Deindustrialization: Causes and Consequences

It’s not mostly about globalization, and it’s not what ails workers

A few months before the 1992 election I, along with some other Democratic-leaning economists, flew to Little Rock to meet with Governor and presidential candidate Bill Clinton. The ostensible purpose was to discuss policy, but it was obviously also an audition for a job in the administration. At one point Clinton asked what could be done to restore manufacturing to its previous share of employment.

Heads turned to me; this was clearly my department. I said something like this: “Sorry, governor, but that’s really not feasible. Even if we could eliminate the trade deficit, manufacturing employment would only rise modestly and would still be a much smaller share of the economy than in the past.”

Needless to say, I didn’t get a job. It was one of the best things that has ever happened to me.

The inconvenient fact is that economy changes over time and so do the industries in which people work. A century and a half ago, despite the growth of manufacturing, America was still largely a nation of farmers. Today hardly any of us work on the land:

Source: Census, BLS

Oh, and many, possibly a majority of farm workers are foreign-born, and many of them undocumented.

Although some politicians still portray rural areas and small towns as the “real America,” you don’t hear a lot of nostalgia for the days when agriculture dominated American employment. (If you ask me, Queens, New York comes a lot closer to being who we are now.)

There is, however, a lot of nostalgia for the 1950s and 1960s, when more than a quarter of U.S. workers were employed in manufacturing. Income inequality was much lower in that era, so much so that many blue-collar workers considered themselves middle-class. And there’s a widespread narrative that (a) attributes those good times for American workers to the availability of well-paid jobs in manufacturing (b) attributes the relative decline of American manufacturing to overseas outsourcing and trade deficits.

But is this narrative right? Yes, it’s a simple, compelling story. But as I tried to explain to Clinton all those years ago, the math behind the story doesn’t work. To preview the conclusions: Even if we could somehow eliminate our trade deficit (which Trump’s tariffs won’t do, but that’s another story), America would not reindustrialize. — our manufacturing sector would be slightly bigger, but nothing like what it used to be in the 1950s and 1960s. And any wage gains for ordinary workers would be trivial at best.

I should say that some people who have bought into the deindustrialization-through-globalization story get annoyed if you point out that it’s mostly wrong. They seem to believe that pointing out the weakness of the deindustrialization story means that you don’t care about American workers. So let me be clear: I do care, a lot, about the fate of American workers. But as I’ll explain later, trying to recreate the economy of the 1950s won’t help them.

This post will, by the way, be a somewhat wonky exercise. But it’s important to understand that policies based on misplaced nostalgia (especially those being wielded so disastrously by Donald Trump) will hurt workers, not help them.

Beyond the paywall I’ll discuss:

1. The limited (not zero) role of international trade in deindustrialization

2. The limited (again not zero) role of deindustrialization in depressing wages

3. What would actually help restore the middle-class society I grew up in