The Centrality of Manufacturing to America's Future Prosperity

Policy Paper
Feb. 14, 2011

In his State of the Union address January 25, 2011, President Barack Obama mentioned the word “manufacturing” just once. This was the only time in his three such speeches to Congress that he has uttered the “M” word. The president’s failure to acknowledge, even in passing, a sector of the economy that accounts for 11 percent of America’s GDP is a metaphor for his administration’s disdain for manufacturing as an important contributor to the nation’s future wellbeing.

To be fair to president Obama, his predecessor, George W. Bush, only mentioned manufacturing once in eight State of the Union addresses. And the State of the Union is not necessarily neither the time nor the place to lay out a detailed game plan for reinvigorating industry in America.

Nevertheless, the president framed his speech as a call to arms for the U.S. economy. “The future is ours to win,” he said. “This is our generation's Sputnik moment.”

But the vision of America’s future that Obama then painted was in laboratories, in the hands of scientists and engineers. It was not on shop floors and in factories, where eleven million Americans still work.

This is a failure to recognize the centrality of manufacturing to America’s future economic prosperity. Despite the relative decline of manufacturing over the years, the United States is the world’s mightiest manufacturing economy, producing 21 percent of all goods made globally. Japan is a distant second, at 13 percent. China, at 12 percent, ranks third.

And U.S. manufacturers are the most efficient in the world. For every dollar that they spend directly, they foster another $1.40 in economic activity—a multiplier larger than for any other sector of the economy.

Manufacturing also remains critical to America’s success in the world marketplace. Exports of goods account for three-fifths of all U.S. sales abroad, paying the bill for imports of consumer products and oil. Without them, the U.S. trade deficit would be even worse.

Manufacturers are an important source of innovation, accounting for more than two-thirds of all research and development conducted in the United States.

Manufacturing wages also bolster the economy. Manufacturing workers have higher pay and more generous benefits—about 20 percent higher—than Americans holding non-manufacturing jobs.

And selling manufacturing short flies in the face of the Obama administration’s own goals. The president has promised to double U.S. exports by 2014, in part to boost lagging job growth. The only way to reach that extremely ambitious target is to increase manufactured exports. That requires a stronger industrial sector.

More broadly, the White House has committed itself to a rebalancing of the U.S. current account, America’s all-encompassing balance sheet with the world economy. That cannot be accomplished simply by exporting more. It also requires that the United States produce domestically more of what it consumes. And that requires a revival of America’s capacity to manufacture.

In the State of the Union, the president said to achieve a better future “we can’t just stand still.” But movement, for the sake of movement, will not necessarily lead to progress. The direction Washington takes is important.

So here is what the president should have said his administration would do to create the right policy environment to boost American manufacturing:

Lower Taxes on Manufacturers

In recent decades the financial sector of the economy has grown while the manufacturing sector has shrunk, thanks, in part, to a distorted tax structure that shapes investors’ decisions. Cut corporate taxation on manufacturing and pay for it through higher taxes on capital gains, reorienting investors’ preferences toward the manufacturing sector. Agree to a repatriation of American manufacturers’ profits from overseas, taxing them at a low tax rate in return for an enforceable commitment to create jobs. If significant new hiring does not take place within a year of profit repatriation, those profits should then be taxed at a higher rate.

Link Deregulation to Job Creation

The Chamber of Commerce and the National Association of Manufacturers claim government regulations inhibit job growth. Challenge them to produce specific examples of individual regulations that reduce manufacturing employment and relax those regulations for one year. If significant new employment does not ensue, the regulations snap back.

Commit to a Weak Dollar

U.S. exports have only doubled once in any five year period in modern history and that was when the dollar halved in value against both the Japanese yen and the German deutsche mark in the late 1970s. To encourage American and foreign investors to boost industrial activity in the United States, they need to know that the dollar area will be a low cost production site for the foreseeable future. 

Offer American Workers Flexicurity

 In a rapidly changing global economy, Washington cannot promise Americans that they can keep their same job forever. Moreover, U.S. businesses need the flexibility to hire and fire people as market conditions change. But every American should have the right to employment security, that is the right to be retrained if necessary for a new job and to have their skills constantly upgraded to help keep their employer competitive. 

“Flexicurity” is the name the Danes have given to this balance between a business’s flexibility and an individual’s access to training. Copenhagen spends ten times as much on training, as a percentage of its GDP, as does the United States.

U.S. manufacturers cannot expect to be competitive when they pay so little attention to upgrading the skills of their workers. To that end, the administration needs to dramatically boost spending on training, not just for workers once they lose their jobs (the most inefficient training), but for workers on the job. As a quid pro quo, companies should be required to spend more on skill development and upgrading. And, in contract negotiations, workers need to accept that retraining is an integral part of their overall compensation package, an investment in them comparable to their health insurance and pension.

Support Research, Development and Entrepreneurship Rooted in the Manufacturing Process

America learned this lesson the hard way when the U.S.-based manufacturing of semiconductors and flat-panel displays for computers and televisions moved to China more than a decade ago. At first, there seemed no cause for alarm because these did not seem to be part of the core manufacturing capability that the United States needed. But the experience that the Chinese gained in making computer chips and screens taught them how to process ultrapure, crystalline silicon into wafers and to apply thin films of the silicon onto large glass sheets. By so doing, they created a solar panel industry that has become a major international player. It was not work done in Chinese laboratories that gave them this competitive advantage, it was experience in manufacturing.

Research and development tax credits, which the administration hopes to make permanent, are an important tool to boost the U.S. economy. But they should not be confused with a manufacturing R&D policy. Washington cannot afford to tap into the ingenuity of American scientists and engineers and come up with new products only to see them built overseas, because in most industries the manufacturing process itself is a critical factor in developing radically new products. Manufacturers feed off each other. That symbiotic relationship is vital in prompting innovation and an entrepreneurial spirit.

Creating and sustaining a network of competitive manufacturers entails day-to-day interaction between suppliers and customers, which allows each to learn from the other. The knowledge underlying emerging technologies requires person-to-person contact on the shop floor and among manufacturing industries and between manufacturing and services. That interaction is harder when a company’s supply chain stretches around the world. New manufacturers also rarely emerge in a vacuum. They typically morph from existing businesses, when coworkers who think they can build a better gadget than their current employer go out on their own.

The United States cannot continue to rely on outdated economic-growth strategies that fail to understand the complexity of industrial technology innovation and the natural synergies between workers and among supply chains. And it cannot afford to allow the next generation of product and process innovation and the spin-off of entrepreneurial firms to take place in China.

Use the Bully Pulpit of the White House to Revive America’s Manufacturing Ethos

None of this is possible as long as Americans believe manufacturing has no future. Businesses invest where they think they are wanted and their commercial activity has a future. A credible goal to grow the U.S. manufacturing sector, supported by a range of policies to achieve that end, backed by the president’s personal and repeated public commitment to manufacturing will create a virtuous circle of investment and job creation. Moreover, it will signal to young Americans that pursuit of a career in manufacturing has a future.

The United States needs a broad-based manufacturing sector to provide good paying jobs for its citizens to sustain the American standard of living. But that goal is not attainable without a plan and a commitment to achieve that end. The 2011 State of the Union gave no indication that the White House has a manufacturing strategy or the will to execute one.