Hamilton’s Economic Vision Had One Crucial Blind Spot

Hamilton recognized the importance of manufacturing but overlooked the market processes that create lasting prosperity

By Donald J. Boudreaux. 

"Speaking in January at Davos, US Trade Representative Jamieson Greer said that President Trump’s protectionism revives the policy first proposed by Alexander Hamilton. Like countless attempts to justify US protectionism and industrial policy, Greer’s effort praises Hamilton’s Report on Manufactures (“Report“). 

More recently, Scott Bessent, now holder of a job first held by Hamilton — US Treasury Secretary — also boasted of the administration’s Hamiltonian creed. Given the fame of Hamilton’s Report, and Hamilton’s key role in America’s founding, a close look at his Report is warranted.

Impetus for the Report

Requested by the US House of Representatives in January 1790, Hamilton submitted his Report on December 5, 1791. It was the longest and most famous of four major reports submitted to the House by Secretary Hamilton.

According to Hamilton, the House requested that he devote attention to “the subject of Manufactures; and particularly to the means of promoting such as will tend to render the United States, independent on foreign nations, for military and other essential supplies.” He complied.

America’s Economy Should Have a Strong Manufacturing Sector

The Report opened by making the case that America would benefit from a larger manufacturing sector despite America being unusually rich in land. Without naming Thomas Jefferson, the Report‘s opening was a challenge to Jefferson’s conviction that America should remain a nation mostly of yeomen farmers.

Offering this challenge, Hamilton relied on Adam Smith (also without naming him) to expose the errors of physiocracy — that is, the belief that net economic value is produced only by agriculture. Yet Hamilton went further, arguing that manufacturing can be more productive than agriculture. In making this argument, Hamilton was impressive; one might even sense in it an anticipation of some insights revealed by economists’ marginal revolution of 80 years later.

Regardless of how much or little Hamilton intuited of marginalism, he deserves credit for emphasizing the reality and significance of opportunity costs. To produce some increment of agricultural output requires that some increment of manufacturing output not be produced. And that increment of agricultural output is worthwhile to produce only if its value exceeds that of the foregone manufacturing output. Thus did Hamilton defuse the arguments of persons who believed that, to establish the case for keeping America an agricultural nation, it’s sufficient to point to the positive market value of agricultural output.

In this way, and some others, Hamilton revealed a keen ability to think insightfully about economic matters. Nevertheless, on a full assessment, Hamilton in the Report got more wrong about economics than he got right. Not content to support only the removal of artificial barriers in the US against domestic manufacturing, Hamilton argued strenuously that the government must actively promote American manufacturing. That promotion should consist chiefly of subsidies (“bounties”) supplemented by protective tariffs.

Hamilton Respected But Rejected Adam Smith

The renown of Smith’s Wealth of Nations obliged Hamilton to try to refute Smith’s argument that, in Hamilton’s summary, “industry, if left to itself … without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require.” For Hamilton, what Smith called “the obvious and simple system of natural liberty” was too simple, at least for a young country without much industry. Here’s Hamilton:

Against the solidity of [Smith’s] hypothesis … cogent reasons may be offered. These have relation to — the strong influence of habit and the spirit of imitation — the fear of want of success in untried enterprises — the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted — the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own Citizens in the branches, in which they are to be rivalled.

The first-mentioned impediment to American manufacturing was Americans’ alleged lack of entrepreneurship. Habit-bound and excessively risk-averse, too many Americans would stick with familiar agricultural pursuits and refrain from launching new manufacturing endeavors. Further discouraging Americans from venturing into manufacturing were the established competitors abroad who would out-compete upstart rivals. 

For Hamilton, simply being long-established was, in free markets, a nearly insurmountable competitive advantage. But in addition, foreign manufacturers might also practice what we today call “predatory pricing,” as well as enjoy their own subsidies. Therefore, Hamilton believed that manufacturing would arise and thrive in America only if the rates of return on these enterprises were boosted by the government.

Hamilton here forgot his own counsel to attend to opportunity costs. He simply presumed that whatever additional manufacturing activities were encouraged by the government would increase the net value of US economic output. He also ignored both the knowledge problem (How do politicians know which particular industries to encourage?) and the public-choice problem (With subsidies and protection being doled out by politicians, what prevents this doling from being distorted by interest-group politics?).

