have made a significant contribution to the industry’s job loss.

The rising trade deficit in manufactured goods, which has not been compensated for by growth in other sectors’ net exports, can explain 34% of the decline in manufacturing employment between 2000 and 2003. Some will argue that the trade deficit in manufactured goods is, in fact, a long-run trend in the U.S. economy that will not be reversed. The idea seems to be that the United States can afford to run large trade deficits in manufactured goods as long as it runs large surpluses in services, reflecting the shift to a post-manufacturing economy. This trade-off between manufacturing and services is theoretically possible, but—given that the U.S. service surplus is 11% the size of its manufacturing deficit and that this service surplus has shrunk by 0.5% of GDP over the past seven years—it is unrealistic to expect that the current enormous trade deficit in manufactured goods can be sustained through burgeoning service exports.

The manufacturing employment situation calls for attention from policy makers. First and foremost, the value of the dollar should be encouraged to fall against a wider range of currencies. In the past year, the dollar has lost almost 40% of its nominal value against the euro. Although this was a necessary adjustment, it is now time for other countries to allow their currencies to fall. A block of East Asian countries (China, Malaysia, and Taiwan) account for 30% of the total U.S. trade deficit by pegging their currencies firmly against the dollar and impeding necessary adjustments. These nations should be pressured to revalue their currencies. If these countries allow their currencies to adjust, this will relieve the competitive pressure on other nations to allow their currencies to move against the U.S. dollar as well.

There are other steps not directly related to trade that can also be taken to aid U.S. manufacturing firms. Given that much of the manufacturing industry’s distress is caused by events and policies outside its own control (i.e., the overvalued dollar), it seems appropriate for policy makers to lend support to the manufacturing industry. One way to do this is for the federal government to relieve the burden of the fixed costs of U.S. manufacturing firms by picking up some legacy costs that firms have incurred for retiree health and pension benefits. Manufacturing firms are far more likely to have offered sufficient retiree health and income benefits and are now suffering financially as a result. Firms with large legacy costs should not be punished for being good employers, and workers and retirees should not be punished for economic events outside their purview.

Lastly, the proposition must be abandoned that trade is blameless for the recent loss of manufacturing jobs and that the decline in manufacturing employment is a natural phenomenon that cannot (and should not) be arrested. There is nothing desirable, sustainable, or irreversible about the present enormous trade deficits in manufactured goods that the United States currently carries.