Can this sector be saved? We often hear sentiments like: "Does America still produce anything?" and "The good jobs in manufacturing have all gone." There is nostalgia for the good old days when there were plentiful well-paid jobs in manufacturing. And there is anger that successive U.S. administrations of both parties have negotiated trade deals, notably NAFTA and the admission of China into the World Trade Organization, that have undercut America's manufacturing base.

Those on the right suggest that if burdensome regulations were lifted, this would fire up a new era of manufacturing prowess. On the left, it is claimed that trade agreements are to blame and, at the very least, we should not sign any more of them. Expanding union power and recruiting are another favorite solution. Despite his position on the right, Donald Trump has joined those on the left blaming China for manufacturing’s problems.

What is the real story and what needs to be done to save this sector? The biggest factor transforming manufacturing has been technology; and technology will largely determine its future.

Disappearing jobs

Employment in the manufacturing sector declined slowly through the 1980s and 1990s, but since 2000, the decline has been much faster falling by over 6 million workers between 2000 and 2010. There were hopes that manufacturing jobs would regain much of their lost ground once the recession ended, but the number of jobs has climbed by less than a million in the recovery so far and employment has been essentially flat since the first quarter of 2015. Manufacturing used to be a road to the middle class for millions of workers with just a high school education, but that road is much narrower today—more like a footpath. In manufacturing’s prime, although not all jobs were good jobs, many were well paid and offered excellent fringe benefits. Now there are many fewer of these.

Sustained but slow output growth

The real output of the manufacturing sector from 2000 to the present gives a somewhat more optimistic view of the sector, with output showing a positive trend growth, with sharp cyclical downturns. There was a peak of manufacturing production in 2000 with the boom in technology goods, most of which were still being produced in the U.S. But despite the technology bust and the shift of much of high-tech manufacturing overseas, real output in the sector in 2007 was still nearly 11 percent higher than its peak in 2000.

Production fell in the Great Recession at a breathtaking pace, dropping by 24 percent starting in Q3 2008. Manufacturing companies were hit by a bomb that wiped out a quarter of their output. Consumers were scared and postponed the purchase of anything they did not need right away. The production of durable goods, like cars and appliances, fell even more than the total. Unlike employment in the sector, output has reclaimed it previous peak and, by the third quarter of 2015, was 3 percent above that peak. The auto industry has recovered particularly strongly. While manufacturing output growth is not breaking any speed records, it is positive.

Understanding the pattern

The explanation for the jobs picture is not simple, but the Cliff Notes version is as follows: manufacturing employment has been declining as a share of total economy-wide employment for 50 years or more—a pattern that holds for all advanced economies, even Germany, a country known for its manufacturing strength. The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector. This conclusion probably comes as a surprise to most Americans who believe that international trade, and trade with China in particular, is the key reason for the loss of jobs. In reality, trade is a factor in manufacturing weakness, but not the most important one.

The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector.

The existence of our large manufacturing trade deficit with Asia means output and employment in the sector are smaller than they would be with balanced trade. Germany, as noted, has seen manufacturing employment declines also, but the size of their manufacturing sector is larger than ours, running huge trade surplus. In addition, right now that there is global economic weakness that has caused a shift of financial capital into the U. S. looking for safety, raising the value of the dollar and thus hurting our exports. In the next few years, it is unlikely that the U.S. trade deficit will improve—and it may well worsen.

Even though it will not spark a jobs revival, manufacturing is still crucial for the future of the U.S. economy, remaining a center for innovation and productivity growth and if the U.S. trade deficit is to be substantially reduced, then manufacturing must become more competitive. The services sector runs a small trade surplus and new technologies are eliminating our energy trade deficit. Nevertheless a substantial expansion of manufactured exports is needed if there is to be overall trade balance.

