Worse Than the Great Depression: What the Experts Are Missing About American Manufacturing Decline

March 19, 2012
| Reports

In the 2000s, U.S. manufacturing suffered its worst performance in American history in terms of jobs. Not only did America lose 5.7 million manufacturing jobs, but the decline as a share of total manufacturing jobs (33 percent) exceeded the rate of loss in the Great Depression. Despite this unprecedented negative performance, most economists, pundits and elected officials remain remarkably blasé about what has transpired. Manufacturing, they argue, has simply become incredibly productive. While tough on workers who are laid off, outsized job losses actually indicate superior performance. All that might be needed are better programs to help laid-off production workers. And there is certainly no need for a determined national manufacturing competitiveness strategy.

Percent Change in Manufacturing Employment During the Great Depression and the 2000s

Figure 1: Percent Change in Manufacturing Employment During the Great Depression and the 2000s

The alarm bells are largely silent for two reasons. First, most economists and pundits do not extend their analysis beyond one macro-level number—change in real manufacturing value-added relative to real GDP—which at first glance appears stable. But this number masks real decline in many industries. In 2010, 13 of the 19 U.S. manufacturing sectors (employing 55 percent of manufacturing workers) were producing less than in 2000.

Second, and more fundamentally, U.S. government statistics significantly overstate the change in U.S. manufacturing output, and by definition productivity, in part because of massive overestimation of output growth in the computer and electronics sector and because of problems with how manufacturing imports are measured. When measured properly, U.S. manufacturing output actually fell 11 percent over the last decade while GDP increased 17 percent, something that has not happened before, at least since WWII.

Moreover, manufacturing productivity grew by just 32 percent, not the reported healthy number of 72 percent indicated by Bureau of Economic Analysis data. If productivity growth was actually 72 percent, one would expect that U.S. manufacturers would have added plenty of machines and factories over the last decade to be more productive, as they have done every decade since WWII. In fact, total U.S. manufacturing capital stock increased just 2 percent, compared to historic rates of growth of between 20 and 50 percent per decade.

Thus, while superior productivity increases played some role in declining manufacturing employment, the overriding factor was output decline, highlighted by a striking result: if from 2000 to 2010 manufacturing output had grown at the same rate as that of the rest of the business sector, the United States would have 3.8 million more manufacturing jobs today and at least another four to six million jobs from the multiplier effect. What so many pundits miss is the centrality of manufacturing (and other globally traded sectors like software) to U.S. economic health. In a comparison of 10 nations, including the United States there is a strong (0.57) correlation between change in manufacturing employment between 1987 and 2005 and total economy-wide employment growth from 2005 to 2010.

As such, the conventional wisdom that U.S. manufacturing job loss is simply a result of productivity-driven restructuring (akin to how U.S. agriculture lost jobs but is still healthy) is fundamentally flawed. U.S. manufacturing lost jobs because manufacturing lost output, and it lost output because its ability to compete in global markets—some manipulated by egregious foreign mercantilist policies, others supported by better national competiveness policies, including much lower corporate tax rates—declined significantly.

Percentage Change in Real Value Added of Manufacturing by Decade

Figure 2: Percentage Change in Real Value Added by Decade

Even if experts acknowledge that manufacturing’s share of output has declined, many comfort themselves with a narrative that such decline is inevitable. “Manufacturing is in decline everywhere, even in China,” they argue. They would be wise to consult actual data, for they would find that while manufacturing has declined as a share of GDP in some nations (notably Canada, Italy, Spain, the United Kingdom, and the United States), it is stable or growing in many others (including Austria, China, Finland, Germany, Japan, Korea, the Netherlands, and Sweden). The loss of U.S. manufacturing is not due to some inexorable shift to a post-industrial economy; it is due to a failure of U.S. policies (for example, underinvestment in manufacturing technology support policies and a corporate tax rate that is increasingly uncompetitive) and the expansion of other nations’ mercantilist policies.

