There’s a popular story that politicians in both parties like to tell us: The Rust Belt was a thriving region until China, Mexico and their American business allies tore their manufacturing jobs away with lopsided trade deals. Whether through President Donald Trump’s tariffs or some Democratic alternative, it’s now up to Washington to get them back.
It’s a politically convenient tale for courting voters in key swing states, pining for the way things once were. The problem is that it’s not true — and it is leading to some terrible policy decisions.
A big missing part of the story: Interstate competition. The Rust Belt’s manufacturing decline isn’t primarily about jobs going to Mexico. It’s about jobs going to Alabama, South Carolina, Georgia and Tennessee. To put it in college football terms, the traditional Big Ten has been losing out to the Southeastern Conference. In 1970, the Rust Belt was responsible for nearly half of all manufacturing exports while the South produced less than a quarter. Today, the roles are reversed, it is the Rust Belt that hosts less than one-fourth of all manufactured exports and the South that exports twice what the Rust Belt does.
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Economic research suggests that labor conflict drove much of the decline of the Rust Belt. Right-to-work laws in the South, by contrast, created more operational flexibility and attracted capital. The average unionization rate in the Rust Belt is 13.3 percent; in the South, it’s 4.3 percent. Southern states’ political leaders are quite open about how they see right-to-work as foundational to their competitiveness.
But that’s far from the only factor. The South offers cheaper electricity, a critical input for energy-intensive manufacturing. Ten states in the South have industrial electricity rates under 8 cents per kilowatt-hour; zero states in the Rust Belt do. Ohio has some of the country’s most restrictive wind-energy setback regulations. You know who doesn’t? Texas.
Despite the economic growth, Southern states have built so much housing that they kept costs from becoming unaffordable. Last year, both North Carolina and South Carolina each built more than four times as much new housing per capita as Massachusetts, according to U.S. census data. Florida, Georgia, Texas, Tennessee, South Carolina and North Carolina, all built more housing per capita than all of Illinois, Ohio, Michigan, Pennsylvania, California, New York and Massachusetts. That is not just a 2024 dynamic. That is true for every single year going all the way back to 1993. Comparatively low-cost housing makes it easier to attract and retain workers, which further attracts capital, which adds yet more investment and jobs, and the virtuous cycle spins upward.
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Of course, if the question is about manufacturing employment, automation has played a big role in the decline of manufacturing employment across all regions. Modern factories simply require fewer workers to produce more goods. This is true even for companies that are returning production from abroad: Stanley Black & Decker’s reshored factory employs just 10 to 12 people on a line that would have needed 50 to 75 abroad. The takeaway: Even if you did somehow generate a huge wave of reshoring, manufacturing as the jobs machine isn’t coming back.
But even accounting for this technological shift, it is the ongoing competition between states, far more than globalization, that has reshaped American manufacturing, creating uncomfortable truths that neither party wants to acknowledge.
Axios published a story for which the accompanying post on X reads, “Hard data suggests tariff-driven inflation and recession fears may be overblown.” A cavalcade of tariff supporters have touted it to say those who opposed the tariffs were wrong and Trump was right.
A few things worth noting:
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I can’t speak for other tariff opponents, but I put my expectations out there for anyone to see back in March. I said there would be a negligible effect on the inflation rate, so anyone pointing to inflation remaining basically the same isn’t scoring any points against me. I said there would be higher prices for the goods to which tariffs apply, and sure enough, companies have announced price increases, with Walmart being the latest major example. I said there would be a negative effect on GDP growth, and sure enough, the economy shrank slightly in the first quarter. I said there would be continued U.S. stock market underperformance compared to the rest of the world, and after a big dip and a recovery, the S&P 500 is at basically the same level today as it was when I wrote that post on March 3. My expectations seem to be holding up pretty well so far.
