Globalization did not hollow out the American middle class
For years, I’ve been calling for the U.S. to promote manufacturing. When Americans started getting excited about reindustrialization, I cheered. I was a big supporter of Joe Biden’s industrial policy, and I even praised Donald Trump for smashing the pro-free-trade consensus in his first term.
Trump’s tariffs haven’t changed my mind about any of that. Yes, the tariffs are a disaster. But they’re not a disaster because they promote manufacturing; indeed, they are deindustrializing America as we speak, by destroying American manufacturers’ ability to leverage supply chains and export markets. When America has finally realized the futility of Trump’s approach, it will be time to turn once again to the task of reindustrialization — in fact, that task will be even more urgent, given the damage that Trump will have done.
And yet at the same time, I think there’s a misguided narrative about globalization, manufacturing, and the American middle class that has taken hold across much of society. The story goes something like this:
In the 1950s and 1960s, America was a smokestack economy. Unionized factory jobs built a broad-based middle class, and we made everything we needed for ourselves. Then we opened up our country to trade and globalization, and things started going downhill. Wages stagnated due to foreign competition, and good manufacturing jobs were shipped overseas. American cities hollowed out, and we became a nation of winners and losers. The college-educated upper middle class thrived in their professional jobs, while regular Americans were forced to fall back on low-wage service work. Eventually the rage of the dispossessed working class boiled over, resulting in the election of Donald Trump.
You can see this narrative at work in Joe Nocera’s recent much-discussed post in the Free Press:
No one anymore, on the left or the right, denies that globalization has fractured the U.S., both economically and socially. It has hollowed out once-prosperous regions like the furniture-making areas of North Carolina and the auto manufacturing towns of the Midwest. It has been a driver of income inequality…Trump owes much of his political success to the fury that these realities aroused in working-class Americans.
“My dad ran factories in the Detroit supply-chain orbit,” Financial Times columnist Rana Foroohar told me recently. “In the 1990s, the factories started shutting down. And when I would go home in the 2000s, half of my high-school classmates were on opioids.” She added, “The economic theories didn’t connect with the real world.”
Which raises an obvious question: Why did so many economists, policymakers, and journalists like me refuse to acknowledge the problems with neoliberalism for so long? Why were we so quick to label anyone who even flirted with the idea that maybe the U.S. should be protecting its industrial base, just as other countries did, as a Pat Buchanan-like fool?
One big reason was the most basic one: It meant low prices. Companies could keep their costs low by using China’s (and Mexico’s) comparative advantage: cheap labor. At the same time, companies like Walmart and Costco could buy goods directly from Chinese manufacturers, which invariably had lower prices than comparable American goods.
And you can see the narrative at work in a recent series of tweets by Talmon Joseph Smith:
Like all such narratives, this one consists of layers of myth wrapped around a core of truth. But not all grand economic narratives are created equal — in this case, the layers of myth are thick and juicy, while the core of truth is thin and brittle. Everyone knows about the China Shock paper and the collapse of manufacturing employment by about 3 million in the 2000s. That’s the core of the story, and it’s very real. But there are a lot of big important economic facts that place that story in perspective, which most of the people talking about this topic seem not to know.
Ultimately, the trade-driven collapse in manufacturing was only a small part of the economic story of America over the last half century.
Pundits and politicians alike talk incessantly about the flood of cheap Chinese goods into America. But overall, this is a small percent of what we buy. The U.S. is actually an unusually closed-off economy; as a fraction of GDP, imports are much lower than in most rich countries, and lower even than China:
Trade deficits are an even smaller amount of GDP. U.S. imports of manufactured goods minus exports are equal to about 4% of GDP per year. Our trade deficit with China is about 1% of GDP.
In terms of imported components, America manufactures most of what it uses in production. China’s exports to the U.S. are actually more likely to be intermediate goods rather than the consumer goods we see on the shelves of Wal-Mart — another thing the typical narrative misses. But even so, China makes only about 3.5% of the intermediate goods that American manufacturers need:
So if we eliminated trade deficits, would it reindustrialize America? Even assuming that we replaced the imports 1-for-1 with domestically made goods, the impact on manufacturing’s share of U.S. GDP would be fairly modest. Here’s Paul Krugman:
Last year the U.S. ran a manufactures trade deficit of around 4 percent of GDP. Suppose we assume that this deficit subtracted an equal amount from spending on U.S. manufactured goods. In that case what would happen if we somehow eliminated that deficit?
Well, it would raise the share of manufacturing in GDP — currently 10 percent — by less than 4 percentage points, because manufacturing firms buy a lot of services. A rough estimate is that manufacturing value-added would rise by around 60 percent of the change in sales, or 2.5 percentage points, implying that the manufacturing sector would be around a quarter larger than it is.
