The economy, however, has moved on, and policies that might have worked in the heyday of our last presidents would have little impact now. The simple fact is that the US economy is no longer dominated by manufacturing, giving way to services. The way forward is through policies that lead to a more vibrant economy by making it less burdensome to start a business, enabling different types of work, providing education for workers of all ages, and new models of unionization that offer insurance for the self-employed while allowing them to negotiate their own wages and hours.
We tend to idealize the economy of the past because there were more unionized manufacturing jobs that provided good, stable jobs that didn’t require a college degree. This was partly because after World War II the stock of capital in other countries was destroyed, which meant that American industry could dominate and earn a large bounty which it shared with its workers. But the rest of the world has caught up, the global economy has become more competitive and has disrupted trade, advances in technology have led to efficiencies and the premium has shrunk. In 1970, manufacturing accounted for about 25% of nominal U.S. gross domestic product, but had fallen to just 11% by 2020.
It may be tempting to fight against these forces, especially trade and technology, and the change they bring, but this serves neither workers nor consumers. For consumers, this only means higher prices. And while protecting workers from global trade may benefit them in the short term, it makes them less competitive and unable to work with new technologies in the long term.
Both presidents attempted to revive manufacturing and related jobs using grants and credits. Trump’s ill-fated attempt to build a factory for Foxconn (the maker of the iPhone) in Wisconsin at great taxpayer expense proved that approach to be short-sighted. Some 13,000 manufacturing jobs were promised in Wisconsin, but only 3,000 materialized, most of which went to engineers and programmers, not those left behind by business and technology. It wasn’t just an execution failure; most American workers lack the skills and cost too much to make the inputs Foxconn needs. It’s also why the outlook for Biden’s Chips Act, which aims to boost domestic semiconductor manufacturing, looks just as bleak and more expensive.
Such efforts to revive the country’s manufacturing past do not work because they do not address the root cause of the decline of the manufacturing industry. To be clear, American workers have a future in manufacturing things, but what it will look like cannot be predicted and directed by the government, and it certainly won’t look like the manufacturing industry of the past. That’s because American labor is more expensive and better educated than ever, and the country’s comparative advantage now lies in services and more skilled manufacturing. A better use of resources is to lower barriers to entrepreneurship, invest in skills training for Americans of all ages, and let the market determine the future of what’s made in America. Economists have estimated that if the money spent on the Foxconn debacle had been in the hands of entrepreneurs, 90,000 jobs would have been created instead of 3,000.
For most of the post-war period, there were great advantages in building up what economists call firm-specific capital, that is, knowledge of how things work in a particular company. If you worked at Ford Motor Co., you knew how cars are made at Ford, and if you worked as an office administrator, you knew how to format documents in a way unique to your employer. But technology has made work more similar across companies: everyone uses Microsoft Word or Google Docs. Technology also means companies can better track worker productivity. These trends mean that there is less value in firm-specific capital and more in individual capital. In other words, there are bigger gains to be made by developing your own skills and being a star employee.
When there was more value in firm-specific capital, there was also a greater return on union membership. Workers had less power because so much of their value was tied to a single employer, when there is now a high return to changing jobs. Unions worked by bringing all employees together for similar pay and benefits in exchange for greater security, which meant that highly productive employees subsidized less productive ones. When there were fewer gains to being an above-average worker, the extra stability was worth it. Now that’s less true, which is one of the reasons many labor campaigns fail. In 1983, more than 20% of workers were union members. In 2021, it was only 10.3% and most of them worked for the government.
Nowadays, there are also more advantages to being a contract worker than a worker tied to a single employer. Many workers appreciate the flexibility, especially after experiencing remote work during the pandemic. Yet the current administration is also fighting this trend, pushing to classify gig workers as employees in another attempt to make jobs more like they used to be.
In fairness, both Trump and Biden have been trying to solve real problems in a transitioning economy that works for well-educated or skilled people, but leaves many others behind. Trade and technology have destroyed the way of life of many, but the solution is not a return to the past of unionized manufacturing. Giving all types of workers the chance to thrive will require some policy and market experimentation. It takes creativity and forward-looking leadership, rather than trying to revive the past.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Allison Schrager is a Bloomberg Opinion columnist covering the economy. A senior fellow at the Manhattan Institute, she is the author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk”.
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