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February 2, 2006
Manufacturing in trouble
Does manufacturing matter? The answer is yes, according to a report released today by the National Association of Manufacturers' Manufacturing Institute, "U.S. Manufacturing Innovation Leadership at Risk". As the title suggests, it matters because manufacturing's innovation process leads to a higher standard of living. But, the report warns that manufacturing is in trouble:
* Manufacturing output since the last recession lags that of earlier economic recoveries - its 15% growth is only half the pace averaged in recoveries of the past half-century.* Manufacturing capacity remains underutilized, slowing investment in new plants and equipment. Since the last recession, total plant and equipment investment has risen at half the pace averaged in recoveries of the past half-century. Manufacturing capacity has grown at less than 1 percent annually (compared with 5% in the 1990s).
* The U.S. share of global trade in manufactured products has shrunk, falling from 13 percent in the 1990s to 10 percent in 2004. The U.S. now runs a trade deficit in Advanced Technology Products, and the U.S. share of global trade in some of the highest value-added export industries such as machinery and equipment is falling.
* U.S. manufacturing offers rewarding and desirable careers for highly skilled workers. Yet the widespread perception that manufacturing employment is unstable and lacks job opportunities discourages new worker entry. While manufacturing continues to pay better than other industries, the sector is experiencing a broadening shortage of skilled workers.
* America's long-standing leadership in R&D is being challenged. While the U.S. continues to spend more than any other country on R&D investment, U.S. growth in R&D has averaged only about 1% per year in real terms since 2000.
The report outlines the following ways that manufacturing R&D benefits the economy:
R&D promotes economic prosperity through a multifaceted and complex process:* The first avenue is through direct benefits to firms from their R&D investments. Those direct benefits, or the need to balance the potential benefits a rival might gain from R&D, are the primary driver of firm financed R&D.
* The second is through "spillovers" whereby innovations flowing from R&D performed by one organization benefit other organizations without direct compensation for the innovation.
* The third is through the widely discussed multiplier -- the effect of one industry’s investment on other industries and the U.S. economy as a whole.
* The fourth is the feedback from R&D and its spillovers to improve manufacturing products, processes and distribution networks.
* Together these benefits produce productivity gains that lead to competitive prices and better paying jobs.
The report calls for pro-production policies, under the banner of "US production":
* U.S. manufacturers' productivity growth is enviable. It must remain so. But productivity growth depends on investment in knowledge and investment in equipment that embodies new innovations.* Along with increasing efforts to improve K-12 education, a special emphasis should be placed on improving the quality and rigor of math and science offerings at all levels. The problem-solving and critical-thinking skills those subjects teach will be vital for the U.S. workforce to compete in a global economy.
* Support continued R&D investment by industry by renewing the R&D tax credit. Increase Federal spending on basic research with a focus on specific areas where social and private returns look most promising. Encourage and continue to fund basic research by colleges and universities and the spillovers that come from such research. But the "D" in R&D -- largely product and process development -- should be emphasized as well. Promote innovation clusters needed to spur such developments, to encourage thick markets for R&D inputs and to increase the productivity of each dollar of R&D spending.
* "U.S. Production" should encourage workers to continuously pursue education and lifetime training so that they are more adaptable to improvements from innovation and to potential structural changes. New labor force entrants should be encouraged to take up the skilled jobs in which shortages are emerging and top engineering and scientific talent should be nurtured.
* Focus on elimination of those workforce, investment and policy obstacles to domestic production and competitiveness that would provide the greatest economic return.
* Encourage the improvement of the efficiency and speed of the U.S. transportation and communication infrastructures.
* Improve tax and intellectual property laws and infrastructure needed to leverage investment in research and development by enhancing the environment for spillovers without needlessly facilitating technology transfers.
The report does a good job, in my opinion, in discussing some of the key issues. One phrase will sound familiar to regular readers of my analysis of the trade statistics: "the United States cannot depend solely on trade in services to offset a serious decline in goods exports."
Unfortunately, the report misses the point in others areas. There is nothing about the new product development process (other than a very brief mention in the policy recommendations). Nothing about design and creativity. Only a little about the fusion of manufacturing and services.
At least the policy recommendations begin to move away from the same-old, same-old. These go beyond standard answers of more funding of basic R&D and of math and science education. For example, the report points out the importance of math and science as the foundation for critical thinking and problem solving skills. And they pick up on the point I made earlier today about the need for continual training.
In sum, a good addition to the mass of competitiveness reports and studies. But not yet the final word on the subject.
Posted by Ken Jarboe at February 2, 2006 1:38 PM
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