Posted by: dstieglitz | June 29, 2011

A Manufacturing Renaissance?

    Will manufacturing continue to be a major part of the U.S. economy? Absolutely, but its future will be very different from its past. Today, there is a longing, even among people who are too young to remember, for a return to the golden days of U.S. manufacturing and middle-class prosperity that followed World War II. Most people don’t recognize the uniqueness of that era. In 1946, the U.S. accounted for half of all global manufacturing. Why? Because the American industrial machine was in overdrive and other industrial countries like Germany and Japan were in ruins. 65 years later, those countries and China are leaders, while U.S. manufacturing has been flat and the salaries and benefits of its factory workers have skyrocketed. 

   Pay Differentials. Companies can build factories anywhere in the world, so the best hope for U.S. workers is to be so skilled and so productive that they justify the pay differential they earn versus workers in Mexico, China and Vietnam. They must produce complex products that can’t be manufactured in low-wage countries and out-hustle foreign competitors with innovation.  China’s pay advantage over the U.S. is eroding because their wages climb almost 20% a year, while U.S. workers are increasingly willing to accept non-union wages and benefits. After adjusting wages for superior U.S. productivity, China’s average wage is still roughly half the wages of workers in Mississippi, South Carolina, and other right-to-work states. 

   Off-Shoring Loses Its Luster. Moving manufacturing to China isn’t the no-brainer it once was. Multinational companies like GE, Caterpillar and GM will continue to build factories around the world – not to ship back to the U.S., but because that’s where demand is growing. On the other hand, companies are likely to build factories on American soil when the goods will be sold in the U.S., often wooed by incentives from state governments. Today, efficiency is increasing steadily which makes labor a smaller factor in overall costs. Furthermore, long supply chains are becoming more risky. When oil prices rise, transportation costs increase; and flu epidemics, tsunamis and other disasters also can disrupt supply chains. Companies no longer automatically manufacture in the country with the lowest labor costs.

   Not a Panacea. A manufacturing renaissance would simulate the U.S. economy, but don’t look for it to be a panacea for unemployment. The idea that manufacturing is the core of the U.S. economy is a relic from the past. Before World War II, agriculture seemed to be the economic mainstay, but then agricultural employment fell dramatically and workers moved to other fields. Similarly, manufacturing workers must switch to jobs in growth sectors. Like agriculture, manufacturing companies produce more with less people these days. Manufacturing has been steady at 15% of GDP despite a 40% decline in workers from the 1979 peak of 20 million. That’s too bad since factory jobs pay better than other jobs that people without college degrees can get. However, even if a manufacturing renaissance doesn’t help unemployment much, it will bolster the economy by increasing exports, shrinking our $600 billion annual trade deficit, and helping to pay our debts to the world.

   Export-Led Recovery. The U.S. economy could grow quickly by increasing exports, which are just 12% of the U.S. GDP but 25% of global GDP. The idea that exports could lead the recovery strikes some people as a pipedream. They pessimistically point to a decline in manufacturing, but don’t realize the U.S. still ranks third in exports behind China and Germany. Historically, U.S. exports have grown because companies export new products, rather than by regaining market share for old products.  Census data show only 1% of U.S. companies are exporters – 99% focus entirely on domestic sales. While U.S. consumers struggle with high unemployment and debt, demand in many other countries is booming, and that demand can translate into job growth. To boost exports, business-friendly policies are required in (1) free-trade, (2) energy, (3) labor relations, and (4) assistance for companies that export. Let’s take a closer look at these areas to see what Obama administration and Congress could do to stimulate for export and job growth – and reduce our budget deficit and national debt at the same time! 

   Free Trade.  President Obama says he wants to expand exports, but several of his decisions actually have inhibited free trade. To appease union supporters, Obama imposed a 35% tariff on tires from China, supported Buy-American provisions in the Stimulus Act, and was silent when Congress shut the border to Mexican trucks. The president also has done little to push Congress to pass agreements with Panama, Colombia and South Korea that would expand trade. Historically, American presidents from both parties have championed free trade because it creates jobs, lifts millions out of poverty, and reduces consumer prices. Globalization has made economies more interdependent than ever, with the supply chain for a car or plane made in the U.S. often using components manufactured in other countries. So Congress and the Obama administration must end protectionist policies and promote growth through free trade. 

   Energy Policies.  Congress has been looking through a rearview mirror in its feeble attempts to revive the economy. For example, they fight any bill that would increase electricity or gas prices  – even if such actions would create many 21st century jobs by making clean energy competitive with coal and encouraging the use of hybrid vehicles. In a single stroke, raising the federal gasoline tax would narrow the deficit, encourage conservation, reduce oil imports, reduce carbon emissions, and make renewable energy more competitive. Alternative energy innovations will create millions of jobs in the next 10 years and, if Congress doesn’t do something soon, most of them will be in Germany and China. The key to the new-job treasure chest is for the U.S. to reduce imports of oil and cars, and instead drill our own oil and incentivize domestic production of hybrid cars and other exportable products. 

   Labor Relations.  At the 2011 Paris Air Show, Airbus booked $72 billion in A-380 orders (about 50,000 jobs), while Boeing got only $22 billion, in part because of uncertain deliveries for its new Dreamliner-787. South Carolina, one of 22 right-to-work states, offered Boeing $200 million in tax breaks to locate a plant in Charleston to assemble the Dreamliners. Boeing, one of the top U.S. exporters, accepted the offer and built a billion dollar, 3800-employee facility that’s scheduled to open this month. However, the National Labor Relations Board (NLRB), in response to a filing by the International Association of Machinists, complained that Boeing violated federal laws when senior executives connected the South Carolina move to the machinist union’s 2008 strikes. In its defense, Boeing said several factors lead to building the plant in South Carolina, including low labor costs and an international port. Boeing also said it added over 2000 jobs in its Seattle plant since 2009. If federal courts endorse the NLRB’s ruling, the new factory in South Carolina (a state with 10% unemployment) will shut down and Dreamliner assembly could move to China or another country that has favorable labor policies and costs. 

   Assistance for Companies That Export. Companies that export often grow rapidly and generate new jobs. Therefore, the government should encourage American companies to export and help them overcome the barriers of entering global markets. One form of support is consular services to guide companies through the red tape of foreign markets. Another support is providing trade financing, which has all but dried up from private sources since the recession. Approving trade agreements Panama, Columbia and South Korea also would make it easier to export by providing access to those markets. Obama talks about expanding exports – it’s time to do things that make it happen! 

   Conclusion.  A manufacturing renaissance coupled with increased exports would be a big step toward solving several daunting challenges in the U.S.: stubbornly high unemployment, providing opportunity for everyone in a class-stratified economy, deteriorating infrastructure, and a soaring national debt. The government policies necessary to stimulate manufacturing and exports require almost no budget expenditures.  In fact, the U.S. has abundant resources to meet these challenges:

  • Plentiful natural resources like oil and gas – if we’d only use them;
  • A relatively young population – if we could only put them to work;
  • Best universities in the world – if citizens had access to them; and
  • A history of business innovation – if we would unleash it.

Unfortunately, the American middle class will never again be several times more prosperous than the rest of the world. In addition, the U.S. won’t dominate manufacturing and technological discovery like it has in the past. That’s the nature of a global economy. It already may be too late to catch the Germans and Chinese in manufacturing and exports, but if Congress and the president would work together to address the challenges, at least the U.S. could stay in the game in third place.

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