Hamilton also had a cramped understanding of economic competition. (In fairness, this understanding still infects economics textbooks today.) For him, competition consisted of firms producing a largely given set of outputs with largely identical technologies. Although he can’t be faulted for not reading Joseph Schumpeter’s 1942 work on creative destruction, even in 1791 evidence was growing that the major source of economic growth was entrepreneur-driven creative destruction. Such innovation introduced not only new products, but also completely new and improved means of producing existing products. 

In such an innovative economy, being long-established wasn’t the great advantage that Hamilton assumed it to be. Just ask, for example, the American millers whose traditional manner of milling flour was rendered obsolete starting in the 1780s in Delaware by Oliver Evans‘s automated flour mill.

Hamilton’s Curious Evidence

Attempting to augment his case for active government encouragement of manufacturing, Hamilton offered curious evidence. Responding to opponents who insisted that America’s economy was unfit for manufacturing, he boasted that America’s economy was already demonstrating an impressive ability to support manufacturing.

Writing about the prospects of profitable investment in manufacturing, Hamilton said that “it is certain that the United States offer a vast field for the advantageous employment of capital; but it does not follow, that there will not be found, in one way or another, a sufficient fund for the successful prosecution of any species of industry which is likely to prove truly beneficial.” He continued: In addition to America’s “multiplying” banks, another ready source of funding for manufacturing was foreign capital, which he wisely welcomed as “a precious acquisition.” Indeed, “the attraction of foreign Capital for the direct purpose of Manufactures ought not to be deemed a chimerical expectation. There are already examples of it.”

Question for Hamilton: If it was certain that the US offered vast opportunities for profitable investments in manufacturing, and if such investment was already occurring, why did such investment need to be further stimulated by the government? Hamilton’s inconsistency is evident.

Another example of Hamilton’s inconsistency is worth mentioning. When he argued for subsidies and protective tariffs for goods produced with iron, his evidence for the worth of such government assistance was the fact that such manufacturing had significantly grown in the US since the American Revolution and was flourishing. His argument was that this industry deserved protection precisely because it had proven itself capable and successful. Presumably, Hamilton would defend this inconsistency by maintaining that, without government assistance, this industrial growth — and that of other critical manufacturers — would stop short of its optimal point.

Here’s where Hamilton-as-economist faltered most seriously. He made the incorrect presumption that markets fail to generate optimal economic growth because, in the end, he didn’t appreciate just how effectively resources are allocated by market signals and incentives — by competitively determined prices, profits, and losses. 

At least for fledgling nations with relatively little industrial capacity, he believed that intervention from the top was required.

The Lasting Lesson

Studying the Report on Manufactures makes clear that Hamilton, contrary to the assertions of Greer and Bessent, was far from being a protectionist in the mold of Donald Trump. 

Not only was Hamilton’s case for protection confined to the need to stimulate industrial capacity in a country lacking such capacity, he also preferred subsidies over tariffs (because tariffs, unlike subsidies, reduce supplies of targeted goods), and he welcomed, rather than bemoaned, net inflows of foreign capital. 

Nevertheless, Hamilton ultimately had too little confidence in free markets. The late Gordon Wood’s assessment of Hamilton-as-economist is accurate:

Hamilton was so wedded to a hierarchical view of society that he could only imagine industrial investment and development coming from the top down. Thus he was incapable of foreseeing that the actual source of America’s manufacturing would come from below, from the ambitions, productivity, and investments of thousands upon thousands of middling artisans and craftsmen who eventually became America’s businessmen. Hamilton’s historical reputation as the prophet of America’s industrial greatness therefore seems somewhat exaggerated. He certainly wanted a powerful and glorious nation, but he was no more capable of accurately foretelling the future than the other American leaders."

America Is in the Middle of a Stealth Manufacturing Boom

Factory jobs are down, but factory output has risen briskly. Credit goes not to tariffs, but to the most basic economic force of all: demand

By Greg Ip. Excerpts:

"Since January 2025, manufacturing jobs have indeed fallen by about 100,000 workers, or roughly 0.6%. In the same period, though, manufacturing production rose 2.3%, and manufacturing shipments, unadjusted for inflation, climbed 4.2%."

