14.3 Decline of Traditional Manufacturing Industries

The 1970s energy crisis hit traditional manufacturing hard, sparking a decline that reshaped the American economy. Skyrocketing oil prices and inflation made production costlier, while emerging global competitors offered cheaper alternatives. These factors forced many U.S. manufacturers to downsize or relocate.

This shift marked the beginning of deindustrialization, a trend that would continue for decades. As manufacturing jobs disappeared, the service sector grew, changing the nature of work and reshaping communities. The "Rust Belt" emerged, symbolizing the economic and social challenges faced by former industrial powerhouses.

Decline of Manufacturing in the 1970s

Energy Crisis and Economic Challenges

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• Oil crisis of 1973 increased energy costs significantly impacted manufacturing profitability and competitiveness
  • Quadrupling of oil prices from $3 to$12 per barrel
  • Manufacturing sectors like steel and automobiles particularly affected
• Economic policies to combat inflation made borrowing more expensive for manufacturers and dampened domestic demand
  • Federal Reserve raised interest rates to as high as 20% in early 1980s
  • High interest rates led to reduced consumer spending on durable goods

Technological and Global Shifts

• Technological advancements and automation began replacing human labor in many manufacturing processes reduced the need for large workforces
  • Introduction of computer-controlled machinery and robotics in assembly lines
  • Example: General Motors' implementation of robotic welding systems in the late 1970s
• Globalization and the rise of newly industrialized countries provided cheaper labor markets encouraged companies to outsource production
  • Emergence of the "Asian Tigers" (South Korea, Taiwan, Hong Kong, Singapore) as manufacturing hubs
  • U.S. companies like Nike began shifting production to countries with lower labor costs

Regulatory and Market Changes

• Increased environmental regulations in the U.S. raised production costs for manufacturers particularly in heavy industries
  • Clean Air Act of 1970 and Clean Water Act of 1972 imposed new compliance costs
  • Steel industry faced significant expenses to meet new pollution control standards
• Shifts in consumer preferences towards services and high-tech products reduced demand for traditional manufactured goods
  • Growing demand for personal computers and electronic devices
  • Increased spending on services like healthcare and education
• Decline of labor unions weakened workers' bargaining power affected wage growth and job security in manufacturing sectors
  • Union membership in private sector declined from 34% in 1973 to 16% in 1985
  • Reduced ability to negotiate for higher wages and better working conditions

Foreign Competition's Impact on Manufacturing

Rise of Global Competitors

• Japan emerged as an economic powerhouse in the 1970s and 1980s challenged U.S. dominance in industries like automobiles and electronics
  • Japanese automakers (Toyota, Honda) gained significant market share in U.S.
  • Sony and Panasonic became leaders in consumer electronics
• Emerging economies particularly in Asia offered lower labor costs attracted U.S. companies to offshore production and created direct competition with domestic manufacturers
  • China's economic reforms in 1978 led to rapid industrialization
  • Countries like Malaysia and Indonesia became major exporters of textiles and electronics

Trade Dynamics and Policy Impacts

• Trade agreements such as NAFTA opened U.S. markets to increased foreign competition while providing opportunities for U.S. companies to access global markets
  • NAFTA implementation in 1994 led to increased trade with Mexico and Canada
  • U.S. manufacturing jobs declined by 5 million between 2000 and 2016
• Foreign competitors often benefited from government subsidies and support created an uneven playing field for U.S. manufacturers
  • Japanese government's support for its automotive and electronics industries
  • Chinese state-owned enterprises received preferential treatment and funding
• Trade deficit in manufactured goods grew significantly reflected the shift in global manufacturing dynamics
  • U.S. trade deficit in goods increased from $31 billion in 1980 to$436 billion in 2000