Disruptive innovation in manufacturing

The manufacturing sector is still very much alive and reports of its demise are not just premature but wrong. If we want to encourage the development of a robust competitive manufacturing sector, industry leaders and policymakers must embrace new technologies. The sector will be revived not by blocking new technologies with restrictive labor practices or over-regulation but by installing them—even if that means putting robots in place instead of workers. To speed the technology revolution, however, help must be provided to those whose jobs are displaced. If they end up as long-term unemployed, or in dead-end or low-wage jobs, then not only do these workers lose out but also the benefits to society of the technology investment and the productivity increase are lost.

The manufacturing sector performs 69 percent of all the business R&D in the U.S. which is powering a revolution that will drive growth not only in manufacturing but also in the broader economy as well. The manufacturing revolution can be described by three key developments:

1. In the internet of things, sensors are embedded in machines, transmitting information that allows them to work together and report impending maintenance problems before there is a breakdown.
2. Advanced manufacturing includes 3-D printing, new materials and the “digital thread” which connects suppliers to the factory and the factory to customers; it breaks down economies of scale allowing new competitors to enter; and it enhances speed and flexibility.
3. Distributed innovation allows crowdsourcing is used to find radical solutions to technical challenges much more quickly and cheaply than with traditional R&D.

In a June 2015 Fortune 500 survey, 72 percent of CEOs reported their biggest challenge is that technology is changing fast, naming it as their number one challenge. That new technology churn is especially acute in manufacturing. The revolution is placing heavy demands on managers who must adapt their businesses to become software companies, big data companies, and even media companies (as they develop a web presence). Value and profit in manufacturing is shifting to digital assets. The gap between current practice and what it takes to be good at these skills is wide for many manufacturers, particularly in their ability to find the talent they need to transform their organizations.

Recent OECD analysis highlighted the large gap between best-practice companies and average companies. Although the gap is smaller in manufacturing than in services because of the heightened level of global competition in manufacturing, it is a sign that manufacturers must learn how to take advantage of new technologies quickly or be driven out of business.

Closing the trade deficit

A glaring weakness of U.S. manufacturing is its international trade performance. Chronic trade deficits have contributed to the sector’s job losses and have required large-scale foreign borrowing that has made us a net debtor to the rest of the world -- to the tune of nearly $7 trillion by the end of 2014. Running up endless foreign debts is a disservice to our children and was one source of the instability that led to the financial crisis. America should try to regain its balance as a global competitor and that means, at the least, reducing the manufacturing trade deficit. Achieving a significant reduction in the trade deficit will be a major task, including new investment and an adjustment of today’s overvalued dollar.

The technology revolution provides an opportunity, making it profitable to manufacture in the U.S. using highly automated methods. Production can be brought home, but it won’t bring back a lot of the lost jobs. Although the revolution in manufacturing is underway and its fate is largely in the hands of the private sector, the policy environment can help speed it up and make sure the broad economy benefits.

First, policymakers must accept that trying to bring back the old days and old jobs is a mistake. Continuing to chase yesterday’s goals isn’t productive, and at this point it only puts off the inevitable. Prioritizing competitiveness, innovativeness, and the U.S. trade position over jobs could be politically difficult, however, so policymakers should look for ways to help workers who lose jobs and communities that are hard hit. Government training programs have a weak track record, but if companies do the training or partner with community colleges, then the outcomes are better. Training vouchers and wage insurance for displaced workers can help them start new careers that will mostly be in the service sector where workers with the right skills can find good jobs, not just dead-end ones.

Second, a vital part of the new manufacturing is the ecosystem around large companies. There were 50,000 fewer manufacturing firms in 2010 than in 2000, with most of the decline among smaller firms. Some of that was inevitable as the sector downsized, but it creates a problem because as large firms transition to the new manufacturing, they rely on small local firms to provide the skills and even the technologies they do not have in-house. The private sector has the biggest stake in developing the ecosystems it needs, but government can and has helped, particularly at the state and local level. Sometimes infrastructure investment is needed, land can be set aside, mentoring programs can be established for young firms, help can be given in finding funding, and simplified and expedited permitting processes instituted.

