This has easily been the most difficult post for me to attempt since beginning the series in 2009. The title of this post expresses my personal frustration, and since 2010 I have kept a stack of marked-up articles on my desk representing the research I’ve done to try to understand the decline in American manufacturing and to see if anyone had coherently recommended solutions. I was disappointed to find that there is a lot of scholarship on the reasons for decline, but very little invested in articulating the way out. Despite reading more than 20 articles and papers on the subject (hardly comprehensive), I’m sure that what I have learned is woefully inadequate. What I have attempted to share here is just a short summary of what I have read, but I fear that it is also disjointed and incomplete.
Where to begin?
It’s been widely reported in the press, studied in academia and lamented by politicians, but over the last few years it’s become startlingly clear to me that we don’t manufacture enough in the United States anymore.
Do you remember when the market positioning for the largest retailer in the world, Wal-Mart, was “Made in America?” It’s seems a distant memory doesn’t it? You wanna know why our economy seems stuck in low gear?! Well, let’s start there.
Two things have occurred recently to drive the significance of this point home for me.
(1) I am in the business of buying and building companies. I like companies that make things because it’s easier for me to figure out who the customers are and what the “secret sauce” behind the business is. But, I can’t find as many companies like that anymore to invest in. Where’d they go?
(2) Another reason that I like companies that make things is that those types of businesses have equipment that they use to manufacture their products, and banks like to lend against those types of assets – so they can put they’re hands on them if they need to…
Well, let me rephrase, they used to like to lend against those kinds of assets.
Now it seems most banks prefer to lend against more liquid assets. These types of assets (inventory and receivables) may be easier to turn into cash for the bank. If a business goes under, they figure, that they can quickly sell any abandoned widgets and get most of the customers to pay their bills.
Fixed assets, it seems, are much more of a pain. There’s already too many widget making machines on the market. The bank doesn’t want to try to sell any more of those.
Why, you ask? ‘Cause we don’t make stuff in the United States anymore!
This is a real problem, and it actually ticks me off. I think, it should tick you off too!
Beginning in the early 1900’s, “American manufacturing dominated the globe. Our efforts turned the tide in World War II and hastened the defeat of Nazi Germany, we helped rebuild Europe and Japan, and our skilled workers enabled the US to outlast the Soviets in the Cold War while also meeting the needs of the American people.” (theTrumpet.com , from the 2/2006 print edition)
But, can the future be built in America? (Business Week , 6/2009) The short answer is that the jury is still out. There are arguments on both sides.
As globalization advanced in the late 1980’s, trade barriers opened up and gave access to foreign markets for American manufacturers in exchange for our ability to build factories abroad. It worked. The North American Free Trade Agreement (NAFTA) and Central American Free Trade Agreement (CAFTA) trade agreements led to growth in US generated employment in these regions. Corporate profits increased, but US-based manufacturing jobs and investment in domestic production capacity declined.
As a result, by 2004 average employee compensation began to decline. In addition, as recently as 2000 the US ran a trade surplus on technology items of nearly $30 billion, but by 2009 that became a trade deficit of almost twice that amount.
Some would-be manufacturers point out that taxes are lower and government incentives are more generous in Asian countries, such as Malaysia and China; as compared to corporate taxes in the US, which are among the highest in the industrialized world. This is because these governments recognize that manufacturing facilities are economic catalysts. They also point out, as I have noticed, that bank lending and private investing in manufacturing remains virtually frozen.
America’s lack of a coherent industrial policy has permitted others to get the upper hand in trade negotiations and to leave us in the dust as it relates to investment in industrial infrastructure that fuels economic growth and stability. As an example, the stories are legend of Asian investment in Smartphone production capacity AHEAD of any firm orders from companies such as Apple.
On the other hand, hope springs eternal for a manufacturing resurgence in the US of A. Most agree that the US remains at the cutting edge of innovation in areas such as clean-tech and green energy. (Unfortunately, this too often results is an “invented here, industrialized elsewhere syndrome,” making America an R&D wellspring for Asian production.)
More baby-steps have been taken with federal tax credits to encourage the installation of solar panels and the appointment of a manufacturing policy czar. The Department of Energy has also lent more than $2 billion to US auto battery manufacturers to build plants in the Midwest, and the Obama administration’s bailout of the auto industry is the closest thing to an industrial policy we’ve seen at the federal level since the 1980’s.
Recently, it has also become clear that Asian and South American countries are losing their edge on labor-related inputs into the manufacturing process as wage rates creep up and currency manipulation proves decreasingly effective. (Of course, this further highlights the skills/education gap that remains between the US and many other nations.) As a result, in the first quarter of 2011, US manufacturing output increased by 9%. Such productivity led the Boston Consulting Group to predict that the US is on the verge of a “manufacturing renaissance.” I sure hope they’re right. I also read somewhere that Wal-Mart is planning to bring back their “Made in America” credo.
But does this recent bit of good news represent some favorable trends in the cycle, or intent? I’m not sure, but it’s doesn’t feel like political resolve.
So what more can be done about this manufacturing paradox? I don’t think that I’m the one with answers. In this case, I’m just a guy with some time to kill on an airplane, a blog platform and more questions than I can find answers to.
It does seem to me that we could use some bigger and louder voices on this issue. For example, perhaps the US Chamber of Commerce could lobby for comprehensive industrial policy instead of spending unproductive dollars trying to pick winners and losers in congressional elections.
The beginnings of an industrial policy might require choosing a handful of industries that we want to lead in and building growth plans around them. From there, planks within the policy might include low cost loans for domestic manufacturing growth accelerated depreciation for sizeable manufacturing investments, fast track regulatory approvals for certain industries, education incentives targeting certain job skills, a simple reduction in corporate tax rates, extending the R&D tax credit and prohibiting currency manipulation in trade agreements. That is intentionality.
Not so sure? Well, consider that Congress refuses to pass legislation funding investments to repair
crumbling bridges, roads, schools and transit systems. Such inaction likely permits the continued decline of our manufacturing sector. In the meantime, Korea, Japan and China race to invest in high-speed rail, automotive battery plants, solar panel production and other industrial infrastructure. (The Truth Hurts , 1/26/2012)
From my perspective, it is imperative that we get our act together here. US manufacturing underpins a plethora of jobs that are indirectly related and high-skilled. Bankers, lawyers and accountants, as well as engineers and researchers all flourish with a robust manufacturing sector. Declines in manufacturing jobs eventually lead to a domestic decline in each of these tangential areas as well. Further, supplying our own needs through domestic production serves as a buffer from international political and economic skirmishes. “The strength or weakness of American manufacturing carries implications for the entire economy, our national security and the well being of all Americans.” (Center for American Progress, 4/7/2011)
P.S. As an business owner, investor, entrepreneur, and by the way, an American consumer, it doesn’t make sense to me that this is not a bigger issue for our policy makers, nor have I heard economists and pundits making a big deal about this. From what I can grasp, the historical perspective is clear, but the political prescription is unavailable. Perhaps you have better insight or expertise. I welcome you to share it with us here.
All I know is, we gotta make stuff!
