While there are many similarities between our time and the Great Depression, there is a crucial difference: In the late 1930s, the United States produced over one-third of the world’s manufactured goods, while in 2008, the American manufacturing share was down to 18 percent after being trashed by outsourcing and imports. By increasing demand for products through government action, FDR was able to set the country up for the “Great Prosperity” from the end of WWII until the 1970s. Now, even with a large second stimulus, we will not be able to experience a new era of prosperity until we rebuild the manufacturing sector.
Recently, a crop of articles has appeared that argue that “our economy will thrive only when we make what we invent,” as Susan Hockstein, President of the Massachussetts Institute of Technology, recently concluded in a New York Times op-ed. Hockstein is challenging the idea that the United States can somehow be a world-class source of innovation without actually producing the new products. As she points out, in the past, “with design and fabrication side by side, insights from the factory floor flowed back to the drawing board.” She echoes the research of Professors Pisano and Shih, from an article in the Harvard Business Review, in which they wrote, “The U.S. has lost or is in the process of losing the knowledge, skilled people and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.” When engineers could go down to the factory floor and look at the results of their design decisions, it was much easier to create yet more innovations. A major criticism of a corporation (such as GM) used to be that the design engineers would take their designs and “throw them over the wall” to the factory floor without worrying about how the designs fared in a factory setting. Now we throw the designs over the Pacific Ocean to China.
By contrast, as John Gertner writes in the New York Times Magazine, “As the former White House economic adviser Lawrence Summers put it, America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff.” The benefits of separating production and innovation have been accepted as conventional wisdom for the past few decades, exemplified by Summers’s statement.
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But reintegrating innovation — that is, science and engineering — with production — skilled production workers and operations managers — is necessary. Back in the Great Depression, the Russians bought American factories and imported American engineers to create their industrial system. (Germany also helped, much to their later regret.) Now, after decades of closing down factories, throwing engineers and skilled production workers out of work, re-orienting those professions to military work and much of the educated class to finance, the U.S. is in the position of a developing country. We must try to catch up to Europe and Asia in any way that we can.
It won’t be easy. On the one hand, Hockstein points out that “to make our economy grow, sell more goods to the world and replenish the work force, we need to restore manufacturing — not the assembly-line jobs of the past, but the high-tech advanced manufacturing of the future.” On the other hand, Gertner reports that advanced electric car battery makers are forced to buy Korean companies and import Korean engineers in order to get up to speed with cutting-edge technology. A battery maker tells him, “That’s where the know-how was — it was nonexistent in the U.S.”
While the increasing recognition of the importance of manufacturing is encouraging, we are still witnessing the very beginning of the effort to tackle solutions. Hockstein calls for more research dollars from the Federal government and support for more graduates and skilled workers in advanced manufacturing fields. While these are a good start, they won’t solve the underlying problem. What we need is an industrial policy, a coordinated set of initiatives that the government pursues to make up for the many market failures we are currently experiencing. But as Gertner points out, “Even now, as unemployment ravages the country, so-called industrial policy remains politically toxic. Legislators will not debate it; most will not even speak its name.”
Further to the left on the political spectrum, writers such as Leo Hindery recognize that “America’s manufacturing sector must be a cornerstone of the nation’s economy and thus one of the essential drivers of the recovery we are still searching for.” He calls for a requirement that government purchase goods made in America, a tax credit for rebuilding existing American factories, eliminating the tax credit for off-shoring factories, and enacting a temporary trade tariff, among other policies. He also advocates for a national infrastructure bank and extending various programs to help with the creation of a green energy economy. In a similar vein, Dave Johnson of the Campaign For America’s Future writes about a multi-pronged set of policies to revive manufacturing: deal with the trade imbalance with China by pushing it to stop making its currency artificially weak, have the government purchase American-made goods, implement a price on carbon in order to encourage a transition to a green economy, and create an industrial policy, for instance with tax incentives and training programs. He also argues that the president could embark on many of these policies now.
While all of these proposals would be a giant step forward politically, and in fact are probably beyond the limit of feasibility in this age of rabid Republican opposition, unfortunately they only begin to put us on the path to a world-class manufacturing system. The Koreans, Chinese, and Japanese directly subsidize companies, make it easy for scientists and engineers to get degrees, aid the import of technology, help companies work together, and engage in many other techniques for building manufacturing industries. According to the New York Times, a partial cause of China’s rise as a solar energy producer and the simultaneous decline of the United States comes from “free or subsidized land from local governments, extensive tax breaks and other state assistance… China has focused on building the competitiveness of the country’s manufacturers.” Since labor is a small part of solar panel costs, cheap labor has not been a key to success in China.
We could combine the ideas of a second stimulus, building a green infrastructure, and rebuilding the manufacturing economy by creating environmentally sustainable transportation, energy, and urban national systems, as I have argued. There are myriad examples of countries pulling themselves up the ladder of manufacturing competency, including the United States. The reality is that in order to be wealthy in the long-run, an economy must be based on manufacturing. As hard as it will be to move the politics of this country toward that reality, in the end it will be easier than making pretend that manufacturing is not important.