It is hard to let go of old ways of thinking. Policymakers have been trying for years to restore the number of manufacturing jobs, but that is not an achievable goal. Yes manufacturing matters; it is a powerhouse of innovation for our economy and a vital source of competitiveness. There will still be good jobs in manufacturing but it is no longer a conveyor belt to the middle class. Policymakers need to focus on speeding up the manufacturing revolution, funding basic science and engineering, and ensuring that tech talent and best-practice companies want to locate in the United States.

Productivity, which is the output produced by each hour of work in the non-farm business sector, grew at a paltry 1.2 percent a year in the 10 years through the third quarter of this year. In the prior decade, the growth rate was more than double, at around 3 percent a year. The question is what it means.

High-wage workers have done better than the average Joe; and profits have grown faster than wages, but productivity growth is even more important — it is the rising tide that lifts most boats. Average wages grew at more than 2 percent a year during the years of strong productivity growth and are growing at under 1 percent a year now.

The pace of the productivity increase is also vital to the nation’s finances. The last balanced federal budgets came after the fast-growth 1990s, which drove up incomes, profits and tax revenues. Today there are scary forecasts of the size of future budget deficits, and those forecasts are set to become much scarier unless productivity improves.

Slow productivity growth does not have the drama of Janet Yellen arguing with angry senators. It is a problem like termites in the attic where you don’t realize it exists until the roof collapses. And, even worse, it is a problem where there is no generally recognized explanation, nor are there obvious solutions.

One possible explanation, put forward by leading economist Robert Gordon, is that all the best innovations have been used up. He looks at the broad sweep of history, describing the age of steam, the age of electricity, and so on. The last wave, he argues, is the one fueled by the technology bubble, and it ran its course 10 years ago.

Gordon’s diagnosis is hard to swallow, however, as technology is changing all around us. A June 2015 survey of the Fortune 500 companies asked CEOs to list the biggest challenges they face, and their number-one answer by far was the challenge of rapid technological change. Any visitor to Silicon Valley or Cambridge, Massachusetts, is impressed by the pace of change.

There seems to be a major gap occurring between the cup and the lip. Technology changes apace, but the changes are apparently not translating into more efficient factories and offices.

One reason for this could be a lack of investment in business and human capital —the skills of the workforce. The Great Recession certainly put a damper on all forms of investment and the recovery has been sluggish. Regardless of what caused the slowdown, a boost to investment would help productivity.

Another possibility is that economic data are not capturing the fruits of innovations. Improved surgical procedures, new drugs and better treatment protocols allow hospitals to become more productive, but this large sector of the economy shows almost no measured productivity growth. Silicon Valley is turning out new apps to make our lives easier, but very little of this activity shows up in our productivity statistics.

Another clue to the productivity problem is that, for some reason, the dynamism of the U.S. economy seems to have faded. The number of startups is down, especially the so-called gazelles that grow fast and become much more productive.

Traditionally, a source of productivity growth has been the expansion of the most productive firms and the contraction of the less productive, and this dynamic has also slowed, perhaps due to diminished access to funding, or maybe regulation has become more burdensome.

While the cause of the problem and the nature of the solution remain uncertain, there is a lot of exciting research going on to understand productivity better and formulate policies to enhance it. If misery loves company, the United States should feel better because weak productivity is a problem for all advanced economies.

Moreover, understanding slow growth is not just a challenge for “experts.” Many of the latest best ideas are coming from the global community. Perhaps a new explanation for and solution to the productivity problem will bubble up from the new interconnected world.

Editor's Note: this piece first appeared in Inside Sources. 

