This is Part 3 in our Planet Money newsletter series on manufacturing in America. Part 1 asked why Americans aren't filling the manufacturing jobs that are already here. Part 2 dived deep into economic research that finds that manufacturing jobs pay a higher premium than many other industries. Subscribe here for the next installment. As always, our podcast is here.
We at the Planet Money newsletter have been looking into what makes manufacturing special. Last week, we looked at economics research that shows that manufacturing jobs continue to pay a higher premium than jobs in many other industries.
Gordon Hanson, an economist at Harvard Kennedy School who has published influential research on American manufacturing, stressed that manufacturing is special because of the good-paying jobs it provides, especially to Americans without a college education, many of whom are in desperate need of good-paying jobs. However, Hanson suggested, politicians are taking the love of manufacturing too far.
"I think we've developed a kind of collective fetish for manufacturing, which is really unproductive," Hanson told us. "The problem is not too few manufacturing jobs. The problem is too few good jobs for workers without a college education." And he argued that policymakers should focus on solving that problem, and not pretend that revitalized manufacturing is the only solution, especially since trying to boost this one sector with tariffs and a trade war could come at tremendous cost for everyone and not produce the desired result of a good-jobs bonanza (for more on this, read our last newsletter).
But manufacturing may be special for other reasons. And, in this newsletter, we dive into one of those reasons: the hope that a revitalized manufacturing sector could promote economic growth in a wider swath of America and fight regional inequality. The theory behind this is pretty fascinating. However, there's a debate over how much politicians can actually do to revitalize manufacturing and whether its regional effects will unfold as desired.
A growing gap in prosperity
In the late 20th and early 21st centuries, as computers and free trade revolutionized America's economy, job opportunities became more and more concentrated in our nation's big cities.
Economists have come to call these economically successful metropolises "superstar cities." Think like San Francisco, New York, Boston, Los Angeles, Seattle and Austin. These are places where usually college-educated, young professionals have found prosperity working in high-paid services, like in tech, finance, science, law, consulting and medicine.
Many of the nation's good-paying jobs concentrated in these superstar cities. Between 2008 and 2018, for instance, America's big cities accounted for more than 70% of the nation's employment growth.
Superstar cities, while becoming the epicenters of job opportunities, also saw an explosive growth in the cost of living, especially for housing. That made it harder for working-class folks to live in these areas. Even more, getting a college degree became a crucial admission ticket to get good-paying jobs in these increasingly prosperous areas. More than half of Americans over 25 don't have a college degree.
Meanwhile, as vividly documented by the research on what happened to American communities in the face of free trade with China, many former manufacturing towns — which did provide opportunities to folks without a college degree — saw a process that looked like the reverse of the one seen in superstar cities. An unwinding. A loss of good jobs. Communities struggling. An inability or an unwillingness of local residents to pack up and move for greener pastures. And all the social ills that come with deindustrialization and higher poverty.
Part of the reason why the loss of manufacturing plants stung so hard wasn't just the manufacturing jobs themselves. It was the economic ecosystems that those plants nurtured around them.
That's because manufacturing is what economists call a "tradable sector," or an industry that sells things to people outside the community.
Why tradable sectors are important for economic development
"The key thing in a local economy is what it can export to other parts of the world or other parts of the nation," says David Card, an economist at UC Berkeley who won the 2021 Nobel Prize in economics.
"The growth of a city is a function of the growth of its export base," says Hanson. "You don't have to export to the rest of the world, but you have to export to somebody outside the city boundaries. And that's because you're not gonna grow just by selling to yourself."
Tradable sectors include many other industries beyond manufacturing, like tech, mining, finance, movies, tourism, colleges that educate students from outside the community, fancy hospitals where people fly in to get surgeries. These outward-facing industries are like magnets that pull in new wealth from the outside.
"Non-tradable" sectors, on the other hand, tend to circulate wealth that already exists in the community. They tend to feed off the money brought into the community by tradable sectors. Examples include local retailers, restaurants, construction companies, gyms, and barbershops.