[DBx: It’s important to remember this fact: No informed free trader predicts that tariffs cause noticeable inflation – that is, cause a significant and sudden rise in the price level. The upward effects of tariffs on the price level are real but play out over a long time span. The price-level effects are seldom noticeable. Yet protectionists routinely assert, without any basis, that part of the core economic case against protectionism is that protectionism causes significant inflation. And so when protectionism rises and detectable inflation doesn’t, protectionists pat themselves on the back for allegedly being more astute than are free traders. They’re wrong to do so.]
But noticeable price hikes on many goods are coming. A slice:
In the weeks that have elapsed since “Liberation Day,” Americans did not experience tariff-induced sticker shock. Many analysts expected the public to encounter price hikes when U.S. retailers exhausted their current inventories. But Walmart’s price adjustments are likely to be hard to miss.
It operates over 4,600 stores (along with 600 Sam’s Clubs) and has the second largest share of the retail e-commerce market, behind Amazon. Last year, while Americans were cutting back on discretionary purchases, they were increasing the amount of time and money they spent at Walmart. “Groceries account for more than half of Walmart’s sales, and Walmart has benefited from its pricing advantage,” CNN reported at the time. “Walmart’s prices are around 25% lower than traditional supermarkets, according to analyst comparisons.” In March, a YouGov survey ranking consumers’ preferences found that nearly 64 percent of U.S. adults named Walmart as their preferred grocer (with Target coming in a distant second place). Estimates indicate that as much as 44 percent of the U.S. population patronizes Walmart annually.
Walmart isn’t the only retailer raising consumer prices to match increased operating costs. Some of them even have the gall to properly inform their customers about the conditions that have compelled them to increase prices — acts of radical transparency White House Press Secretary Karoline Leavitt deemed “a hostile and political act” last month. The truth hurts, and no amount of hectoring from the lectern in the James Brady Briefing Room will repel market forces.
Eric Boehm reports from the trade-war front.
Mike Munger continues to write insightfully and wisely about trade. Here’s the conclusion of his latest essay for AIER:
It is very tempting to believe that a nation should try to be self-sufficient, in all things. After all, that way “we keep the money and the jobs here at home.” But as I have argued before, those are spoon jobs, not jobs that pay well or produce wealth or prosperity. As Adam Smith recognized, and as we should remember, trying to make everything and buy nothing makes you poorer, not richer. Those $100 tomatoes were quite tasty, but they weren’t worth what I saved by not buying them.
Also writing insightfully and wisely about trade is GMU Econ alum Jon Murphy. A slice:
Writing for the Peterson Institute for International Economics, J. Bradford Jensen and Lori G. Keltzer show that the overwhelming majority of jobs “at risk” to trade are in sectors with low productivity and low wages. Conversely, the sectors with the highest productivity and wages are exporters (see figures 4 and 7). These data are a little old (the report is from 2008), but I have been working on updating the figures. The pattern isn’t changing; just the numbers.
George Will is not impressed with Major League Baseball’s justification for reinstating Pete Rose. A slice:
We do not know what [Shoeless Joe] Jackson did. We know that Rose, a monster of self-absorption, put at risk the game’s dignity, which is inseparable from the ideal of excellence within rules. MLB’s gravest rule, its proscription against gambling, protects baseball’s integrity because a gambler within baseball communicates inside knowledge about games he does — and does not — bet on. Players whose numbers came from performance-enhancing drugs engendered a related risk and are excluded from the Hall.
When in 1989 MLB Commissioner A. Bartlett Giamatti, former president of Yale University, orchestrated the settlement that made Rose permanently ineligible, Giamatti provided the nation an example of ethical standards taken seriously, an example never more needed than presently. Rose’s principal advocate [Donald Trump] has other priorities.
During the NFL draft last month, all of the 32 NFL teams, all having done their due diligence, went more than four rounds before one finally made Deion Sanders’s quarterback son Shedeur the 144th pick. The polymath-in-chief, incensed, announced that Shedeur “has PHENOMENAL GENES” and “should be ‘picked’ IMMEDIATELY.” Is there anything Trump doesn’t know?
