Will Obama's New "Made In America" Ideas Be Enough To Bring Our Jobs Back?
The January jobs report is in -- and it shows 50,000 manufacturing jobs added last month. That's the highest monthly gain since August 1998. Is it possible that factory work is back after a decade of sustained and steep decline?
For most Americans, it is difficult to imagine an economic renewal centered around manufacturing. What would this renewal look like, and what would it take to get there?
When President Obama gave a starring role to manufacturing policy in his State of the Union address, albeit with proposals that were not transformational, many serious people--including progressives--were stunned into silence. Cynics suggested the President featured "Made in America" policy proposals simply because it is a politically popular notion; polls conducted after the speech indicated the policy does indeed have extraordinarily high support. But most people didn't know what to think, in part because the manufacturing sector is seen as not much more than an artifact of nostalgia by a generation immersed in social networks, digital communications, and an economy seemingly dominated by the service sector.
Some observers smartly noted stories in the New York Times on Apple's manufacturing in China and concluded that any manufacturing policy as a strategy to grow American jobs would be futile in the face of globalized supply chains and a seemingly unshakeable system of worker exploitation in China and elsewhere. Would Apple users and Walmart shoppers tolerate higher prices for goods made in America? Could multinational companies be coerced into returning production? More fundamentally, do we even want those manufacturing jobs?
Three decades ago, there was a similar debate. The manufacturing sector of our economy had suffered a slow and steady decline since its peak in the 1950s, and competitors like Japan and West Germany were gaining market share as the United States was experiencing layoffs and factory closures. Calls were made for a new American industrial policy--a coordinated strategy of economic policies to boost specific sectors. President Reagan adopted such policies for the defense industry and (for a time) the semiconductor industry, but cast aside any meaningful efforts.
Now, American manufacturing is coming off of its worst decade ever. We lost one-third of all jobs in the sector (5.5 million), quadrupled our trade deficit in manufactured goods in just 13 years, closed more than 50,000 factories, and recorded a drop in industrial output for the first time. While America suffered a recession beginning in 2008, manufacturing experienced an entire decade of sustained losses, at a far faster clip than any other time in our history.
What caused this decay? A number of factors contributed.
1. China provided multinational retailers like Walmart and producers like Apple with an endless supply of highly exploitable workers and plenty of subsidies.
2. Financial deregulation in the late 1990s made Wall Street the master of manufacturing rather than merely a provider of capital. Quarterly earnings pressures and long-term growth strategies are often mutually exclusive in the world of capital-intensive manufacturing.
3. A surge in automation, robotics, and productivity all meant that it took fewer factory workers to produce the same amount of output.
4. The strong dollar policy adopted by the Clinton Administration and carried forward by the Bush Administration made our goods less globally competitive.
5. Virtually all of our economic policies (taxes, trade agreements) and emphasis on education (college instead of vocational training) encouraged multinationals to shift production offshore.
What few of us appreciate is that while some changes (low-wage competition, automation, productivity) inevitably lead to lower employment in industry, it doesn't necessarily follow that we should give up on industry altogether. Germany, a nation with a thick regulatory environment, universal health care, high wages ($48/hour compared to $32/hour US in manufacturing), and relatively strong industrial unions, has more than 20 percent of its economy in manufacturing and a balanced trade account with China (compared to the US-China annual deficit of $272 billion). While manufacturing employment and output have declined as a percentage of the overall economy in Germany, few in Germany see a future without manufacturing--or public policies to support it.
Casting the political equation aside, the manufacturing policy debate has ignited again in the United States for two simple reasons.
The first was desperation to create jobs in the absence of a housing or tech sector bubble. Policymakers on the left and right have tried everything else, and by that I mean everything: steering our youth to four-year colleges, focusing on innovation, building up domestic energy capabilities, relying on Wall Street, expanding homeownership, low interest rates, etc. None of it has worked. Why not return to America's core competency? We do know how to make stuff.
