Learning the Wrong History of Declining Manufacturing Employment
For decades, politicians have promised to bring back factory jobs. A new working paper from a pair of liberal economists at Stanford’s Institute for Economic Policy Research tries to make sense of what actually drives manufacturing employment. It’s full of useful data. But in trying to defend the conventional wisdom against tariffs, it ends up making the case for exactly the policies—Donald Trump’s tariffs—that it tries to argue against.
Economists Jared Bernstein and Daniel Posthumus, in a working paper released last month, examined manufacturing employment from 1949 to today. Their decomposition is straightforward: employment growth equals output growth minus productivity growth. The story is clear.
From 1949 to 1970, factory jobs grew 1.4 percent annually because output growth outpaced productivity gains. From 1970 to 2000, employment stagnated as productivity accelerated. Since 2000, jobs have fallen 1.2 percent per year as output growth collapsed.
The worst period was 2000 to 2010, the “China Shock” period. As Chinese imports flooded American markets, 5.7 million factory jobs disappeared. The trade deficit hit 6.5 percent of GDP. Entire communities were devastated.
Bernstein and Posthumus call this period “destructive” and say that such shocks shouldn’t happen again. Then they argue against the one policy tool that would actually prevent it.
The Dependency Contradiction
The paper opposes “sweeping tariffs” on the grounds that “half of our imports are inputs into domestic manufacturing.” Tax those imports, the argument goes, and you make American production more expensive and less competitive.
But that claim proves too much. If American factories are so dependent on foreign parts that taxing them would cause significant disruption, what does that say about our vulnerability?
Bernstein and Posthumus themselves advocate subsidies for sectors “vulnerable to export controls from trading partners”—semiconductors, batteries, critical minerals. These are areas where foreign suppliers could cut us off, threatening national security or economic stability. But if we’re so dependent on imported inputs that tariffs would disrupt production, we’re massively vulnerable to export controls. The authors’ anti-tariff argument accidentally proves we’ve hollowed out our industrial base to a dangerous degree.
You can’t have it both ways. Either imported inputs are critical to our manufacturing—in which case that dependence represents exactly the strategic vulnerability that justifies bringing production home—or they’re not critical, in which case tariffs won’t cause the disruption predicted.
The authors have documented a crisis and then argued we’re too dependent to fix it.
Tarifflation Didn’t Happen
But set aside the logic for a moment and look at what actually happened. Trump imposed sweeping tariffs beginning in April 2025, including the Liberation Day tariffs. The authors published this paper in September, months after those tariffs took effect.
According to the tariff-bashers, prices should have risen sharply. They predicted that higher import costs would get passed to consumers. Kamala Harris called it a national sales tax. Anti-tariff economists insisted that Americans pay the tariff tax.
Except that’s not what the data shows. The Harvard Business School tariff price tracker—which monitors prices on tariffed imports versus non-tariffed domestic goods as well as domestic goods whose prices might be affected by tariffs—finds that prices on non-tariffed domestic goods have risen more than prices on tariffed imports. Prices of domestic goods that are considered affected by tariffs—because they have lots of tariffed inputs or compete with imports—are down since Liberation Day.
The tarifflation scare story has come crashing down. Importers absorbed costs through lower margins. Foreign exporters cut prices to maintain market share. Domestic competitors held prices steady to gain share from imports. The predicted price increases didn’t materialize.
This completely undermines the central economic case against tariffs. If tariffs don’t raise consumer prices—and the evidence so far says they haven’t—what’s the argument against them? That they might raise prices in the future? That they violate free trade theory?
At some point, evidence matters more than theory.
Tomorrow: Part II of our examination of the Bernstein and Posthumus paper.
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