Act II for American Manufacturing?

MEANS OF REVIVAL

During the past couple of years, a national preoccupation with Wall Street’s meltdown and the ensuing recession has crowded out any serious debate about how to revive American manufacturing. So has the customary aversion to government-directed industrial policy, often demeaned as “picking winners and losers.”

These attitudes, however, may be changing. Despite the distrust of government that Americans displayed in the November congressional elections, four of five Americans support a national manufacturing strategy, according to a poll that the Alliance for American Manufacturing conducted last spring. Proponents of a government-led strategy say that it needs to be comprehensive, with tax cuts, helpful regulations, and interrelated efforts to preserve and rebuild core industries, the small companies that cluster around them, and their skilled managers and workers.

So far, the specter of such a strategy hasn’t raised the tea party’s hackles or provoked a political furor over government’s proper role. Indeed, political antagonists have found points of agreement. Recommendations issued in November by a bipartisan budget commission suggest growing sentiment that the corporate tax rate—among the highest in the world—ought to be reduced to encourage companies to base their operations in the United States.

Similarly, Democrats as well as Republicans support a tax credit for research and development, which lapsed a year ago for the 14th time in the past three decades. The United States accounts for about a third of the world’s R&D spending, far more than the second-place Europeans. Still, relative to the size of its economy, America’s spending on research and development ranks eighth among major industrial economies.

But R&D isn’t enough. “An R&D policy should not be confused with a manufacturing policy,” First Solar’s Sohn warned. “The worst thing would be for us to tap into the ingenuity of our engineers and come up with products and manufacturing processes, and then go and put [them] overseas because that is the only place that it makes sense to make things.”

Manufacturers gravitate to societies that show they want them, said Sohn, whose company operates factories in Germany, Malaysia, and Perrysburg, Ohio. “We were attracted to Malaysia,” he noted, “because of their focus on manufacturing. It starts with a tone in the country. Politicians and businessmen there have acknowledged the utility and value of having manufacturing as a base, and they have established a set of policies that were attractive,” including lowering taxes and providing access to low-cost capital.

Subsidies can dry up, of course, and tax benefits can be withdrawn. Manufacturers also look for stable—preferably growing—domestic demand. That’s one reason First Solar built a factory in Germany and is expanding it. German utilities are required to buy electricity produced by consumers’ roof-top solar panels
at a price set high enough to enable them to pay for its installation. Giving every consumer a chance to earn money as an electricity producer has sent German demand for solar panels skyrocketing.

R&D alone won’t assure a future for American manufacturing.

A vibrant American market for manufactured goods will be harder to achieve, given the likelihood of continual slow growth. The 2009 economic-stimulus package sought to encourage the market by requiring that projects it funded include substantial U.S.-made content. Many economists and foreign governments decried the provision as inefficient and jingoistic. Yet it enabled United Streetcar in Clackamas, Ore., to begin the first production of streetcars in America in more than half a century. “The buy-America provision took the risk factor out, so we could make the start-up investment,” said Chandra Brown, United Streetcar’s president.

Foreigners, too, can be lured into making in the United States more of what they sell to Americans and to the rest of the world. Because of the recent decline in the dollar and the slow growth in American wages, it’s become cheaper in many cases to manufacture in the United States than in Germany or Japan. As a result, Volkswagen is building a plant in Tennessee, and BMW’s factory in South Carolina has become the largest exporter of U.S.-built cars. The federal government might also attract and keep manufacturers by matching the investment subsidies and tax breaks that China and Singapore offer.

Lowering the value of the dollar would preserve and expand the U.S. manufacturing base by making homemade goods a better buy for Americans and foreigners. The dollar is estimated to be overvalued against the Chinese renminbi by at least 20 percent. Reducing that to zero, according to the Peterson Institute for International Economics in Washington, would create about a half-million well-paying American jobs, mainly in manufacturing.

THE SKILL, THE DESIRE

But something more is needed to assure a vibrant future for American manufacturing: a skilled workforce. That’s a scarce commodity these days, even in Butler County. “Every kid who grows up here wants to go to college and work on Wall Street,” said Wise Machine’s Garrard, “not follow their fathers into AK Steel.”

Butler High School has a highly regarded vocational education program that teaches the latest in manufacturing techniques. Almost all of its graduates find jobs. But there are only 43 participants—more students choose training to become beauticians than machinists. “If we want to replicate the highly skilled German workforce,” said Scott Paul, executive director of the Alliance for American Manufacturing, “we need a seamless four-year program that starts in high school and goes through community college or technical schools that prepare students for manufacturing jobs.”

That proposal costs money. Butler County Community College conducts extensive training programs for local manufacturers, but demand is down, partly because of cuts in the state funding that picked up much of the cost. Nationally, only 0.17 percent of America’s GDP is invested in worker training. Germany spends nearly five times as much.

If skills are an obstacle, more money can help. But if it’s desire that’s lacking, all bets are off. In the past few decades, as manufacturing’s share of the American economy and workforce has slipped precipitously, the perception has grown that U.S. manufacturing has no future. No doubt this has contributed, in turn, to the Butler County youths’ tepid desire to pursue a manufacturing career.

Yet in Butler County, where the surviving manufacturers are showing some spunk, these fears seem premature. “There will always be a manufacturing sector in the United States—there has to be one,” said Frank Vargo, NAM’s vice president for international economic affairs. “The question is what kind of manufacturing. And that is a matter for policymakers to shape.”

In any event, there is reason to hope. “The future is still in our hands,” said Kent Hughes, director of the program on America and the global economy at the Woodrow Wilson International Center for Scholars in Washington, “if we don’t sit on them.”

The author, a senior fellow at the German Marshall Fund, is a contributing editor to National Journal. 

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