Policy Report

October 2003

The Bush Manufacturing Crisis

by Robert D. Atkinson
Since January 2001, the United States has lost 3.3 million private sector jobs, over 2.4 million of them in manufacturing. 1 The hemorrhaging of factory jobs has gotten bad enough for the media and official Washington to take notice. Even the Bush White House, with its laissez-faire ideology and its political aversion to recognizing bad news, has finally admitted there is a problem. The precipitous decline in manufacturing jobs has led to an intense debate over the causes and the solutions. On the one hand, many conservatives are sanguine, claiming that factory job loss is simply the natural result of market forces and technological change. On the other hand, many liberals blame trade and unfair foreign competition. Given the almost daily news stories of U.S. manufacturers moving jobs to China, this latter explanation has a visceral appeal to many Americans. However, neither explanation paints a complete picture. PPI estimates that during the Bush administration about 30 percent of lost manufacturing jobs were caused by an increase in the trade deficit. Higher factory productivity was responsible for about 40 percent of the loss, while slower growth in the demand for goods (as compared to services) caused the remaining 30 percent. Government should not intervene to prevent job losses from higher productivity. But since 60 percent of the job losses under this president are unrelated to productivity, it is reasonable to focus on the kinds of active steps government can take to help manufacturing. Unfortunately, the Bush administrations economic ideology precludes it from taking such steps. Even worse, its commitment to shrinking the federal government has meant cutting funds for programs to help manufacturers compete and laid-off manufacturing workers to adjust. Instead of an administration that can only promise good times are around the corner, we need an administration that will take the needed steps to boost U.S. manufacturing competitiveness. There are three principal areas where government can help. First, the best way for the United States to compete is through innovation, both by developing the next generation of innovative manufactured products and by using technology to dramatically boost productivity. As a result, government should boost technological innovation by: " establishing a next-generation manufacturing R&D initiative; " establishing an Industry Research Alliance Challenge Grant Fund; " doubling the funding of the Manufacturing Extension Partnership; " fully funding the Enterprise Integration Act; and " promoting the digital economy to drive investment in information technology (IT). Second, it is important to get trade policies right. Most importantly, this means not giving into protectionist impulses. However, we should also: " provide incentives for developing nations to develop and enforce higher labor and environmental standards; " help manufacturers, particularly small and mid-sized companies, to better access foreign markets; and " ensure that the price of currencies, including the dollar, adjust to trade imbalances.

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Third, manufacturing job dislocation will continue even in the best of times. Therefore, we need to take steps to help laid-off manufacturing workers adjust, including: " expanding and modernizing unemployment insurance system; the

" consolidating federal training programs into a National Skills Corporation; " transferring funds for dislocated worker programs to a New Economy Scholarship Program for dislocated workers to use for training or outplacement services; and " expanding health insurance tax credits for laid-off workers.

Why Is Manufacturing Important?

Is there justification for focusing policy on a specific sector of the economy? Indeed there is, but it should be done for the right reasons. Most of the claims about the importance of manufacturing are incorrect or overstated. Some argue that the real economy is about making things, while providing services is a second-class activity; the reality is that our economic well-being is determined by the productivity of the entire economy, not any one sector. Some argue that manufacturing provides good jobs, while service workers are more likely to be flipping hamburgers at minimum wage; the reality is that the wages in many service sectors exceed those in manufacturing. Some argue that without manufacturing jobs, workers would not have any jobs at all; the reality is that as manufactured goods become cheaper (either through trade or technology), consumers spend the savings on other things (e.g., a vacation, broadband, a college education) and in turn create jobs in these industries (e.g., hotels, telecommunications, universities). This does not, however, mean that we should be indifferent to the health of the manufacturing sector. But the concern with manufacturing relates principally to the economic well-being of the next generation of Americans. Manufacturing accounts for the

