Our Manufacturers Need a U.S. Competitiveness Strategy, Not Special Treatment

On February 4, Christina Romer, former head of the Council of Economic Advisors (CEA) under the Obama Administration, wrote an op-ed asking “Do Manufacturers Need Special Treatment?,” and argued that they don’t. For Romer, as for most neoclassical economists, manufacturing and manufacturing jobs matter no more than any other industry or jobs in the economy. But Romer’s op-ed gets at least four critical points flat wrong. First, it conflates having a coherent set of policies and strategies to support U.S. manufacturers with them receiving “special treatment.” Second, it wrongly argues that manufacturing jobs are the same as all other jobs in the economy. Third, it misdiagnoses the central challenge facing the U.S. economy as a lack of aggregate demand when the real problem is faltering U.S. competitiveness, especially in the traded sectors of the economy, such as manufacturing. In doing so, her op-ed fails to recognize that the loss of manufacturing jobs has contributed significantly to the loss of U.S. employment, in terms of both direct and indirect jobs lost. Finally, arguments like this that manufacturing in the United States deserves no specific policy focus refuse to acknowledge the sophisticated strategies that dozens of U.S. competitors around the world have put in place to bolster the competitiveness of their manufacturing sectors.

First, those who call for a U.S. manufacturing strategy aren’t asking for special treatment or handouts from Washington. They aren’t asking—as Romer suggests—for differential, preferential tax rates specifically for U.S. manufacturing firms, that U.S. trade enforcement activity focus especially on protecting U.S. manufacturers, or for bailouts from Washington. (Notwithstanding the irony that it was Romer’s very CEA that supported the bailouts of GM and Chrysler, “special treatment” interventions which she now doth protests.) And they aren’t asking for an industrial policy that picks national champion winners to compete in manufacturing sectors like automobiles or advanced batteries.

Rather, those calling for a Strategy to Revitalize U.S. Manufacturing seek a coherent strategy regarding technology investment, tax, trade, and talent policies. While such policies will bolster the competitiveness of U.S. manufacturers, they also benefit other U.S. enterprises, especially those in traded sectors. Such policies seek to improve STEM education, to expand the R&D tax credit into an investment and innovation tax credit, and to invest in not just basic but also applied and translational research into cutting-edge technologies and processes like nanotechnology, robotics, or microelectromechanical systems. A strategy would also seek to increase investment in programs like the Manufacturing Extension Partnership (MEP), which bolsters the innovation and productivity capacity of SME manufacturers, who account for 98 percent of manufacturing establishments and 40 percent of the manufacturing workforce; though presumably Romer does not support such programs, because they provide “special treatment” for U.S. manufacturers. The point is there’s a clear difference between having a thoughtful manufacturing strategy and entering into the realm of providing “special treatment” that constitutes an “industrial policy” for manufacturing, and Romer way too cavalierly conflates the two.

Second, and more disconcerting, is Romer’s “Boskinian” equivalency between forms of economic output: $100 of output from semiconductors, potato chips, or haircuts is all the same to neoclassical economists. But Romer’s argument misses that manufacturing jobs are in fact not the same as all other jobs in the economy. Romer offers up three straw men—market failures, jobs, and income distribution—as potential economic rationales for a manufacturing policy and then (upon weakly defending them) argues that “none are completely convincing.” However, many of the arguments made by supporters of manufacturing on why manufacturing jobs are different and more important are valid. Indeed, as ITIF documents in The Case for a National Manufacturing Strategy, these include that: 1) manufacturing jobs pay more; 2) manufacturing has a higher multiplier so it leads to more jobs in downstream industries; 3) manufacturing is a key driver of innovation, and without manufacturing non-manufacturing innovation jobs (e.g., design, research) will not thrive; 4) manufacturing is a source of good jobs for non-college educated workers; and 5) the United States will not be able to come close to balancing its trade deficit without a healthy manufacturing sector.

But as important as these are, they are not the major reason why it’s critical to have an internationally competitive manufacturing sector. The major reason is that it’s still the largest “traded sector” of the United States economy and will be for a long time and it is simply impossible to have a vibrant economy without a healthy traded sector. (Traded-sector companies are those that ring up a not insignificant share of their sales by people or companies who do not reside in the United States.)  Indeed, manufacturing still contributes $1.6 trillion to U.S. GDP and employs 13 million workers; it’s a critical component of the U.S. economy that we cannot allow to wither.

