During the past decade the US sat on the sidelines while many nations around the world competed aggressively to win larger shares of manufacturing output and employment. The next decade is likely to be different. In several recent speeches and policy proposals, President Barack Obama has laid out a compelling case for why manufacturing matters for the health of the American economy and has signalled that the US will be a more active player in the intense global competition for manufacturing.
The manufacturing sector has led the US economic recovery in the past two years, expanding by about 10 per cent and adding more than 330,000 jobs since December 2009. This is a small number compared with overall private-sector job gains of 3.7m during the same period, but US manufacturing employment is growing for the first time since the late 1990s. And there are promising signs that American companies are beginning to shift some of their foreign operations back home. Rising wages abroad, the decline in the dollar’s value, increasing supply-chain co-ordination and transportation costs, and strong productivity are combining to foster this “insourcing” trend.
A resurgence of manufacturing in the American economy is important for several reasons.
First, the US must rebalance growth away from consumption and imports financed by foreign borrowing and towards exports. Manufactured goods account for about 86 per cent of its merchandise exports and about 60 per cent of exports of goods and services. Even though service exports are becoming more important, the only way the US can rebalance growth and make a significant dent in its trade deficit is by increasing exports of manufactured goods.
Second, on average manufacturing jobs are high-productivity jobs with good pay and benefits. Even though the premium on manufacturing wages has been declining over time, it remains significant. Both workers with only a high-school degree and those with a college degree earn significantly more on average in manufacturing than their peers in the rest of the economy.
After staying roughly constant during the 1990s, manufacturing employment dropped by about 32 per cent between 2000 and 2011. This precipitous decline was a major factor behind the increase in wage inequality and the polarisation of job opportunities between the top and bottom of the wage and skill distribution. Contrary to conventional wisdom, the loss of manufacturing jobs was not the inevitable result of productivity gains. In the 1990s, with comparable productivity growth, manufacturing employment was roughly constant.
During the coming decade, with the right incentives, US manufacturers can again win larger shares of global value added as they did in the 1990s.
Third, manufacturing plays a substantial and disproportionate role in innovation. A strong manufacturing sector supports the key building blocks of the nation’s innovation ecosystem – its skilled scientific, engineering and technical work force, its research and development, its ability to identify technical challenges and provide creative solutions.
Manufacturing only accounts for about 9 nine per cent of the nation’s jobs and 11 per cent of the nation’s output. But it employs about 36 per cent of the nation’s engineers and accounts for 68 per cent of R&D spending by business which in turn accounts for about 70per cent of total R&D in the US. American leadership in science and technology depends on R&D investment by manufacturing companies, and the social returns to such investment are substantial, far exceeding the returns to the companies that fund it.
Despite the offshoring of parts of their supply chain, American multinational manufacturing companies continue to locate most of their R&D investment and research work force in the US.
But this share is gradually declining as they shift some of their R&D from both the US and Europe to Asia in response to rapidly growing markets, ample supplies of technical workers and engineers, and generous subsidies.
China and other emerging economies are actively building their research capabilities and aggressively competing for the R&D of American manufacturing companies. At the same time, the comparative attractiveness of the US as a location for such activities is slipping in part because of shortages in the scientific, engineering and technical labour force and restrictions on the number of immigrants with these skills.
President Obama’s 2012 budget proposal calls for $1tn in discretionary spending cuts over the next decade, reducing the share of discretionary spending to five per cent of gross domestic product by 2022. Despite its overall austerity, the proposal contains measures to boost manufacturing. Many of these – including policies to increase high-school graduation rates; workforce training programs at community colleges; more funding for basic research, infrastructure investment, and scientific, engineering and technical education; and immigration reform – would benefit other sectors as well.
President Obama’s plan for business tax reform would also benefit manufacturing. The plan would reduce the statutory corporate tax rate from 35 per cent, soon to be the highest in the OECD countries, to 28 per cent. The US rate would fall to 25 per cent for manufacturing and even lower for advanced manufacturing which is targeted for a 19 per cent increase in R&D funding in the budget.
Given its outsized share of R&D investment, manufacturing would also benefit disproportionately from the President’s proposal to expand and simplify the research and experimentation tax credit and to make it permanent. Although the US was the first nation to introduce a tax credit for R&D in the 1980s, many countries provide far more generous incentives now. Recent research confirms that the credit is a cost-effective way to encourage business research spending and that the society-wide returns to such spending exceed the private returns to the investors who fund it, often by a considerable margin.
President Obama recognises that manufacturing matters for the health of the American economy. And despite severe budgetary constraints, he has laid out an ambitious set of policies to achieve that goal.
The writer is a professor at the Haas School of Business at the University of California at Berkeley and former chair of the Council of Economic Advisers under President Bill Clinton.
