THE FUTURE OF U.S. MANUFACTURING
The stated theme of the recent meeting of the Association for Corporation Growth in Boston was to explore the prospects for a manufacturing resurgence in the United States, and a panel headed by MIT Professor Suzanne Berger took a pretty deep dive into that issue.
Noting that the U.S. contributes 19.4% of the world’s manufactured goods, a statistic that has remained stable for about twenty years (although the number of workers declines, we make up for it in productivity), the panel agreed that manufacturing in the United States is here to stay and indeed will see something of a resurgence. U.S. manufacturing will take place where technology and innovation are important to production. “Cheapest country” manufacture will continue to focus on the less technologically sophisticated products. U.S. workers provide the greatest per-capita value-added to manufacture of any country in the world, exceeding that of Japan and other developed countries and blowing away the value added component of Chinese labor.
Manufacturing jobs are back; last month 50,000 U.S. manufacturing jobs were added and industry optimism is higher than in the last two years.
What are the drags? A significant shortage of skilled labor, together with higher U.S. operating expenses for manufacturing even putting aside the cost of labor; it is at least 20% more expensive to manufacture in the United States than elsewhere, by reason of tax load and government regulation.
The capital providers on the panel thought there was no lack of capital to finance American production, but were worried on a couple of other fronts:
- A foolish immigration policy that causes us to train engineers and others who can drive successful manufacture, and then making it impossible for them to stay in the United States.
- A lack of an educational system designed to support development of the kinds of sophisticated factory labor that is required.
There are functional dynamics which drive United States manufacture. There remains substantial distrust of the ability to protect intellectual property offshore. This pushes low tech manufacturing offshore, or manufacture of technological products where the obsolescence is so rapid that having the technology knocked off is irrelevant (as the United States will continue to re-engineer and improve what is marketable in a given space). Also, attenuated supply chains make it difficult to rely on production that spends six weeks on a ship coming from China, particularly when goods are destined either for the United States economy or the South American economy; as just in time gets shorter, the attenuation and reliability of the supply chain becomes more vital (witness the disasters in Japan and the impact on U.S. business).
Perhaps the most interesting comment was related to the tax code. Even the Obama program calls for the reduction only of corporate tax rates, but 70% of United States manufacturing is done by enterprises with flow-through tax treatment, which means that the individual tax rate is really the corporate tax rate for 70% of our domestic manufacture. Does this matter? Is this just a question of making sure that the rich owners of companies will have to pay their fair share of taxes? The panel, which included one such owner, didn’t think so. There seems to be at least anecdotal support for the proposition that lower tax rates for this population will cause greater investment in the growth of a company, and in the growth of the R&D function of a company. Two-thirds of R&D in the United States is performed in manufacturing companies, and it is also thus essential that Congress pass a permanent R&D tax credit.
In addition to tax, immigration and education reforms, the panel noted that American manufacture would be improved by a more friendly attitude on the part of EPA and OSHA, a clear and liberal policy toward stem cell research, and the establishment of trade agreements that foster U.S. exports.
Is there an analogy between what has happened to agriculture and what has happened to manufacturing in the United States? We have learned that 1% of the U.S. population can not only feed the United States but also create substantial exports of food stuffs. We are a “category killer” when it comes to food. Can American manufacturing become a “category killer” in the manufacture of technologically related goods? The panel thinks yes. The panel doesn’t think that a huge increase in the number of manufacturing jobs is a measure of United States manufacturing prowess. The panel thinks that if we can get out of our own way, and educate and accept from overseas the necessary worker base, primacy of U.S. manufacturing will remain an economic fact in the world economy.