"several sectors that where domestic production was strong, so were imports. Where production was down, so were imports."

"domestic production of computer and electronic products last year was up 7.7%. (All its figures are from the fourth quarter compared with a year earlier.) But imports in this sector were up even more, by 40.5%."

"Behind this: an artificial intelligence revolution"

"Aerospace and transportation equipment (which excludes trucks and cars) also boomed last year, with domestic output up 28%."

"Now consider motor vehicles and parts, around which Trump erected steep tariff barriers. Imports duly fell 14%. But domestic output also dropped 3%. In furniture and related products, imports were down 22% while domestic output fell 3%. Relatively high interest rates last year were likely a factor."

"Production of primary metals, including steel and aluminum, did benefit from tariffs which are now as high as 50%. Production rose, and imports fell. With prices well above global levels, capacity utilization, profits and investment should all rise. But Trump’s first-term tariffs didn’t yield sustained prosperity. Even now, primary metals production is more or less back to 2023 levels"

"Food and beverages contribute the largest share of domestic manufacturing output at 18%."

"Foreign competition isn’t that consequential. And production last year was basically flat."

"production can rise simply because existing factories are ramping up capacity. But durable improvement requires investment in new capacity, which is visible in semiconductors, pharmaceuticals and aerospace. If tariffs have led to new investment, the effect on production might not show up for a while." 

Every President Tries It. It Never Works. (to increase manufacturing jobs)

By Jason Furman. Excerpts:

"In a full accounting, during the first full month of his second term, the United States lost 2,000 manufacturing jobs. Losses continued almost every month, totaling 100,000 manufacturing jobs since January 2025."

"In his 2024 State of the Union address, President Joe Biden declared, “We’ve got 800,000 new manufacturing jobs in America and counting.” The next morning the Bureau of Labor Statistics announced that the economy had lost 4,000 manufacturing jobs the previous month. More losses followed, in almost every subsequent month of Mr. Biden’s presidency, totaling 202,000 in his last year. The 800,000 new jobs he exulted in were not the beginning of a sustained recovery of manufacturing but rather the return of some of the 1.4 million positions lost during the Covid pandemic."

"Reversing the loss of manufacturing jobs is extremely hard — and not necessarily desirable."

"Manufacturing job share has been dwindling in nearly all middle- and high-income countries. By one analysis, China lost more than 30 million of those jobs from 2011 to 2020, more than twice as many as the number of jobs that exist in the entire U.S. manufacturing sector. Yet total employment continued to grow"

"Manufacturing output, meanwhile, has risen, because workers now produce far more per hour using better and more sophisticated equipment. Today a given number of autoworkers can make, according to my calculations, three times as many cars in a year as they could 50 years ago.

The problem is that consumers do not want three times as many cars. Even as people get richer, they increase their spending on manufactured goods only modestly, preferring instead to spend more on services like travel, health care and dining out. There are only so many cars a family can own, but that’s not the case for expensive vacations or fancy meals. As a result we have fewer people working in auto factories and more people working in luxury resorts and the like.

These forces — rising productivity but steady demand — explain why the United States was losing manufacturing job share as far back as the 1950s and 1960s, long before trade became a major factor. The downward trend changed little after the U.S. entered NAFTA in 1994 or granted permanent normal trade relations to China in 2000. Economists continue to debate the magnitude of the “China shock,” but though it hit some regions harder than others, much of the research suggests that overall, it was responsible for a small fraction of the total manufacturing jobs lost since then."

 

"When governments try to reverse the trend, they mostly succeed only in shifting jobs from one industry to another rather than expanding manufacturing overall. Tariffs on steel, for example, may protect jobs in steel production, but they cost jobs in downstream industries such as automobiles by raising costs and undermining global competitiveness.

Subsidies for targeted industries — Mr. Biden’s preferred approach, particularly for microchips and green energy — have similar trade-offs. They help the favored industries but they also drive up construction and equipment costs across the board, making it harder for companies in other arenas to compete. So instead of creating more jobs overall, the subsidized industries just crowd out unsubsidized ones.

