American
manufacturing needs a national strategy. It once had one—more than 200
years ago. The architect was Alexander Hamilton, among the most
foresighted of the Founding Fathers. The world of 2012 is dramatically
different from that of 1791, and yet Hamilton’s words are eerily
reflective of the current evolution of public opinion: “The expediency
of encouraging manufactures in the United States,” he told Congress in
his Report on Manufactures, “which was not long since deemed very
questionable, appears at this time to be pretty generally admitted.”
That
statement is as true in the early 21st century as it was in the late
18th century. A sector that was ignored by policymakers or even
mistakenly given up for dead a decade ago is now viewed as key to our
country’s economic survival. After all, among other things,
manufacturers generate more economic activity across society, invest
more in research and development (R&D) and innovation, and export
more than any other sector.
Because of
this welcome change in public perception of the factory sector, over the
past few years a growing number of influential factions have called for
a national manufacturing strategy. While such a focus on manufacturing
is long overdue, industrial strategies are not completely novel in the
United States. In January 2004, the Bush administration released its
version, a list of 31 thoughtful recommendations culled from a series of
manufacturing town hall meetings held across the country. Had even a
handful of those recommendations been adopted, the story of American
manufacturing—including the search for greener pastures overseas, the
20% contraction during the Great Recession, and the inability of
manufacturers today to find enough skilled workers for their shop
floors—might have taken on a different tone. Unfortunately, for the most
part, the recommendations were ignored by lawmakers.
Without
a national strategy, manufacturing employment in the United States has
steadily declined, as has manufacturing as a percentage of U.S. GDP. Not
surprisingly considering this downward drift, in 2010 (according to the
United Nations), the United States gave way to China as the world’s top
manufacturing economy in turns of output.
Given
its singular focus on creating a global export platform, China’s rise
as a manufacturing powerhouse was likely inevitable; America’s
manufacturing decline was not. Rather, as Rob Atkinson and Stephen Ezell
of the Information Technology and Innovation Foundation (ITIF) have
advanced, unlike the dwindling footprint of agriculture that came from
higher productivity, American manufacturing’s decline has resulted
purely and simply from a loss of international competitiveness.
Other
nations have manufacturing strategies. We should have one as well. Note
that, in this context, an industrial strategy is not the same as an
industrial policy. Industrial policy involves politicians “picking
winners”—that is, favoring specific industries and technologies over
others through incentives and the reallocation of resources. It is true
that the federal government is well situated to assist directly and
indirectly in the research and development of nascent technologies—for
example, the spillover effects from the Apollo space program are well
known. The combination of politics and bureaucracy makes most industrial
policies wasteful of taxpayer dollars at best, and breeds corruption at
worst. Markets are far more efficient and effective at picking winners
because, as James Surowiecki observed in his popular book The Wisdom of Crowds,
they involve the aggregation and dissemination of information by
groups, resulting in decisions that are typically better than those made
by any lone politicians or regulators.
Thus,
instead of politicians creating narrowly based incentives for specific
companies and industries, a national manufacturing strategy should
involve broadly based policies that support a more alluring climate for
production and innovation across the board. If the world’s best
manufacturers are scrambling to build factories, invest in R&D and
capital equipment, and create new jobs in this country, such a strategy
will raise living standards far higher and broader than a narrow
industrial policy.
There’s no need to
reinvent the wheel—a number of manufacturing strategies have been
proposed in recent years. While there isn’t space here to review the
hundreds of policy proposals now being promoted, here are some broad
concepts to propel American manufacturing well into the future.
Tax and Regulatory Reform
A
national strategy must first be grounded on the principle that, in the
words of the National Association of Manufacturers (NAM), “The United
States will be the best place in the world to manufacture and attract
foreign direct investment.” To that end, the nation needs a tax and
regulatory climate that encourages R&D and production here while
still serving the purposes of government. The United States has the
highest statutory corporate tax rates among developed countries, at
39.2% (federal and state combined). Moreover, according to a joint study
by the Manufacturers Alliance for Productivity and Innovation (MAPI)
and NAM, America’s pollution abatement costs are higher than those of
any of its major trading partners. The NAM’s Manufacturing Renaissance: Four Goals for Economic Growth
(October 2011) challenges politicians to create a better tax climate and perform more effective cost-benefit analysis on federal regulations. On the tax side, this includes reducing corporate rates to at least 25%, ensuring lower individual income tax rates for the 70% of manufacturers who operate as pass-through entities, and increasing the R&D tax credit to 20% and making it permanent.
On
the regulatory side, this includes requiring federal agencies to select
the lowest-cost alternative among regulatory options, strengthening the
Regulatory Flexibility Act to ease the burden on small businesses, and
strengthening Executive Order 12866 to include cost-benefit analysis on
the 90% of rules that will have less than a $100 million impact on the
economy.
Better Education and Continuous Training
America’s
advanced manufacturing processes of today require a high level of
science, technology, engineering, and mathematics (STEM) skills. Yet
according to a skills gap survey by The Manufacturing Institute and
Deloitte, two-thirds of manufacturers say they can’t find enough workers
with sufficient skills. This translates into roughly 600,000 open
manufacturing jobs at any one point in time. Without a steady supply of
qualified employees here, manufacturers will go abroad to make their
products.
Creating a more educated, better prepared funnel of students must be part of a national manufacturing strategy. In Why Does Manufacturing Matter? Which Manufacturing Matters?