largest component of our trade balance and a weak manufacturing sector leads to a larger trade deficit. Since the trade deficit cannot continue to grow indefinitely, foreigners will at some point stop reinvesting their dollars in the United States, leading to a significant deterioration of the value of the dollar. This in turn will reduce the economic well-being of the next generation as they are forced pay more for imports. Without action now, the day of reckoning will come at the same time that our nation is burdened with the baby boomers retirement bill and a huge national debt. Therefore, the principal reason to be concerned with the health of manufacturing relates to its key role in determining the trade balance. If Americans are going to import goods, we must have something that other nations want to buythats why it is called trade and not borrow. 2 Even with extremely low costs in other nations, there is no inherent reason why America has to run a trade deficit. Although developing nations pay lower wages, their factories are much less productive. Moreover, a lower value of the dollar should offset some of the cost disadvantage and help bring our exports and imports into balance. Some who downplay the problem of the trade deficit argue that large manufacturing trade deficits can be offset by equally large service trade surpluses. Conceptually, this is true, running a trade surplus in services as large as the deficit in goods would eliminate the trade deficit and be a perfectly acceptable outcome. Unfortunately, for the foreseeable future, this is extremely unlikely to happen. The trade surplus in services was just $78 billion in 2002 (the goods deficit was $583 billion), up from just $70 billion in 1993. In spite of the growth of global telecommunications and information technology, which make it easier to trade services across borders, the extent services are traded is still dwarfed by goods and will be for at least a couple of decades.3 Moreover, it is possible that the same forces that have led to a deterioration of our manufacturing trade balance would work on at least some of our service sectors. Finally, it is important to define the health of manufacturing. Some wrongly equate it

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solely with the number of factory jobs. Yet, a more productive manufacturing sector is likely to lead to fewer jobs as companies produce more with fewer workers. More accurate indicators of the health of manufacturing are the rate of productivity growth and the ability to be competitive with manufacturers in other nations.4

just 13 percent of total jobs) suggests that something else other than an economic slowdown is the principal culprit.

Is Productivity To Blame?
The Bush administration claims that the hollowing of manufacturing under its watch is just a continuation of the longer trend of superior manufacturing productivity. Glen Hubbard, former chairman of the Council of Economic Advisers under Bush, argues that the decline in manufacturing employment resembles that in agriculture in the last century, in which robust productivity growth characterized American performance, and millions of workers exited agriculture for other segments of the economy.6 Hubbard is only partially correct. It is true that higher productivity is an important factor in the loss of manufacturing jobs as a share of total jobs. From 1992 to 2003, manufacturing productivity increased 49 percent, compared to around 23 percent in the non-manufacturing business sector. As a result, manufacturers were able to produce more with fewer workers relative to the rest of the economy. During the Clinton administration, higher productivity was an even greater factor in why the share of manufacturing jobs declined, accounting for about 60 percent

Why Have Job Losses Accelerated?

The United States added 257,000 manufacturing jobs during the Clinton administration. In contrast, 2.4 million manufacturing jobs have been lost during the Bush administration. 5 While the Bush administration is not directly responsible for most of these losses, it has done little to reverse them, and in some ways has exacerbated them. Bush administration officials offer myriad explanations to deflect blame, from a slower economy, to higher productivity growth, to the value of the Chinese currency. A closer look suggests a more complex picture. There is no doubt that the stagnant economy and overall loss of jobs has played a role. However, the fact that 87 percent of the jobs lost under Bush have been in manufacturing (which in 2001 accounted for

Figure 1

Manufacturing Employment Change

20
Millions of jobs

19 18 17 16 15 14

93

94

95

96

97

98

99

00

01

02 20

19

19

19

19

19

19

19

20

20

Years
Source: Bureau of Labor Statistics.

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of the declining share of factory jobs.7 Under Clinton, manufacturing employment increased by about 250,000 jobsbut as total employment grew, manufacturing jobs fell from around 15.4 percent to 13 percent of total employment.8 In contrast, during the Bush administration, higher productivity has been responsible for only about 40 percent of the loss of manufacturing jobs.9 More than 60 percent of the losses (1.4 million jobs) have nothing to do with productivity. In defending the Bush administrations manufacturing record, Hubbard also points to the fact that as a share of GDP, goods production is higher in the Bush administration than in years past. Indeed, Bureau of Economic Analysis (BEA) data show that goods output as a share of GDP jumped from 36.1 percent in 1993 to 39.3 percent in 2003, suggesting at first glance that, indeed, all is well.10 However, because the goods measured include software, the value-added of wholesalers and retailers, and other industries such as mining and construction, it does not accurately reflect changes in manufacturing output. The more accurate measure comes from BEAs real GDP by industry data series, which suggests a very different story. These data show that, when controlling for inflation, manufacturings share of GDP declined from 17.6 percent in 1988 to 16.1 percent in 2002. This defeats the Bush administrations claim that manufacturing is growing relative to the economy. This decline in manufacturings share of GDP could have come about only one of two ways: Either Americans consumed fewer manufactured goods relative to the rest of the economy, or they consumed the same or more, but imported an increased share.