The third flaw with Romer’s argument is that the real challenge facing the U.S. economy isn’t a lack of aggregate demand, but rather it’s the fact that the overall U.S. economy is losing international competitiveness, as ITIF documented in Explaining Anemic U.S. Job Growth: The Role of Faltering U.S. Competitiveness. This is actually seen most clearly in manufacturing. Over the past decade, the United States lost 5.4 million manufacturing jobs, or 32 percent of its manufacturing workforce; saw 54,000 factories close; and, when the figures are counted correctly, actually suffered an 11 percent decline in manufacturing output (in contrast to dramatically inflated official government figures which suggest manufacturing output grew 16 percent over the past decade). In reality, fourteen of the nineteen aggregate-level U.S. manufacturing sectors actually produced less in 2010 than they did at the start of the decade in 2000, even though the economy grew by 18.2 percent over the last decade. Put simply, manufacturing job losses were not primarily the result of increased productivity that maintained high levels of output with fewer workers. Rather, the U.S. manufacturing sector and workforce contracted over the past decade as output shrank, in large part because a number of manufacturing sectors were losing their international competitiveness.

However, if U.S. manufacturing had contributed its same share to GDP growth this past decade as it did in the 1980s and 1990s, overall GDP growth would have been 28 percent in this last decade, rather than 18 percent. And if manufacturing output had grown at the same rate as GDP from 1997-2010, there would be 2.2 million more manufacturing jobs in the United States. Given the multiplier effect that manufacturing jobs have on the rest of the economy, which is at least two to one, (and as high as five to one), had manufacturing not shrunk, there’d be perhaps 8 million more Americans working today. In other words, the impact of manufacturing decline is not just on the 5.4 million manufacturing workers or in a few “manufacturing” states, it’s on an entire economy.

So ultimately, Romer’s diagnosis and prescription to solve the problem of a lack of aggregate demand addresses the symptom, but not the cause, of the economy’s travails. Demand is depressed from the high levels of unemployment and because many of the new jobs being created are in the lower-wage sectors of the economy—hospital orderlies and nursing aides, secretaries and temporary workers, retail and restaurant workers, etc. There was evidence of this even before the Great Recession, as wage data from 2000 to 2007 showed a shift in the “occupational mix” of the jobs in the U.S. economy, meaning that U.S. workers are taking home less in hourly wages. The data show that if the United States had the same composition of jobs in 2007 as in 2000, average wages paid to U.S. workers would have increased twenty-two cents an hour, whereas on average U.S. workers only realized one-half that increase, because a larger share of workers in 2007 were in lower-paying occupations. It’s lack of earnings from high levels of unemployment and lower wage levels from lower-skill, lower-paying jobs that’s depressing aggregate demand. And in part that stems from the failure of the United States to maintain its competitiveness in the global economy, particularly in manufacturing, which means that the overall U.S. engine of growth is not running on all cylinders and that the recovery is halting. Addressing the competitiveness problem is what will solve the demand problem.

Finally, neoclassical economists would perpetuate the myth that manufacturing is passé in all developed economies, and so can’t be counted on as a future jobs and growth engine for the United States. Yet this analysis is oblivious to what’s going on in the manufacturing sector in countries like Germany. There, manufacturing accounts for 20 percent of GDP (compared to 11 percent in the United States); the country’s share of world manufacturing output has remained roughly stable since the 1970s, while the U.S. share has fallen 12 percentage points; manufacturing workers earn more than 40 percent more per labor hour than U.S. manufacturing workers do; more than 60 percent of the country’s manufacturing activity is in medium-high or high-technology industries (compared to just 40 percent of U.S. manufacturing activity); and the country’s exports of high-tech, research-intensive products is seven times greater than the United States’.

The success of Germany’s manufacturing economy rests not on special treatment, but because Germany is but one of a long list of countries—including Australia, Austria, Japan, India, New Zealand, South Africa, the United Kingdom, and many others—that have a manufacturing strategy. Elements of Germany’s manufacturing strategy include its network of 59 Fraunhofer Institutes that conduct cutting-edge, industrially relevant research across a range of sectors and technology platforms. (A recent ITIF event on Boosting Competitiveness by Connecting Science and Industry: Insights from Germany’s Innovation Model explains in detail how the Fraunhofer’s support manufacturing innovation in Germany). Investment is another element: Germany invests six times as much as the U.S. does in industrial production and technology, and it invests twenty times as much, as a share of GDP, in its SME manufacturing support programs as the United States. (Nor is Germany alone: as a share of GDP, Japan invests forty times more in its SME manufacturing support programs than the United States does and Canada invests ten times more). Finally, Germany has put in place effective talent and education policies to assure its manufacturing workforce is amongst the world’s most highly skilled.

If the United States wishes to restore long-term growth and to ensure that current and future generations enjoy the standard of living to which Americans have grown accustomed in the post-War period, it will have to restore the international competitiveness of the traded sectors of its economy, principally in manufacturing. To do so doesn’t require giving these sectors special treatment, but it does require that the United States have a strategy to support the competitiveness of its manufacturers marked by sound and coherent policies regarding the four “Ts” of technology, tax, trade, and talent.