So even under the optimal scenario, if we totally eliminated the U.S. trade deficit, manufacturing would go from 10% of U.S. GDP to 12.5% — about the same as its share in 2007, and still far less than Germany, Japan, or China:
You can also see from this chart that other countries haven’t necessarily done an amazing job of protecting their industrial bases, as Nocera claimed; the manufacturing share of GDP is drifting down everywhere.
And this chart is also a hint that trade deficits and manufacturing aren’t as tightly linked as most people seem to think. France has become steadily less manufacturing-intensive since 1960, despite the fact that it historically had very balanced trade, and even ran big trade surpluses in the 90s and 00s. Meanwhile, out of all the countries on the chart, Japan has done the best job of preserving its manufacturing share since 2010, despite running a trade deficit over that time period.
So while we tend to focus a lot on the impact of trade on U.S. manufacturing, the truth is that there are much bigger forces at work there. Most of what the U.S. consumes is made here, and most of what the U.S. produces is consumed here, and eliminating trade deficits wouldn’t change either of those basic facts.
Americans, as a people, are startlingly rich. This isn’t just true because a few very rich people pull up the average. If you take median disposable household income, the U.S. comes out way ahead of the pack:
Note that this includes taxes and transfers, including in-kind transfers like government-provided health care.
Other countries may have protected their manufacturing sectors, but middle-class Americans are richer than the middle classes in other countries.
And middle-class Americans’ income has not been stagnant over the years. Here’s real median personal income, which isn’t affected by the shift to two-earner families:
This is an increase of 50% since the early 70s. I wish it had been more, of course, and it has its ups and downs, but 50% is nothing to sneeze at.
As for middle-class wages, they’ve grown less than incomes, since some of the increased income has been in the form of corporate benefits (health care, retirement accounts), investment income, and government benefits. But they have still grown:
Wage growth has resumed since the mid-1990s, despite increasing trade deficits. Note that the China Shock, which threw millions of manufacturing workers out of their jobs, utterly failed to stop wages from resuming their upward climb. Wage stagnation and hyperglobalization just don’t line up, timing-wise. Jason Furman has another good chart that shows this very clearly:
A lot of commentators have gotten so used to the idea that incomes are stagnant that they have trouble believing this data is correct. But as Adam Ozimek points out, the Economic Policy Institute — a pro-union think tank that frequently complains that wages are too low — chooses a very similar measure for median wages. EPI writes that wages “have not been stagnant”, but “have…been suppressed”.
And when we look at the lower percentiles of the wage distribution — the working class and the poor — we see that they’ve grown even more strongly, by over 40% since 1996:
A $4/hr. raise (adjusted for inflation) might not sound like a big deal, but for a poor person it’s pretty huge.
Of course, as Autor et al. show in their famous “China Shock” paper, the harms from Chinese import competition were concentrated among a few workers in a few regions. 2 million workers were only 1.5% of the U.S. workforce at the time, but for that 1.5%, being thrown out of good manufacturing jobs was a heavy blow.
But even in those unlucky regions, the negative effects don’t look to have been permanent. Jeremy Horpedahl points out that wages for the poor in Flint, Michigan and Greensboro, North Carolina — two areas that Nocera claims were “hollowed out” — have actually increased, while middle-class wages have risen in the latter:
And when we look at median income, the two areas look like they’ve recovered their economic health over the last decade:
(Nor is this a composition effect from people moving out; Flint’s population has held roughly steady, while Greensboro’s population has continued to increase smoothly.)
How are the American middle class and working class prospering, if the good manufacturing jobs of yesteryear are all gone? Talmon Joseph Smith scoffs at “service economy jobs”, and Autor et al. find that manufacturing workers displaced by Chinese imports often took crappier, lower-paid jobs in the service sector.
But that describes the 2000s. The 2010s and 2020s have been very different. Deming et al. (2024) show that over the last 15 years, the boom in low-skilled service-sector jobs has gone into reverse, and Americans are instead flooding into higher-skilled professional service jobs:
“Go to college” turns out to have been good advice. The boom jobs of the new era are in things like management, STEM, education, and health care:
It took a couple decades, but we’re finding that Bill Clinton was right — the average American is smart and competent enough to do knowledge work. And it’s being reflected in wages and incomes.
Now, none of this is to say that manufacturing is unimportant. It’s important for national defense, obviously. I also think it’s important for building a balanced, well-rounded economy — adding high-tech manufacturing on top of America’s knowledge industries would make us even richer, and would help us pump up exports and take advantage of multiplier effects. Manufacturing is also ripe for a productivity boom after decades of stagnation.
But the master narrative of protectionism is simply much more myth than fact. Yes, Chinese import competition hurt America a bit in the 2000s. But overall, globalization and trade deficits are not the main reason that manufacturing’s role in the U.S. economy has shrunk. Nor has globalization hollowed out the middle class — because in fact, the middle class has not been hollowed out.
Once we accept that this common protectionist narrative is deeply flawed, we can begin to think more clearly about trade policy, industrial policy, and a bunch of other things.