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July 1, 2012

The New Game Plan for Manufacturing

While Congress hardens its partisan backing, a fresh policy consensus takes shape.

American Manufacturing has been enjoying a strong two-year rebound, and it may soon begin a long-range renaissance. Better still, if Washington finally gets its act together by adopting a coordinated national manufacturing strategy, a more coherent U.S. public- policy framework could help sustain the manufacturing sector's success for years to come.

A critical mass of agreement has been gradually coalescing among those who focus on the vitality of U.S. manufacturing—the business community, research institutions and government. After years of anxiety over the fading stature of the sec- tor, one aspect of the new consensus seems clear: The hands-off, laissez- faire economic dogma of the past generation did not ease, but aggravated, an erosion of American manufacturing competitiveness. Continued U.S. passivity, say many economists, would surely be a gesture of unilateral economic disarmament amid intensifying global competition.

Their conclusion: After a generation of “just leave it to the market” inaction, U.S. manufacturing urgently needs active public-private cooperation on such priorities as research funding, business-university partnerships, workforce training, energy development and export support to maintain its momentum. And if policymakers harness the growing concensus for a coherent national manufacturing strategy, the U.S. economy could strengthen its status as an exporter of manufactured goods.

“There's actually some rather unnoticed but very important good news when it comes to [American] global competitiveness,” says Antoine van Agtmael, an investment-firm CEO and trustee of the Brookings Institution, a prominent Washington think tank, at a March forum on U.S. manufacturing and exports. “We are more competitive than we think. And what we have to overcome is not lack of competitiveness. What we have to overcome is lack of confidence.” “Belatedly we're finally beginning to focus again on manufacturing,” said van Agtmael. “The problem is that we lived under a delusion: As long as we're really high-tech and have wonderful [companies] like Apple, the manufacturing jobs will follow. It was another trickle-down theory that didn't trickle.”

Manufacturing's New Momentum

Brookings scholar Bruce Katz notes that the United States remains the world's second-largest merchandise exporter, behind China. “For all the talk of a post-industrial economy, the United States remains a manufacturing powerhouse, exporting more than $1.25 trillion in manufactured goods in 2010,” he said. By 2011, the figure had jumped to nearly $1.5 trillion according to the Bureau of Economic Analysis.

Manufacturing comprises 61% of U.S. exports but drove the export resurgence in 2010, contributing 75% of U.S. export growth in the first year of economic recovery, Katz says, noting the majority of that growth came from just four sectors: transportation equipment, chemicals, machinery and computer and electronic products.

Just as important for election-year politics, the U.S. industrial sector's strong turnaround has also come in U.S. job creation. After a shakeout during the Great Recession from late 2007 to early 2009, almost 500,000 new U.S. manufacturing jobs have been created during the recovery that (technically, if perhaps imperceptibly) began in the spring of 2009, according to federal employment data. At its current pace, the job-growth number may soon approach the 700,000 manufacturing jobs that were created during the expansion of 1993 to 1999.

While those manufacturing job gains are only a fraction of the 3.7 million overall private-sector jobs created since the end of the downturn—and while they barely start to make up for the 6 million manufacturing jobs lost between 2001 and 2009—several long-term factors are now inspiring a new optimism about manufacturing's prospects:

  • Multinational companies are “reshoring” industries that had moved overseas, as the U.S. wage gap with China has gradually narrowed, and as the sustainability of China's socioeconomic model has been called into question.

 

  • Exports of U.S.-made goods and services—which reached a record $181.2 billion in February— have been increasing steadily, thanks in part to currency fluctuations.

 

  • Plummeting natural gas prices are making U.S. manufacturing industries competitive again, thanks to newly plentiful North American supplies of fossil fuels—a factor that van Agtmael called “an economic game changer.” The “shale gale”—with vast amounts of natural gas and oil liberated from rock formations by new horizontal drilling and hydraulic fracturing techniques—along with the production of oil from tar sands in Canada, will strengthen the U.S. position as a manufacturing powerhouse, according to recent studies by PricewaterhouseCoopers and Citigroup's “Citi GPS: Global Perspectives and Solutions” research group.

 

  • Washington—at least, the executive branch— seems ready to respond to pleas from industry and innovation-focused groups to bring some coherence to policy by creating a unified U.S. manufacturing strategy.

 

  • The White House created a new Office of Manufacturing Policy, launched a new National Network for Manufacturing Innovation (NNMI), proposed a realignment of the Department of Commerce to unify federal export strategy and proposed an array of tax breaks and research grants to support high technology and advanced manufacturing, reinforcing the public-private Advanced Manufacturing Partnership launched in 2011.

Momentum in the manufacturing sector has clearly been building. “The only thing that can stop this is politics,” wrote Edward L. Morse, co-author of the Citi GPS report. Oops. There's that dreaded word, “politics.” Cue the partisans: Election-year politics is now having a baleful impact on the economic debate, with the partisan combat focused first on Capitol Hill before moving to the autumn campaign trail.