Efforts to revive manufacturing are rooted in nostalgia. Once upon a time, manufacturing jobs provided a reliable pathway to the middle class, offering a wage premium to workers without a college degree. In 1970, roughly 80 percent of manufacturing workers had no more than a high school education. Today that figure is closer to 40 percent.

Manufacturing jobs also used to pay more than nonmanufacturing jobs with similar skill requirements. Not anymore: Today people in nonmanagerial manufacturing jobs average $30 an hour as compared with $32 for truck drivers, $33 for wholesale trade workers and $38 for construction workers. Trying to push more people into manufacturing jobs is therefore more likely to harm the middle class than help it."

Related post:

The manufacturing delusion? (2023) This has an article by Christina Romer that makes points similar to Furman's

Where Are Those Manufacturing Jobs?

The jobs market is so-so, but tariffs are hurting domestic companies that make things

WSJ editorial. Excerpts:

"private employers aren’t laying off workers in large numbers but they also aren’t hiring all that many. The question is why?"

"Our main suspect is the impact of tariffs and the uncertainty Mr. Trump’s willy-nilly border tax policies have caused."

"Remember when tariffs were supposed to produce a U.S. manufacturing boom? It hasn’t happened. In January BLS reported 12,755,000 workers in all manufacturing industries. The number rose by a few thousand through April, but then began to fall each month and in November hit 12,697,000. That’s a net loss of 58,000 jobs, including 19,000 in the last three months."

"Further evidence comes from the industries affected most by Mr. Trump’s tariffs of 50% on steel and aluminum and 25% on autos and auto parts. Employment in motor vehicles and parts fell 15,000 since January, while it remained flat in steel-making and aluminum manufacturing." 

China’s Manufacturing Is Booming Despite Trump’s Tariffs

U.S. pressure has only cemented its rival’s status as the world’s indispensable factory floor, sending its trade surplus above $1 trillion

By Jason Douglas and Jon Emont of The WSJ. Excerpts:

"Chinese industrial production broke records this year as its factories churned out more cars, machinery and chemicals than ever before. Despite the disruptions of tariffs, the country’s trade surplus in goods has set a record, as growing shipments to Asia, Europe, Latin America and Africa offset the hit from Trump’s levies on direct sales to the U.S.

Chinese companies that built their business around low trade barriers to sell into the U.S. have adapted and in some cases are bouncing back."

"China reported a goods trade surplus of more than $1 trillion for the year through November, while manufacturing output in the first 10 months of the year was up 7% compared with the same period in 2024."

"The economy is battling an insidious phenomenon dubbed “involution,” in which cutthroat competition and ballooning industrial capacity are pushing down prices, profits and incomes."

"U.S. efforts to contain China’s economic and strategic ambitions and weaken its grip on essential global supply chains are falling flat. They might even be counterproductive, analysts and economists say, as Chinese policymakers conclude they need to dominate more industries to shield their economy from U.S. pressure and give them more chokepoints they can exploit"

"direct exports to the U.S. did take a hit from tariffs, falling about 19% over the same period. But the decline was more than made up for by sales to other regions, with exports to Southeast Asia up 14%, exports to the European Union up 8%, exports to Latin America up 7% and exports to Africa jumping by more than a quarter."

"Some of those exports probably found their way to the U.S."

"Average tariffs on Chinese imports are currently around 37%, according to the Tax Policy Center, compared with a rate of about 20% on Vietnamese imports"

"Chinese leader Xi Jinping is instead doubling down on a factory-powered future. A new five-year plan’s biggest priorities are supporting cutting-edge manufacturing" 

Trump's Tariffs Were Supposed To Cut the Trade Deficit and Boost U.S. Manufacturing. They're Not Working.

For Trump, tariffs are a solution to every problem, and his trade war is more about the vibes than the economics.

By Eric Boehm of Reason.

"How should we assess whether President Donald Trump's tariffs have been effective?

It's an important question—yet frustratingly difficult to answer. Trump has outlined overlapping, confusing, and sometimes competing goals for the tariffs.

He's celebrated them as a source of government revenue, for example, but also claimed they are meant as a negotiating tactic. They can't be both. Tariffs used for negotiation are meant to be removed (once negotiations are complete), rendering them useless for long-term revenue. For Trump, tariffs are a solution to every problem, and the trade war is more about the vibes than the economics.

