Thoughts on American Manufacturing Decline and Revitalization

Abstract

The recent decline in American manufacturing probably reflects long-run problems. A sensible approach to revitalizing American manufacturing would focus on overcoming inefficiencies in the development of manufacturing, such as problems in smalland mediumsized manufacturers getting information about deploying new technologies. This approach to revitalizing manufacturing can best be implemented through federal efforts to encourage and support state and local economic development policies that help enhance manufacturing productivity. A decentralized approach to the revitalization of manufacturing encourages a variety of creative policies, is adaptable to local conditions, and is consistent with American political traditions. I. THE PROBLEM: THE RECENT DECLINE IN AMERICAN MANUFACTURING The decline in manufacturing is a growing national issue, affecting all U.S. regions. For example, from the recession’s beginning in the first quarter of 2001 until the first quarter of 2003, real earnings in manufacturing declined 9.1 percent nationally, with real earnings in manufacturing declining at least 5 percent in every major region of the United States. The manufacturing decline is more severe in employment, but also occurs in output. Manufacturing employment declined around 14 percent from the beginning of the recession, but manufacturing output declined about 7 percent. II. REASONS FOR THE DECLINE The manufacturing decline is probably more than a temporary, recession-related phenomenon. Manufacturing output declined by 7 percent from the beginning of the recession to its end in November 2001, and it has essentially stagnated ever since. Recession-induced job losses may be temporary or permanent. This recession has caused fewer temporary layoffs and more permanent layoffs than is usually the case. This recession and recovery have thus far been accompanied by greater than usual “structural shifts” in employment across different industries. In addition to being caused by the recession, the manufacturing decline in output is associated partially with recent trade trends (about one-fourth due to trade according to one estimate), and partially with unusually high productivity growth. The U.S. trade problems in manufacturing may be caused by “temporary” factors, such as an overvalued dollar, and may be caused by longer-run shifts in comparative advantage that favor lower-cost overseas production. Manufacturing has also had unusually high productivity growth for a recessionary period, which