Some go so far as to assert that manufacturing industries are “old economy” and that it is a reflection of failure, not success, if a country has a manufacturing sector that is either stable or growing. Perhaps they are thinking of the kind of factory represented in old movies, television shows, or news clips: dirty, clunky, mechanical havens filled with low- and moderate-skilled workers producing commodity products. They would be well-advised to visit the clean, streamlined, IT-driven manufacturing facilities operating in the United States today. The new facilities use advanced technologies and employ moderate- and high-skilled workers to turn out advanced products, from jet aircraft, computers and semiconductors, and advanced instruments and vehicles, to sophisticated chemical and biological compounds.

Percent Change in Manufacturing Real Value Added by Industry, 2000-2010

Figure 3: Percent Change in Manufacturing Real Value Added by Industry, 2000-2010

Others now argue that because a few manufacturing jobs have returned that the United States is poised for a manufacturing renaissance. But the rebound looks as good as it does only because the prior loss was so steep. The United States lost two million manufacturing jobs during the Great Recession, and since then a little over 166,000, or 8.2 percent, have returned. At the rate of growth in manufacturing jobs in 2011, it would take until 2020 to return to where the economy was in terms of manufacturing jobs at the end of 2007.

So much of the debate and rhetoric around U.S. manufacturing is erroneous, precisely because the core data on manufacturing output and productivity are so flawed. It is time for this debate to be informed by accurate data and thorough analysis. We need to arrive at a point where anytime someone asserts that the loss of manufacturing jobs is due principally to superior productivity growth, the statement is challenged as inaccurate. And likewise with statements like, “since we have lost so many manufacturing jobs, it proves that it is no longer an important industry”. The reality is:

  • A large share of manufacturing jobs was lost in the last decade because the United States lost its competitive edge for manufacturing. It was due to a failure of U.S. policy, not superior productivity.
  • The loss was cataclysmic and unprecedented, and it continues to severely impact the overall U.S. economy.
  • Regaining U.S. manufacturing competitiveness to the point where America has balanced its trade in manufacturing products is critical to restoring U.S. economic vibrancy.
  • Regaining manufacturing competitiveness will create millions of higher-than-average-wage manufacturing jobs, as well as an even greater number of jobs from the multiplier effect on other sectors of the economy.
  • The United States can restore manufacturing competitiveness and balance manufacturing goods trade within less than a decade if it adopts the right set of policies in what can be termed the “four T’s” (tax, trade, talent, and technology).

U.S. Map Displaying Percentage Loss in Manufacturing Jobs, 2000-2010

Figure 4: Percentage Loss in Manufacturing Jobs, 2000-2010

This issue is too important for policy to be informed by poor data and shallow analysis. It is time for economists, journalists, policymakers, and others to get the story right.



“An epic report on manufacturing … a tremendous, tremendous contribution.” --Michael Mandel, Chief Economic Strategist, Progressive Policy Institute

“… should be a standard reference work for policymakers and their staffs and for the many—or most—economists who do not specialize in manufacturing.” --Howard Wial, Fellow, Brookings Institution

ITIF Welcomes President Obama's Proposal on Manufacturing Innovation

In response to an initiative to promote innovation and competitiveness in manufacturing President Obama is announcing today, ITIF President Rob Atkinson made the following statement:

"Finally, at the very highest levels of government there is recognition that manufacturing matters and an acknowledgement that our public policies have been failing this critical sector. The National Network for Manufacturing Innovation is one of the most important steps this or any Administration has taken in recent years to revitalize American manufacturing and it is urgently needed.
Read more »

Senate Hearing on Tax Reform Options: Incentives for Capital Investment and Manufacturing

March 6, 2012
| Testimony and Filings

Congress has an opportunity to reform the corporate tax code to explicitly promote the competitiveness of business establishments in America by expanding, not cutting, incentives for investing in America, including the domestic production deduction, the R&E tax credit, and accelerated depreciation. Ideally, Congress would also establish new incentives, such as an investment tax credit for new machinery, equipment and software investment (replacing accelerated depreciation) and a “patent box” incentive, as a number of European nations have recently put in place that taxes corporate income from innovation-based products at a lower rate.