(February 2012), the Brookings Institution points to Germany’s approach
to education as a model. That approach includes a so-called “dual
educational system” that channels students who aren’t interested in a
post-secondary diploma into a vocational school and an apprenticeship
with a company.
Our country made a
serious mistake decades ago when it virtually abandoned the vocational
education track in our high schools. A national manufacturing strategy
should include a coordinated approach in which secondary schools work
with industry to help re-introduce this opportunity. Community colleges
will play an increasingly important role as well, and organizations such
as the NAM’s Manufacturing Institute are helping by developing a
standardized Manufacturing Skills Certification System for use in
two-year post-secondary schools.
American
students once led the world in these areas; now their aptitude scores
rank in the bottom half of the developed world. If the United States is
going to maintain its leadership in innovation, it also must help
re-engage its youth in STEM. The nation needs a coordinated focus by
elementary and secondary teachers, government leaders, and the private
sector to develop a long-term plan for improving our nation’s math and
science instruction.
Open Markets and Enforcement of Global Trade Laws
U.S.
manufacturers presently account for more than half of all exports from
this country. In plain economic terms, without the more than $1.1
trillion in receipts for exported manufactures, this country would be
forced to increase its borrowing or foreign investments to offset the
well over $2 trillion in imports. A more activist trade policy must be
part of any manufacturing strategy moving forward. As ITIF points out in
its September 2012 National Traded Sector Competitiveness Strategy,
such a policy should include both expanded trade promotion and trade
enforcement components.
While the
aforementioned policy changes would encourage “reshoring” and thus help
our balance of trade by decreasing imports, ITIF notes several ways the
federal government can boost exports. First and foremost is forging new
trade agreements. As this country is currently negotiating one new
agreement, the EU is in negotiation with the Association of Southeast
Asian Nations (ASEAN), the Gulf Cooperation Council (GCC), and five
separate countries—including India and its market of 1.3 billion
consumers. Congress should also expand our Manufacturing Extension
Partnership (MEP) export assistance program, which helps small and
mid-size manufacturers sell goods abroad.
Trade
promotion isn’t enough. As events of the last decade demonstrate, a
growing number of countries are adopting China’s mercantilist approach
to trade. Without enforcement of the rules that have governed global
trade for the past half-century, the market-friendly system that ensured
mutual advantages to all will break down completely. Any national
manufacturing strategy will have to include a stronger response to
currency manipulation, intellectual property theft, and comparable “win
at all costs” tactics as practiced in emerging markets.
Federal Support for Basic and Applied Research
To
achieve the kinds of breakthrough advancements needed to maintain our
industrial competitiveness, federal funding for manufacturing-specific
basic and applied research are essential to any national strategy.
Manufacturers invest more in R&D than any other sector, particularly
in areas related to their specific customers and markets—but in tough
economic times, companies become more risk-averse with their business
decisions. As physicist Geoffrey West observed in a recent interview
with Edge.org, “It’s not surprising to learn that when manufacturing
companies are on a down turn, they decrease research and development,
and in fact in some cases, do actually get rid of it, thinking this is
‘oh, we can get that back in two years we’ll be back on track.’”
Moreover, as Harvard Business School professors Gary Pisano and Willy
Shih explain in their HBR report, “Does America Really Need
Manufacturing?” (March 2012), the private sector has less incentive to
invest in basic or applied research because, “the payoffs are too far in
the future and too diffuse.”
That’s why
since World War II the federal government has played a substantial role
in basic and applied research—funding that has helped stimulate
manufacturing innovation in the U.S. For example, as Pisano and Shih
note, it was government-funded research in metallurgy that enabled
American jet engine manufacturers to develop advanced materials and
ceramics capable of withstanding extreme heat and pressure. The Defense
Department played an important role in the development of the Global
Positioning System and, of course, it was the applied research of the
Advanced Research Projects Agency that ultimately led to the creation of
the Internet.
Federal funding for basic
and applied research has declined over the past decade, and the
President’s Council of Advisors on Science and Technology has called for
ramping the level of funding back up—particularly in such
manufacturing-related areas as robotics, nanotechnology, and
biomanufacturing. If policymakers want U.S. manufacturing to compete in
the coming decades with their global counterparts, a long-term
commitment to funding basic and applied research is a must.
Infrastructure and Energy Strategy
No
national strategy would be complete without ensuring the long-term
fitness of America’s infrastructure—not just its roads, rails, ports,
and bridges, but its electricity and telecommunications grids as well.
In a strategy unveiled in April, titled Value Added: America’s Manufacturing Future
(April 2012), the New America Foundation notes that reducing
infrastructure congestion and bottlenecks and creating “smart”
transportation and communications systems are important factors in
reducing the costs to U.S. manufacturers. Rather than the current
piecemeal approach, Congress needs to adopt a long-term strategy to
target and pay for the refurbishing of our transportation
infrastructure. An integrated approach involving federal and state
incentives and private-sector investment would ensure the creation of a
21st-century electricity and communications system.
The
New America Foundation also promotes policies that ensure lower energy
costs as a critical factor in maintaining a competitive manufacturing
base in the United States. No sector is more dependent on plentiful,
inexpensive energy supplies—manufacturers consume about one-third of the
energy in this country. With the varied resources now available across
North America—including new gas and oil reserves that modern technology
can safely secure and transport—U.S. policymakers’ conscious evasion of a
long-term national energy plan is nothing short of a dereliction of
duty.
Never before have so many
organizations and policy experts harmonized so clearly on the need for a
long-term manufacturing strategy. It’s time to set aside political
differences and work together to ensure American manufacturing remains
competitive for decades to come.
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