Why Manufacturing is Failing in the US

The company he founded bears his name, but for all its American roots, the Vermeer Corporation put its newest factory — and the wealth that goes with it — not here but in the capital of China. And Mr. Vermeer’s daughter, Mary Vermeer Andringa, the chief executive, presides over a manufacturing operation that relies increasingly on government support. Manufacturing is not simply a market activity, especially not in the 21st century: manufacturers rely increasingly on governments, here and abroad, to prosper and expand. Vermeer, family owned, thrives with such help, as do big multinationals like Dow Chemical. 

In Dow Chemical’s case, thanks to a $141 million state grant, roof shingles that generatesolar power are rolling out of a pilot plant near Dow’s headquarters in Midland, Mich., and a full-scale factory is under construction nearby. The federal government is also paying nearly half the cost of building a $362 million Dow plant in the Midland area, whose “clean” rooms will soon produce batteries for electric cars.

The solution according to Andrew N. Liveris, the chairman and chief executive of Dow Chemical is “An advanced manufacturing policy.”  He argues that, in effect, manufacturing needs government support to expand its dwindling share of the nation’s economy.

Mr. Liveris, 57, himself a chemical engineer and co-chairman of President Obama’s newly formed Advanced Manufacturing Partnership, a group of outside advisers, would even “pick winners” — that is, select some manufacturers for continuing support. “I would not let free markets rule without also addressing what I want manufacturing to be 20 or 30 years from now,” he says.

The Obama administration hasn’t tried to formulate policy that far into the future. But, last year, the president called for a doubling of exports by 2015 — which would require total factory output in America to rise several times faster than it has in recent years. One way to accomplish that would be to have multinationals repatriate some of their overseas production — which Mr. Liveris, for one, is not planning to do.

The author points out that it was ” manufacturing’s muscle that helped make the Unites States a world power.” And “while corporate leaders like Mr. Liveris and Jeffrey R. Immelt of General Electric — who is chairman of the President’s Council on Jobs and Competitiveness — are beginning to express concern over manufacturing’s relative decline, the multinationals they command have contributed to the problem by gradually shifting production abroad. About half of Dow Chemical’s $58 billion in revenue last year came from overseas operations.”

Why isn’t more being done about this?

It may seem remarkable that America’s fall — or impending fall — from first place in manufacturing isn’t generating all that many headlines, certainly not when compared with the controversies over the national debt or persistent unemployment. One reason may be that the nation’s political leaders don’t see manufacturing as a problem. Put another way, they don’t necessarily regard making an engine, a computer or even a pair of scissors as having as much value as investment banking or retailing or a useful Web site.

“You have a culture within the elites of both political parties that says manufacturing does not matter, and industrial policy will do more harm than good,” says Ronil Hira, an assistant professor of public policy at the Rochester Institute of Technology.

And here’s the stark reality:

…manufacturing’s shrinking share of national output is beginning to force these questions: Does manufacturing matter? And is the financial sector, which rose as manufacturing declined, an adequate substitute? The financial crisis may have answered that last question with an emphatic no. Certainly, many experts maintain that manufacturing’s contribution to the national health is significantly underappreciated.

Recovery from the recession, they say, would not be so sluggish if there were still enough manufacturers to jump-start an upturn by revving up production and rehiring en masse at the first signs of better times. What’s more, each new manufacturing job generates five others in the economy. Shrinking the relative size of manufacturing has undermined that multiplier effect.

The damage doesn’t end there. The intractable trade deficit is attributable in part to manufacturing’s shaken status. And in many areas, craftsmanship in America has been eroding. Forty percent of the nation’s engineers work in manufacturing, for example, and that profession’s numbers have been declining. That is a particular problem because innovation often originates in manufacturing, frequently in research centers near factories, which aid in the creation of products and the tweaking of them on assembly lines.

As multinationals place factories abroad, they are putting research centers near them, with as-yet-undetermined consequences. At the very least, this trend challenges the view that the United States has the best scientists and research centers and is thus the research-and-development pacesetter.

“If you let manufacturing go, over time that will have a negative gravitational pull on innovation,” says Ron Bloom, who served as the administration’s senior counselor for manufacturing. He resigned in August and has not yet been replaced.

In fact, as American multinationals become ever more global, they are placing sophisticated research centers near their overseas factories, partly to keep R.& D. close to assembly lines and partly because of enticing government incentives.

From China, Dow Chemical now exports products invented at its research center near Shanghai. “Overseas,” Mr. Liveris said, “I get tax incentives, and I get incentives to go to certain locations where they offer us utilities, infrastructure and land. I get access to human capital. I get all sorts of support to help train that human capital.”

Against that backdrop, he and a few other top executives of multinationals exhort the Obama administration and Congress to grant incentives and subsidies intended to halt the 60-year decline in manufacturing’s contribution to national income. Mr. Liveris recently published a book on the subject.

He says vigorous government support, like the subsidies that Dow receives for its solar roof shingle operation and the electric battery factory, might eventually halt manufacturing’s slide. But he adds that his company and others will not embark on a reverse migration, a significant “in-shoring” of what has already moved abroad. Too many consumers are concentrated today in Asia and Europe.

“We put things overseas,” Mr. Liveris says, “because markets were growing there and we wanted to be close to them, and that will never change.”

Uchitelle concludes the article with this quote:

“The reason you no longer get much of an outcry over this exodus has to do mainly with jobs,” says Heather Boushey, a senior economist at the Center for American Progress. “Less than 12 percent of the American work force is in manufacturing today, down from 30 percent in the 1970s. So there isn’t the same level of public concern.”

This may be a contributing factor, but I also feel that many Americans 1) feel powerless to stop it 2) don’t understand how legislative policy impacts economic outcomes and 3) still believe that “the market” will magically right itself with less regulation and bigger tax breaks for the “job creators.”