Partisan bickering in and around Congress this year—propelled, in some high-profile cases, by the Tea Party wing of the Republican coalition and by the environmentalist wing of the Democratic coalition— has added extra uncertainty to Washington's predict- able election-year jockeying for position.

Even if a re-elected Obama administration or an incoming Romney administration tries to steer toward the center after Election Day, the extra polarization caused by the fundamentalist wings of the two par- ties just might weaken confidence in the positive economic trends.

Manufacturing-related policies are at the eye of the storm.

“The Obama administration is pursuing a strategic approach to encourage high-value manufacturing and to export 'traded goods,'” says Robert D. Atkinson, the president of the competitiveness-focused Information Technology and Innovation Foundation (ITIF). The administration's manufacturing policy has taken a more activist approach, he said. “But the other side just has a fundamental belief that market allocation of activity is far better than [influencing] outcomes via government action through smart public policy. They [Republicans lawmakers] have a deep, deep belief in this,” Atkinson says.

Key Issues to Resolve

Amid the partisan gridlock in the 112th Congress, the debate over two proposals that will influence America's continued manufacturing strength—the construction of the Keystone XL pipeline and the reauthorization of the Export-Import Bank of the United States—symbolize the both-ends-against-the- middle complexity of assembling a coherent manufacturing policy.

Both the Keystone XL and the Ex-Im Bank controversies have been proxy wars—part of the larger philosophical debate in Washington over government's regulatory reach and economic role.

Consider the controversy over Keystone XL, which TransCanada Corporation envisions as a 1,661-mile conduit to take crude oil from the oil-sands region of Alberta toward refineries on the Gulf Coast. The pipeline, according to business and labor leaders, could be a critical way to supply the energy-thirsty U.S. market with abundant Canadian fossil fuels.

Not so fast, said environmentalists: The extraction of energy from the Alberta oil sands is an energy-intensive process, producing larger carbon emissions than convention- al oil production—thus intensifying climate change. The route of Keystone XL's northern section would go through the Sandhills wetland region of Nebraska and directly over the Ogallala aquifer, a source of fresh water that, in the unlikely event of a pipeline mishap, could be irreversibly polluted.

The controversy landed in the Obama administration's inbox because the Department of State is required to weigh approval of an international pipe- line. While environmental groups filed lawsuits—and when about 12,000 protesters ringed the White House in a November 2011 gesture of civil disobedience—TransCanada proposed alternative routes, including one that avoids the Nebraska wetlands and aquifer. Four days after the ring-around-the-White- House demonstration, President Obama announced that any decision on the pipeline would conveniently be delayed until at least 2013, pending environmental review.

To further escape the political squeeze, Obama devised a split-the-difference solution: He delayed a decision on the northern section of the pipeline, but allowed work to begin on the southern section, far from the Nebraska dispute. That was enough—for the moment—to mollify environmentalists, while suggesting that, after Election Day, a rerouted northern section would allow Canadian oil to flow south.

Election-Year Gamesmanship

The partisan sniping on Capitol Hill seemed to abate—momentarily. But election-year posturing soon revived amid another impasse, this time over a modest- sized but pivotal component of U.S. manufacturing and export policy: the U.S. Export-Import Bank.

Long non-controversial, the bank (since 1934) has been one of the key financing mechanisms helping U.S. manufacturers sell products overseas, thanks to favorable lending terms. The intense and prolonged congressional fight over Ex-Im has exasperated U.S. manufacturers—especially companies making high- value manufactured products, like Boeing aircraft and General Electric engines—who have long relied on Ex-Im financing.

Hostility was fed by the Tea Party faction and longtime libertarian-leaning opponents of activist government. The bank “is a case study in Washington bureaucrats picking winners and losers and interfering with the free market. It's corporate welfare that is hurting economic growth and costing our nation jobs,” says Chris Chocola, a former Republican congressman from Indiana who now leads the free-market Club for Growth. “We are $15 trillion in debt due to huge overspending. And it is no time for Washington to reauthorize the Ex-Im Bank and give it more money.”

Pro-bank pragmatists—including a strange- bedfellows alliance of the National Association of Manufacturers, the U.S. Chamber of Commerce and organized labor—dwelled on the potential damage to U.S. exports if Ex-Im expired.

American opponents of Ex-Im would “unilaterally disarm American companies,” says Fred Hochberg, the Ex-Im bank's chairman and president, noting that every other industrialized nation has an export- financing arm. (China has three.) “Other countries will happily step in if we can't or won't finance a deal.”

Congress managed to get past its endless bickering and reauthorize Ex-Im in May. And with the White House in a more conciliatory election-year mood, it seems fairly certain the Keystone project will move forward as well.