The second was that there was a reasonable prospect for success. Government support for Chrysler and General Motors appeared to work: consumers have better choices, employment in the auto sector is growing (with 160,000 more jobs expected to be added through 2015), and the industry even agreed to a 54.5 mpg fuel economy standard and embraced electric vehicles, dramatically reversing their efforts to kill these. Manufacturing employment overall has increased by well over 300,000 since 2010, and forward-looking indexes have been positive for nearly three years now. Consulting firms are extolling the virtues of "reshoring" work from overseas, though at far lower wages.
But the auto rescue was what I call "Emergency Room" industrial policy. President Obama and his team didn't do a perfect job, but the alternatives were far more grim.
Since then, the President has from time to time highlighted manufacturing proposals on workforce development and advanced research, and his Administration has adequately enforced trade laws, but he has yet to do three important things.
First, leverage our market power to compel China to cease its mercantilism, which, Paul Krugman notes, inflates dangerous global imbalances and dampens economic growth around the world. Krugman--who was awarded a Nobel in economics for his free trade theory--is no protectionist. The fact that President Obama has not even named China as a "currency manipulator" indicates just how far we have to go.
Second, put real money behind his words. Giving students the tools they need to enter the manufacturing workforce will take money, which instead is spent preparing them for standardized tests and a four-year college degree. Until technical training is adequately resourced and structured, our system will not even be on par with programs in mid-tier industrialized nations.
Third, restate the big idea. In 2009, the President repeatedly said that we had to make fundamental shifts in our economy, to transform ourselves from a nation that buys too much and produces too little into a nation more in balance. Instead of myopic debates on the annual budget deficit, this has real purpose. Manufacturing, of course, is one of the ways in which we achieve such balance. And, it's a way to restore our middle class.
Think of what we could accomplish if we thoughtfully rebuilt our nation's manufacturing ecology into one that could compete with manufacturing powerhouses like Germany and China.
A New American Industrial Policy
The irony is that from 1791 to 1945, we had that ecology. It was made possible by a national industrial policy that was framed around public investment (the Erie Canal, for instance), tariffs (to support new or strategic industries), education (e.g., the Land Grant Act) and research. Around 1900, the United States began to lead the world in manufacturing output, a title we only relinquished to China within the past two years.
All industrialized and industrializing nations (except, for some odd reason, the English-speaking nations) have robust, modern industrial policies, which vary widely from place to place. What policies would rebuild sustainable manufacturing in our nation in the 21st century? We can't simply drop the German model into our economy. The mercantilism of China is destructive to other nations. The Hamiltonian industrial policy we employed earlier in our history is outdated. What we need now is a new, uniquely American strategy, that builds on our remaining strengths.
* We need to identify strategic industries to support. The automotive sector, and in particular clean energy vehicles, is an obvious candidate. Add to that solar, wind, and other renewable energy manufacturing, which will be in growing demand. In an age of automation, it is quite possible to recapture high-tech manufacturing, from semiconductors to tablet production. Aerospace and national-security related industries must be on the list. Emerging technologies like nano and bio, as well as opto-electronics also make sense. Finally, industries where proximity to market is critical.
* Next, we need to identify the right policies. The State of the Union was helpful in that it outlined some of the basic issues, such as tax policy. Tax credits for hiring, producing, and innovating domestically are a good start. All of this can be done without cutting the corporate tax rate, which would predominately benefit big banks.
* While 154 nations have a value-added tax (VAT) rebatable for exports, the United States does not. It is worth exploring what sort of a consumption tax system makes sense to incentivize exports rather than imports.
* There must be incentives to make capital more patient, as it is in Germany. Requiring a longer holding of assets to receive preferential tax treatment is one way to do this.
* Our system of vocational education must be rebuilt from the bottom up, and provide a seamless period of skills development and training through high school, vocational school, and apprenticeship. Young men and women should be encouraged to fill manufacturing jobs (where demographic shifts will create millions of openings over the next five years) rather than fleeing them.
