Joining the Great American Manufacturing Battle

bridges vol. 34, July 2012 / Innovation Matters

By Stephen Ezell

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Ezell Stephen Ezell StephenWriting in the May 2012 issue of bridges, Roger Pielke, Jr. limned the contours of "The Great American Manufacturing Battle" that's unfolding, concerning the United States' need for a comprehensive manufacturing strategy with coordinated policies to address what the Information Technology and Innovation Foundation (ITIF) calls the "4Ts" – technology, tax, trade, and talent – in order to bolster the competitiveness of US manufacturing firms and industries. Pielke sided against what he disparagingly refers to as "manufacturing romantics" and with the "manufacturing skeptics" like Christina Romer, who believe that manufacturing is no more important to the economy than massage therapy or any other sector and therefore deserves no special policy emphasis.

In so doing, Pielke channels the conventional neoclassical economic wisdom that "what a country makes doesn't matter," a viewpoint memorably captured by Michael Boskin (head of former President George H. W. Bush's Council of Economic Advisors) in his famous quip: "Potato chips, computer chips, what's the difference? $100 of one or $100 of the other is still $100." But there is a difference, and it is profound. First, many manufacturing industries such as those making semiconductor microprocessors (computer chips), experience very rapid growth and reductions in cost, spark the development of related industries, and increase the productivity of all other sectors of the economy. In essence, spillover effects from the sale of computer chips make potato chip manufacturers more efficient; but the converse is not true. Second, jobs producing computer chips require a higher skill level and thus pay more than jobs producing potato chips. And indeed, as ITIF explains in The Case for a National Manufacturing Strategy, manufacturing remains a key source of jobs that pay well – 21 percent more than the average hourly compensation in private-sector service industries – as well as have much larger employment multiplier effects, with each manufacturing job supporting as many as 2.9 other jobs across the economy.1 Third, manufacturing industries are a vital source of innovation and R&D in the US economy, with the manufacturing sector accounting for 72 percent of all private-sector R&D spending and employing 63 percent of domestic scientists and engineers; furthermore, US manufacturing firms demonstrate almost three times the innovation rate of US service firms.2 In other words, if we lose manufacturing, we lose more than just jobs. We lose know-how, creative capacity, and innovation. Put simply, manufacturing distinctively engenders economies of scale, leading to lower prices, lower inflation, higher productivity, and thus greater wealth creation for the whole economy. Manufacturing is also vital to US national security and defense, a concern laid bare by a recent report highlighting the infiltration of counterfeit electronic parts into the US defense supply chain.

Yet the central reason why manufacturing matters is that it is a key enabler of traded-sector strength. In a globalized economy, a vibrant national economy is impossible without globally competitive traded sectors and enterprises – those that compete in international marketplaces and whose output is sold, at least in part, to nonresidents of the nation. And manufacturing, as the largest traded sector of the United States economy now and for the foreseeable future, will be indispensable if the United States is to balance its terms of trade (the country accrued an astounding $5.5 trillion foreign trade deficit in the 2000s); manufacturing accounts for 86 percent of US goods exports and 60 percent of total US exports.3 By contrast, we're not going to be exporting $400 billion worth of massages per year. In addition, globally competing traded sectors like manufacturing are key drivers of local economic growth. As recently explained by "manufacturing romantic" Gene Sperling, current chairman of the National Economic Council: If an auto plant opens up, a Walmart can be expected to follow. But the converse – that a Walmart opening definitely brings an auto plant with it – does not necessarily hold.

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