Manufacturing in the App Economy

By and / 5.2.2012

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.

Read the entire report here