By Carl Tannenbaum

As a child of the American Midwest whose father worked in the steel industry, I have witnessed the decline of U.S. factories at close range.  I remember visiting mills on the Southeast side of Chicago that were teeming with activity. Today, they are ruins that have been overtaken by native vegetation.  The communities surrounding them have endured comparable decline and decay.

American leaders are now engaged in an effort to reverse the loss of manufacturing.  The hope is to restore a path to prosperity for struggling regions and their residents.  Tariffs are being employed liberally as a means to this end.

The endeavor seems noble.  But success is far from certain, and the costs of achieving it could be substantial.  A look at how we got to this point provides important perspective as we set a course for the future.

Not everyone agrees that American manufacturing is in decline.  U.S. industrial output is near a record level, and has grown significantly during the past forty years.  Shocks such as the 2008 financial crisis and the pandemic interrupted the upward trend.

Employment in manufacturing, however, began to stagnate in the mid-1960s.  The United States was still a relatively closed economy then, and China was many years from becoming a global economic power.  The advancing application of technology was the root cause of diminished labor demand at the time, and remains an important force today.

The newer the facility, the more likely it is to be heavily automated.  Jobs created by new plant construction will require elevated skill levels, and may not be that plentiful. Reshoring may not provide the boost to factory employment that some are hoping for.

The decline in manufacturing jobs became much more pronounced as globalization advanced.  Trust between nations steadily improved as memories of the Second World War receded, allowing the opening of markets and the establishment of global supply chains. Thanks to a series of major trade treaties, merchandise exports as a percentage of global gross domestic product (GDP) tripled between 1960 and 2008.

Proponents of free trade contend that globalization lowered prices, increased product quality, sharpened efficiency and raised standards of living.  It has also been credited for contributing to the unprecedented gains in global asset markets seen over the past forty years.

But while populations prospered overall, some regressed.  Exposed to keen international competition, many domestic industries struggled.  As a prominent example, American mills produced over 20% of the world’s steel in 1970; today, imported steel has driven that fraction down to less than 3%.

Many workers in sectors disrupted by trade struggle to find new opportunities. When they do, they often have to accept lower wages.  Economic dislocation resulting from industrial change is among the contributors to advancing income inequality and declining economic well-being for many households.  It has also led to elevated levels of drug addiction, alcoholism and suicide in the affected communities. These developments are well-documented in Case and Deaton’s “Deaths of Despair,” which is based on work that earned the Nobel Prize in Economics.

In an attempt to cushion the blow, the U.S. government began offering Trade Adjustment Assistance (TAA) in the 1960s.  TAA featured prominently when the first North American Free Trade Agreement was constructed in the 1990s, and again when China was granted entry to the World Trade Organization in late 2001.  TAA encompassed programs that retrained workers and helped to find them new opportunities, as well as programs that offered direct financial support to ease in the transition.  The annual budget for the effort peaked at about $800 million.

The broad design sounds sensible, but the results of TAA were disappointing. The amounts appropriated were modest, and the program was cumbersome. Studies showed that the red tape discouraged prospective TAA candidates, many of whom opted to simply collect unemployment or disability payments instead.

Even when applied, TAA’s effectiveness was limited.  Retraining was supposed to be central to the effort, but the requirement was often waived.  While younger workers generally took advantage of the opportunity to update their skills, older workers often did not. In the end, TAA did a poor job of getting workers back on track. Unpopular with both parties, Congress allowed TAA to close in 2022.  Some fresh thinking is sorely needed.

The inexorable evolution of economies requires adaptation.  Trying to control these transitions is difficult and expensive, and may limit growth.  Allowing them to proceed unfettered can leave some families and communities behind.  To address the challenge of industrial change, many countries make substantial investments in labor force transition programs.  As shown in the chart, however, the United States is not among the world leaders on this front.  

Failure to manage the tradeoffs associated with economic change almost inevitably results in calls to turn back the clock, as is happening in the United States. Unfortunately, going back to the past will be a very expensive proposition.  Consumers will pay for the regression in the form of higher prices; the current tariff trajectory is equivalent to one of the largest tax increases in American history.  It will take years and billions of dollars to construct new facilities and supply chains. And there may still be a permanent underclass that is left behind.

There isn’t much left of the South Works mill.  The entry gate is still standing, and long-abandoned rail lines still crisscross the property.  The question of what to do after the factory is gone lingers over the surrounding neighborhoods, and our country.