Thankfully, U.S. Trade Representative Jamieson Greer offered some more objectively measurable goals during an April 2025 hearing with the House Ways and Means Committee. When Rep. Brendan Boyle (D–Pa.) pressed Greer on what success would look like, Greer offered two clear metrics in response.

"The [trade] deficit needs to go in the right direction," Greer said. "Manufacturing as a share of [gross domestic product] needs to go in the right direction."

More than six months later, neither goal is any closer to being achieved. More importantly, neither seems likely to be completed over the long term by an economic policy rooted in barriers to trade.

Start with the trade deficit—the difference between the total value of all imports and exports. Trump has been obsessed with the trade deficit for years (though he tends to confuse it with the federal government's budget deficit—the gap between spending and tax revenue).

From January through July 2025, America's trade deficit was $840 billion, about 23 percent larger than during the same months in 2024. (Data for August were due to be released in October but were delayed by the government shutdown.)

That increase partially reflects businesses' urgency to get goods into the country quickly in early 2025 before even higher tariffs on items from many countries were enacted in August. It also reflects a now well-established fact: Tariffs don't reduce trade deficits. During his first term, Trump raised various tariffs but the country's trade deficit climbed from about $481 billion in 2016 to $679 billion in 2020.

Tariffs are no better as a tool for boosting manufacturing. According to the Commerce Department's latest figures, manufacturing has contributed 9.4 percent of total GDP through August 2025, down from 9.8 percent in 2024.

Rather than being helped, the manu-
facturing sector is being crushed by
tariffs, which are increasing the cost of raw materials and intermediate goods. Monthly surveys by the Institute for Supply Management show that overall manufacturing activity has declined for seven consecutive months through September. A separate survey conducted by the Dallas Federal Reserve in August 2025 found that just 2.1 percent of business owners believed the tariffs had a positive impact. "The effect is most widespread in manufacturing, where more than 70 percent of firms noted negative impacts," the survey reported.

Even if the tariffs weren't creating serious headwinds for manufacturers, Greer's focus on "manufacturing as a share of GDP" is a misguided way of looking at the economy. That metric assumes that the whole economy is a fixed size, which is not true. The share of GDP generated by manufacturing could increase during a recession if other sectors of the economy are declining by larger margins. For the same reasons, the manufacturing share of GDP could decline during strong economic times simply because other sectors are growing more rapidly. That's been the case for decades.

Some in Trump's orbit insist that 15 percent of the economy should be manufacturing, but that's an arbitrary target. And if the slice of the pie labeled "manufacturing" should grow, what sectors should shrink to make room for it?

During a speech in July, Greer added a third goal for the administration's tariff policies: increasing real median household income. It's too soon to know how that is shaking out—the Census Bureau won't release 2025 data on that stat until late 2026—but it is already clear that tariffs are making it more difficult for households to make ends meet. An October study from the Harvard Business School shows that retail prices had declined throughout 2024 and early 2025, then began rising in April, after Trump's tariffs were announced.

The Trump administration's tariff policies misunderstand the value of trade in a productive, flourishing economy. The administration has set the wrong goals and then made policy choices that are unlikely to achieve them."

Why Ford Can’t Find Mechanics

Forget about reshoring manufacturing without more skilled workers

WSJ editorial. Excerpts:

"Government subsidies for college and graduate education have encouraged the young to go to college even though they might be better off learning a trade. This has created a skills mismatch in the labor market. Unemployment among young college grads is increasing, while employers struggle to hire skilled manufacturing workers, technicians and contractors.

Only 114,000 Americans in their 20s completed vocational programs during the first 10 months of last year, compared to 1.24 million who graduated from four-year colleges and 405,000 who received advanced degrees. Yet recent bachelor’s recipients in their 20s were 5.6 percentage points less likely to be employed than those who finished vocational programs."

"one third of small business owners reported jobs they couldn’t fill, and 49% reported few or no qualified applicants for positions they were trying to fill." 

To Beat China, Turn to India

Plus: There’s no need to embrace Beijing-style industrial policy

Letter to The WSJ. 

"Shyam Sankar’s recommendation that the U.S. copy China’s industrial policy is compelling but misguided (“Why the China Doves Are Wrong,” op-ed, Oct. 18). State-led industrial policy makes economies weaker, not stronger.

