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.
It’s National Manufacturing Day!
October 5, 2012 is National Manufacturing Day. The day is being marked with events around the country highlighting the importance of manufacturing to the U.S. economy and celebrating innovations in fields ranging from aerospace and automobiles to nanotechnology and medical devices.
Winning the Race 2012 Memos: Traded Sector Industries
It will be difficult for America to enjoy robust economic growth if its globally traded sector industries (e.g., manufacturing, software and Internet, motion pictures and music, etc.) are not competitive. Unfortunately, America’s traded industries have lost competitive advantage. In the 2000s, the United States lost a greater share of manufacturing jobs than in the Great Depression and more than 60 percent of the losses stemmed from declining global competitiveness. In fact, from 1990 to today, the United States has achieved virtually no net growth in traded sector jobs. Meanwhile, our rank on most global innovation indicators has fallen, in some cases significantly.
While both parties talk about the importance of traded sectors, they diverge sharply on how to strengthen it. As a general rule, Republicans focus more on reducing taxes and regulations, while Democrats favor public investments in science, technology, education, and training. The next administration needs to make traded sector competitiveness a top priority and not only would reduce taxes and streamline regulatory burdens but also push for significant increases in public investments in technology and skills.
ITIF Disputes Boston Consulting Group (BCG) Report that U.S. Set for Industrial Revival
BCG is correct that the United States can become an industrial powerhouse again, but they are wrong that market forces acting alone will produce such a result. Rather, as ITIF explains in Innovation Economics: The Race for Global Advantage and reports like A National Traded Sector Competitiveness Strategy,it will take a coordinated set of policies around the “4Ts” of Technology, Tax, Trade, and Talent to power sustained American industrial renewal. U.S. manufacturing simply won’t be globally competitive if we continue to impose the world’s third-highest corporate tax on manufacturers, permit continued foreign mercantilism through currency and standards manipulation or IP theft, and fail to address skills, education, and immigration challenges.
Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy
By definition, countries that wish to successfully compete in the global economy must have highly competitive traded sectors. A nation’s traded sector comprises those industries and establishments which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. Traded sectors include almost all of a nation’s manufacturing activity, some services (such as software, Internet, and engineering services, and entertainment content like music, movies, and video games), and some of the extraction sectors (e.g., farming or mining). Because these industries face market competition that is global in nature in a way that non-traded, local-serving industries (e.g., retail trade or personal services) do not, their success is by no means assured. For example, while we may not know whether Safeway, Giant, or Walmart are going to gain market share in the U.S. grocery store industry, we do know that the industry itself will be healthy, dependent only on the income and purchasing habits of American consumers. On the other hand, while we may not know whether Boeing or Airbus are going to gain market share in the global aircraft industry, we also do not know whether there will be aviation industry jobs in the United States, since this depends on the United States winning in global competition in this industry. Put differently, if a grocer goes out of business another will emerge to take its place to serve local demand, but if a traded sector enterprise such as a manufacturer or software company closes, the one that takes its place may well be located in another country.
This report presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness (and an additional 13 state-level recommendations). The recommendations are organized around federal policies regarding the “4Ts” of technology, tax, trade, and talent as well as policies to increase access to capital, reduce regulatory burdens, and enable better analysis of the competitiveness of U.S. traded sectors.
While we believe all 50 recommendations are needed, we list what we believe are the most critical 10 recommendations here:
- Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.
- Support the designation of at least 20 U.S. “manufacturing universities.”
- Increase funding for the Manufacturing Extension Partnership (MEP).
- Increase R&D tax credit generosity and make the R&D tax credit permanent.
- Institute an investment tax credit on purchases of new capital equipment and software.
- Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.
- Fully fund a nationwide manufacturing skills standards initiative.
- Expand high-skill immigration, particularly that focused on the traded sector.
- Transform Fannie Mae into an industrial bank.
- Require the Office of Information and Regulatory Affairs (OIRA) to incorporate a “competitiveness screen” in its review of federal regulations.
Finally, while the report presents 50 specific recommendations, it also articulates four key themes that permeate the report and which should be viewed as essential thematic components of a U.S. traded sector competitiveness strategy. Beyond implementing specific policies, these are the key themes U.S. policymakers must embrace if the United States is to restore its traded sector competitiveness:
- The federal government must place strategic focus on its traded sectors, because it simply can’t rely entirely on its non-traded sectors to sustainably power the U.S. economy.
- The United States needs to embrace and reintegrate an engineering culture. While America has thrived on science-based innovation and has a strong science culture, 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 capturable and appropriable within nations.
- The United States must move toward an economic system more focused on production than consumption. This means being willing to give short-term consumption less priority in our politics. Examples include raising the gasoline tax to invest more in roads and highways, pushing for a lower U.S. dollar, and raising taxes on individuals in order to cut them on businesses, particularly those in traded industries.
- There is a need to seriously rethink the structure of the global trading system and ensure that it is a trading system based on market-oriented principles. Unfortunately, the last decade in particular has seen a troubling rise in “innovation mercantilism,” which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.