The Price of Paralysis: 5% of GDP?

Yet Congress' uproar through the winter and spring foreshadowed a potentially worse crisis to come, when a critical deadline arrives soon after Election Day.

Congress and the White House must reach an agreement on long-term budget priorities before Dec. 31—the deadline that was set in midsummer 2011, when Congress and the White House failed to reach a long-term deficit-reduction compromise. That spectacular political failure led to the downgrading of the U.S. government's credit rating, an embarrassment that has proven, so far, to be largely symbolic. But the next “sword of Damocles” moment, at year-end, might inflict greater damage.

The political debate around the construction of the Keystone Pipeline, on which construction has begun in North Dakota (pictured here), demonstrates the difficulty of getting bipartisan cooperation on issues important to manufacturers.

If the feuding parties fail to reach a deficit-reduction deal, then painful, automatic budget cuts on Jan. 1 are set to cut deep into federal programs (most severely, the military budget). In addition, a tax increase estimated at $494 billion is slated to occur, with the expiration of the George W. Bush-era tax rates on personal income; the removal of capital-gains tax preferences; the elimination of the post-financial-crisis payroll-tax cut; the cutoff of extended unemployment-insurance payments; and a delay of a new formula on Medicare reimbursements for doctors.

With no resolution likely before Election Day, the decision may be up to a lame-duck Congress and, potentially, a lame-duck president. If they cannot compromise, the result could be an anti-stimulus of the economy amounting to about 5% of GDP, according to Morgan Stanley economist Vincent Reinhart—threatening a return to recession. Reinhart told a World Bank audience in April that uncertainty over a possible budget shock has been undermining business confidence all year.

Although the idea of taking active, public-sector steps to strengthen manufacturing remains controversial on Capitol Hill, the verdict among economists, corporate executives and labor leaders seems more clear-cut—even if, as occurs whenever academic theory meets political reality, there's no unanimity. The nonpartisan ITIF, for example, has been gathering support for its activist “Charter for Revitalizing American Manufacturing.” And a blunt warning in 2011 by the nonpartisan Council on Competitiveness, a Washington-based advocacy group uniting corporate CEOs, labor leaders and university presidents, concluded: “America's innovation leadership is in jeopardy, and Washington must make sweeping changes in its approach to manufacturing policy to maintain its ability to compete.”

'Demolishing' Old Dogmas

Even if Washington takes pragmatic steps to strength- en manufacturing policy, Susan Hockfield, president of the Massachusetts Institute of Technology, in a New York Times commentary, pointed to a more far- reaching challenge: “Rebuilding our manufacturing capacity,” she wrote, “requires the demolition of the idea that the United States can thrive on its service sector alone.”

The U.S. Ex-Im bank, headquartered in Washington, D.C., finances U.S. exports with favorable lending terms. But opponents wanted to stop its reauthorization for fear it interfered with the free market.

That “demolition” of a nostrum among academic economists may be a tall order, judging by a dissenting note from a prominent economist—someone with prominent liberal Democratic credentials, no less. Christina Romer, the former chair of President Obama's Council of Economic Advisers, authored a provocative New York Times column in February that caused a ruckus among her fellow Democrats. The column highlighted the divide between old- guard “neoclassical” theoretical economists—of both parties—and progressive “innovation economics” supporters who focus more on competitiveness and real-world results.

Romer questioned whether manufacturing deserves “special treatment,” claiming that “a persuasive case for a manufacturing policy remains to be made.” It didn't take long for pro-manufacturing economists to take up Romer's challenge. At a high-profile Brookings forum, the think-tank economist Howard Wial led a phalanx of critics dismissing Romer's position as an archaic academic bromide.

“Manufacturing is a special sector, because it delivers quality jobs, fuels innovation, drives exports, reduces the trade deficit and enables the United States to be at the vanguard of the clean-tech revolution,” said Brookings scholar Katz at a February forum. “A country that produces more, innovates more.”

But a coordinated manufacturing strategy requires far more than just top-down policy from Washington, Katz argued. “It is essential, post-recession, that the U.S. develop and implement a national manufacturing strategy. I use the word 'national' rather than 'federal' deliberately, because all levels of government play critical roles in supporting, buttressing and leveraging manufacturing,” said Katz, citing the important roles of state, local and metropolitan-area governments. “Manufacturing strategy is a federalist act, done in close collaboration with the private sector.”

Beyond the think-tank realm, it didn't take very long for the White House, too, to distance itself from ex-advisor Romer. Reiterating its pro-manufacturing position—and seizing an election-year opening amid the Republican presidential primary's free-market orthodoxy— National Economic Council Director Gene Sperling delivered a policy address that heralded a more energetic federal manufacturing strategy. “We understand that the goal of economic policy must be to lay the foundation for our private sector to create good jobs across the board, from professional service jobs to construction to manufacturing, from jobs in the tradable and non-tradable sectors,” Sperling told the Conference on the Renaissance of American Manufacturing. “Yet, we do believe that … manufacturing is a sector that punches above its weight.”