Competitive Pressures and Responses

• Influx of cheaper foreign goods led to price pressures on U.S. products forced domestic manufacturers to cut costs or lose market share
  • Example: U.S. steel industry faced intense competition from cheaper imports
  • Retail chains like Walmart increased imports of low-cost consumer goods
• Some U.S. manufacturers responded by adopting new technologies and lean manufacturing processes to remain competitive
  • Implementation of Just-In-Time inventory systems inspired by Japanese methods
  • Increased focus on quality control and Six Sigma processes

Manufacturing to Services: A Shift in the Economy

Growth of the Service Sector

• Service sector's share of GDP and employment grew substantially while manufacturing's contribution declined relatively and absolutely
  • Services sector grew from 65% of GDP in 1970 to over 80% by 2000
  • Manufacturing employment fell from 26% of workforce in 1970 to 14% in 2000
• Knowledge-based industries such as finance healthcare and technology became primary drivers of economic growth and job creation
  • Rise of Silicon Valley and the tech boom of the 1990s
  • Expansion of the healthcare sector with aging population and medical advances

Workforce and Productivity Changes

• Transition led to changes in workforce skills requirements with a greater emphasis on education and specialized training
  • Increased demand for college-educated workers in service sector jobs
  • Growth of vocational training programs for new service industries
• Productivity gains in manufacturing allowed for increased output with fewer workers accelerated the shift towards service employment
  • U.S. manufacturing output doubled between 1970 and 2000 despite job losses
  • Automation and improved processes led to higher output per worker

New Economic Models and Work Arrangements

• Rise of the digital economy created new service-based business models and industries that didn't exist in the manufacturing era
  • E-commerce platforms like Amazon transformed retail services
  • Emergence of the gig economy with companies like Uber and TaskRabbit
• Outsourcing of non-core business functions contributed to the growth of professional and business services within the U.S. economy
  • Growth of IT outsourcing and business process outsourcing industries
  • Expansion of consulting firms offering specialized services to businesses
• Shift altered the nature of work with more flexible employment arrangements and a decrease in traditional blue-collar jobs
  • Increase in part-time and contract work in service sectors
  • Growth of telecommuting and remote work options

Deindustrialization: Social and Economic Consequences

Employment and Income Impacts

• Mass layoffs and plant closures led to high unemployment rates in manufacturing-dependent regions created "Rust Belt" communities
  • Cities like Detroit, Cleveland, and Pittsburgh experienced significant job losses
  • Unemployment in some Rust Belt cities reached over 15% in the early 1980s
• Loss of high-paying manufacturing jobs contributed to income inequality and the erosion of the middle class in affected areas
  • Average manufacturing wages were 19% higher than median income in 1970s
  • Decline in unionized jobs reduced access to benefits and stable incomes
• Many workers faced challenges in transitioning to service sector jobs often experiencing underemployment or lower wages
  • Former manufacturing workers often took jobs in retail or food service
  • Skills mismatch led to long-term unemployment for some displaced workers

Community and Social Fabric Changes

• Deindustrialization led to the decline of labor unions reduced collective bargaining power and altered labor-management relations
  • Union membership in manufacturing fell from 39% in 1973 to 14% in 2000
  • Weakened unions had less influence on workplace policies and wages
• Local economies built around major manufacturing employers suffered from reduced tax bases led to fiscal challenges for municipalities
  • Decreased property values and business closures reduced local tax revenues
  • Many cities struggled to maintain public services and infrastructure
• Social fabric of many communities was disrupted with increased rates of poverty crime and substance abuse in severely affected areas
  • Opioid crisis hit many deindustrialized communities particularly hard
  • Some areas saw increases in crime rates and social unrest

Demographic and Long-term Effects

• Demographic shifts occurred as younger workers migrated from deindustrialized areas led to aging populations in some communities
  • "Brain drain" as educated youth left for better opportunities elsewhere
  • Median age in many Rust Belt cities increased significantly
• Intergenerational impacts of deindustrialization created long-term economic challenges for affected regions
  • Children of displaced workers often had fewer educational and career opportunities
  • Some communities struggled to attract new industries and investment