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"Do Manufacturers Need Special Treatment?" -- They Both Need It and Deserve It

Posted: 02/14/2012 8:00 am

In one of the most uninformed -- and counter-productive -- op-eds we've read in the last five years, President Barack Obama's first chairwoman of the Council of Economic Advisors, Christina D. Romer, just spent 1,200 words arguing that we should do nothing about the crisis in American manufacturing. She meticulously constructed three straw men -- market failures, jobs and income distribution -- and then proceeded to knock the stuffing out of each of them.

It was a heroic, if not faintly humorous, performance given Ms. Romer's recent position in the administration and the fact that few others in the country misread more the depth and the duration of the still largely ongoing Great Recession of 2007. She was an architect of the administration's stimulus package, its auto bailout, and its policies that led to the "green shoots" and "recovery summer" fiascos. But none of that stopped her from eviscerating arguments meant to do something about the crisis in manufacturing.

Ms. Romer concluded her op-ed by admitting that manufacturing was "the engine of growth that allowed us to win two world wars and provide millions of families with a ticket to the middle class." And yet she felt that public policy regarding manufacturing should be "based on hard evidence of market failures, and reliable data on the proposals' impact on jobs and income inequality", for which, in her opinion, "a persuasive case for a manufacturing policy remains to be made."

President Harry Truman, in a moment of sheer frustration, demanded a one-armed economist. He had grown tired of dismal scientists telling him "on the one hand, we should do this. On the other hand, we should do that." He had a point.

Now the consensus among too many economists also seems to be that we should let cycles cycle and the economy naturally evolve -- and structural collapse be damned. They spin so many theories, twist so many numbers, and advance so many specious arguments that the cumulative result is nothing gets done.

We've seen the hard evidence in the eyes of the real unemployed and underemployed. We have reliable data on how many factories have closed and how many manufacturing jobs have been lost overseas. What we, as a nation, lack is the foresight, drive and intensity to re-spark our true engines of growth.

But those sparks will not come from the dismal scientists that Harry Truman dealt with and Barack Obama seems content to deal with. They will only come from those who actually want to do something, who take pride in making things in America, and who are willing to look to concrete solutions rather than academic sophistry to drag us out of this jobless recovery.

Borrowing liberally from the writings and speeches of Senators Sherrod Brown (D-OH), Debbie Stabenow (D-MI) and Sheldon Whitehouse (D-RI), and from our colleagues at the New America Foundation, we first have to admit that manufacturing is, as they say, 'critical to the American economy'.

  • Largest multiplier. Manufacturing has the largest multiplier of all sectors of the economy. Every dollar in final sales in manufacturing products supports about1.40 in other sectors of the economy. By contrast, the hallowed financial services sector generates only about 50 cents for every dollar of activity.
  • Productivity powerhouse. Manufacturing productivity consistently outpaces productivity growth in other sectors of the economy. Between 1997 and 2007, multifactor labor productivity in manufacturing grew at an average rate of 4.6% per year. This was 60% greater than in the private, non-farm economy as a whole.
  • Good wages and benefits. Manufacturing employees earn higher wages and receive more generous benefits than other working Americans. On average, manufacturing employees earn 23% more than workers in other parts of the economy.
  • Diversified employment. Manufacturing employs workers at all skill and education levels and helps to reduce income inequality. For non-college educated workers, manufacturing is a crucial source of good, often highly skilled jobs that pay above average wages. On average, non-college educated manufacturing workers made1.38 per hour (or 9.2%) more than similar workers in the rest of the economy in 2006-07.
  • Source of innovation. The manufacturing sector is of vital importance in maintaining our innovative capacity. Manufacturers are responsible for more than 70% of all business R&D, which ultimately benefits other manufacturing and non-manufacturing activity.
  • Key to an improved trade balance. An increase in the production of manufactured exports and import-replacing goods in the United States is the only thing that will bring down our trade deficit to sustainable levels and reduce America's international debt burden.
  • Critical to other high value-added sectors of the economy. The maintenance of a strong and vibrant manufacturing sector is essential to other high value-added sectors of the economy, including design, telecommunications and finance.


It's past time to admit that the Great Recession of 2007 has only exacerbated the adverse trends in manufacturing that actually first reared their heads as far back as 1980, with the "Reagan Revolution". And for those thirty years the manufacturing sector has shed jobs faster than many other sectors of the economy.

While there are many reasons for the decline in manufacturing over this period -- including productivity growth -- and for the closely related economic downturns, productivity growth in truth is actually much less than some economists -- Ms. Romer among them -- would have us believe. The now decades long decline in manufacturing is mostly because while other countries have a policy of maintaining capacity and employment, the U.S. does not have a national manufacturing strategy and has not established a framework for creating one.

U.S. government policies across the board -- taxes, trade, investments, R&D, exports, infrastructure and procurement -- are not integrated into a strategy to restore and grow the U.S. manufacturing sector. And until they are and America has its own manufacturing policy to rival those of our trade competitors, U.S. manufacturing employment will continue to decline, as will manufacturing output as a percentage of GDP, and the U.S trade deficit will remain crushingly high.

In the sweeping onrush of the Recession, America's industrial base is undergoing its most radical restructuring in decades as manufacturers dramatically rethink their businesses, with far too little support from Congress and the administration.

These moves are accelerating the U.S. manufacturing economy's longer-term shrinkage, as well as exacerbating its shift away from heavy sectors. In some cases, companies are investing in smaller, more-efficient facilities that rely heavily on goods manufactured overseas. In other cases, such as with General Electric's avionics business, they are continuing to relocate labor-intensive operations to countries where wages are cheaper and subsidies, often illegal, are available.

As a result, right-headed economists expect unemployment to remain high for many years as millions of American workers in the hardest-hit sectors struggle to find new jobs. And while some economists see this restructuring as inevitable, those right-headed ones worry that the sheer scope of the cutbacks could doom companies that ought to survive and further weaken an already depleted manufacturing sector.

The erosion of our manufacturing base -- our skilled workforces and our plants, production processes and supply chains -- continues even as economists like Ms. Romer urge us to do nothing. But doing nothing is not an option now. With nearly a fifth of our workforce idled in real terms and with competitor nations buying our under-utilized machines, now is the time to do what we've always done: roll up our sleeves and make the best of a bad situation.

A great nation like ours requires time and space to change directions. As with a supertanker, there is misdirection to slow and shed before a new course can be set. And there are always obstacles -- naysayers, overseas competitors and the inherent inertia of a very large economy -- to overcome before resuming flank speed.

We haven't a moment to lose.

Leo Hindery, Jr. is Chair of the US Economy/Smart Globalization Initiative at the New America Foundation, Co-Chair (with USW President Leo Gerard) of The Task Force on Jobs Creation, founder of Jobs First 2012, and a member of the Council on Foreign Relations. Rick Sloan is the Communications Director of the International Association of Machinists and Aerospace Workers and Executive Director of its Union of Unemployed.

 

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