* Our trade policy must become more results-oriented and less philosophical. Our trade deficit matters as much as the rest of our debt, but it receives scant attention. Penalizing China's currency manipulation is a good start. Such a move would empower Chinese consumers, raise the wages of Chinese workers, and make American production more competitive. Moreover, labor rights must be treated at least as well as investor and corporate rights, and not as an afterthought. Boosting the wages of workers overseas will, among other things, permit them to buy more of our goods.
* We must develop a national economic development model that is built around the idea of competitive clusters to avoid a state vs. state race to the bottom, which is our status quo.
* Public investment is critically important to build up a 21st century system of transportation and energy transmission that reduces pollutants and increases efficiency.
* Rebuilding the "industrial commons," a system of public-private support for basic scientific research and applied research, will required a renewed allocation of resources.
There are meta-trends and other forces that will have a profound impact on whether or not these strategies can be successful. First, rising costs in China are beginning to drive production to lower cost locations like Vietnam and Cambodia, but also to more automated systems in the United States. Second, the natural extension of the localization movement in food is making its way to consumer goods. We're already seeing urban manufacturing movements sprout up in places like San Francisco and New York City.
This new manufacturing ecosystem won't look like our old one. Apart from what we already have in the automotive, commodity-based production, shipbuilding, and aerospace sectors, we're unlikely to see anything like the old Fordist system, with massive factories each employing thousands of workers. If Apple does produce iPads in America, the factory will be highly automated, though staffed by well-paid engineers and technical professionals. Hundreds of thousands of Foxconn workers would be replaced by perhaps only hundreds of engineers.
The advent of personalized manufacturing in the form of three-dimensional printing devices will also have some impact in dampening growth in manufacturing employment, unless we make 3D printing a strategic industry to grow in our nation, as well.
And the attitudes of business professionals must be dramatically altered. MBAs simply aren't trained to think about manufacturing in America. Nor are venture capitalists. Until that mindset is changed, their bias will continue to be making things elsewhere. Just as outsourcing was a trendy business model for the past two decades, let's hope insourcing gains as much traction. It's helpful to have the President invite business leaders to the White House who are committed to making things in America. It's also helpful to have ABC News broadcast "Made in America" segments to millions of viewers. But until the incentives change, publicity alone will create no more than a handful of jobs.
Finally, we must resist the idea that wages of manufacturing workers must be slashed for us to be competitive. A nation with factory wages closer to Mississippi than Michigan will be a poor, debt-ridden nation. Making jobs good ones must be a priority. Investing in the worker must be the strategy, not the obstacle. Germany pays its autoworkers double what ours make. Labor is an easy scapegoat, but the truth says it simply isn't so.
In ten years, it might be possible to push the percentage of our economic output in manufacturing from just under 12 percent, where it stand today, to 15 or even 20 percent. As urban manufacturing blossoms, it is equally possible that the creative class wants to reconnect with production, which would give it an image boost. It's likely that new factories will be clean, energy efficient, and highly automated, meaning that the old smokestack image may no longer apply to most American production.
What happens to manufacturing will impact all of us. Manufacturing plays an outsized role in our innovation (providing two-thirds of all private sector research and 90 percent of patents), economic development (adding a multiplier of 4 to 5 jobs for every manufacturing job created), and revenues (manufacturers often have the highest revenue impact locally). The gains manufacturing can make in energy efficiency and developing high fuel economy vehicles will also have a profound impact on our nation's carbon footprint.
Today, we stand at a crossroads: will the public and private sectors start the hard work it will take to keep the manufacturing revolution moving forward, or will we retreat back to economic policies that leave us vulnerable to the whims of big corporations, the Chinese government, and Wall Street bubbles? Rebuilding our middle class must start with rebuilding manufacturing. How do we know this? Because we've tried everything else, and it hasn't worked.