"The way I always put it is, like, we can't all just be cutting each other's hair," says Oren Cass, the founder and chief economist at American Compass, a conservative think tank.
Not all tradable sectors are the same. Some are more valuable for communities to have than others. Agriculture, for example, is a tradable sector. However, farms don't employ a ton of people these days. Many of the ones they do often don't get paid a lot. The work also tends to be seasonal. So the agricultural sector has pretty limited upside for communities looking for broader economic development.
Generally speaking, the value of tradable sectors to a local community depends on factors like the number of jobs they create, how much investment or spending they bring into their community, relationships they have with other local businesses and the government and how much they pay their workers.
Economists have tried to estimate the value of various tradable sectors to local communities. One popular way is to calculate how many extra jobs each tradable sector job creates in other sectors. Economists call these "local multipliers."
Estimating the true size of these local multipliers is pretty hard. There are debates about how big these multipliers are. The UC Berkeley economist Enrico Moretti has done some of the most influential research on local multipliers, including in manufacturing.
"When a local community attracts a manufacturing plant, it attracts employment directly into that plant, but it also generates jobs outside that plant through the income that those manufacturing workers spend in the community in local services," Moretti says. Manufacturing plants also create jobs at local suppliers, which provide goods and services that help them make stuff.
"My estimate suggests that in manufacturing, for each one job in the manufacturing sector, 1.6 additional jobs get created in the local community, outside manufacturing, through this multiplier effect," Moretti says. That 1.6 extra jobs created per manufacturing job is over a 10-year time frame.
So, as an illustration, a new manufacturing employee will help support 1.6 extra jobs in their community over a decade because they will spend their paychecks at local restaurants, gyms, concerts and so on.
The manufacturing multiplier is higher than the multiplier at say a local retail store or restaurant, which tend to have little or no multiplier effect because they're basically feeding off of existing money circulating in the community. (Although, Moretti says, some retail stores and restaurants do attract residents from outside communities, so they too can have some multiplier effect, although they will usually be small).
The manufacturing multiplier of 1.6 is much lower than the multiplier Moretti calculates for tech jobs: 5. For every tech job created, Moretti estimates, 5 additional jobs are created in other sectors. The high multiplier for tech jobs helps explain some of the roaring job growth seen in superstar cities, which tend to be tech bastions and have lots of well-paid young professionals spending money.
While he doesn't calculate a multiplier for finance jobs, Moretti says, they will also likely have a high multiplier. That's because, he says, a huge part of what drives the multiplier effect is how much workers in the tradable sector get paid. The more they get paid, the more workers will tend to spend on local goods and services that support business and job creation in their community.
Manufacturing jobs, on average, tend to not pay as high as jobs in industries like tech or finance, which helps explain its lower multiplier.
However, the 1.6 multiplier in manufacturing is the average for a pretty diverse sector. Manufacturers make tons of different things, from t-shirts to chocolate bars to rocket ships.
Moretti finds that the multiplier for high-end manufacturing jobs, specifically in "Machinery and Computing Equipment, Electrical Machinery and Professional Equipment," has a much higher multiplier: 4.9. That's not far off from the multiplier in tech. (And, we should note, a lot of times these high-end manufacturing jobs are tech jobs in a broader sense than we've come to talk about tech, which tends to refer to tech services, like software development, research and design of products, and so on).
So, yeah, manufacturing — and especially advanced manufacturing — can rightly be seen as a seed for greater economic prosperity for local communities. And the loss of manufacturing plants can rightly be seen as devastating to these communities, not just because of the loss of good-paying manufacturing jobs themselves, but also because the loss of those jobs is like bulldozing some of the pillars of a broader local economy.
It makes a lot of sense why so many politicians try so hard to bring manufacturing plants to their communities. Manufacturing is special. But so are many other tradable industries in the service sector. Is manufacturing the only option for struggling communities? And, even if it is, can national politicians really put their thumb on the scale and revitalize this sector (without tanking the broader economy)? This is where there is much less agreement.
