By Gerald Najarian
OK, the title sounds facetious. But we are, in fact, schizophrenic about the state of manufacturing in the United States. It seems like all the familiar products we buy from the expanded pharmacy to the big box stores come from developing countries in Asia and Latin America so we think that manufacturing has left the country never to return. Yet lately, we hear reports of a “rebirth” of manufacturing based on anecdotes about one or another company’s decision to relocate a plant back home and opinion surveys. The press also reports that “manufacturing is leading the recovery.” Small wonder that there is confusion!
So where does the truth about manufacturing lie? The fact is that it never left, it just changed caused by the confluence of two major trends – globalization and what economists call “comparative advantage.” Globalization is easy to understand even though not long ago, it would have stretched the imagination to think that India would ever be in the steel and automobile businesses. Comparative advantage among countries is chiefly about labor costs. It is manifest in the high labor-content products that are now manufactured in foreign countries like sneakers, clothing, electronics and even computers. These products are produced in low capital cost plants set up to take advantage of the momentary low wages in a particular country. When wages inevitably start to rise in those countries, these manufacturers can quickly move to another country in which wages are still low. As these trends developed, the economic and social landscape changed so that communities that were once anchored by a high employment factory now seem to be adrift with residents commuting long distances to go to work in diffuse companies.
Manufacturing employment in the sixty odd years since the end of the Second World War has declined by twenty-two percent in absolute numbers and from thirty-two percent of the total non-farm labor force to nine percent. Non-manufacturing employment has grown correspondingly. These employment trends have tracked the composition of GDP but manufacturing employment has also suffered from continuing automation exacerbating its downward trend. GDP grew explosively in the years after the Second World War and manufacturing grew at approximately half the overall GDP rate. The most pronounced period of growth for both took place in the twenty years between 1970 and 1990. In the years following 1990, the growth rates slowed but the growth of manufacturing slowed much more – GDP grew by a factor of 2.5 and manufacturing grew by 1.8 while manufacturing employment dropped by a third. These economic numbers tell us three things: i) we still make plenty of stuff here – industrial production continues to grow, ii) although growing, manufacturing is not growing as fast as it once did and, iii) manufacturing employment will lag industrial production.
The obvious challenge is to get manufacturing growing at the rate that it did in 1970-1990 – when output quadrupled. Recognizing that globalization and automation have taken their toll on manufacturing employment, the general solution to “bringing manufacturing back” will depend on volume. Simply stated, volume means creating the conditions that make manufacturing economically attractive in the United States so that there will be more companies and more output and consequently, more employment. In contemplating greater volume, we can’t delude ourselves into believing that we can restore low-skill, high-labor content industries to the United States in the near term.
The challenge to policy-makers is to create conditions amenable to manufacturers so that those who have left will return and those who are here will stay. This is not about taxes and tax incentives but rather it is about economic conditions: logistics infrastructure – roads, rails, depots etc; location infrastructure – industrial sites, public warehousing, origin-based tax abatement; a trained, well-paid and productive labor force to manage and operate the modern factory; sustainable demand – a robust export policy, a low value of the dollar, economic stimulus; and finally a modest but thoughtful National Industrial Policy to facilitate growth in targeted industries as has been proposed by Lester Thurow and others. Fostering such economic conditions will require intense focus by the national government with the specific objective of creating a favorable manufacturing environment in the United States. It will not be enough to gaze upon anemic upticks in manufacturing employment and anecdotal accounts about a returning company and hope somehow that randomly changing economic conditions will re-birth manufacturing. We are capable of restoring a strong, albeit different, manufacturing sector with its traditional well-paying jobs. It only requires national focus and commitment.
This article appeared in the September 2011 issue of Financial Executive magazine