We live in a world where the communications sector is driving the recovery and receiving much attention. We believe that this is the most important ongoing development in the American economy, offering the potential for long-term transformation.

But while very important, a boom in communications isn’t enough, alone, to achieve balanced and sustainable growth. We need every sector of the economy, including manufacturing, to contribute. With this in mind, the Obama Administration has taken the positive step of proposing a series of policy measures that would encourage domestic manufacturing.

In this spirit, we undertake an audacious question: In this era of apps and social media, what is a reasonable long-term goal for manufacturing employment?

We first show that manufacturing has larger job spillovers than commonly thought, based on new calculations. Next, we estimate the employment consequences of eliminating the trade gap in manufactured non-oil goods, a desirable long-term goal, without reducing our standard of living.

Assuming such a balancing, we find that the U.S. should aim to add roughly 3.5-4 million direct and indirect manufacturing jobs over the long run, raising total manufacturing employment to about 15.5-16 million, or 2001 levels. This bold effort would ease the job drought and offer millions of Americans a path to the middle class. What’s more, we would be producing more at home, while borrowing less from the rest of the world.

Achieving this admittedly aspirational goal would come at a relatively small price: we calculate that overall economy-wide prices would have a one-time rise of only 1.8-2.0%, spread out over the time it takes to close the trade gap. To put this in context, the inflation rate for gross domestic purchases has averaged well over 2% annually over the past ten years. So closing the trade gap would raise prices by less than one-year’s inflation.

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When it comes to manufacturing, most politicians, economists, and journalists agree: the millions of manufacturing jobs lost in recent years are mostly not coming back. Looking at the official data, it’s easy to understand why. Productivity in the sector has continued to climb even as jobs dwindled, so it must be the case that these jobs were lost to good old human ingenuity.

But this conclusion is derived from faulty official data. Indeed, a closer look at the numbers reveals an entirely different history on what happened to U.S. manufacturing.

Specifically, this paper shows that rising imports play a much larger role in the loss of jobs since 2007 than official data suggests. In fact, we estimate that rising real imports are responsible for approximately 1.3 million of the jobs lost between 2007 and 2011, or almost one-third of total private non-construction job loss.

We reached the estimate of 1.3 million jobs through a process that adjusts for for measurement problems in the official statistics. This adjustment is based on a concept called the “import price bias,” which causes the government to undercount the growth of low-cost imports from countries such as China. After adjusting for the import price bias, our analysis suggests that the import growth of goods, adjusted for price changes, have been underestimated by roughly $117 billion since 2007 (in 2011 dollars).

Moreover, we find undercounting real imports leads to a distortion in most of the official statistics that keep track of economic activity, including real GDP, which was overstated during the Great Recession and subsequent recovery by 0.8%. Our analysis suggests imports of low-cost goods continued to expand their presence in U.S. markets during this period, a phenomenon that likely started in the early 2000’s when developing countries such as China significantly boosted their exporting presence.

In this paper we also discuss how these revised statistics might affect the economic and political landscape going into the 2012 election. Specifically, President Obama’s recently announced “insourcing” initiative has the potential to recover some portion of the 1.3 million jobs lost to rising imports. By comparison, current policies like the payroll tax break are more likely to leak overseas than we realize instead of stimulating demand at home.

Understanding the true effect of rising imports on jobs better explains the everyday reality of Americans who are struggling through a weak job market and stagnant real wages. This is especially true in key states such as Ohio, North Carolina and Pennsylvania, where voters know that jobs have been lost to foreign competition.

In the end, sustainable economic growth and the creation of tomorrow’s jobs cannot be achieved through the consumption, debt driven economy of the past few decades. Instead, we advocate more of the pro-investment, pro-manufacturing policies recently introduced by the Obama Administration, such policies shift America toward a “Production Economy” which emphasizes investment in physical, human, and knowledge capital. Understanding the true role of imports in the U.S. economy, we can design better, more targeted economic policies.