During the 2000s, as U.S. manufacturing was transformed by devastating job losses, prominent economists and presidential advisers offered comforting words.
The paring of the manufacturing workforce, which shrank by a third over the decade, actually represented good news, they said. It meant that U.S. workers and factories had become more efficient and that, as a result, manufacturing companies needed fewer people.
“What happened to manufacturing? In two words, higher productivity,” Robert Reich, who served as labor secretary in the Clinton administration, wrote in 2009.
“The decline in U.S. manufacturing employment is explained by rapid growth in manufacturing productivity over the past 50 years,” said Glenn Hubbard, chairman of the Council of Economic Advisers (CEA) under President George W. Bush.
But a handful of economists are challenging that explanation, chipping away at the long-offered assurances that the state of U.S. manufacturing is not as bad as employment numbers make it look.
Instead, they say, it’s significantly worse.
What caused the job losses, in their view, is less the efficiency of U.S. factories than the failure of those factories to hold their own amid global competition and rising imports. The apparent productivity gains reflected in the official U.S. statistics have been miscalculated and misrepresented, they say, a position that has been at least partially validated by recent research.
“I bought into this idea for a long time that it was superior labor productivity that caused most manufacturing job losses,” said Rob Atkinson of the Information Technology and Innovation Foundation, a nonpartisan think tank. “Then I began to dig into the numbers.”
The arguments, which get a fresh airing in a report to be issued this week by the think tank, are being mounted as economists and politicians on the presidential campaign trial debate what, if anything, to do to help the nation’s manufacturers. Among the options are tax incentives, trade assistance and education credits.
“These numbers have been tossed about to say, ‘Look how productive U.S. factories have been,’ ” said Susan Houseman, senior economist at the W.E. Upjohn Institute, co-author with three Federal Reserve economists of a paper that raises questions about the accuracy of the productivity numbers. “The reality is a lot more complex and not as flattering.”
As calculated by federal statisticians, the productivity growth of U.S. factories has seemed quite impressive. Between 1991 and 2011, productivity more than doubled, meaning that a single worker today produces what two did 20 years ago, according to Bureau of Labor Statistics figures.
Looking at this number, many economists have concluded that the loss of manufacturing work could be considered a success story. Just as farming became more efficient over the previous century and fewer Americans found jobs on farms, U.S. manufacturing is simply becoming more efficient, as economists such as N. Gregory Mankiw, CEA chairman under Bush, and Austan Goolsbee, a recent CEA chief under President Obama, have argued.
“It is exactly the same process that agriculture went through,” Goolsbee said in a 2006 speech.
While many Americans blamed free trade for much of the unemployment in the Rust Belt, the idea that productivity was the culprit amounted to orthodoxy among many mainstream economists.
But as Houseman, Atkinson and others have pointed out, that view may mask a far more complex reality.
For starters, the reported productivity gains may be overstated because the statistics the government collects do not adequately reflect the changes that have come with globalization, as Houseman and Federal Reserve colleagues Christopher Kurz, Paul Lengermann and Benjamin Mandel have shown.
Calculating labor productivity depends on determining the value of U.S. manufacturing output and dividing it by the number of manufacturing-worker hours.
But in a time when factories increasingly have turned to outsourcing, it can be difficult to determine what is U.S. manufacturing output and what should be properly counted as output from a foreign factory.
Critically, Houseman and others have shown that the price savings that U.S. factories have realized from outsourcing have incorrectly shown up as gains in U.S. output and productivity.
This bias may have accounted for as much as half of the growth of U.S. manufacturing output from 1997 to 2007, excluding computers and electronics manufacturing, Houseman and her co-authors have estimated.
For example, suppose a U.S. factory decides to offshore the production of a part for which it used to pay $1. With the switch to an overseas supplier, it might pay 50 cents for the part. If U.S. statistics do not capture this drop in price, the savings by the U.S. factory can show up as a gain in output and productivity.