Prof. Schlevogt’s Compass No. 42: America’s hidden ledger of decline

Seven million jobs lost, manufacturing’s share halved – America’s Dutch disease in numbers, the cost of flying too high.

The dollar’s reserve-currency privilege underwrites low-cost US borrowing and persistent deficits while a structurally overvalued currency hollows out the nation’s industrial core, masking deep systemic imbalances beneath a veneer of easy foreign financing.

The numbers tell a clear story of an American-style Dutch disease: In a pathology emblematic of mismanaged abundance, relentless foreign demand for dollars functions as a perpetual resource windfall, structurally elevating the currency and steadily corroding, most conspicuously, US manufacturing.

The arithmetic of erosion: America’s Dutch disease in figures

Manufacturing employment in the US peaked at 19.6 million in 1979 and stood at 12.6 million at the beginning of 2026, a loss of 7 million jobs. This amounts to a drop of nearly 36 percent, reflecting decades of structural transformation rather than a short business cycle.

Concurrently, manufacturing’s share of GDP, measured by its value added, shrunk even more dramatically, sliding from 22 percent in 1979 to 9.5 percent by Q3 2025. This is equivalent to a decline of 12.5 percentage points, amounting to a roughly 57 percent reduction in manufacturing’s relative economic weight. In contrast, the private service sector expanded to 73 percent of the economy by Q3 2025.

US manufacturing survives, even thrives in pockets, but it has become markedly less central to the economy’s structure, commanding a far smaller share of employment and national income than it once did.

It bears noting that while manufacturing’s relative weight has diminished substantially, its real output, as measured by the Federal Reserve’s industrial production index, has roughly doubled since 1979. Yet this does not invalidate the diagnosis of structural hollowing-out; it refines it.

Over recent decades, US production has become increasingly capital-intensive, globally fragmented, and structurally less resilient. Imported intermediate goods now account for a far larger share of American manufacturing than in the 1970s, as firms dispersed critical stages of industrial activity offshore, forging increasingly global value chains.

In the process, domestic supplier networks thinned, industrial ecosystems weakened, accumulated process know-how eroded, and strategic capabilities migrated offshore, while investment in advanced manufacturing capacity lagged, even as the financial sector and asset markets thrived.

Rising measured output, then, can create an illusion of strength in the aggregate data. As for the US, beneath this statistical sheen lies a steady erosion of domestic industrial density. The vaunted productivity gains reflect automation, scale efficiencies, and foreign sourcing rather than a broadening and deepening of the industrial base at home.

The Icarus lesson: The sky is vast – but not forgiving

The etiology and pathology of the Dutch disease, the paradoxical curse of resource blessing, lays bare a hard truth: Whether it is oil, gold, aid money, or even a blockbuster firm, economic monocultures are fragile; prosperity left undiversified has an insidious way of sabotaging the future it appears to secure.

Easy revenues structurally elevate the currency, crowd capital and labor into the ascendant sector, and encourage rent-seeking over diversification, leaving a country dependent on a single, narrow, and dominant income base. Once the exuberance subsides, ostensibly robust prosperity reveals its systemic brittleness. This dynamic is now well understood, yet the temptation to dismiss it as a process of benign specialization persists.

The dollar’s ascent to global supremacy reveals the dilemma of asymmetric success, Dutch style. On the strength of the global dollar, a single star “product” tantamount to a gift from heaven, the US attained unparalleled financial depth and reach, projecting the influence of its capital markets across the international system.

Yet as monetary power expanded, the nation grew steadily less competitive in goods production, much as resource windfalls buoy headline prosperity in commodity states even as they relentlessly wear down the industrial base beneath the surface.

America’s manufacturing unwinding is neither mysterious nor accidental. It reflects a multi-decade confluence of policy commitments and market incentives that privileged a strong dollar, open capital markets, and consumption-led growth over industrial density. The cumulative costs of the subversive hollowing-out that has unfolded are not merely economic; they verge on the existential.

The world’s preeminent power, in this respect, evokes Icarus, a figure at once overreaching and ill-prepared. Exultant in his rise toward the heavens, the son of Daedalus flew too near the sun on wings of wax, only to plunge into the sea as the wax dissolved – nature reasserting its limits.

Like Icarus, America soared on wings of monetary supremacy, only to discover that unchecked ascent and neglected limits can transmute triumph into its own undoing.

The parable of failed transcendence endures: Every unsecured bid for hegemony carries wax in its wings; vaulting ambition, untempered by measure and restraint, only hastens the inevitable fall.

[Part 5 of a series on the global dollar. To be continued. Previous columns in the series: