ITIF Report Details Decline in Output and Jobs; Exposes Flaws in Productivity Assumptions
The erosion of American manufacturing in the last decade has been far more severe than commonly recognized, with sharp declines not only in employment but also in output, according to a report released today by the Information Technology and Innovation Foundation.
"Worse Than the Great Depression: What the Experts Are Missing about American Manufacturing Decline," debunks widely held myths about productivity gains, restructuring, and a manufacturing renaissance and reveals the stark reality of a historic decline in U.S. competitiveness and unprecedented deindustrialization. The report explains what the United States is experiencing is not merely another boom and bust cycle but a structural decline more akin to what Britain experienced in the 1960s and 1970s when it lost its industrial leadership.
"What we discovered flies in the face of nearly all the reporting and commentary on manufacturing and reveals a disturbing truth," said ITIF President Robert D. Atkinson, the report's chief author. "U.S. manufacturing jobs have been lost not simply because the sector is more productive. It is producing less. And unlike some high-wage nations, America is not replacing low-value-added manufacturing with high-valued-added manufacturing or opening new plants to replace closed ones. There is difference between restructuring and decline. American manufacturing is in decline."
From January 2000 to January 2010, the U.S. lost one-third of its manufacturing jobs, almost 5.5 million jobs. This is likely the highest rate of manufacturing job loss in American history, exceeding even the rate of loss in the Great Depression. In addition, economy-wide job losses in the last decade were far more concentrated in manufacturing than during the Great Depression. But unlike the period after the Depression or in the recoveries from recessions after World War II, the recent rebound in manufacturing has been far weaker than portrayed by recent news reports and comes off the steepest decline of any post-war recession.
In the face of these unprecedented losses, expert opinion has been remarkably blasé, attributing the massive job loss to manufacturing's superior productivity performance. That view is based almost entirely on one number - change in real manufacturing value added as a share of GDP. But the report finds that U.S. government data significantly overstates this macro number, in part by vastly overstating value-added growth in the computer and electronic products sector and by miscalculating the price of imports of intermediate manufacturing inputs. According to the U.S. Bureau of Economic Analysis, growth of output in the computer and electronics sector accounted for more than all the output growth in U.S. manufacturing. In other words, collectively the other 18 U.S. manufacturing sectors produce less today than they did in 2000. In fact, when measured accurately, real manufacturing output declined by 11 percent in the last decade, at a time when the overall economy grew by more than 11 percent. Compare that to prior decades when manufacturing output grew by upwards of 35 percent. Something went seriously wrong in the 2000s.
The report also refutes the commonly expressed view that other industrialized high-skill nations are also failing behind in manufacturing. There's nothing normal or preordained about rich countries losing manufacturing. While nations such as Austria, German, Korea, the Netherlands and Sweden have seen increased or stable manufacturing output growth, only the United States and a handful of other nations (e.g. Canada, Spain, Italy and the UK) that have seen outright losses.
The report shows these losses have not been due to declining demand for manufactured goods. Demand has stayed robust. What has declined is U.S. production of those goods as the manufacturing trade deficit has soared.
Despite the sobering findings, the report also emphasizes that manufacturing is still critical to America's economic future. Manufacturing still adds $1.6 trillion to GDP, employs nearly over 12 million people and is a traded sector, which means when we lose a manufacturing job due to foreign competition it is not automatically replaced by the market.
ITIF emphasizes that policy changes like a more competitive corporate tax code, increases in funding for manufacturing-focused R&D and programs to train manufacturing workers, and increased efforts to fight unfair or illegal trade practices can stem the tide and help restore the U.S. manufacturing base.
"America needs to wake up to the fact that a series of grave policy errors have left us a production foundation that is too weak to support the kind of economy we need to build. We will need new policies to build a new manufacturing foundation," said Atkinson. "This is a central economic task for America for this decade."
Among the findings in the report are the following:
• Productivity: Between 2000-2010 government data overestimated manufacturing labor productivity by a remarkable 122 percent.
• Output: Rather than rising by 16% as the government data indicated, manufacturing output during that period actually fell by 11 percent. If manufacturing output had grown at the same rate as the rest of the business sector, the United States would currently have 13.3 million more jobs.
• Job Losses: Today, more Americans are unemployed - a total of 12.8 million - than there are Americans who work in manufacturing, 12 million. On average, every day for the last 12 years, the United States lost 3,643 jobs - 1,243 net manufacturing jobs plus approximately 2,400 additional jobs because of manufacturing's multiplier effect.
• Manufacturing Capital Stock: While the amount of capital (e.g. machines, factories, computers) grew by between 20 and 40 percent per decade prior to 2000, in this last decade it grew by less than 2 percent.
• Plant Closings: Since 2000, a net 60,300 manufacturing plants closed, or 15 each day.
• Recovery: While the economy has been adding manufacturing jobs during the current recovery, for every six jobs lost in the 2000-2010 period, only one was restored as of January 2011.
• Decline in the States: Only two U.S. states experienced less than double-digit declines in manufacturing employment in the 2000s.