A US manufacturing strategy: Not an industrial policy

Article Highlights

  • A manufacturing strategy for the 21st century should focus on making the industrial sector globally competitive

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  • While the nation's overall economy grew only 1.7% last year, the manufacturing sector increased at almost 3x that rate: 4.7%

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The general economic "health" of the U.S. manufacturing sector has re-emerged in a Presidential election year. In his 2012 State of the Union address, President Obama announced to Americans "that we have a huge opportunity, at this moment to bring manufacturing back," promising manufacturers special tax reductions and other federal government support.

In the Republican presidential primary, candidate Rick Santorum acknowledged the U.S. manufacturing sector's alleged cost competitive disadvantages in the global economy and proposed eliminating its federal corporate taxes. Furthermore, according to a 2011 Alliance for American Manufacturing (AAM) poll of likely American 2012 voters, 90 percent of respondents believe it is "most important" or "very important" for the country to be "strengthening manufacturing in this country." But the popular view of the U.S. manufacturing sector does not quite match its recent economic performance.

The fact that the manufacturing sector is now credited as the "shining star" of the U.S. economic recovery provides evidence contrary to the common assumption that America's manufacturing sector is in a perpetual state of decline. While the U.S. manufacturing sector has undergone a decline as a percent of real GDP from 27 percent in 1957 to 12.8 percent in 2010, U.S. manufacturing has made a surprising comeback recently. While the nation's overall economy grew only 1.7 percent last year, the manufacturing sector of U.S. industrial production increased at almost three times that rate, rising 4.7 percent. Moreover, manufacturing employment increased by 109,000 jobs in 2010 following 12 straight years of declines, and manufacturing companies have added another 345,000 factory jobs in 2011 and the first quarter of 2012.

A March 2012 report from the Washington, DC-based Information Technology & Innovation Foundation (ITIF), however, takes a decidedly contrarian view. First, while the macro-level changes in real manufacturing value-added relative to real GDP appears stable, in fact 13 of the 19 U.S. manufacturing sectors that employ 55 percent of manufacturing workers were producing less than in 2000. Second, U.S. government statistics may significantly overstate the change in U.S. manufacturing productivity, in part because of the possible overestimation of output growth in the computer and electronics sector and how manufacturing imports are measured. Moreover, when data are re-adjusted properly (in constant dollars), U.S. manufacturing output actually fell 11 percent over the last decade, and manufacturing productivity grew by just 32 percent, not the 72 percent reported.

Whether one is in the policy camp of manufacturing "resurgence" or "decline," proper government support for a thriving U.S. manufacturing sector is critical for the nation's long-term economic growth, a higher standard of living, and for national security purposes. Clyde Prestowitz, president of the Washington DC-based Economic Strategy Institute, calls for the U.S. to join with other major economic powers, such as China, Germany and Japan, in developing an "industrial policy" conducive to competing in global markets. However, this begs an important question: Are U.S. manufacturers asking for an industrial policy - or rather a less obtrusive, manufacturing strategy?

In 2010, the McKinsey Global Institute (MGI) developed an industry/sector-based, analytic approach to evaluating national competitiveness.  It was designed to assist national governments in their efforts to make the most effective policy-making decisions in support of globally competitive industries. According to MGI researchers, the spectrum of public policy intervention ranges from a "hands-off" approach limited to creating the necessary market institutions, for example, "setting the ground rules and directions" and "building enablers," a manufacturing strategy approach, to being a central operator in a sector, for example, "tilting the playing field" and "playing the role of principal actor," an industrial policy approach.

In our research published in the April edition of Business Economics, we identified 11 U.S. manufacturing strategy proposals (released between 2009 and 2011) by a variety of business associations, multi-stakeholder coalitions, and academic and government institutions, representing the National Association of Manufacturers, AAM, and the ITIF, among others. We also identified 21 specific manufacturing policies, including "improving business/government coordination of manufacturing public policy," "adequately funding public investment in basic and applied research," and "modernizing the export control system," recommended in two or more of these manufacturing strategy proposals.

The overwhelming majority (17) of the manufacturing policies recommended focus on "setting the ground rules and direction" (13) and "building enablers" (4) - the lower-level government interventionist policy categories in the MGI framework. It is noteworthy that only four recommended manufacturing policies are classified as "tilting the playing field", with no recommendations classified as "playing the role of principal actor." We conclude there exists overwhelming manufacturing sector -and multi-stakeholder - support for low public policy intervention in the form of a manufacturing strategy, over high public policy intervention, industrial policy.

Therefore, as we consider a manufacturing strategy for the 21st century, it should focus on making the industrial sector globally competitive, with a regulatory, trade and tax environment encouraging innovation, research and investment in one of America's most historically important industries. Several recent studies have made a convincing case for a pending "manufacturing renaissance" in the U.S., and a well-designed manufacturing strategy helping "rebuild our industrial commons" would provide additional support for revitalizing the U.S. economy.

Thomas A. Hemphill is a professor of management, and Mark J. Perry is a professor of economics, both at the University of Michigan in Flint.  Perry is also a scholar at the American Enterprise Institute.

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About the Author

 

Mark J.
Perry
  • Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

    Follow Mark Perry on Twitter.


  • Phone: 202.419.5207
    Email: mark.perry@aei.org

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