By Michael J. Hicks PhD
I give a number of public talks each year on changes to the state and local economy. One trick I use to help folks understand these changes is to ask a couple questions. This sets up a great discussion about issues ranging from educational attainment to quality of life to economic development and trade policy.
The first question is simple: “In what year did Indiana’s manufacturing economy produce the most ‘stuff’ as measured in inflation-adjusted dollars?” Economists call this gross domestic product, and it is measured as the value-added production in our state. That just means we subtract all the imported parts, whether they come from Ohio or Thailand.
I get all kinds of thoughtful answers regarding which year was our production peak: 1944, 1955, the ’70s, ’80s and ’90s. There are reasons to suppose all of these are true. I rarely get the right answer, or anything close to it. The answer to this question is 2022.
That’s right folks, last year was our peak manufacturing production year of all time. Don’t be surprised; 2021 was our previous peak, as was 2018 before it. We might not have a new peak in 2023, but I’d wager a case of 3 Floyd’s Zombie Ice IPA that 2024 will again be a peak year for factory production in Indiana.
My second question is: “In what year did manufacturing employment peak in Indiana?” The answer to that question is 1973. Nearly every audience has someone who gets close to the right answer. So, what happened?
Well, three big things happened. Estimates vary, but maybe a quarter of factory jobs, mostly from 1990 to 2007, were lost to foreign competition. The rest were lost due to productivity — workers and factories simply got better at making goods. But, there’s a catch even here. Close to half those manufacturing jobs that were lost to productivity and trade weren’t really lost; they were just reclassified from ‘manufacturing’ to ‘professional services.’ These are the people who service robots, design factory modifications, teach Lean Six Sigma, provide security, take out the trash or write computer code.
These facts set up some deep and uncomfortable questions about state and local policy. Right away it is important to note manufacturing in Indiana is an important and healthy sector of our economy. It is a source of rapid productivity growth, innovation, and wealth creation. Factories can be great places to work, particularly the newer, safer facilities, where workers are better paid. For state and local governments, manufacturing could be an important source of tax revenue to sustain roads, public safety, education, and quality of life.
One thing manufacturing will not be is a growing source of jobs. This has been true for a half century, and it’d be helpful if everyone admitted that obvious truth.
The good news is that should not be a problem for our economy. For every factory job Indiana lost since 1973, other industries created seven more jobs. Most of these jobs pay better than the factory jobs they replaced. In fact, nationwide, the data is even better. We’ve lost about 6.5 million factory jobs since the national peak in 1979, but created more than 66 million jobs elsewhere.
In historical terms, this is a remarkably soft adjustment to changing economic conditions. In fact, it’d be hard to find such a large structural change that occurred anywhere, with so much warning, that carried with it so many alternative opportunities for workers and communities. Economists have long puzzled why so many places and people failed to adjust effectively. I think there is a two-part answer.
The first factories to close due to trade or productivity pressures were the least productive plants. These factories would tend to have a disproportionate number of lower-skilled factory workers, doing work that a poorly educated worker in a third-world country could do. But, even the best workers at these plants would’ve been exposed to less technology and fewer new production practices.
Better-skilled and educated workers transition to other jobs more readily. So, job losses from automation and trade tended to clobber those least prepared to deal with the consequences. For these workers, relocating brought few opportunities, so they stayed. But, this excess supply of labor did nothing to boost the prospects of a community. In fact, there is at least anecdotal evidence that newer, more technologically advanced firms went out of their way to avoid places where other factories closed.
The national numbers surrounding this are stark. Since 1992, the USA has created 39.4 million new jobs, which is very respectable. But, 33.7 million of those went to college graduates with a bachelor’s degree or higher, and another 9.5 million to folks who’d been to college or received an associates degree. Since the end of the Great Recession, the data is even worse. The U.S. economy has created more than 17 million jobs for college graduates, while employment for everyone else is down by roughly 700,000 jobs.
These facts offer strong support for an argument that the increasing demand for more highly skilled workers is leaving behind those who lost lower-skilled jobs. But, this has been happening for a couple centuries. So, it would seem to me that the stagnation and decline in so many cities and towns across the Midwest has other contributing factors.
Though there are many possible explanations for the continued stagnation of much of the Rustbelt, at least part of the reason must be the fact that many people continue to believe that prosperity is just one more factory announcement away.
To be fair, it takes tough, honest leadership to confront this problem. It could start by simply stating a few facts. I’d like to hear someone repeat this fact that “since the end of the Great Recession, in June of 2009, more than 100 percent of all the net job growth in the USA went to college graduates.” Then add, “This means that to prosper, our state must be full of world-class schools that offer every student the chance to go to college.”
Of course, we aren’t anywhere near that level of discourse. Instead, we get too many adults telling students to plan on a future with growing factory jobs. And, we have too many communities working to get those new factory jobs, instead of preparing for a different future. That’s a dismal combination of mistakes, that surely explains part of the ongoing stagnation of much of the Midwest.
Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.