The decline of American manufacturing since the 1980s has been a major economic shift, transforming the U.S. from an industrial powerhouse to a service-driven economy. In his paper, “Relative Prices, Hysteresis, and the Decline of American Manufacturing”, economist Douglas L. Campbell explores why this happened. He argues that two key factors—“relative prices” (especially due to exchange rates) and “hysteresis” (long-lasting economic scars from temporary shocks)—played a crucial role in this decline.
This article breaks down Campbell’s findings in simple terms, explaining how currency fluctuations and trade dynamics hurt U.S. manufacturing jobs and why some losses became permanent.
Key Takeaways
1. Exchange Rates Matter: A stronger U.S. dollar made American goods more expensive abroad, hurting manufacturing jobs.
2. Hysteresis Effect: Temporary economic shocks (like a recession) led to permanent job losses as factories closed and never reopened.
3. Sector-Specific Damage: Industries more exposed to global trade (like textiles and electronics) suffered the most.
4. Policy Solutions Needed: Campbell suggests managing exchange rates and improving worker training to revive manufacturing.
Background: The Rise and Fall of U.S. Manufacturing
After World War II, the U.S. was the world’s leading manufacturer, providing high-paying jobs and driving economic growth. However, starting in the 1980s, manufacturing employment began a steep decline.
What Caused the Decline?
– Trade Liberalization: Cheaper imports from countries like China and Mexico undercut U.S. factories.
– Strong U.S. Dollar: In the 1980s and early 2000s, the dollar’s value rose, making American goods more expensive overseas.
– Automation & Offshoring: Companies moved production abroad or replaced workers with machines.
But Campbell argues that relative prices (how U.S. goods compare in cost to foreign ones) and hysteresis (long-term damage from short-term shocks) were major hidden drivers.
How Relative Prices Hurt Manufacturing The Dollar’s Role
When the U.S. dollar strengthens:
– Imports become cheaper → Americans buy more foreign goods.
– Exports become more expensive → Foreigners buy fewer U.S. goods.
Campbell found that over two-thirds of manufacturing job losses in the early 2000s were linked to the dollar’s rise. Sectors most exposed to trade (like auto parts and electronics) were hit hardest.
The Hysteresis Effect
Hysteresis means that temporary economic problems can cause permanent damage. For example:
– A factory closes during a recession.
– Even when the economy recovers, the factory never reopens because workers have left, supply chains are broken, or investors lost confidence.
Campbell shows that the 1980s and 2000s dollar shocks didn’t just cause job losses—they permanently reduced manufacturing capacity.
Policy Implications: Can Manufacturing Bounce Back?
Campbell suggests several solutions:
1. Exchange Rate Management: Avoid extreme dollar appreciation to keep U.S. goods competitive.
2. Trade Policies: Protect key industries without sparking trade wars.
3. Workforce Training: Help workers adapt to high-tech manufacturing jobs.
However, reversing hysteresis is tough—once factories and skills are lost, they’re hard to rebuild.
Conclusion
Campbell’s research shows that currency fluctuations and hysteresis played a bigger role in manufacturing decline than many realize. While automation and trade were factors, the strong dollar and lasting economic scars made recovery difficult.
To revive U.S. manufacturing, policymakers must address these structural issues—not just blame outsourcing or technology.
References
– Campbell, D. L. (Year). “Relative Prices, Hysteresis, and the Decline of American Manufacturing”.
– U.S. Bureau of Labor Statistics (BLS) & Census Bureau data.
– Related studies on exchange rates and manufacturing employment.
