The Epic Mistake About Manufacturing That's Cost Americans Millions Of Jobs

Looking back, there were two kinds of people who lived in America in 2016: people who believed Donald Trump, and people who believed data.

 

Trump claimed on the campaign trail that globalization had destroyed US manufacturing—and in the process, the American economy—by letting China and other countries steal American factory jobs. From the turnout at Trump’s rallies and the “Make America Great Again” stickers slapped on bumpers across America, it was clear the message was resonating.

The data camp didn’t get it. Yes, the US had hemorrhaged manufacturing jobs, losing close to 5 million of them since 2000. Trade may have been a factor—but it clearly wasn’t the main culprit. Automation was. Robots and fancy machines had supplanted workers, turning the US into a manufacturing dynamo at the cutting edge of innovation. An article in Vox, published a month before the 2016 presidential election, spelled out the situation.

“Declining manufacturing employment over the past 30 years has given a lot of people the impression that America’s manufacturing sector is in decline. But that’s actually wrong,” the Vox article explained. “American factories are about twice as efficient today as they were three decades ago. So we’re producing more and more stuff, even as we use fewer and fewer people to do it.”

This was hardly a groundbreaking insight. For a decade or so, this phenomenon had been put forth by Ivy Leagueeconomists, former US secretaries of treasury, transportation, and labor, Congressional Research Services, vice president Joe Biden, president Barack Obama—and by Quartz too, for that matter. In a 2016 New York Times article titled “The Long-Term Jobs Killer is Not China. It’s Automation,” labor economist David Autor laid out the general consensus. Some manufacturing unemployment “is globalization, but a lot of it is we require many fewer workers to do the same amount of work,” said Autor. “Workers are basically supervisors of machines.” Harvard economist Lawrence Katz concurred: “Over the long haul, clearly automation’s been much more important—it’s not even close.”

  America’s manufacturing sector is in far worse shape than the media, politicians, and even most academics realize.   Manufacturers’ embrace of automation was supposedly a good thing. Sure, some factory workers lost their jobs. But increased productivity boosted living standards, and as manufacturing work vanished, new jobs in construction and other services took its place. This was more of a shift than a loss, explained Bradford DeLong, economics professor at the University of California, Berkeley.

So when Trump won the presidential election, the true-blue data believers dismissed his victory as the triumph of rhetoric over fact. His supporters had succumbed to a nativist tale with cartoon villains like “cheating China” and a shadowy cabal of Rust Belt-razing “globalists.”

But it turns out that Trump’s story of US manufacturing decline was much closer to being right than the story of technological progress being spun in Washington, New York, and Cambridge.

Thanks to a painstaking analysis by a handful of economists, it’s become clear that the data that underpin the dominant narrative—or more precisely, the way most economists interpreted the data—were way off-base. Foreign competition, not automation, was behind the stunning loss in factory jobs. And that means America’s manufacturing sector is in far worse shape than the media, politicians, and even most academics realize.

Worse than the Great Depression: America’s manufacturing jobs implosion

In the four decades between 1960 and 2000, US manufacturing employment was basically stable, averaging around 17.5 million jobs. Even during the 1980s and 1990s, as Korea and other smaller Asian nations joined the ranks of Germany and Japan to threaten the dominance of US factories, the absolute number of manufacturing workers stayed mostly flat. That’s why what happened next is so alarming.

Between 2000 and 2010, manufacturing employment plummeted by more than a third. Nearly 6 million American factory workers lost their jobs. The drop was unprecedented—worse than any decade in US manufacturing history. Even during the Great Depression, factory jobs shrunk by only 31%, according to a Information Technology & Innovation Foundation report. Though the sector recovered slightly since then, America’s manufacturing workforce is still more than 26% smaller than it was in 2000.

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What’s odd is that, even as US factories laid off an historically unprecedented share of workers, the amount of stuff they made rose steadily—or at least, it appeared to. The sector’s growth in output, adjusted for inflation, had been chugging away at roughly the same pace as US GDP since the late 1940s. That makes sense given that productivity—that is, advances in technology, skill, or management that allow workers to make more stuff in less time—has also been growing at a zippy clip.

How, then, do you reconcile the epic employment slump of the 2000s with the steady rise in output? The obvious conclusion is that factories needed fewer people than they did in the past because robots are now doing more and more of the producing. That’s tough for factory workers, but US manufacturing is doing fine.

That rests on the basic assumption that the manufacturing output data reflect the actual volume of stuff produced by US factories. It’s a reasonable assumption to make. Unfortunately, it’s not an accurate one.

Houseman’s light bulb moment

Economists have long been aware that computers and electronics, a relatively small sector of manufacturing, has powered much of manufacturing’s growth in output over the past few decades. But until 2009, no one had connected this fact to the puzzling paradox of surging manufacturing output alongside dwindling employment. That’s when Susan Houseman and her colleagues first took a crack at it—and, in the process, discovered something funny going on with data.

  “It was staggering—it was actually staggering—how much that subsector was contributing to growth.”   An economist at the Upjohn Institute, an independent organization that researches employment, Houseman specializes in measuring globalization. She had been working with a team of Federal Reserve economists with access to more granular data than was publicly available, which allowed them to strip away the computers industry output from the rest of the data. That revealed just how the rest of manufacturing was doing—and it was much worse than what Houseman and her colleagues expected.

“It was staggering—it was actually staggering—how much that was contributing to growth in real [meaning, inflation-adjusted] manufacturing productivity and output,” says Houseman.

This was especially striking given that the two measures lay at the heart of the prevailing narrative that US manufacturing is growing healthily.

In 2011, Houseman and her colleagues mentioned their discovery in a paper they published in the Journal of Economic Perspectives. But the point went largely unnoticed.

Undeterred, Houseman spent the next few years digging further into why this relatively small industry was driving so much growth—and what was really going on with America’s manufacturing.