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American Manufacturing Has Declined More Than Most Experts Have Thought

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A new report released by the Information Technology & Innovation Foundation (ITIF) presents a strong case that manufacturing has declined more during the last decade than it did during the Great Depression of the 1930s. It's gratifying to finally see a well-respected non-partisan "think tank" release a report based on empirical data that corroborates what those of working in the manufacturing industry have experienced, about which I have been speaking and writing since 2003.

One of the main points of the report is that during the Great Depression, we lost 30.9% of manufacturing jobs, but in the decade of 2000-2010, we lost 33.1% of manufacturing jobs. It becomes more serious when you realize that in the Great Depression, manufacturing accounted for 43% of jobs lost and 34% of all jobs at the time, but now manufacturing only represents about 11% of all jobs, but nearly one-third of the job loss. This percentage loss represents 5.7 million manufacturing jobs. The report states:

"On average, 1,276 manufacturing jobs were lost every day for the past 12 years. A net of 66,486 manufacturing establishments closed, from 404,758 in 2000 down to 338,273 in 2011. In other words, on each day since the year 2000, America had, on average, 17 fewer manufacturing establishments than it had the previous day."

When you understand the multiplier effect of manufacturing jobs, creating 2-3 supporting jobs, this loss of manufacturing jobs represents 11 to 17 million jobs. The report states, "In fact, in January 2012 there were more unemployed Americans (12.8 million) than there were Americans who worked in manufacturing (just under 12 million)." No wonder we have the high local, state, and federal deficits that we are experiencing -- there are fewer taxpayers and more benefit collectors.

The two million manufacturing jobs we lost during the Great Recession was added to the over 3.7 million we had already lost. After the recession ended, the report states:

"Just 166,000, or 8.2 percent, returned. That leaves 91.8 percent of jobs to be recovered. At the rate of growth in manufacturing jobs in 2011, it would take until at least 2020 for employment to return to where the economy was in terms of manufacturing jobs at the end of 2007. In reality... U.S. manufacturing has been in a state of structural decline due to loss of U.S. competitiveness, not temporary decline based on the business cycle."

It's obvious that with unemployment at 8.3 percent, "all those jobs have not been recreated in other industries." If manufacturing declines further, there are no guarantees that other jobs will appear to replace those lost in manufacturing. The authors validate what I've written in my book and previous articles: "manufacturing jobs pay more; manufacturing is a source of good jobs for non-college-educated workers; and manufacturing is the key driver of innovation -- without manufacturing, non-manufacturing innovation jobs (for example, research and design) will not thrive."

For years, most economists, experts, and government officials have said that the decline in manufacturing is a natural outcome of our transformation from an industrial society to a post-industrial society.

"This decline is often cited by defenders as 'normal' and in line with what is happening in other countries. In this 'post-industrial' view, advanced nations are transitioning from factories to services; the greater and faster the loss of manufacturing, the more successful nations are in mastering the transition."

The authors concede that there is:

"Some truth to the post-industrialists' view. Advanced economies naturally see manufacturing jobs contribute to a smaller share of total employment, since manufacturing productivity is typically higher than non-manufacturing productivity. But normally the loss is modest and gradual, in contrast to the United States where in the last decade it was sudden and steep."

In addition:

"Advanced nations do lose some lower-value-added, lower-skill, commodity-based manufacturing to lower-wage nations. But ... they also increase their demand for the higher-value-added products that developed nations should naturally produce ... the process of global integration does not and should not naturally lead to the deindustrialization of developed economies, but rather to the transformation of their industrial bases toward more complex, higher-value-added production."

These same experts have denied that manufacturing has been in decline, arguing that manufacturing became incredibly productive just like agriculture did a century earlier so that fewer workers are needed in the industry. The authors state that:

"Virtually everyone makes the argument that massive manufacturing job decline is a sign of success: manufacturers are using technology to automate work and to become more efficient ... Manufacturing is like agriculture has been the dominant story. The United States produces more food than ever, but because farming has become so efficient, it requires a very small share of U.S. workers to grow and harvest the food. So while manufacturing productivity growth may be tough on workers, job loss is seen as a sign of strength, not weakness."

It's true that job loss could be result of increased productivity, but what these experts have ignored is that manufacturing's share of the Gross Domestic Product (GD) declined from 15% in 2000 to 11.0% in 2009. While manufacturing has declined as a share of GDP in the United States and some other nations, such as Canada, Italy, Spain, and the United Kingdom," it is stable or even growing in many others (including Austria, China, Finland, Germany, Japan, Korea, the Netherlands, and Switzerland.)"

The ITIF report dispels the myth that increased productivity is the reason for the job loss with a review of the productivity of various manufacturing industry sectors, showing that in 2010, "13 of the 19 manufacturing sectors (employing 55 percent of manufacturing workers) were producing less than they there were in 2000 in terms of inflation-adjusted output."

In addition, the authors assert that "the government's official calculation of manufacturing output growth, and by definition productivity, is significantly overstated.

"Correcting for biases in the official data, ITIF finds that from 2000 to 2010, U.S. manufacturing labor productivity growth was overstated by a remarkable 122 percent. Moreover, manufacturing output, instead of increasing at the reported 16 percent rate, in fact fell by 11 percent over the period."

This was during a period when the U. S. GDP increased by 17 percent.Besides, the report states that:

"It is not clear how productivity could be the culprit behind the large share of job loss in the 2000s when manufacturing labor productivity (as measured by the official value added data) was not substantially different in the 1990s than it was in the 2000s. During the 1990s, manufacturing jobs fell by one percent, while labor productivity increased by 53 percent. In the 2000s, manufacturing jobs fell by 33 percent while productivity increased by 66 percent ... the 2000s productivity number is actually significantly overstated, even more so than the 1990s figure. Adjusting for bias in the data, the actual productivity growth in the 2000s was just 32 percent."

The authors provide evidence that:

"There are serious problems with how the U.S. government measures manufacturing output that cause it to significantly overstate output and, by extension, productivity. In order to see how productivity and output are overstated, it is necessary to understand both concepts."

Their explanation is too complicated to consider in this short article, but is well worth reading in the report. They conclude:

"that there are substantial upward biases in the U.S. government's official statistics and that real manufacturing output and productivity growth is significantly overstated. The most serious bias relates to the computers and electronics industry (NAICS 334) -- its output is vastly overstated. Correcting for these statistical biases, we see that the base of U.S. manufacturing has eroded faster over the past decade than at any time since WWII, when the United States began compiling the statistics."

I can substantiate this conclusion from my experience as a manufacturers' representative for American companies who perform fabrication services, such as plastic and rubber molding, metal stamping and casting, machining, and sheet metal fabrication for other American manufacturers. While many of the manufacturers in my sales territory of southern California may still be assembling their products in the U.S., many of the components and subassemblies they are using have been produced offshore. Obviously, it takes fewer American workers to produce the end product because part of the work was actually done by foreign workers.

The problem is that there is no way for the government to track the value of the components and subassemblies that have been produced elsewhere from the value of the product that is sold by the American company. Therefore, the value of the whole product is counted as American productivity without deducting the value of the parts produced outside of the U.S. You can see how American productivity becomes inflated.

I hope this report will convince the majority of economists, experts, and government officials recognize that manufacturing is truly in serious decline so that they will look at what are the main reasons: outsourcing manufacturing offshore and the economic warfare being waged by China against the U.S.