Yes, indeed. What is the problem with manufacturing in this country? The answer may be simple. There is nothing unusual in the capitalist system. But wait. Is it not true that all manufactured goods in the United States are made abroad? Aren't manufacturing jobs being moved to India, China and other parts of Asia and the Subcontinent? All of these questions are answered by "YES!" But...
The four main factors that have impacted U.S. manufacturing are globalization, comparative edge, automation, and policy neglect at national government level. All of these things are quite natural in American capitalism. While the first three are inevitable, the last one, policy, is possible to address. We will discuss policy neglect in a later essay. After some statistical background, let's examine the unavoidable.
Trends and Numbers
Manufacturing has been growing steadily since World War II. Although there have been some years of decline, the trend has been up over the years. Despite being ubiquitous, with factories emitting smoke into our atmosphere and workers queuing up to change shifts, at its peak manufacturing employment was only 32% of all non-farm labor U.S. workforce and never exceeded 27% GDP.
Manufacturing GDP grew by 3% between 1950 and 1970; it grew by 4% between 1970 and 1990. Manufacturing GDP has grown less than 2% since 1990. Growth between World War II, 1990, and 1990 was strong, but it has always been slower.
The story of employment is quite different. Manufacturing employment has declined 33% in the past three years, from 18% to 1990. As output increased, so did employment. This suggests that automation has helped to increase productivity. In fact, we are a more productive manufacturing country. This is great news. We just need to put this productivity to work making things. Herein lies the problem: we must make and sell more products. Despite all the productivity gains, our bounty is not being used. The manufacturing capacity utilization rate is at 75%. This is the lowest level in over 20 years. Economists believe that the industry must have a capacity utilization of at least 80% to be considered healthy and profitable. The manufacturing output is not declining; it's only anaemic.
The Inevitable and the Unavoidable
Let's now look at some of the inevitable international phenomena that affect our ability to sell more. The United States would produce more goods if India and China didn't grow their manufacturing bases. Globalization and its relative, the comparative advantage of developing countries' labor costs, cannot be stopped. Industrialization is a sensible policy for developing countries in a world with rising economic expectations. We can see this industrialization/globalization as a threat or as an opportunity -- and embrace it intelligently.
The relative advantage will eventually disappear. As wages in industrialized countries rise (just like they did in Japan), the advantage often disappears and is replaced by a less developed country that experiences its own wage growth. It continues as such. It is a race to the bottom to try and compete with low-labor cost countries. Comparative advantage means that high labor content products such as sneakers, which are made in the United States, will not be seen anytime soon. We don't want these two international factors to stop. However, we can take advantage of these international factors through policy.
Automation, which is unavoidable in America, reduces aggregate demand by requiring fewer workers and lower wage payments. Automation and a more educated workforce have led to a dramatic increase in productivity since 1970. However, wage growth has not been comparable in manufacturing or other industries. In the post-war period, manufacturing wages rose up to 1980 before levelling out. There were many reasons for this increase in wages and subsequent levelling. The most important was the impact of unions on the upside, as well as their decline during the current levelling period. The complex topic of changing wage patterns is beyond the scope of this essay. However, increasing the output can influence manufacturing employment and production. To make factories run in three shifts, it is necessary to manage the demand.
What can be done?
The manufacturing sector's share in GDP stands at 12 percent. This is equivalent to $1.8 trillion of output. With approximately 12 million employees, its share of total nonfarm employment is 9 per cent. It is necessary to set goals for growth, GDP share, and quantity -- and to implement policies that will help them. It is not necessary to set employment goals, since growth and increased output will drive the employment numbers higher.
In 1990, manufacturing accounted for 17 percent of the GDP. This would be an achievable, but ambitious, goal for the next ten years. If we assume a very modest increase in annual GDP, a 17% share of GDP would create four to five million new manufacturing jobs over the next ten years. In addition, an increase in manufacturing output creates more jobs for the tangential sectors that serve the manufacturing industry at a rate of five to 1.
Having goals is not enough. It is time to implement the policy, investment, and focus changes necessary to achieve the goals. These changes may be traditional or very unconventional. They must be serious and must be significant. First, certain attitudes must change. An animosity between national governments and manufacturers must be replaced by a mutually beneficial partnership. Both sides must recognize their responsibilities towards the public and their constituencies. There are many unconventional approaches that can be used to overcome mutual suspicion.
Focus is key to facilitating the policy and investment initiatives necessary for growing the U.S. factory base. This can be achieved by focusing on people and organizations. The most significant change to achieve that focus would be to create a Cabinet-level Department of Manufacturing. There are departments for energy, transportation and agriculture. They all aim to improve the country's capabilities in their respective "industries". Why not create a Department of Manufacturing if we think that manufacturing is an important sector? A department of manufacturing would bring more focus to the manufacturing policy. However, its true value would be to end the "hope as a strategy" approach to manufacturing that is currently the policy de facto.
Manufacturing growth is not possible without the right infrastructure. Manufacturing requires quality logistics and infrastructure. Training for Manufacturing Companies need skilled and well-paid workers. The industry needs steady demand from a weak dollar, an aggressive export policy, and serious economic stimuli to keep it thriving. Manufacturing needs an industrial policy that encourages and protects promising industries to ensure they grow and remain strong.
Because it is against American capitalism's grain, the last of these needs -- industrial policy -- is controversial. Manufacturing capitalism is the result of an "incentivized laissez faire" in which 19th-century norms of minimum government are combined 20th-century tax code encouragement. This policy must be abandoned and it is time for the national government to recognize, along with industry, that they can identify, invest in, and protect the foundation industries.
This doesn't necessarily mean the government will seek to select businesses from popular culture. Market selection is best. An industrial policy would apply to high-tech, basic and environmental industries. Our industrial policy, which is based on the financial models of private equity and venture capital, would provide a unique American model for industrial revitalization. A policy like this cannot be timid. It requires substantial funding and strong political support.