factured goods was responsible for approximately 17 percent of the decline in the share of manufacturing jobs. In other words, had Americans consumption of manufacturing goods grown as fast as their consumption of services in the 1990s, manufacturing employment would have been 17 percent higher than it was in 2000. However, during the Bush administration, the pace of job loss due to relatively slower growth in manufacturing demand has accelerated, accounting for approximately 30 percent of the relative loss of factory jobs. One reason is because while the consumption of manufactured goods went up in the Clinton administration (2 percent)although less rapidly than non-manufactured goods and services (14 percent)consumption of factory goods has actually fallen 3 percent during the Bush administration. This falloff has been particularly acute in the capital goods sector (equipment sold to businesses to help them produce goods). 11 For example, business investment in computers and machinery grew 3.93 percent per year during the Clinton administration, but has declined one-half of 1 percent per year during the Bush administration. This is a key reason why employment has fallen so rapidly in the high-tech sector. The decline in demand has been caused in part by the bursting of the high-tech bubble: Companies and consumers who purchased large quantities of high-tech goods in the late 1990s needed much fewer in the last few years.

Is Trade Killing U.S. Manufacturing?

Many on the left blame trade for most of our manufacturing woes as vociferously as conservatives attribute the losses to a decline in productivity. The reality is somewhere in between. There is no doubt that a rising trade deficit in goods ($628 billion in the second quarter of 2003 at an annualized rate) has played a role in job loss. However, only about 25 percent of the decline in manufacturing job share during the Clinton administration came from trade, and much of this was in lower-skilled consumer goods industries, such as textiles and apparel, that compete largely on cost.12 Since Bush took office, the impact from trade has increased somewhat, with about 30

Is Declining Demand for Manufactured Goods the Problem?

Even though manufactured goods are getting cheaper relative to services, Americans are consuming services at a more rapid pace than goods. As incomes go up, Americans are more likely to go out to dinner and a movie, take a vacation, open a mutual fund, or get more health care than they are to buy a car or new furniture. During the Clinton administration, slower growth in the consumption of manu-

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Figure 2

Per Quarter Change in Manufacturing Employment, Output and Trade

2 1 0 Change -1 -2 -3 -4 -5 Clinton Administration Bush Administration
Employment (in 100 thousands) Output (in 10s of billions of $) Trade Balance (in 10s of billions of $)

percent of the loss of manufacturing job share stemming from an increase in the trade deficit. In relation to the loss of jobs from productivity, however, the trade losses are 62 percent higher in the Bush administration than in the Clinton administration. Moreover, the annual rate of manufacturing job loss due to trade is over 40 percent higher under Bush than Clinton. Some sectors have been hit particularly hard. Of the $152 billion increase in the trade deficit during the Bush administration, $36 billion has been in computers, parts, and peripherals, with another $50 billion in consumer products, excluding autos. In some sectors, such as computers (-$23 billion) and other capital goods (-$49 billion), a drop in exports has caused ballooning trade deficits. Others, such as consumer durables and non-durables ($45 billion) and autos ($20 billion), have seen a huge jump in imports. It is possible that the losses due to trade for certain sectors could accelerate, particularly if currency issues are not dealt with. For example, the Chinese government has targeted the semiconductor industry for development, and has provided a significant amount of subsidies to attract new chip-making plants to China.13

The Bush Response to the Manufacturing Crisis

As stories of the manufacturing plight reach Washington, the White Houses response is instructive. There are some in the administration, the same people that pushed for Bushs politically inspired tariffs on steel and lumber, who want to do something anythingto show that they are responding, particularly as the 2004 election nears, with industrial Midwest states as key battlegrounds. On the other hand, the administrations supply-side inspired economic chiefs argue that focusing on a particular sector, even one as broad as manufacturing, is the last thing government should do, for that means picking winners and engaging in industrial policy. Moreover, for this archly conservative administration, anything involving investing public funds runs counter to its greater mission of cutting taxes and reducing the size and scope of the federal government. As a result, Bush has taken only the meekest of actions, limited largely to repeating the tired mantra that budget-busting tax cuts will produce a recovery and claiming that policy actions taken for other reasons (e.g., energy policy) are actually part of its manufacturing agenda. The reality is

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that much of what the administration has done is making the manufacturing situation worse.

