Manufacturing is Innovative Too!

There is an emerging cottage industry among the economic punditry these days: attempting to debunk any talk that manufacturing is either in trouble or important. The pundits all have the same underlying motivation: we don’t want to be seen as being on the wrong side of history: e.g., technology protectionists living in the 20^th century. We’re 21^st century guys and gals who understand globalization and the new economy. Not like those folks who wanted to go back to the mid-1950s and have everyone work in dark, dreary manufacturing plants and come home with grease on their hands.

The latest addition to this anthology is the article in the New York Times by Eduardo Porter, The Promise of Today’s Factory Jobs.

He starts out with standard observation:

“Much of the anxiety about factory jobs is based on the misconception that job losses have been due to a sclerotic manufacturing sector, unable to compete against cheap imports. Until the Great Recession clobbered the world economy, manufacturing production was actually holding its own. Real value added in manufacturing, the most precise measure of its contribution to the economy, has grown by more than two thirds since its heyday in 1979, when manufacturing employed almost 20 million Americans — eight million more than today."

But as we pointed out in ITIF’s report “Worse Than the Great Depression: What the Experts Are Missing About American Manufacturing Decline" this is simply not the case and reflects fundamental flaws in how the government reports manufacturing value added. As we showed, 18 of 19 U.S. manufacturing industries produce less today than they did a decade ago. The fact that value added went up at all was because the U.S. government measures Moores’ Law in the computer industry in a way that it accounts for ALL and more of the growth of U.S. manufacturing.He then goes on the repeat the other standard observation as if it constitutes proof of his claim that all is well:

“Manufacturers are shedding jobs around the industrial world. Germany lost more than a fifth of its factory jobs from 1991 to 2007, according to the United Nations Industrial Development Organization, about the same share as the United States. Japan — the manufacturing behemoth of the 1980s — lost a third."

But the German data can't be used this way because it conflates losses when unification with East Germany occurred. Moreover, comparing the U.S. to Japan, or even Germany is not valid. Because of immigration restrictions and an aging population Japan is losing working age population while we are gaining. The proper comparison is change in percent of manufacturing workers as a share of total working age population and on this measure of 10 nations measured by the BLS, only the UK performs worse than America.

Moreover, Porter and others think because manufacturing jobs are declining in many nations that decline is normal. But the key point is the rate of decline. What if we had lost 90 percent of our manufacturing jobs in the last decade?  Would the view still be, well it’s okay, manufacturing jobs are declining everywhere?

The rate of loss matters.

He goes on to note:

“It may not matter to factory workers who lost their jobs. Whether forced out because an employer moved production to China or because a fancy new machine makes it easier to compete against a rival in China, the job is gone. Still, the distinction is important. Without an understanding of the forces at work, policy makers’ attempts to bolster manufacturing could backfire.”

Amen brother. Unfortunately, Porter does not provide understanding, he provides misdirection. Policymakers reading this would conclude that manufacturing is doing fine and the only thing that is needed are policies to help displaced factory workers get jobs.  In fact, as ITIF showed, things are not fine and in fact, much of U.S. manufacturing has lost global competitiveness and we need a national manufacturing strategy. He then attempts to paint manufacturing advocates as backward looking protectionists, saying,

“One thing is clear. Most of the jobs lost to China and other poor countries cannot “come back.” They don’t pay anywhere near enough. And they don’t exist here anymore anyway.”

I don’t know about you, but ITIF has definitely not advocated a “let’s bring back the plastic Happy Meal Toy industry to America” strategy. One can argue for a manufacturing strategy that recognizes that our manufacturing sector has restructured. Most sophisticated analysts are NOT saying that most manufacturing jobs will come back. What they and we are saying is that we should not be running a trade deficit in manufacturing and if we don't, we will be producing a lot more manufacturing output most of it advanced.

He goes on to state that an economic strategy “narrowly focused on manufacturing is unlikely to deliver.” No kidding. But no one, including the President, is proposing a strategy narrowly focused on manufacturing. Have we really gotten to a point where if you say we need a national manufacturing strategy that you are accused of ignoring everything else? Yes, ITIF has called for a national manufacturing strategy (as has the Administration) but we have also called for a broader innovation and trade strategy (as has the Administration). It’s not either or and to dismiss it this way does a disservice to the debate.

He states “A tricky thing to understand is that most jobs in the United States are created in areas of the economy not exposed to global competition.” Again, this is completely circular logic. If we lost all our manufacturing jobs he’d say, all jobs in the U.S. are created in areas not exposed to global competition, so don’t worry. America had no job growth in the last decade precisely because the traded sector did not grow. It’s impossible to have a robust economy without a healthy traded sector and manufacturing is a key part of that. As a sop to the administration, he says,

“This doesn't mean the administration should ignore manufacturing. We need world-class, innovative industries that compete in global markets. They won’t add a ton of jobs precisely because they must stay lean to compete."

I guess he’s implying 3 million is not a ton? Because that’s how many we have lost to lack of competitiveness this last decade. And if his point is more jobs are in induced demand jobs, of course and so what? They call it induced demand because it is induced by something - in this case manufacturing. He closes his article with a truly stunning statement:

“Innovation — not manufacturing —has always propelled this country’s progress.”

So semiconductor production, making biotech drugs at scale, figuring out how to make composite airplanes, figuring out how to make super-fast digital offset printers, etc., are not innovation? Manufacturing accounts for around ¾ of all R&D. What he might have more accurately said is, “innovation is the future of America and that innovation will have to be in a wide variety of industries, especially traded sectors like manufacturing, software and information, and in a variety of types, including product and process innovation.

So, can we finally put an end to these kinds of articles and move to a sophisticated, nuanced and informed discussion of U.S. innovation challenges?