Industry Today: The World of Manufacturing

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 Date:1/18/2010

 

Wake Up Call
Bon Voyage, Manufacturing?
Manufacturing must once again create enough wealth to pay for the whole society’s affluence without the need for reckless borrowing, contends Alan Tonelson.

Reading President Obama’s Framework for Revitalizing American Manufacturing makes three conclusions all too clear. First, the president doesn’t understand the main economic reason for revitalizing domestic manufacturing (as opposed to the political reasons – mainly throwing a few real and rhetorical crumbs to his union supporters). Second, knowing nothing about the stakes involved in reindustrialization, the president has no sense of the sector’s most important weaknesses, and how serious they remain. Finally, the president’s ignorance about manufacturing’s real significance has inevitably produced a revitalization program certain to fail – and to deepen the economic crisis even further.

In normal times, this Obama manufacturing policy blueprint might merit a Gentleman’s C. It competently but perfunctorily summarizes the recent, bromide-level conventional wisdom about manufacturing among middle-of-the-road Democrats. And it proposes to overcome the sector’s “enormous challenges” through modestly expanding Bush (the first!) and Clinton-era tax, worker retraining, and technology promotion programs, tweaking Bush (I and II) and Clinton-era American trade policy, and a government mid-wifing of those exhilarating but still largely theoretical mainstays of the Obama worldview – wholly new green industries and greener existing industries (mainly steel autos) large enough eventually to supplant most of the nation’s current manufacturing complex.

In addition, the Framework’s smorgasbord of wonkishly pragmatic mini-steps topped with a dollop of futurism could plausibly accomplish its mission if its target was just one portion of the economy out of many, and simply needed a little extra TLC to regain its mojo. But the times today of course are anything but normal, and manufacturing is not just another brick in our economic wall.

It’s true, as the Obama Framework notes, that manufacturing “provides good-paying jobs for millions of American families;” that it’s “responsible for 70 percent of all research and development spending” by the U.S. private sector and for 90 percent of all American patents, and that manufacturing leads the nation in productivity. But however important, those facts by themselves don’t capture why manufacturing has always been nothing less than the foundation of America’s very prosperity (not to mention national security), and why today it is nothing less than the key to economic recovery.

For as the Obama administration still doesn’t seem to get, even after decades of official neglect and worse, manufacturing represents nearly 90 percent of that part of the American economy that actually creates new wealth. And for a country still choking on debt, creating new wealth to pay down that debt and reignite growth that is healthy and sustainable is the only road out of crisis.

All of which means that the real challenge for policymakers is as concrete and specific as it is daunting. It is not, pace the Obama Framework, to foster the “many sectors of American manufacturing [that] have the potential to enjoy significant growth and success.” And it is certainly not the much less ambitious formulation stated just three pages later: providing “intelligent government support to create and sustain good-paying manufacturing jobs” in industries where labor content is slight enough to allow productivity and America’s “other areas of advantage” to create overall cost competitiveness.

The real challenge for Washington is first, to admit that manufacturing has been permitted to shrink to levels too low compared with the rest of the economy to generate enough real wealth to finance America’s current affluence responsibly. Second, as a result, Washington must do whatever it takes to make manufacturing not “vibrant” or “thriving” or evocative of these or any such ultimately empty adjectives, but a much larger share of the economy. In other words, manufacturing must once again create enough wealth to pay for the whole society’s affluence without the need for reckless borrowing.

That’s why the Framework’s Assessment of manufacturing’s current condition is not only wildly optimistic, but completely beside the point. In other words, it doesn’t matter fundamentally that “the U.S. Manufacturing sector today is the world’s largest....” It doesn’t matter fundamentally that, over the last 30 years, “the United States has had the largest increase in manufacturing output among major developed countries.”

What matters fundamentally is that the domestic manufacturing sector today is no longer nearly big enough in relative terms to play the crucial wealth-creating role it has played for decades for the entire economy as well as the broader society. And there are no adequate substitutes.

No one knows what the necessary size is, but the most important lesson the crisis is trying to knock into the nation’s head is that the 13.66 percent of real GDP to which manufacturing sank by 2008 is way too small. Which is why the most important fact that the Obama Framework should have emphasized is that, since the recession, manufacturing’s inflation-adjusted output has shrunk about four times faster than the economy as a whole. That is to say, the nation has been moving farther away, not closer to where it needs to be manufacturing-wise.

Because the problem is much greater than the administration recognizes, the measures outlined in the Framework can’t possibly achieve the massive reindustrialization America needs.

Some of the Framework’s proposals are laudatory, like greatly increasing federal spending on research and development. But the benefits of this decision won’t come soon enough to address the current emergency. Making the R&D tax credit permanent would be helpful, too – although with the challenge hanging over the economy of paying for Obama-care and the rest of the Washington spending and deficit explosions, it’s hard to believe the administration’s claim that this measure will “provide businesses with the greater confidence they need to initiate new research projects.....”.

But too much of the rest of the Framework has nothing to do with increasing manufacturing output at all, or per se. These proposals include a renewed commitment to worker reeducation and retraining programs that have consistently failed because they pretend that only Americans are smart enough to understand the importance of knowledge and skills. They also include more support for education generally, dressed-up welfare programs like the $134 million approved by the administration in emergency relief grants for hard-hit states like Michigan, and longer required notification periods for plant closings.

Meanwhile, other recommendations fall into the drop-in-the-bucket category – like expanding the worthy but minuscule federal Technology Innovation Program and the network of Manufacturing Extension Partnerships, and awarding prizes for technological breakthrough discoveries.

Finally, the Obama Framework completely mishandles trade policy in two related ways. First, its insistence that Washington simply needs to improve implementation of current trade policies may be a convenient way to defend a patently disastrous status quo, but it is hardly a convincing one. After all, the trade agreements pursued by the nation since NAFTA were not simply exercises in international economic tinkering. They were billed as an economic and business revolution, and they have clearly had revolutionary effects.

Chiefly, they’ve created a series of worldwide arbitrage opportunities for large companies – especially on the wage, tax, regulatory, and subsidy fronts. These arrangements undoubtedly have generated short-term efficiencies. But in a world full of mercantilist and export-obsessed U.S. trade competitors, they have also inevitably channeled productive investment away from developed, free-trading countries like the United States. Therefore, this perverse cost-benefit calculus presented to global companies has to be completely blown up and replaced.

Second, until U.S. trade policy is overhauled, the continuing arbitrage opportunities can only sabotage the president’s plans to create huge new green industries or green-up existing industries. Absent that change, offshoring the production of solar cells and wind turbines and even new high-speed rail and other more energy-efficient transportation and other infrastructure systems will prove just as tempting for large manufacturers as the offshoring of existing industries. One main reason, of course, is that the new manufactured goods dominating Obama’s dreams largely consist of traditional manufactured parts and components and assemblies whose production he apparently views as increasingly losing propositions for America.

In all, the President’s manufacturing Framework may ultimately be remembered most for providing future scholars and analysts with a truly delicious irony: When it came to the early 21st century manufacturing scene, what most needed revitalization and reeducation and retraining were not America’s industries but its political leaders.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C. A contributor to the Council’s AmericanEconomicAlert.org website, he is also the author of The Race to the Bottom (Westview Press, 2000). The views expressed here are his own.