A debate over whether manufacturing can be an engine for widespread economic growth
Oren Cass, who is a vocal advocate for tariffs, says it's true that manufacturing isn't the only option for communities looking to foster economic development. "Could it be financial services? Sure. Could it be tourism? Sure."
But, he says, there are many communities around the country that aren't going to be able to lure big banks or tech firms or make themselves a tourism hotspot.
Meanwhile, there are reasons to believe that these places do have a shot at luring manufacturers. The economic logic of setting up a manufacturing plant is arguably different from creating a new tech startup or investment bank. For one, the cost of real estate tends to matter a lot when you're thinking about where to build a huge factory. And the price per square foot in superstar cities is often exorbitant.
"If you're thinking about where to locate manufacturing, you're just looking at a very different set of factors than if you're asking where to locate an investment bank," Cass says. "What are the key things that you need for manufacturing? Certainly a trained workforce is one element of it, but you also need a lot more space. Good luck setting up your manufacturing in Manhattan. You may need close connections to natural resources, potentially low cost energy, logistics and transportation infrastructure and so forth."
So, if you're a manufacturer who is questioning where to place a big, new factory in America, Cass argues, "at a minimum, the answer is going to be not the same places doing media and finance and tech." That's the big reason why he thinks that policies that boost manufacturing will help lead to more regionally diversified economic growth. He says he's also supportive of "place-based policies," which incentivize companies and people to invest in struggling communities.
"Manufacturing isn't the only answer," Cass says of potential industries that could help revitalize struggling regions of the country. "But manufacturing is a good answer — and there are a lot of places where manufacturing is a much more likely answer than some of the things that we've seen be successful elsewhere."
That said, this is all pretty theoretical. There's no guarantee that new or repatriated manufacturers will set up shop in communities that are in need of economic development. And there's not strong evidence that tariffs can make that happen either.
Enrico Moretti says, sure, manufacturing plants could help some communities jumpstart their economic growth. However, he's skeptical whether the sector can be an engine of widespread prosperity.
"Given how small the sector is — and how small the sector is likely to stay, tariffs or no tariffs — I'm not really sure that this is really the source of jobs of the future," Moretti says. The reality, Moretti argues, is that manufacturing has become very automated, so new factories don't provide that many jobs, and these factories will become even more automated in the future. " I don't think tariffs will really change the profound dynamics of the decline of the manufacturing sector that we see everywhere in the world," Moretti says.
Using tariffs to try to convince more factories to set up shop in America can also result in blowback for the economy, including in tradable sectors, which often rely on foreign parts, materials, or labor to make products or services. Many companies in tradable sectors also tend to sell to the rest of the world, which is where most potential customers are. Trade retaliation from foreign nations can really hurt tradable sectors.
In fact, Gordon Hanson, together with economists David Autor, Anne Beck and David Dorn, recently published a working paper that finds that President Trump's tariffs in his first term failed to help communities in America's heartland. The tariffs and the trade war they sparked during his first term, they find, "was at best a wash, and it may have been mildly negative" for their economies. At least during and shortly after Trump's first term, tariffs didn't seem to do much to narrow the gap between the heartland and superstar cities.
It's possible that politicians can help revitalize manufacturing through means beyond just tariffs, including workforce development programs and subsidies. The Biden administration pursued a more multifaceted strategy (which included subsidies and tariffs) to boost particular manufacturing industries. We are waiting to see more robust evidence on the effect of these policies — although, as we highlighted a few weeks ago, there is currently an explosion in spending to construct new factories in America, and the timing suggests that government policies have played at least some role in the industry's comeback. Much of this new factory investment is in Southern states.
In the coming years, we're sure to get more evidence about the effects of government policies, including President Trump's current trade policy — and whether a potential manufacturing renaissance sweeps America and helps reduce regional inequality.
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