The Revenge of the Rust Belt: How the Midwest Got Its Groove Back

By becoming more cost competitive, the Midwest is luring back manufacturers, creating signs of hope in a troubled region. 

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Clouds of moisture form on Lake Michigan at sunrise in Kenosha, Wisconsin (Reuters)

We're not used to thinking of the old industrial Midwest as a beacon of good news. Just the opposite. It's Exhibit A in the story of America's economic decline -- a land of hollowed-out factory towns and shrinking cities. There's an entire genre of photography dedicated to Detroit's decaying cityscape alone.  

Yet, it may be time to rethink that view. Because there are signs that the heart of the rust belt may be finally shaking off its rust.

For the past thirty years or so, there have been two great running narratives about American manufacturing, both of which have been disastrous for the Midwest's economy. The first has been about the disappearing factory worker -- how by shipping some jobs abroad and replacing others with machines, companies have figured out ways to produce more goods with millions of fewer employees on their assembly lines. The second narrative has been about migration -- the decision by companies to move production away from once-booming industrial centers of the north, to southern states with weaker unions and lower wages.

Both of those trends, it appears, may have drawn to an end.

The first sign of hope is the bounce-back the country has seen in manufacturing employment since the end of the recession. The graph below, courtesy of a recent Brookings Institute report, shows the great plunge of U.S. factory jobs over the last three decades, from more than 19.4 million in 1979 to a little more than 11.5 million in 2010. Recently, manufacturing has staged a small comeback. Between January 2010 and December 2011, we added 350,000 jobs in the sector. It's a modest increase, but at least it's a movement in the right direction.


It's certainly possible that manufacturing is experiencing its own version of a dead cat bounce -- that employment fell so low in the wake of the recession, it simply had to recover a bit, even though the sector is still effectively moribund. But there are reasons to believe that we're seeing bona fide signs of life. The auto industry has gotten healthy. Exports are increasing. And some large manufacturers, including General Electric, Whirlpool, and Ford have started bringing jobs back to the U.S. from overseas -- a trend often referred to as "onshoring." These companies have discovered that with rising costs in China, it can be just as cost effective to make products here at home as overseas.

The biggest beneficiary of these trends has been the Midwest -- which is something of a shock. For years, many observers have believed that if America ever experienced a manufacturing renaissance, it would happen in Dixie. States like Alabama, South Carolina, and Tennessee made themselves attractive to foreign manufacturers as well as companies up north, by using right-to-work laws to weaken unions and keep wages at cut-throat-competitive levels. They also offered up incentives in the form of sweet tax deals. All of this was supposed to make them the center of the future manufacturing economy.

That hasn't been the case. The graph below is from the same Brookings report I cited earlier, which contains an extensive mapping of America's industrial base, and the way its geography has shifted for the last several decades. What it shows is that, contrary to popular belief, the great flight of manufacturers to the South effectively ended at the turn of the millennium. From 2000 to 2010, manufacturing employment fell in the Midwest and South at roughly same the pace. Since 2010, the Midwestern factory employment has recovered faster than the rest of the nation's, growing by 5 percent compared to 2.2 percent in the South. It's not simply that industries clustered in the region, such as cars and heavy machinery, have come back faster than others. If the Midwest had simply regained jobs at the same rate as its dominant industries, factory employment would have only grown by 2 percent.


There's a relatively simple explanation for this recovery. When it comes to the price of operating a business, the Midwest is a lot more competitive than it used to be. As the Wall Street Journal  recently reported, the overall cost of doing business in the region, including factors such as labor and energy prices, is now about 96 percent of the national average. In the South, it's about 95 percent. The graph below shows how that gap has changed over the years.


How did rust belt get back into fighting shape? In part, it has chased the South down to the bottom. Though states like Michigan and Illinois haven't gone to war against their unions, some factory wages have dropped. The major labor unions have also switched gears from trying to bid up pay and benefits to job preservation, as was vividly demonstrated by the most recent round of negotiations between the major car companies and the United Auto Workers. The famously pugnacious union accepted a two-tier wage system that would essentially pay new workers in Detroit and Ohio the same wage they'd make at a Toyota plant Alabama. In return, they got assurances that the companies would hire more workers, and bring more production back from abroad. Meanwhile, Midwestern states have become more adept at luring factories with generous tax breaks.

The manufacturing revival has been far too modest to bring back the rust belt's glory years. But it appears that some of the region's worst economic bleeding has stopped. Its an opportunity for its cities and states to go into rebuilding mode. Hopefully, that'll mean more good news in the future.