Automation destroyed 20 million manufacturing jobs By Scott Sumner

I am becoming increasingly frustrated by all the articles I’m reading about how trade is supposedly decimating jobs in US manufacturing. I went to the FRED data set, and they have manufacturing output (real) going back to the first quarter of 1987. So let’s start there. Their series shows total manufacturing output rising from 69.789 in 1987 to 129.129 in the most recent quarter. That’s an 85% gain.

At the same time, manufacturing employment has fallen, from 17.499 million to 12.275 million. This represents a decline from 17.3% of total employment to only 8.5% of total employment. That’s the figure that has people so upset. But the cause is not trade; it’s automation.

What people forget is that an increase in imports tend to cause an increase in exports. It’s true that imports may currently exceed exports, but that gap is not caused by trade, it reflects saving/investment imbalances. But let’s say I’m wrong. Let’s say trade does cause the current account deficit. In that case, how many jobs have been lost to trade since 1987?

Zero.

Not because the CA deficit is zero; it’s 2.26% of GDP in the most recent quarter. However in the first quarter of 1987 it was 3.19% of GDP. So the trade deficit has shrunk over that period. If you really believed that trade deficits caused unemployment (I don’t) you’d be forced to conclude that, in net terms, trade has added jobs to US manufacturing since 1987. After all, the deficit has gotten smaller.

When people say they are upset about trade, I think that what really bothers them is that automation is allowing us to produce 85% more manufactured goods with far fewer workers. That transition has been painful for many workers, but it’s not about trade—except in one respect.

Trade allows the US to concentrate in industries where we have a comparative advantage (aircraft, chemicals, agricultural products, high tech goods, movies, pharmaceuticals, coal, etc.) We then import cars, toys, sneakers, TVs, clothing, furniture and lots of other goods. It’s likely that our productivity is higher in the industries where we export as compared to the industries where we import. So in that sense, trade may be speeding up the pace by which automation costs jobs. But probably only slightly; in previous posts I’ve shown that even within a given industry, such as steel, the job loss is overwhelmingly about automation, not trade.

Why do so may people blame trade? Cognitive illusions. It seems like imports would reduce aggregate demand, and that this would reduce employment. Those effects are highly visible. It’s human nature to demonize foreigners. But even Paul Krugman rejects that argument, at least when we are not at the zero bound. The Fed would simply offset any reduction to AD due to trade. Even if you thought it was depressing output during the recent recession, the effect would have gone away once we exited the zero bound. But the jobs are still not there in manufacturing. The bottom line is that to the extent trade is a problem, it has nothing to do with aggregate demand. The real problem is frictional unemployment, the difficulty of transitioning from dying industries to growing industries.

Business Insider has an excellent article discussing a recent interview with Carrier (United Technologies) CEO Greg Hayes, by Jim Cramer:

The result of keeping the plant in Indiana open is a $16 million investment to drive down the cost of production, so as to reduce the cost gap with operating in Mexico. What does that mean? Automation. What does that mean? Fewer jobs, Hayes acknowledged. From the transcript (emphasis added): GREG HAYES: Right. Well, and again, if you think about what we talked about last week, we’re going to make a $16 million investment in that factory in Indianapolis to automate to drive the cost down so that we can continue to be competitive. Now is it as cheap as moving to Mexico with lower cost of labor? No. But we will make that plant competitive just because we’ll make the capital investments there. JIM CRAMER: Right. GREG HAYES: But what that ultimately means is there will be fewer jobs. The general theme here is something we’ve been writing about a lot at Business Insider. Yes, low-skilled jobs are being lost to other countries, but they’re also being lost to technology. Everyone from liberal, Nobel-winning economist Paul Krugman to Republican Sen. Ben Sasse has noted that technological developments are a bigger threat to American workers than trade. Viktor Shvets, a strategist at Macquarie, has called it the “third industrial revolution.”

One by one we are repeating all the mistakes of the Great Depression. We are falling prey to fallacies that were adopted in the 1930s, but rejected by the 1990s. Now they are all coming back:

1. The belief that financial crisis caused the Great Depression (rather than vice versa).

2. The view that the Fed was out of ammo.

3. The view that interest rates measure the stance of monetary policy.

4. The view that exchange rate depreciation is a beggar-thy-neighbor policy.

5. The view that fiscal stimulus is needed in recessions.

6. The view that a higher minimum wage could boost the economy.

7. The view that mercantilist policies are justified.

I spent much of my life studying the intellectual climate during the 1930s, including reading all of the New York Times from 1929-38. I can’t tell you how depressing it is to see today’s intellectual climate reverting back to the vulgar Keynesianism of the 1930s. To see us making all of the same mistakes.

But opposition to free trade might be the worst of all, as it’s based on pure innumeracy. That’s why even Keynesians like Krugman don’t buy the argument. Unfortunately, the innumerates are probably in the majority.

PS. About the title of the post. The US did not even have 20 million manufacturing jobs in 1987. So how could we lose that many? I derived this figure by first assuming that our current manufacturing output was produced with the same level of productivity as in 1987—in which case employment would have risen by 85%. That would have required an extra 15 million workers. Then I noted that actual manufacturing employment has fallen by 5 million. The gap is 20 million. Is that a ridiculous comparison? Of course it is. But so are all the estimates of jobs lost from trade.

So what’s all this really about? Perhaps the “feminization” of America. When farm work was wiped out by automation, uneducated farmers generally found factory jobs in the city. Now factory workers are being asked to transition to service sector jobs that have been traditionally seen as “women’s work”. Even worse, the culture is pushing back against a lot of traditionally masculine character traits (especially on campuses). The alt-right is overtly anti-feminist, and Trump ran a consciously macho themed campaign. This all may seem to be about trade, but it’s actually about automation and low-skilled men who feel emasculated.