In the three decades I’ve been writing about manufacturing, there has been much ado about manufacturing’s decline. The general perception has been that it was driven by the rise of foreign automakers in the American market in the ‘60s or ‘70s. That’s when the Japanese and Germans seized an opportunity opened by complacency among the American “Big Three” that had been riding high in the years immediately after World War II. This, the common thinking goes, is when American manufacturing began to decline. An article by Louis D. Johnston on minnpost.com brings some statistics to light that reveal the historical fallacy in that line of thinking. He shows quite clearly that the U.S. industrial decline has been a long-term development, stretching back much longer than the middle of the last century. Economists traditionally categorize economic activity into three sectors: agriculture, industry, and services. The author describes the common perception of how this activity has come down through American history:
You probably have a story in mind about what (economic) data will tell us: The United States was primarily an agricultural economy through the 19th century; then, industry swept the landscape in the late-19th and early-20th century—with America standing as the industrial powerhouse of the world by the . Things stayed this way until the late and , when we first lost our edge to the Japanese, then to the Chinese, and have now become a service economy that doesn’t produce stuff.
However, the story isn’t quite right, in terms of labor and output. Beginning in at roughly 70 percent of the labor force, agricultural employment fell to about 40 percent, 10 percent in , and remains at about 2 percent today. But in terms of employment, the service sector exceeded industrial employment throughout American history. Looking at industry, the closest that sector got to services in terms of labor was in 1880! Considering output, a similar pattern emerges. The agricultural sector originally accounted for the largest share of output, but services caught up and exceeded agriculture by the 1880s. Industrial production kept pace with services until , but after that services pulled ahead and never looked back. Since , the share of output produced in industry has steadily declined, falling from about 40 percent of output to about 25 percent today. This holds true as well when looking strictly at the private sector, debunking the arguments of those who correlate the service sector’s rise with the growth of government. Johnston proposes a pull-push explanation for the rise of the service sector at the expense of industry. Before World War II, as the wealth of the nation grew, the general demand for services increased significantly, pulling workers into the service sector. After World War II, industrial productivity grew faster than the demand for industrial products, driving down the need for industrial workers and pushing them out of industry into the service sector. According to Johnston, this has serious implications for manufacturing policy:
The decline in manufacturing output and employment is a long-run phenomenon, not just a short-run problem. This means that policies designed to boost manufacturing need to be designed with this long-run trend in mind, and not just [in reaction] to problems of the last 10 to 20 years.
Such policy also needs to account for how U.S. manufacturing fits into today’s global perspective. A recent report from the Congressional Research Service points to five key findings in that area:
- China displaced the United States as the largest manufacturing country, as the United States’ share of global manufacturing activity declined from 30 percent to 17.4 percent.
- Manufacturing output has grown more rapidly in the United States over the past decade than in most European countries and Japan, although it has lagged China, Korea, and other Asian countries.
- Employment in manufacturing has fallen in most major manufacturing countries during the past two decades. The United States saw a disproportionately large drop between but its decline in manufacturing employment since is in line with the changes in several European countries and Japan.
- U.S. manufacturers spend far more on research and development (R&D) than those in any other country, but manufacturers’ R&D spending is rising more rapidly in China, Korea, and Taiwan.
- A large share of manufacturing R&D in the United States takes place in high-technology sectors, particularly pharmaceutical and electronic instrument manufacturing, whereas in other countries a far greater proportion of manufacturers’ R&D outlays occur in medium-technology sectors such as motor vehicle and machinery manufacturing.
“A generation which ignores history has no past and no future,” said the American author Robert Heinlein. It seems that the same holds true for manufacturing, whose brighter future is likely to depend on an accurate and deeply considered understanding of its past, distant as well as recent.