Skyrocketing Budget Deficits

Instead of leading to recovery, Bushs large and permanent tax cuts are making things worse. First, investors have lost any confidence they might have once had that the federal government cares about budget deficits. Without the assurance that the federal government can and will keep its fiscal house in order, businesses and investors are jittery, not sure exactly what will happen. The record budget deficits have another equally bad effect, which is to draw in even more foreign capital to finance the public debt.14 As foreigners recycle the dollars Americans spend on imported goods back to buy our Treasury notes, the result is that the value of the dollar is kept higher than the market (of trade in goods and services) would otherwise dictate. Moreover, until recently, the administration consciously pursued a strong dollar strategy, for example, pledging to defend the dollar against the euro. Both actions preclude the kinds of natural market corrections to the value of the dollar that would help reduce imports and boost exports.

assistant secretary of commerce for Manufacturing and Services. Rather than creating a special position to focus on ensuring the health of the manufacturing sector, they have watered it down by giving this person a portfolio that includes services. By doing this, they are essentially creating an assistant secretary of the economy. The rest of the administrations socalled manufacturing agenda consists of little more than relabeling policy initiatives from other areas, such as health care and energy, as manufacturing policy. For example, the administration touts its energy policy as helping manufacturing, despite the fact that energy issues have played no role in the manufacturing downturn.

Cutting Programs to Help Manufacturers and Manufacturing Workers

When it comes to taking concrete steps to help manufacturing employers and employees, this administration is doing the opposite. In their zeal to cut the budget, they have slashed funding for the very programs that have proven effective at helping manufacturers become more productive and innovative. The list of proposed cuts in the Bush administrations 2004 budget includes: " Eliminating the Manufacturing Extension Partnership (MEP), a highly effective program where experienced manufacturing engineers help small and medium-sized manufacturers adopt new technologies and work-organization practices to be more competitive. " Cutting all funds for the 2002 Enterprise Integration Act that calls on the National Institute of Standards & Technology (NIST) to develop and implement standards and protocols to enable manufacturing industries and the businesses who supply them to electronically exchange product- and standards-related information. Without the $15 million Congress authorized, the effort is stillborn. " Cutting funding to Mantechthe exemplary Department of Defense (DOD) program that supports research and

Higher Tariffs
At the same time, the administrations protectionist schemes, particularly its tariffs on steel and, to a lesser extent, lumber and sugar, have hurt manufacturing as a whole. In fact, even the administrations economic advisors admit that the steel tariffs have cost manufacturing jobs among the large number of manufacturing companies that use steel.15 According to Glen Hubbard, the steel tariffs did hurt manufacturing, no question about it. 16

Empty Promises
After driving up the budget deficit and tariffs on intermediate goods that manufacturers use, the administration is desperately trying to show that it has a plan. Yet, its actions are, at best, public relations gimmicks with little substance. Emblematic of this strategy was the presidents recent announcement of the creation of a new

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development of advanced manufacturing technologiesby 18 percent. " Eliminating the Advanced Technology Program, which is run by NIST to help cofundlargely with manufacturing companieshigh-risk, early-stage research. " Cutting funding for the Department of Energys Industrial Technologies Sector Program by 60 percent, or $36 million.17 This administration is not content with eliminating programs to help manufacturers become more innovative and productive, it is also cutting programs that could help the 2.4 million manufacturing workers who have lost their jobs on the Bush watch. The administration has: " Opposed temporarily extending unemployment insurance benefits for workers who have exhausted them. " Cut funding for job search assistance and employment retraining. Federal funding per dislocated worker has fallen from about $300 in the last year of the Clinton administration to just $161. " Proposed cutting funds for adult vocational education by 40 percent and allowing some of the remaining money to be spent on general K-12 education. " Eliminated the National Skills Standard Board, an industry-led group focused on establishing and implementing a national system of skill standards, particularly for manufacturers.

