Wednesday, February 29, 2012

Is Manufacturing the Answer?

by Richard Crews
Not long ago (well, a few decades, but think of it as a wink of geologic time) the U.S. was the manufacturing titan of the world. ("Titan" may not be quite the right word here, but you get the idea.) During the first half of the 20th century, U.S. manufacturing grew, and grew, and grew until by mid-century, the U.S. out-manufactured the entire rest of the post-industrial world combined. (True, the Second World War, 1940-'45, demolished manufacturing capacities throughout Europe and Asia while the U.S. doubled down on making ships, planes, Jeeps, guns, etc., but it would be unseemly of me to let some historical subtleties and complexities stand in the way of a strong narrative--I've learned that from watching the Republican primaries.)

Then along came 2008 with Wall Street greed and the housing credit bubble, lots of closed factories and lost jobs (even the mighty auto industry almost folded) and--well--the U.S. is now an "also ran" as a manufacturing powerhouse (think Germany, Japan, and the U.K. with the BRIC countries coming on strong ("BRIC" stands for Brazil, Russia, India, and China)).

But a lot has changed in the world over the past couple of decades: robots build cars with something like 1/10 number of humans needed, electronics speed our financial transactions around the globe, green energy and environmental consciousness rise like a raging forest fire, and political aspirations rise and fall with an iPhone video and a "tweet," not a newspaper headline. The question arises, Is manufacturing coming back to save the American dream (in other words, is the decline in manufacturing "cyclical")? Or has the economic landscape changed in fundamental ways (is the decline "structural," never to return)?

On the one hand (according to a Brookings panel), manufacturing significantly provides (1) high-wage jobs, (2) commercial innovation, (3) trade deficit reduction, and (4) a disproportionately large contribution to environmental sustainability. Moreover, the manufacturing industries and firms that make the greatest contribution to these four objectives are also those that have the greatest potential to maintain or expand employment in the United States: computers and electronics, chemicals (including pharmaceuticals), transportation equipment (including aerospace and motor vehicles and parts), and machinery. American manufacturing, it is argued, needs strengthening through government help in four key areas: (1) research and development, (2) lifelong training and retraining of workers, (3) improved access to finance, and (4) an increased role for workers and their communities in sharing in the gains from innovative manufacturing.

On the other hand, Michael Klein (also at Brookings) points out that the 300,000 new manufacturing jobs created since the depths of the Great Recession represent only 8% of total job growth. Manufacturing's current share of employment is only about 9% of the nation's overall total. Over the past three decades, employment in manufacturing has decreased about 40%. So while manufacturing has been a bright spot lately, this is a story of productivity gains, not of employment growth. Thanks to these productivity gains, the employment drop occurred while the value added by manufacturing increased by 40%. Hourly compensation to workers has remained stagnant; so the question arises: Who benefits from policies to support manufacturing, workers or owners?

Furthermore, manufacturing is characterized by "churning"--simultaneous job creation and destruction. On average, about one in five manufacturing jobs are either destroyed or created each year, and that churn is not especially concentrated within some narrowly defined manufacturing sector.

Klein comments, "The case has also been made that manufacturing matters because of exporting. [But] a bit more than half of all U.S. exports are manufactured goods, and two-thirds of these manufacturing exports come from four sectors: chemicals, transportation equipment, computers (and other electronic products), and machinery.

"Policies to promote exporting would, therefore, disproportionately favor a relatively small set of firms in these sectors. How small a set? Only about 4% of manufacturing firms in the U.S. exported in 2000 and 96% of all U.S. exports are sold by just 10% of this already small set of firms.

"It may be possible to expand the set of firms that export, rather than just the export activity of those that already sell abroad, but the extreme concentration of exporting gives one some pause about export-promoting policies. And exporting is not an end in itself. Is there some special feature of exporting that benefits workers as well as owners?

"There is evidence of a wage premium paid to workers in exporting firms, but those workers also tend to have more education and skills than those in non-exporting firms. Part of the premium is due to this.

"Since higher education and skills result in higher wages, it would be well worth considering policies promoting the skills and education of workers, regardless of the industry in which they are employed."