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Restore Manufacturing Jobs and Reduce the Trade Deficit

The Path to Full-Employment

by SUSAN HOUSEMAN and DEAN BAKER

Despite the latest jobs report showing that the economy added 175,000 jobs in February, economists agree that job growth and recovery are not as robust as they should be. The goal of full employment, where nearly all persons willing and able to work have the chance to do so, remains elusive.

Yet, few economists see a significant role for manufacturing, which historically has powered job growth during recovery periods. Although the manufacturing sector has shed 30 percent of its jobs since 2000, output growth at the nation’s factories during this period exceeded growth in the economy overall, except during recessions. These facts have led many economists to conclude that American manufacturing is strong and steep job losses in the sector are largely due to labor-saving technology. Such conventional wisdom also has kept economists from pursuing policies to boost manufacturing jobs.

This view, however, reflects a fundamental misunderstanding about what manufacturing statistics measure and what they mean. For arcane technical reasons, virtually all of the sector’s real output growth results from the way domestically manufactured computers and semiconductors are counted in U.S. statistics. Output growth in most manufacturing industries — those that account for the large majority of the sector’s value-added and employment — has been weak or negative since 2000. And although automation undoubtedly has displaced some workers in manufacturing, a growing body of research suggests that trade and the decline of the United States as a location for production have accounted for much of the sector’s job loss.

In addition, the employment effects of manufacturing production extend well beyond that sector. The breakup of vertically integrated firms and the growth of complex supply chains mean that a large share of workers needed to produce manufactured goods — now about half — works outside the manufacturing sector. Recognizing that the United States has lost competitiveness as a location for production and that globalization and international trade are largely responsible for the steep loss of manufacturing jobs is an essential first step for fashioning appropriate policy responses.

Addressing the trade deficit is an important starting point. The current (2013) level of $500 billion (3 percent of gross domestic product) means that a large amount of demand is directed outside of the United States rather than at home, where it could create employment.

Boosting exports or reducing imports enough to bring trade into balance would generate 4.2 million jobs directly and another 2.1 million jobs indirectly. The 4.2 million jobs directly created would be disproportionately manufacturing jobs, which continue to be a source of relatively high-wage employment for the 70 percent of the workforce that lacks a college degree.

The trade deficit gets remarkably little attention in today’s discussion about economic recovery, even among those who recognize its size. Many assume that the United States has a long history of running large trade deficits, but that’s not the case. The trade deficit actually had been relatively small through most of the 1990s. This changed following the East Asian financial crisis. Countries throughout the developing world deliberately depressed their currencies against the dollar to accumulate foreign reserves causing our trade deficit to soar.

The value of the dollar relative to foreign currencies is a major factor influencing the trade deficit. The challenge to returning the trade balance to its pre-1997 level in line with the dollar is that losses in some of the industries might not be recovered when the dollar falls back to its earlier level. Manufacturing operations have become more sophisticated and critical supply networks have developed in emerging economies. In many cases, the dollar would have to fall well below its original value in order for manufacturers to find it profitable to bring back or expand production in the United States, a fact that shows the permanent cost of enduring a prolonged period in which the dollar is overvalued. Taking immediate steps to lower the value of the dollar is essential to making the United States a competitive location for producers and bringing the trade deficit down.

The most likely way that the value of the dollar will fall is by negotiating agreements with the countries that have deliberately propped up the dollar against their own currencies. But, while a lower-valued dollar is important to workers and many domestic businesses, it’s not going to be popular with certain powerful interest groups that benefit, directly or indirectly, from an overvalued dollar. In other words, a major obstacle to lowering the value of the dollar is political.

It’s time that policy makers and political leaders consider the long-term benefits of reducing our trade deficit and creating a resurgence of manufacturing jobs – a move that will not only help return the country to full employment and close the gap in income inequality but also promote the global competitiveness of American workers.

Susan Houseman is Senior Economist at the W.E. Upjohn Institute for Employment Research.

Dean Baker is Co-Founder of the Center for Economic and Policy Research. Both are participating in the Center on Budget and Policy Priorities national dialogue on full employment, to take place April 2 at the National Press Club in Washington, D.C.