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The White House Council of Economic Advisers (CEA) was created by Congress in 1946 to advise the president on ways “to foster and promote free competitive enterprise” and “to promote maximum employment, production and purchasing power.” President Truman, who signed the Employment Act of 1946 into law, was unenthusiastic about the Council and didn’t nominate members for nearly six months. Yet the CEA, comprised of three individuals whom Congress says are to be “exceptionally qualified,” has not only survived but also prospered for 70 years and remains an important part of the president’s economic policy decisionmaking.

On February 11, the Hutchins Center on Fiscal and Monetary Policy at Brookings marked this anniversary by examining the ways the CEA and other economists succeed and fail when they set out to advise elected politicians and tap the expertise of some of the “exceptionally qualified” economists who have chaired the Council over the past four decades.

You can join the conversation and tweet questions for the panelists at #CEAat70.

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• Panel 1: The CEA in Moments of Crisis
• Panel 2: The CEA and Policymaking
• Panel 3: Current Economic Policy Issues

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• The Council of Economic Advisers: 70 years of advising the president

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• Uncorrected Transcript (.pdf)

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On July 20 and 21, defense ministers from several nations will gather in Washington, D.C. at the invitation of U.S. Secretary of Defense Ash Carter. The meeting will bring together representatives from countries working to confront and defeat the Islamic State (or ISIL). French Defense Minister Jean-Yves Le Drian will be among those at the summit discussing how to accelerate long-term efforts to fight ISIL in Iraq and Syria. The close relationship between France and the United States has provided a solid base for security cooperation for decades, and in recent years, France has become one of America’s strongest allies in fighting terrorism and a prominent member of the international coalition to defeat ISIL.

On July 20, the Foreign Policy program at Brookings hosted Minister Le Drian for a discussion on French and U.S. cooperation as the two countries face multiple transnational security threats. Since becoming France’s defense minister in 2012, Le Drian has had to address numerous new security crises emerging from Africa, the Middle East, and within Europe itself. France faced horrific terrorist attacks on its own soil in January and November 2015 and remains under a state of emergency with its armed forces playing an active role in maintaining security both at home and abroad. Le Drian recently authored “Qui est l’ennemi?” (“Who is the enemy?”, Editions du Cerf, May 2016), defining a comprehensive strategy to address numerous current threats.

Join the conversation on Twitter using #USFrance

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• Introduction et conférencier invité
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An individual-based computational model of smallpox epidemics in a two-town county is presented and used to develop strategies for bioterror containment. A powerful and feasible combination of preemptive and reactive vaccination and isolation strategies is developed which achieves epidemic quenching while minimizing risks of adverse side effects. Calibration of the model to historical data is described. Various model extensions and applications to other public health problems are noted.

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As the recent primary in Delaware attests, this year's midterm elections continue to offer unexpected twists and raise large questions. Will the Republicans take over the House and possibly the Senate? Or has the Republican wave ebbed? What role will President Obama play in rallying seemingly dispirited Democrats -- and what effect will reaction to the sluggish economy play in rallying Republicans? Is the Tea Party more an asset or a liability to the G.O.P.'s hopes? What effect will the inevitably narrowed partisan majorities have in the last two year's of Obama's first term? And how will contests for governorships and state legislatures around the nation affect redistricting and the shape of politics to come?

On October 4, a panel of Brookings Governance Studies scholars, moderated by Senior Fellow E.J. Dionne, Jr., attempted to answer these questions. Senior Fellow Thomas Mann provided an overview. Senior Fellow Sarah Binder discussed congressional dynamics under shrunken majorities or divided government. Senior Fellow William Galston offered his views on the administration’s policy prospects during the 112th Congress. Nonresident Senior Fellow Michael McDonald addressed electoral reapportionment and redistricting around the country.

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• Partisan Gridlock post-Elections?
• GOP Influence over Redistricting, Reapportionment
• Working Within Divided Government
• Good Conditions for GOP in 2010 Midterms

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• Midterm Elections 2010: Driving Forces, Likely Outcomes, Possible Consequences

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