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If manufacturing is critically important to driving trends of national well being, an exploration of the decline of that sector is crucial. But that exploration almost always leads back to a very difficult place - international trade. And every right minded economist and policymaker knows unequivocally that free trade is good, and to even question that assumption makes one an ignorant heretic who has never heard of Smoot-Hawley. Therefore, the examination ends. Manufacturing's decline simply cannot be a problem if it is consequence of international trade because everyone knows international trade is good.

Just as everyone "knew" that the increased liquidity offered by exotic financial instruments and the free flow of capital was unequivocally good. But that is a different story.

Indeed, the establishment will defend any assault on free trade with a simple, seemingly unassailable story: NAFTA was followed by the 1990s jobs boom in the US even as the current account deficit widened. Therefore, free trade does not have net negative impacts. Winners and losses, yes, but the former outweigh the latter.

I have told that story myself.

Such a story, of course, denies the importance and unrelated rise of information technology - a once in a generation tectonic shift that, ironically, vastly accelerated the offshoring of manufacturing capacity the following decade. But even more importantly, it fails to acknowledge that while free trade produces net positive effects, that process can certainly be upset by the deliberate manipulation of currency values. And make no mistake, those values have been manipulated. There can be no other excuse for the massive buildup of official reserve assets in global central banks.

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There may be an additional implication for fiscal policy. Declining rates of industrial capacity investment suggest that maintaining full employment requires acceleration in other sectors. In the last decade this was accomplished via the redirection of investment capital to housing and consumer spending with a related debt bubble. The unsustainability of that approach is now evident. Thus, if willingness to invest in industrial capacity remains weak, we can expect that that the government sector will need to fill the gap for much longer than many believe. In short, if domestic investment is limited not by negative animal spirits, but by a rational fear that such investment will rapidly be rendered obsolete by the mercantilist policies of other nations, then government investment becomes ever more important.

Bottom Line: Something more than cyclical forces is weighing on the American jobs machine. Here I have tried to extend the Grove/Smith/Sethi discourse with additional focus on absolute declines in manufacturing jobs and distressing declines in capacity growth rates. These trends may be critically important in understanding the dismal performance of US labor markets. If they are in fact critical, they raise serious questions about US trade policy - questions that few in Washington want to address. Given the extent to which manufacturing capacity has already been offshored, those questions go far beyond the recently announced tiny shift in Chinese currency policy. Simply put, accepting the importance of manufacturing capacity and the possibility that offshoring has had a much more deleterious impact on the US economy than commonly accepted would requrie a significant paradigm shift in the thinkink of US policymakers. If you scream "protectionist fool" in response, then you need to have a viable policy alternative that goes beyond the empty rhetoric of "we need to teach better creative thinking skills in schools." That answer is simply too little too late.