From Theory to Action

Two prominent economic scholars, while championing a coordinated approach to manufacturing, voice different degrees of hope about whether Washington will actually drive a determined U.S. manufacturing strategy.

Historian Michael Lind of the New America Foundation—author of the new book, Land of Promise: An Economic History of the United States, as well as of the think tank's new “Value Added” report—says he is “moderately optimistic.”

“The correlation of forces has shifted in this battle,” says Lind. Although the Obama administration has not been energetic enough in intervening in the economy, “I am skeptical about this administration,” he avers, lamenting its caution.

Robert Atkinson of ITIF, an economist and author of the forthcoming book, Innovation Economics: The Race for Global Advantage, says, “I wish I were as optimistic. We're in a better position in terms of policy, but I wish we were in a better place intellectually.”

Lind and Atkinson agree, however, that Washington's debate must move past the ritualized rhetoric of laissez- faire, which pretends to reject any notion of government involvement in the economy—even as the federal government guides economic decisions via everything from tax-code incentives to subsidies for favored industries to bailouts for firms dubbed “too big to fail.”

The United States has long actively intervened in the marketplace, they assert, while not admitting it: A de facto U.S. industrial policy has invested vast taxpayer sums through such vehicles as the Defense Department, NASA and the national laboratory network—but it has deliberately neglected manufacturing.

Although the growing pro-manufacturing consensus applauds such Obama-era innovations as establishing NNMI and AMP as public-private partnerships, there are a handful of policy areas where experts offer some cautious praise for Obama's Republican challenger, former Massachusetts Gov. Mitt Romney. The most prominent among them: In a departure from previous foreign-policy orthodoxy of both parties, Romney says he is ready to defiantly confront China on its wide range of mercantilist policies, ranging from manipulating its currency to providing vast subsidies to state-owned industries.

Lind and Atkinson seem to echo (albeit with less truculence) the viewpoint of former Reagan-era economic official Clyde Prestowitz, the founder of the Economic Strategy Institute, who recently wrote: “The issue is not whether we have an industrial policy. It's only what kind of industrial policy we're going to have. The fantasy of pristine free markets is just that—a fantasy that exists only in the economists' models. In the real world, there is inevitably massive government intervention in the economy. At the moment, American industrial policy is … incoherent, self-contradictory and counterproductive for U.S. economic performance. Rather than opposing industrial policy, economists should be promoting one that could provide a rational framework. … Manufacturing would then not be a despised orphan.”

Policy Action Ahead

No matter which party takes control of the White House and Congress next January, a broad consensus—among business, labor, academic and civic leaders—is clearly forming around a competitiveness agenda, including an explicit pro-manufacturing strategy. Either a renewed Obama administration or an incoming Romney administration will find that leading economists have largely embraced that viewpoint.

Given the emerging consensus, it's little wonder that most manufacturing-strategy blueprints—advanced by such groups as ITIF, the Council on Competitiveness, New America and the National Association of Manufacturers—bear a close resemblance to one other.

With varying degrees of emphasis, they all call for Washington to, as the Council on Competitiveness puts it, “articulate a globally competitive, long-term innovation and manufacturing strategy that demonstrates to the world that America is, without a doubt, in the business of innovation and 'making things'.” The various blueprints include exhortations for tax-code and regulatory reforms to spur investment; to exert continued pressure to pry open global markets for U.S. goods and services; to invest in education for a high-skilled work force; to create national advanced manufacturing networks and partnerships; and to create more resilient energy, transportation, manufacturing and infrastructure policies.

There are enough ambiguities in those blueprints to keep the incoming 113th Congress and the next administration busy arguing over the details. Just what kind of tax-code adjustments and regulatory changes should occur, for example, is open to various interpretations.

But the competitiveness consensus seems stronger than it has been since, perhaps, the days of national unity after World War II. Support for an energetic national manufacturing strategy is at the center of that emerging consensus.

“To remain competitive, the U.S. needs a strategy to ensure that breakthroughs in technology, and their diffusion and commercialization, continue to take place in America,” as Lind wrote in the New America report. That is the strongly held viewpoint of a broad coalition of experts in the private sector—yet it remains uncertain whether the incoming administration and new 113th Congress will follow through on that reasoning—for, as Lind notes, in a wry rephrasing of a dictum by former Supreme Court Justice Oliver Wendell Holmes Jr., “The United States is governed, not by logic, but by Congress.


Christopher Colford has spent more than 20 years covering Washington politics, focusing on economic policy as a newspaper editor, as a speechwriter at federal and inter- national agencies, and as an independent journalist. His editorial analyses and speeches have won awards on the national, regional and local levels.