Researchers at Stanford found that receipt of billions of dollars in direct subsidies from Beijing was “linked with lower firm productivity growth and only modest growth in R&D spending in subsequent years.” A recent International Monetary Fund working paper argues that China’s industrial policy has led to reduced aggregate productivity.

To beat Beijing, we ought to allow its products to reach the hands of productive Americans. We have 12.7 million workers employed in manufacturing; China has some 212 million. That they only produce twice as much “manufacturing value” as we do despite having more than 16 times as many workers is evidence enough that we needn’t embrace their policies.

David Hebert

American Inst. for Economic Research"

China Shocked? Hard Hit Metropolitan Statistical Areas Have Performed Well Economically Since 2000

By Jeremy Horpedahl.

"Much has been made of the “China Shock,” or the impact on US manufacturing from two related trade policy changes: the US granting China permanent normal trade relations in 2000, and China’s accession to the WTO in 2001. As Scott Lincicome has pointed out, the policy discussion has strayed from the academic research on this topic in several important ways: the job losses are frequently overstated, it didn’t devastate the US economy (it probably helped), and the prominent authors of papers on the China Shock don’t think the negative impacts justify broad-based tariffs.

Today I’ll deflate another piece of the China Shock political narrative: that it crushed American communities.

David Autor and co-authors have been some of the primary contributors to academic research on the China Shock, showing its negative impact on certain people living in various parts of the US and contextualizing those impacts. In a 2021 paper, those authors provide a list of the “most trade-impacted” commuting zones from the China Shock (the list is found in the Online Appendix Table A4). From this list, we can identify 10 metropolitan statistical areas (MSAs) that are the most affected by Chinese imports (MSAs and commuting zones are defined slightly differently, but there is a lot more data available for MSAs). The remainder of the trade-affected commuting zones they identify are much smaller, rural counties, with less available data, so I won’t dig into them in this post.

What happened to those “most affected” MSAs? Here’s a shocking fact: all of the MSAs hit hard by the China Shock still managed to have significant and positive real wage growth across the distribution since 2001, the earliest comparable data in the BLS OEWS data, conveniently timed at the beginning of the China Shock (note: for Cleveland, TN the data is first available in 2005, since it was not recognized as an MSA until 2003). Wage gains in several of these places, in fact, are better than the national trends.

The chart below shows the 10th percentile and median wages, adjusted for inflation, from the BLS Occupational Employment and Wage Statistics, and BLS also publishes wages at the 25th, 75th, and 90th percentiles (the 10th percentile wage is the point in the distribution where 10 percent of workers are below that wage, while the median is the middle of the distribution). Every single MSA in this group had positive real wage growth since 2001 in every single slice of the distribution that BLS reports. It is also notable that the 10th percentile workers saw larger gains than the median worker. I only show the 10th percentile wage and median wage in the chart for clarity of presentation, but all of the gains would be positive if I had used the 25th, 75th, or 90th percentiles.

 

For comparison, the national median wage increased by 11.5 percent (adjusted for inflation) from 2001 to 2024, and the 10th percentile wage increased by 30.1 percent. This means that most of these MSAs experienced slower wages at the bottom end than did the nation as a whole. That may be the China Shock. But we shouldn’t confuse this outcome with the communities being worse off than they were decades ago.

Perhaps wages are rising because people are dropping out of the labor force, thus artificially boosting the wages we observe in the OEWS data. That could be the case if the workers losing their jobs have below-average wages. When we look only at manufacturing jobs, all ten of these MSAs saw manufacturing employment fall since 2000, even though some of them saw recovery after the Great Recession. However, as we will see below, gains in jobs in other sectors offset those manufacturing job losses in almost all of these cities.

 

For comparison, total US manufacturing employment declined by 25.8 percent from 2000 to 2024. Thus, six of these ten trade-affected MSAs saw smaller declines in manufacturing employment than the nation as a whole, even though three of these MSAs (Lynchburg, San Jose, and Hickory) lost around half of the manufacturing jobs they had in 2000.

