Manufacturing employment, productivity and the business cycle

The U.S. manufacturing sector has become the poster child of the jobless recovery, the latest victim of the Bubble Economy. On Labor Day 2003 President Bush called for the creation of a new position of Assistant Secretary for Manufacturing in the Department of Commerce. The National Association of Manufacturers has called for a new strategy for renewal of U.S. manufacturing, referring to the sector as being in “jeopardy.” Congress is even considering legislation, such as the American Jobs Creation Act (H.R. 2896), that would lower the corporate income tax rate for the nation’s manufacturing sector. Secretary of Treasury Snow has succeeded in reversing long-standing U.S. exchange rate policy, calling for “flexibility” of Chinese and Japanese exchange rates. But the focus is on two countries where he believes that flexibility would lead to a lower value of the dollar (and not, for example, Hong Kong, where it would not). The new U.S. policy has succeeded in pushing down the dollar sharply against nearly all our major trading partners, the true objective of the policy. The political and economic policy situation is becoming critical. In the 1980s, the “deindustrialization” of America and the hollowing out of the American corporation threatened to turn us in to a nation of hamburger flippers and promised a Day of Reckoning. The irony was that manufacturing and the economy as a whole were enjoying a surge of policy-induced economic growth that had not been seen for two decades and that was restoring some faith in the continuing promise of the American Dream. Pundits are always looking for a new whipping boy symbolize US economic decline. In the mid-1980s it was the "deindustrialization" of America reflected in the massive current account deficit. But this time things could get nastier. A large current account deficit is back and has remained in the face of another jobless recovery, i.e., an economic expansion without a recovery in employment. And the decline in overall employment is heavily concentrated in manufacturing sector job losses. A more patient and optimistic perspective could be offered by reflecting on the euphoria of the new economy with its rapid productivity growth, advances that appear to be continuing. But instead, memories of recent boom times have apparently simply reinforced concerns about the demise of US manufacturing. As a result, the rhetoric of industrial decline and political intervention to protect industry and jobs is growing. Has there been a structural shift in the U.S. economy that has doomed the manufacturing sector? Are government policies necessary for renewal? This paper attempts to provide some perspective on the decline in manufacturing employment and whether it represents a fundamental structural shift that requires public policy assistance to halt and/or reverse. It also assesses some potential policy efforts to aid the sector and the outlook for manufacturing employment.