However, the economy has evolved, and policies that would have worked during the heyday of our recent presidents would have little impact today. The simple fact is that the US economy is no longer dominated by manufacturing and is giving way to services. The way forward means policies that lead to a more dynamic economy by making starting a business less onerous, enabling different types of work, providing education for workers of all ages, and offering new models of unionization that reassure independent workers but they still allow negotiate their own wages and hours.
We tend to idealize the economy of the past because there were more unionized manufacturing jobs that offered good, stable jobs that didn’t require a college degree. This was partly because after World War II capital stocks in other countries were devastated, meaning American manufacturing was able to dominate and earn a large premium to share with its workers. But the rest of the world was catching up, the global economy became more competitive and trade was turned upside down, technological advances led to efficiencies and the premium shrank. In 1970, manufacturing accounted for about 25% of nominal US gross domestic product, but by 2020 it had fallen to just 11%.
It may be tempting to fight these forces, especially trade and technology, and the changes they bring, but it serves neither workers nor consumers. For consumers, this only means higher prices. And while shielding workers from global trade may benefit them in the short term, in the long run it makes them less competitive and unable to work with new technologies.
Both presidents tried to revitalize manufacturing and related jobs through the use of subsidies and credit. Trump’s ill-fated attempt to build a factory for Foxconn (the maker of the iPhone) in Wisconsin at high taxpayer expense proved that this approach was short-sighted. About 13,000 manufacturing jobs were promised in Wisconsin, but only 3,000 materialized, most of which went to engineers and programmers, not to those left behind by trade and technology. This wasn’t just an execution error; most American workers lack the skills and are too expensive to provide the inputs Foxconn needs. Because of this, the outlook for Biden’s Chips Act, which aims to boost domestic semiconductor manufacturing, looks equally bleak and expensive.
Such efforts to revitalize the country’s manufacturing heritage are failing because they fail to address the root cause of manufacturing’s decline. To be clear, American workers have a future in making things, but what it will be like cannot be predicted or controlled by the government, and it certainly will not resemble the manufacturing industry of the past. That’s because America’s labor force is more expensive and better educated than ever before, and the country’s comparative advantage is now in the service sector and higher-skilled manufacturing. Better use of resources is to remove the barriers to entrepreneurship, invest in educating Americans of all ages, and let the market determine the future of what’s made in America. Economists estimate that if the money spent on the Foxconn debacle were 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 benefits in building up what economists call firm-specific capital, ie knowledge of how things are done in a given firm. If you worked at Ford Motor Co. it was knowledge of how cars are made at Ford, and if you worked as an office clerk you knew how to format documents in a way unique to your employer. But technology has made corporate work more similar: everyone uses Microsoft Word or Google Docs. Technology also means companies can better track the productivity of their employees. These trends mean that company-specific capital is worth less and more individual capital. In other words, there are bigger wins to be had by building your own skills and becoming a star collaborator.
When company-specific capital was of greater value, there was a greater return on union membership. Workers had less power as much of their value was tied to an employer, while there is now a high rate of return for a job change. Unions worked so that all employees would join together for similar wages and benefits in exchange for more security, which meant that highly productive employees subsidized less productive ones. When there were fewer benefits from being an above-average worker, it was worth the extra stability. That is less true now, which is one of the reasons many union drives 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.
Today, there are also more benefits to being a contract worker than being tied to a single employer. Many workers value flexibility, especially after experiencing remote work during the pandemic. But the current government is also tackling this trend, pushing to reclassify gig workers as employees to get jobs back to how they used to be.
In fairness, Trump and Biden must both seek to address real issues in a changing economy that works for the well-educated or skilled but leaves many others behind. Trade and technology have destroyed the way of life for many, but the solution is not a return to the unionized manufacturing past. Giving all types of workers a chance to succeed requires some experimentation in politics and markets. This requires creativity and leadership that is open to the future rather than trying to bring back the past.
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Allison Schrager is a columnist for the Bloomberg Opinion on economics. She is a Senior Fellow at the Manhattan Institute and the author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.
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