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The U.S. manufacturing sector experienced a devastating decade between 2000 and 2010, from which it has only partially recovered. The decline is illustrated by five measures: employment, investment, output, productivity, and trade.

Employment:Over the past 50 years manufacturing's share of gross domestic product (GDP) shrank from 27 percent to 12 percent. For most of this period (1965-2000), manufacturing employment remained constant at about 17 million; in the decade from 2000 to 2010 it fell by almost a third, to under 12 million,recovering by 2015 to only 12.3 million.4All manufacturing sectors saw job losses between 2000 and 2010, with sectors most prone to globalization displacement, led by textiles and furniture, suffering massive losses.5

Investment:The fixed capital investment of manufacturing (plant, equipment, information technology, and so on), actually declined 1.8 percent in the 2000s when adjusted for costthe first time this has occurred since data collection began in 1947. It declined in 15 of 19 industrial sectors and continues at low levels.6

Output:U.S. manufacturing output grew only 0.5 percent per year between 2000 and 2007, and during the Great Recession of 2007-09 fell by a dramatic 10.3 percent. Even as GDP began to slowly grow again (in what has been the slowest economic recovery in total GDP in 60 years), manufacturing output remained flat and has only recently returned to pre-recession levels.7

Productivity:Recent analysis shows that although the productivity growth rate in manufacturing ran at 3-4 percent per year between 1989 and 2000 while the sector was absorbing the gains of the IT revolution, it fell to only 1.7 percent per year between 2007 and 2014.8Because productivity and output are tied together, the decline and stagnation in output tracks with the decline in productivity in this period. Assuming that our metrics are appropriate for a changing economic environment, compared with 19 other leading manufacturing nations, the United States was 10thin productivity growth and 17thin net output growth.9Though still increasing, U.S. productivity growth remains at historically low levels; so productivity increases alone cannot account for the decline in manufacturing employment.

Trade:The decline of the U.S. manufacturing sector is made clear by its manufacturing trade deficit. In 2015 the United States ran a trade deficit of $832 billion in manufactured goods. In 2017 the total included a $110 billion deficit in advanced technology products, a deficit that has been growing since 2002.10

Trading Places:China moved from 5.7 percent of global manufacturing output in 2000 to 19.8 percent in 2011, passing the United States as the world's largest manufacturing power. Since then, the gap has widened further. Manufacturing value-added in China totaled $2.56 trillion in 2012 compared with $1.99 trillion for the United States.11The U.S. share of world manufacturing value-added declined from 18.1 percent in 2010 to 17.4 percent in 2012, and the decline was primarily against China's growing share. In the first half of 2016, China's global exports in manufactured goods totaled $935 billion, 68 percent more than the $555 billion of U.S. exports; this is striking because in 2000, U.S. manufactured exports were three times larger than Chinese exports.12

The labor profile derangement caused by this economic shift has resulted in growing social disruption.13While most Americans once assumed we were becoming one big middle classdefined socially in the popular imagination as opposed to economicallyinstead a working class that has been facing declining incomes is now in clear, angry view. For example, full-year employment of men with high school but not college degrees went from 76 percent in 1990 to 68 percent in 2013.14The share of these men who did not work at all went from 11 percent in 1990 to 18 percent in 2013. Importantly, the median income for men without high school diplomas fell by 20 percent between 1990 and 2013; for men with high school diplomas or some college, it fell by 13 percent.15

Because men dominated the production workforce, the decline of American manufacturing in the 2000s hit them particularly hard. Overall, real household income, measured both at the median and the mean, declined between 1999 and 2014.16Importantly, there is a growing gap betweenmedianhousehold incomethe statistical center of the middle classandaveragehousehold income, which includes the higher gains going to the upper-middle and upper classes.17This spells middle-class decline.

It also spells growing income inequality. As labor economist Richard Freeman put it, "inequality is now at Third World levels."18It can be traced to the stagnation in college graduation rates since the mid-1970s: Workforce skill requirements kept growing but educational output, as state support of higher education waned, failed to keep up.19Those who had the education captured a wage premium, those without it, the opposite. Meanwhile, the one-third decline in better-paying manufacturing jobs in the 2000s exacerbated the inequality split as the definition of the middle class shifted over time: In other words, employment in manufacturing has proven for many to be a downward way out of the middle class. The manufacturing decline curtailed what had been a critical pathway to the middle class for working-class families. This wasn't just a white working-class problem: African-Americans make up 10 percent of the manufacturing workforce and Hispanics 16 percent; the decline restricted a pivotal middle-class route for those sub-communities.20

