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Rob Atkinson: Time for a Manufacturing Debate Based on Facts, Not Opinion

By Rob Atkinson October 5, 2012

The president of the Information Technology and Innovation Foundation argues for an honest debate on the health of the American manufacturing industry.

From 1960 to 1982, manufacturing remained America’s largest employer, and as late as 2000 the third-largest employer. It wasn’t until the 2000s that U.S. manufacturing employment really went into a nose dive, with one out of every three jobs being eliminated.  Yet, virtually all economists and pundits attribute this massive decline to superior productivity performance, arguing that as manufacturing became more productive, fewer workers were needed to produce more.  In this narrative, all is well.

It is disturbing to say the least that on perhaps the single most important question related to the health of the U.S. economy – how healthy is U.S. manufacturing? – the consensus view is so utterly wrong.  And because it is so wrong it is lulling the public and policymakers into a sense of complacency and leading policymakers down the wrong road.

The idea that “all is well” is faulty on two counts. First, even when relying on official government data, it is clear that manufacturing output growth has lagged in most industries.  At the end of 2010, the wood products industry was producing 10 percent less than in 2000, the electrical equipment industry 12 percent less, printing and plastics both 14 percent less, fabricated metals 20 percent less, furniture 26 percent less, paper 27 percent less, nonmetallic minerals 30 percent less, primary metals 36 percent less, apparel 40 percent less, motor vehicles 45 percent less, and textiles 47 percent less. In other words, 13 manufacturing sectors that employed 55 percent of manufacturing workers all produced much less in 2010 than in 2000, at a time when the economy grew 17 percent. And three of the remaining six sectors grew slower than the rate of GDP growth.

Second, the federal government’s official statistics of real manufacturing output and productivity growth paint a misleading picture.  According the BEA, the output in one industry, computer and electronic products (NAICS 334), grew 20 times faster than the rest of manufacturing.  They would have us believe that this one industry, accounting for fewer than 11 percent of manufacturing jobs in 2000, accounted for more than all the output growth the U.S. manufacturing sector. Collectively, the other 18 sectors with 89 percent of manufacturing jobs declined in output. This growth is all from a unique and dubious way the government measures output in this one sector, assuming that when a computer doubles in speed every 18 months (from “Moore’s Law”), that real output also doubles.  In fact, actual shipments from this sector declined by about half in the 2000s, as the industry increasingly relied on foreign sources for production.

Any economist or policy expert weighing in on the health of U.S. manufacturing would be advised to deal with these facts and not sweep them under the rug in an attempt to advance a “Panglossian” view that all is well.  If in fact we accept the stark and disturbing reality that U.S. manufacturing has declined in output while many U.S. competitors saw manufacturing output growth, it leads us directly to the realization that the federal government needs to develop a robust national manufacturing strategy focusing on the “4Ts” of technology, tax, trade, and talent.

One of the most important components of such a strategy is to recognize that the United States needs to reinvigorate an engineering culture. While America has thrived on science-based innovation, it needs to become much more of an engineering economy. The notion that the United States can win through science alone is fallacious, because science is a public good that’s freely traded around the world, whereas gains from engineering-based innovation are appropriable within nations.

Here are three ideas for doing this.  First, create a nationwide network of at least 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.

If the United States wishes to more consistently “bridge the gap” to transform scientific discoveries into useful technologies and on into commercializable products that can be manufactured at scale, it needs to provide a much stronger institutional platform through which universities and industry can enter into public-private partnerships to conduct translational R&D. Germany’s 60 Fraunhofer Institutes have long provided a compelling model for performing applied research of direct utility to industry by helping to translate research into commercializable products.

Second the federal government should support the designation of at least 20 U.S. “manufacturing universities.” If the United States wants to win in the advanced manufacturing economy, it must transform university culture away from its “research for the sake of knowledge accumulation” approach and align it much more with industry’s knowledge needs.  The United States should support a core of at least 20 universities that would revamp their engineering programs and focus much more on manufacturing engineering and in particular work that is more relevant to industry. This would include more joint industry-university research projects, more student training that incorporates manufacturing experiences through co-ops or other programs, and a Ph.D. education program focused on turning out more engineering grads who work in industry.

Third, Congress should institute an investment tax credit on purchases of new capital equipment and software.  If we want more engineering, particularly better process technology, we need to provide stronger incentives for companies to invest in equipment, machinery, and software.  Such a credit should be modeled after the Alternative Simplified R&D Credit to provide a credit, but only on all expenditures made above 75 percent of the base level.

As we argue in Innovation Economics: The Race for Global Advantage, America can regain its manufacturing excellence and leadership but only if we stop pretending that all is well and recognize the magnitude of the challenge ahead of us.