promise that it is possible to create more than a modest number of additional manufacturing jobs. The goal should not even principally be to boost demand for manufactured goods. A growing economy will help restore manufacturing demand as it leads to a rebound in the capital goods sector. But this should happen on its own, especially if we have an administration that adopts the right policies. The most important goal for manufacturing policy is to reduce the trade deficit in goods by increasing the competitiveness of U.S. manufacturers. This will not only lead to increased exports, but also reduced imports, particularly in high-value- added manufactured goods. As discussed above, the trade deficit serves as a hidden tax on the next generation of Americans. Unfortunately, this administrations economic ideology precludes it from taking active steps to help, and its political ambition leads it to take steps that hurt manufacturing. There are, however, a range of things that Washington can do to help manufacturing. These include:

1) Support Research and Development to Help Create the Next-Generation Manufacturing Economy
At the end of the day, the best way for the United States to compete is through innovation, both by developing the next generation of innovative manufactured products and using technology to dramatically boost productivity. Moreover, a next-generation manufacturing economy is also critical to keeping our military strong, as that requires new, more flexible and responsive manufacturing capabilities. In addition, this would reinvigorate manufacturing, drawing in talent and expertise that might now go to other sectors that appear more interesting or rewarding. New technology will therefore play a key role in any manufacturing policy. There are a number of promising areas, including: the use of new materials such as nanotechnology; intelligent process controls and systems to create much more automated factories; more flexible factories that can operate at a low cost, even with customized products; and e-commerce to drive costs out of the logistics system.

What Should Washington Do and Not Do?

Before determining what Washington should do to help manufacturing, it is important to first identify an appropriate and realistic goal. The focus should not be to increase or even preserve manufacturing jobs, for the easiest way to do this would be to take steps to slow down productivity growth. In fact, no responsible elected official can honestly

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Partnerships between the federal government and industry can speed up development and widespread deployment of these technologies. Just as the federal government played a critical role in past manufacturing innovationsincluding computer-controlled machines, optics, robotics, and composite materialsit can play a key role in the next transformation. Relative to the need, however, the federal government does little in this areagovernment investment in basic and applied research devoted to manufacturing is only around 2 percent of total federal research spending. 18 Moreover, the private sector is investing less in this kind of early stage manufacturing research and development (R&D). There are several steps that Congress could take: " Establish a next-generation manufacturing R&D initiative. There are many research areas with the potential to create a next generation manufacturing economy, including research on machinery and equipment, materials processing, and nano-engineering. This program could be run through the National Science Foundations Division of Design, Manufacture and Industrial Innovation which focuses on fundamental research. Congress should also pass and fund the Udall-Ehlers legislation reauthorizing NIST, which increases the funding for NIST, including the manufacturing engineering lab.19 " Establish an Industry Research Alliance Challenge Grant Fund to match industry consortia funds invested in research at universities and federal labs. For many issues, collaborative efforts can help manufacturers. In particular, R&D partnerships can help firms share the risk and costs of early stage, generic technology projects. One of the most successful consortia is Sematech, a joint public-private consortia designed to help boost innovation in the semiconductor equipment sector. 20 Government can play a catalytic role in helping industry develop such partnerships. To be eligible for matching funding, firms

would have to: 1) form an industry-led research consortia of at least five firms; 2) agree to develop a mid-term (three to 10 year) technology roadmap that charts generic science and technology needs the firms share; 3) provide at least a dollar-for-dollar match of federal funds; and 4) invest the funds in universities and federal laboratories through a competitive selection process. This proposed initiative would not constitute corporate welfare because funding would not be directed to industry but to universities or federal laboratories for R&D on generic, shared technology needs. " Double the funding of the Manufacturing Extension Partnership. MEP plays a key role in securing the future of the nations small- and medium-sized industrial base. MEP funding should be doubled, with a significant portion of the increased funds devoted to establish sector-based, regional consortia. Such consortia can help smalland medium-sized manufacturers become more productive and develop new, innovative products. For example, North Carolinas Hosiery Technology Center s work is at the center of a public-private partnership designed to buck the economic tide that has battered the U.S. hosiery and textiles sectors for years.21 " Fully fund the Enterprise Integration Act. As described above, this innovative legislation gives NIST the authority and resources to help develop standards critical to boosting e-commerce and computerbased integration among U.S. manufacturers.