This is not to say that corporate tax reform should not reduce or eliminate special deductions, exemptions and credits that cannot be justified on a productivity, innovation or competitiveness basis. Indeed, a reconstituted corporate tax code which eliminates incentives that do not spur growth could have some positive, albeit likely modest, impacts on growth. But if a dogged faith in simplicity ends up reducing and even eliminating incentives that spur productivity, innovation and competiveness, reform will lead to less economic growth, not more. So the choice should not be between a corporate tax code riddled with particular exemptions and credits and a completely neutral code. Rather the code should reduce ineffective exemptions and incentives while expanding effective ones focused on innovation and growth-enhancing activities characterized by significant spillovers or other market failures, all the while lowering the effective, and statutory, corporate rates.

Why—and Which—Manufacturing Matters: Innovation and Production in the United States

February 22, 2012
| Presentations

On February 22, Rob Atkinson will moderate Why—and Which—Manufacturing Matters: Innovation and Production in the United States. The forum hosted by the Metropolitan Policy Program at Brookings will be exploring the type of manufacturing the nation is most likely to retain and build, as well as a policy framework for strengthening high-wage, export-intensive production in America. Brookings and CONNECT Innovation Institute scholars will present new arguments from complementary research studies assessing production activities and innovation.

Obama Proposes Bringing Jobs Home from Overseas. Would His Plan Work?

Christian Science Monitor
A central problem for US manufacturers, Mr. Atkinson says, is that they are currently asked to pay higher tax rates than their overseas competitors.

The number of industrial manufacturing relocations and significant expansions fell from an average of 5,139 per year for 1995-2000 to 3,162 in 2005

The understanding that the most important goal in economic development is attracting out-of-state business establishments is flawed. As such, less attention is given to helping existing firms grow and helping new firms start up. In the New Economy, entrepreneurship is much more important than firm attraction is to economic success. Consider the fact that the number of industrial manufacturing relocations and significant expansions fell from an average of 5,139 per year for 1995-2000 to 3,162 in 2005. Read more »

Our Manufacturers Need a U.S. Competitiveness Strategy, Not Special Treatment

February 7, 2012
| Blogs & Op-eds

Romer’s op-ed gets at least four critical points flat wrong. First, it conflates having a coherent set of policies and strategies to support U.S. manufacturers with them receiving “special treatment.” Second, it wrongly argues that manufacturing jobs are the same as all other jobs in the economy. Third, it misdiagnoses the central challenge facing the U.S. economy as a lack of aggregate demand when the real problem is faltering U.S. competitiveness, especially in the traded sectors of the economy, such as manufacturing. Finally, arguments like this that manufacturing in the United States deserves no specific policy focus refuse to acknowledge the sophisticated strategies that dozens of U.S. competitors around the world have put in place to bolster the competitiveness of their manufacturing sectors.

Manufacturing Policy is NOT “Industrial Policy”

February 3, 2012
| Blogs & Op-eds

There is much debate over the state of U.S. manufacturing. Many have been arbitrarily using the term "industrial policy" to refer to a host of problems and initiatives in this critical sector. If we’ve come this far (or low) in the debate that a policy to help ALL manufacturers is industrial policy, then essentially neoclassical economists are saying that all policies need to be completely neutral between industries. This is too critical an issue for our nation’s future for it to be decided in the newspaper articles and offhand quotes from neoclassical economists.

Tech Industry to Washington: It's Your Turn

National Journal
The president and many members of Congress agree on such issues as in-sourcing, manufacturing competitiveness, and R&D. They should not wait until after the election to act.

Good Speech, Good Ideas, Yet More Needed…

January 26, 2012
| Blogs & Op-eds

In follow-up analysis of the State of the Union address, ITIF affirmed it praise for the President's focus on competitiveness but makes the case for more robust R&D, tax, trade and energy that should included in the President's upcoming budget proposal.


  • It is important to maintain funding for applied R&D in addition to basic R&D to better ensure commercialization of good ideas. The revitalization of manufacturing requires serious investment in a manufacturing technology initiative.
  • Better trade enforcement must be matched with identifying China as a currency manipulator and setting higher standards in new free trade agreements.
  • Corporate tax reform must expand and retain tax incentives to bolster the competitiveness of traded sectors and not be tethered to revenue neutrality. Lower effective corporate taxes should be the goal.
  • Technology's role in enhancing productivity and long-term growth is critical. Support for clean energy must include robust investment in the innovation that will lead to the breakthroughs we need.
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