The massive trade imbalance in manufacturing hit many industrial communities especially hard.21Those areas that faced direct impacts from Chinese imports sustained an average income loss per adult per year of $549 between 1990 and 2007. This was offset by per capita Federal adjustment assistance of only $58. Job loss to trade with China was 2.4 million between 1999 and 2011. As Nobel economist Michael Spence has found, "Globalization hurts some subgroups within some countries, including in advanced economies. . . . The result is growing disparities in income and employment across the U.S. economy, with highly educated workers enjoying more opportunities and workers with less education facing declining employment prospects and stagnant incomes."22

Employment in the manufacturing sector can be viewed as an hourglass.23At the center, the narrow point of the hourglass, is the production moment. But manufacturing employment is not subsumed by that moment. Pouring into the production moment is a much larger employment base that includes those working in resources, those employed by a range of suppliers and component makers, and the innovation workforcethe roughly 60 percent of scientists and engineers employed by industrial firms. Flowing out of the production moment is another, larger host of jobs, in distribution systems, retail and sales, and maintenance of the product over its life cycle both within and beyond the main production company. The employment base at the top and bottom of the hourglass is far larger than the production moment itself.

Arranged throughout the hourglass are lengthy and complex value chains of firms involved in the production of the goodsfrom resources to suppliers of components to innovation, production, and finally distribution, retail, and life cyclea great array of skills and firms, much of which we count as services. But these services are tied inextricably to manufacturing; if we removed the production element, the value chains of connected companies snap. While the lower base of the hourglass, the output end, may be partially restored if a foreign good is substituted for a domestic one, the firms involved will still be disrupted. The upper part of the hourglass, the input end, with its firms and employees, doesn't get restored by import substitution. One major study of manufacturing value-added indicates that when the full hourglass effects are considered, manufacturing may amount to a third of the economy.24

When these complex value chains are disrupted, it is hard to put them back together. That's why, historically, once the U.S. economy loses an economic sector it tends not to come back. It also loses the potential to innovate in the sector. This is a key reason why manufacturing decline is so consequential.

Following World War II, the U.S. economy was organized around world leadership in technology.25It developed a comparative advantage over other nations in innovation and, as a result, led nearly all the significant innovation waves for the rest of the 20thcentury.26The operating assumption was that U.S. industry would innovate and translate those innovations into products. By innovating here and producing here, it realized the full spectrum of economic gains at all stages, from research and development through production at scale, and in the follow-on life cycle of the product. It workedthe United States became the world's richest economy.

The United States since 1940, then, has been playing out Solow's economic growth theorythat the predominant factor in economic growth is technological and related innovationand demonstrating that it works, with its model increasingly emulated abroad. But in recent years, with the advent of a more interconnected global economy, theinnovate here/produce heremodel has broken down. In some industrial sectors, firms can now sever R&D and design from production. Code-able information-technology-based specifications for goods that can be sent to software-controlled production equipment have enabled "distributed" manufacturing.27

Theinnovate here/produce theremodel appears to work well for many IT and commodity products. However, the distributed model does not work for all sectors, particularly those that still require a close connection between research, design, and productionfor example, capital goods, aerospace products, energy equipment, and complex pharmaceuticals. Here, the production infrastructure provides constant feedback to the R&D and design phases. Product innovation is most efficient when tied to a close understanding of and linkage to manufacturing processes.

However, if R&D/design and production are tightly linked, these innovation stagesmay have to follow production offshoreif it indeed goes offshore. To the extent this is happening it is disastrous. Theproduce there/innovatethereapproach brings the very foundations of U.S. innovation-based economic success into question. If this approach grows in importance, the historic U.S. comparative advantage in innovation could be jeopardized, further hindering growth and stimulating social disruption.

Understanding how manufacturing is related to the economy as a whole is critical to all related policy processes concerning the economy. Alas, our understanding is fragile. Few U.S. leaders took the developments in manufacturing described above seriously in recent decades partly because a series of well-established economic views assured us that declines in manufacturing would be more than offset by gains elsewhere in the economy.28

Economics has held an elevated position in national policymakingthe President has a Council of Economic Advisors, not a Council of Sociological Advisors. Mainstream economists have long told us a reassuring story about economic change and the role of manufacturing in it:

The nation was losing manufacturing jobs because of major productivity gains;

The production economy would in the natural course of economics be replaced by a services economy;

Low-wage, low-cost producer nations must inevitably displace higher-cost ones;

Don't worry about the loss of commodity production, since the country will retain a lead in producing high-value advanced technologies;

The benefits of free trade always greatly outweigh any short-term adverse effects;

Innovation is distinct from production, so innovation capacity remains even if production is distributed worldwide; and

A governmental role in the production system would constitute a dangerous "industrial policy."