2) Promote the Digital Economy to Drive IT Investment

A rebound in capital spending, particularly in information technology, will help manufacturing recover. Promoting more rapid growth of the digital economy will not only make the economy more productive, it will also revive the lagging IT sector as companies increase IT purchases. Ubiquitous digitization (the use of IT in virtually all aspects of the economy that now

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conduct routine business with paper and personto-person processes) will not happen any time soon unless Washington develops bold and innovative regulatory, procurement, and tax policies to spur this kind of transformation. This means not only taking on special interests whose business models are threatened by digital transformation, but also developing smart, sectorbased policies to drive transformation. Unfortunately, both are anathema to a libertarian Republican Party closely tied to entrenched corporate interests.

3) Dont Give Into Protectionist Impulses

Although some manufacturing jobs have been lost as a result of higher productivity, we should not forget to celebrate the increased turnout for this improvement also leads to higher standards of living, just as 100 years of high productivity in agriculture has led to higher incomes and lower food prices. Moreover, for many sectors with largely lower-skilled, routine production, continuing job loss to lower-cost foreign nations is a fact of life. This cannot be stoppedand as long as market forces, and not subsidies or unfair trade practices, are causing job loss, it should not be stopped. U.S. policies designed to cut-off access to our markets by other countries are self-defeating. However, at least one Democratic presidential candidate, Howard Dean, initially proposed that we should trade only with countries that have the same level of health, safety, and environmental regulations.22 This would limit our trading partners to only a handful of rich nations, and dramatically raise the prices of goods and services for consumers, not to mention stifle industries that rely on imports. It is important to remember that developing nations cannot leapfrog stages of economic development and adopt Western regulatory practices overnight, any more than the United States could have been expected to have the same labor and environmental standards in 1950 that we have today. There are things, however, we should do with regard to foreign trade: " Work more closely with the International Labor Organization (ILO). With our help, the

ILO, a branch of the United Nations, can play a stronger role in ensuring that developing nations have more robust labor standards and more active labor union movements. Moreover, rather than demand new trade barriers that retard economic growth and living standards, activists and others concerned about labor practices abroad should use the power of consumer choice to encourage positive change. They can do so, for instance, by boycotting firms that fail to meet core labor standards and patronizing those that produce socially responsible goods and services. Finally, developed nations must back up demands for improved labor standards and conditions with grants and loans, technical assistance, and other forms of development aid. " Help manufacturers, particularly smalland mid-sized companies, get better access to foreign markets. As we open more markets to exports through trade agreements, government should also help companies access those markets. Small- and mid-sized manufacturers in particular often need assistance. As a result, we should increase funding for the MEP program to encourage exporters in the same sectors to collaborate.

4) Ensure that the Price of Currencies, Including the Dollar, Adjust to Trade Imbalances
Letting markets set currency values will lead to the most efficient global allocation of capital and resources. Just as tariffs and other trade barriers distort trade, so do policies to distort currency values. If markets are allowed to work, their response to an almost $550 billion annual trade deficit would be to drive down the value of the dollar. A lower dollar makes imports more expensive and exports cheaper, leading to elimination of the deficit. The most direct way of doing this would be to abandon a strong dollar policy, something the Bush administration has only recently appeared to do.23 However, in the long run, establishing a sound fiscal policy will be key. The enormous current and projected budget deficits this administration is running will prevent natural currency devaluations.

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In addition to promoting the right policy at home, we should put similar pressure on other nations. A number of countries pursue what could be called competitive undervaluation. This is particularly true with regard to China, where there has been a dramatic acceleration of the trade deficit in the last several years. As the trade deficit has gone up, the value of the Chinese currency, the yuan, has not gone up as market forces would suggest, because its value is tied to the value of the dollar. The Chinese and other governments also employ a variety of subsidies and other measures to help attract manufacturing facilities and boost manufacturing exports. The Bush administration is rightly stepping up its pressure on China to readjust the value of the yuan. At minimum, the Chinese should re-peg it to a higher rate.24 The administration should do the same with other nations including Japan, where the Bank of Japan has sold yen and bought dollars to stem an appreciation of the yen. Some argue that making this adjustment is no silver bullet but rather just blaming China and other nations for problems of our own making. Indeed, the Bush administration appears to hope that it can get off the hook for the failure of its policies by blaming the Chinese. While setting foreign currency valuations by market forces will not eliminate the trade deficit, it will help. Even free market economists should recognize that the global economy is more efficient if asset and currency prices reflect underlying market realities.

jobs in other sectors. PPI has proposed a comprehensive set of initiatives to help expand the winners circle for American workers. Among other things, we need to expand and modernize the unemployment insurance system;25 consolidate federal training programs into a National Skills Corporation;26 transfer funds now going to dislocated worker programs into a New Economy Scholarship Program for dislocated workers to use for training or outplacement services; 27 and expand health insurance tax credits for laid-off workers.