But we don’t only care about manufacturing jobs. Indeed, there isn’t necessarily a reason to prefer manufacturing jobs to other jobs. What we care about are whether people have jobs, whether those jobs pay well, and other characteristics about the jobs (how dangerous they are, how stable they are, etc.). Thus, it makes sense to look at total employment for these MSAs and not just bemoan the decline of one sector.

 

For comparison, total US growth in nonfarm jobs over the same period was 19.7 percent from 2000 to 2024. Thus, while the majority of these areas had total job growth below the national average, four of the MSAs had job growth that exceeded the national average. Only one MSA—Hickory, NC—clearly lost jobs since 2000, while Sioux City and Lynchburg had close to no net job growth. Thus, we can see that, at least on net, the rise in real wages for most of these hard-hit MSAs is not caused by a decline in labor force participation, though there may have been a change in exactly who the workers were and their education and training levels.

Even the one exception of Hickory, NC (full name: Hickory-Lenoir-Morgantown MSA), the worst performer in job growth in this group, has performed better than the pessimistic projections. For example, a 2011 report predicted that in Hickory, “unemployment levels won’t reach pre-recession levels for another decade,” when the unemployment rate in Hickory was 12 percent, and put the prospects for Hickory “near the bottom of the road for recovery nationwide.” But three years later, the unemployment rate was down to 6.2 percent, on par with 2006 and 2007. By 2018, it had dropped all the way to 3.7 percent, the lowest since the late 1990s, and slightly below the national rate of 3.9 percent. As my colleague (and North Carolina resident) Scott Lincicome has repeatedly noted, Hickory’s economy is doing well today, and the area has repeatedly been voted one of the best places to live in the country.

How did these areas perform so well, given the pessimistic narrative of the China Shock? Remember, again, to emphasize, these are the MSAs that are likely the worst hit by the Shock. We are already making the hard case, not cherry-picking MSAs with good stories of recovery.

For MSAs such as San Jose (which includes Silicon Valley), Austin, and Raleigh, their resilience from the China Shock is not surprising. As Autor et al. point out, diverse areas with a high concentration of college-educated workers in 2000 (these areas were all over 30 percent college educated, while the other “most impacted” areas were under 20 percent) and low concentration of manufacturing employment in 2000 (these areas were all under 21 percent, the lowest 3 on the “most impacted” list) were able to adapt well to the China Shock, even if they experienced significant manufacturing job losses. On the other hand, areas with the opposite combination—high manufacturing employment and low numbers of college-educated workers —faced bigger challenges in adjusting to the Shock.

Indeed, Autor and his co-authors contrast the performance of Raleigh-Cary and Hickory (separated into the commuting zones of North and West Hickory), both located in North Carolina and separated by less than 200 miles. Given their very different mixes of employment in 2000—Raleigh with just 17 percent in manufacturing and Hickory over 40 percent—we would expect Raleigh to adjust better to the Shock of increased trade penetration. And as we saw in Chart 3 above, this was the case.

As Adam Ozimek has recently pointed out, the resiliency of highly educated cities and commuting zones likely isn’t a coincidence or a mere correlation. It’s much more likely that it is a causal relationship, and there are good reasons a more-educated city would be better able to adapt to heavy exposure to the China Shock. So if there are policy implications to economically homogenous, lower-educated cities being less resilient in the face of an economic shock, it is that education and economic diversification would help, not trade barriers.

But there are other success cases we can identify that did not have Raleigh and Austin’s favorable starting position. Even San Jose, despite benefitting from the booming Silicon Valley, was a mediocre performer in employment growth, even though it performed well in wage growth (note: the wage figures are adjusted using national price indices, even though costs may have increased faster there).

One such success case is in Jonesboro, Arkansas. Employment grew faster than the national average, and wage growth also compared favorably. While Jonesboro is home to a mid-sized research university (Arkansas State University), it didn’t have a very high proportion of its population with college degrees in 2000: just 14.6 percent, less than half of the proportion in places like San Jose and Austin. Nonetheless, despite a 13 percent drop in goods-producing jobs in Jonesboro from 2000 to 2024, service-producing jobs grew by 55 percent. And this is not merely a “small base” effect, as service-sector employment was almost three times as large as goods-producing employment in 2000 in Jonesboro.