Conclusion
It is important to be realistic about the future of manufacturing. There is no reason to believe that manufacturing will not continue to enjoy higher productivity rates than the rest of the economy, resulting in the continuing long-term decline in the share of jobs in manufacturing. However, the rate of decline can be slowed, particularly if Washington focuses on smart policies to help manufacturing become more competitive, saving jobs that otherwise would be lost to foreign competitors. This is a key policy task, not just because it will reduce the number of lost manufacturing jobs, but because it will work to reduce the large and unsustainable trade deficit. The bill we run up every year by buying more imports than selling exports will have to be paid eventually as foreign nations demand payment in real goods and services. Absent federal leadership, this is likely to happen 10 to 15 years from now, just when the baby boomers start to retire. As a result, not only will Americans face the twin debts of the national debt and the Social Security shortfall at the same time, they will also face the foreign exchange burdens. Delaying this repayment will mean a larger devaluation of the dollar, with resultant lower purchasing power for the next generation.

5) Help Laid-Off Manufacturing Workers Adjust

It will be virtually impossible to increase the number of manufacturing jobs in the United States, if for no other reason than manufacturing productivity is likely to keep growing faster than overall productivity. However, we can and should take steps to help manufacturing workers adjust and gain good

Robert D. Atkinson is vice president of the Progressive Policy Institute and director of the Technology & New Economy Project at PPI. The author wishes to acknowledge the helpful comments on earlier drafts of Will Marshall, PPI president; Chuck Alston, PPI executive director; William Budinger, chairman of the board, Rodel Charitable Foundation of Deleware;and Ed Gresser, director of PPIs Trade and Global Markets Project.
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Endnotes
A total of 2.7 million total jobs have been lost, with 3.3 million in the private sector. A second reason for concern with manufacturing relates to the difficulty in replicating the knowledge and expertise in some manufacturing sectors. The loss of manufacturing capacity in some technologically advanced sectors, such as aviation and instruments, would be extremely difficult to replicate later. Should we lose capacity in these sectors, it would be extremely difficult to bring it back even if market conditions, such as a falling dollar, make it economical to do so. 3 A third reason for concern relates to the match between the interests and skills of Americans and the jobs available. There is no doubt that just as some Americans like to work in offices at keyboards, other Americans would prefer to work with their hands, manipulating the physical world. For the latter group, manufacturing gives them the opportunity to do much more than some service jobs would. However, it is important to note that these opportunities exist outside of manufacturing. For example, construction, wholesale trade and transportation, and repair and technician jobs can entail a similar utilization of skills. 4 Some might argue that the true measure of manufacturing health is growth in inflation-adjusted output as a share of GDP. The problem with this measure is that as economies grow, consumption of services often grow faster than manufactured goods as people desire more travel, entertainment, education, medical services, etc. Such differential growth does not reflect the relative health of the manufacturing sector. 5 When we look at individual sectors the contrast is even starker. During the Clinton administration an average of approximately 1,300 jobs in the transportation sector (e.g., automobiles) were created each month, under Bush an average of 9,100 have been lost each month. Under Clinton, machinery companies created 1,100 jobs each month, in the Bush administration they lost 8,900. Even sectors that lost jobs from 1993 to 2000 are doing much worse during the Bush reign. For example, apparel sector was losing about 3,100 jobs per month during the Clinton administration, since Bush took office, it has almost doubled to 6,000 per month. 6 Hubbard, R. Glenn, Dont Blame the Yuan, Wall Street Journal, September 9, 2003. 7 Data based on PPI analysis. PPI analyzed a wide array of data to determine what factors were responsible for the decline in manufacturing jobs as a share of total jobs. PPI analyzed the extent to which changes in productivity, business and consumer demand for manufacturing goods, and trade affected manufacturing employment. All data were for manufacturing and non-farm business. Productivity data was from the Bureau of Labor Statistics, http://www.bls.gov/ cps/cpsatabs.htm. Data on manufacturing and non-manufacturing trade was from the Bureau of Economic Analysis. Demand data relied on total output and trade data from BEA, http://www.bea.doc.gov/bea/dn2/gpoc.htm. 8 At least one academic study has examined the impact of technology and trade on employment, although with a focus on the changing skill composition of the economy. The authors found that technology was a more important variable than trade in explaining changing skills. Morrison, Paul Catherine J. (University of California at Davis) and Donald S. Siegel (University of Nottingham), The Impacts of Technology, Trade and Outsourcing on Employment and Labor Composition, unpublished manuscript, April 2000. 9 PPI analysis. Please see note 7. 10 U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov. 11 The Performance Benchmarking Service (PBS) group at the Michigan Manufacturing Technology Center found a large increase in the number of companies with falling sales in the last 3 years. They found that 44.3 percent had sales down by at least 10 percent during the 2 years from 2000-2002 (versus 37.8 percent for 1999-2001); 25.7 percent reported sales down 20 percent or more for that period (versus just under 21.5 percent for 1999-2001). Both the 1999-2001 and 20002002 data are in sharp contrast to survey participants in 1995 - 2001. In those survey years, only 7 percent to 15 percent of participants reported 2-year sales declines of 10 percent or more. In the early and mid-1990s, really large sales declines were even more uncommon: during 1995-1998, the percent of participants with 2-year sales declines of 10 percent or more never exceed 9 percent. Some of these sales losses could be due to imports, but some clearly are due to declining demand. 12 PPI analysis. Please see note 7. 13 Lieberman, Sen. Joseph, White Paper: National Security Aspects of the Global Migration of the U.S. Semiconductor Industry, June 2003. 14 To the extent that our national debt is held by foreign investors, they are in a position to at least exert pressure on the U.S. government to not let the value of the dollar fall, thereby diminishing the value of their investments. 15 Bloomberg News, Advisers to Bush seek steel-tariff rollback, The Boston Globe, August 26, 2003, http:// www.boston.com/business/globe/articles/2003/08/26/advisers_to_bush_seek_steel_tariff_rollback/. 16 Weisman, Jonathan, Bush Policy On Jobs Is a Shift, The Washington Post, September 3, 2003, p. E01.
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Because some programs were shifted out of DOEs Office of Industrial Technologies program between FY03 and 04, direct budget comparisons are not possible. However, the Bush administration proposes cutting the industrial sector specific program funding from $60.4 million in 2003 to $24 million in 2004, with no funding change in the $34 million cross-cutting program. 18 NACFAM, http://www.nacfam.org/. 19 H.R. 2908 American Manufacturing Works Act of 2003 (Introduced in House), http://thomas.loc.gov/cgi-bin/query/ D?c108:1:./temp/~c108ydHa73::. The Enterprise Integration Act (H.R. 2733), http://thomas.loc.gov/cgi-bin/bdquery/ z?d107:HR02733:|/bss/d107query.html|. 20 A related model is Microelectronics Advanced Research Corporation, an industry-university-government partnership that focuses on cutting-edge research related to microelectronics. 21 Justice, John B., What Works: Hosiery Technology Center, BLUEPRINT, June 2003, http://www.ndol.org/. 22 Dr. Dean has since maintained that he was suggesting that some kinds of international standards, instead of necessarily U.S. standards, be applied to all other nations. Democratic Differences, The Washington Post, September 7, 2003. 23 As recently as June Bush declared that the decline of the dollar against the euro was contrary to U.S. policy. 24 The Chinese financial system is poorly not transparent and probably insolvent, there are significant problems in the real estate sector at minimum, and there may be similar problems in manufacturing. Floating would invite volatility of the Asian-financial-crisis sort which would pose far bigger economic and security problems than the trade imbalance creates. However, re-pegging the yuan to a higher level relative to the dollar would appear to send a more accurate economic message. 25 Atkinson, Robert D., Modernizing Unemployment Insurance, Progressive Policy Institute, February 2002, http:// www.ppionline.org. 26 Atkinson, Robert D., Creating a National Skills Corporation, Progressive Policy Institute, June 2002, http:// www.ppionline.org. 27 Weinstein, Paul, New Economy Work (NEW) Scholarships: Universal Access to Training for Dislocated Workers, Progressive Policy Institute, June 2002, http://www.ppionline.org.

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