Jonesboro is no exception. Service sector employment grew in all 10 of these MSAs from 2000 to 2024, by as much as 116 percent in Austin, down to 14 and 15 percent in Lynchburg and Fort Wayne.

These outcomes reveal an important fact: contrary to the conventional political wisdom, most service-sector jobs are not bad, low-paying jobs. According to the latest BLS wage data, private-sector service jobs pay on average about $36 per hour, slightly higher than manufacturing at about $35 per hour. These are not large differences. But it is simply not the case that, on average, manufacturing jobs are better paying. And, in fact, many manufacturing jobs pay well below the wages in comparable blue-collar service industries.

Thus, once again, the lesson of the China Shock isn’t that we need more tariffs and industrial subsidies. Instead, it’s that the way to help Americans and US regions that are hurt by foreign trade (or any other economic shock) is to allow them to transition to a different, more modern industrial structure and allow their service sectors to flourish. As Lincicome and others have shown, numerous government policies thwart this necessary adjustment and thus make our workers and localities less resilient to shocks. Reforming these policies—not protectionism—should be the priority. Recovery from a large trade shock takes time, as David Autor and other economists explained recently, but that doesn’t mean recovery doesn’t happen.

To emphasize one more time, in this post I have focused on the MSAs that were most affected by the China Shock—in other words, the worst-case scenarios. Yet even these worst cases show that the US economy is more than able to adapt to employment changes brought on by international trade, even as we enjoy all of its other benefits."

Walter Williams on manufacturing

From Cafe Hayek. 

"U.S. manufacturing is going through the same kind of labor-saving technological innovation as agriculture. In 1790, farmers were 90 percent of the U.S. labor force. By 1900, only about 41 percent of our labor force was employed in agriculture. By 2008, less than 3 percent of Americans were employed in agriculture. What would you have had Congress do in the face of this precipitous loss of agricultural jobs? Should Congress have outlawed all of the technological advances and machinery that cost millions of agricultural jobs and made our farmers the world’s most productive? Also, had Congress done something to save those agricultural jobs, where would we have gotten the workers to produce the millions of things we enjoy that weren’t even around in 1790? We would have been poorer."

America is a Manufacturing Powerhouse

By Scott Sumner.

"A recent Bloomberg article by Dan Wang and Ben Reinhardt had some interesting things to say about US manufacturing. Instead of imposing high tariffs, they suggested that the US encourage foreign investment into facilities producing goods in America.  I particularly liked this paragraph:

But the more that Trump makes the country captive to his impulses—whether on trade policy, immigration or the treatment of investors—the more likely that it won’t be China that’s isolated from the rest of the world, but America itself.

But what if the entire premise of the article is false?  Is it possible that the US is not, in fact, falling behind in manufacturing?  Given all of the stories about the hollowing out of the Rustbelt, that optimistic view seems a bit far-fetched.  But consider this graph provided in the Bloomberg piece:

It is important to recall that China has more than 4 times America’s population.  Thus, in per capita terms, American manufacturing output is more than two and a half times larger than that of China.  Indeed, in per capita terms, the US leads every single country on that list, except for Germany (which has 1/4th our population).  We even lead countries like Japan and South Korea in per capita manufacturing output, despite their impressive export sectors. 

I suspect that people underestimate American manufacturing because it is a relatively low share of GDP.  But that doesn’t reflect the fact that our manufacturing sector is doing poorly—it isn’t—rather, that our other sectors are so productive that our total GDP per capita greatly exceeds that of almost all other countries.  

A recent article by Gary Winslett showed that the decline in the Rustbelt was largely caused by a re-allocation of industry to other regions, especially the Sunbelt.  Another article, by Ben Glasner, showed that workers in manufacturing are actually more likely to be college graduates than workers in other sectors of the economy.  American manufacturing is doing far better than many people assume.

PS.  The strong dollar may somewhat overstate our manufacturing strength.  But recall that manufactured goods are often traded internationally, and hence “PPP” type adjustments are much less important than in the service sector."

From the comments:

David Henderson

May 22 2025 at 9:43am

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Good post.
One correction: U.S. per capita manufacturing is not more than  two and a half times larger than China’s. It’s more than one and a half time larger, and two and a half times as large.

Scott Sumner

May 22 2025 at 11:54am

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Good point.