Bamby
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Is it actually "workers wages" or "government policy" creating the mass off-shoring of manufacturing seeking political asylum of restrictive government rules, mandates, and restrictions....
“I’d love to make this product in America. But I’m afraid I won’t be able to.”
My host, a NASA engineer turned Silicon Valley entrepreneur, has just conducted a fascinating tour of his new clean-energy bench-scale test facility. It’s one of the Valley’s hottest clean-technology startups. And he’s already thinking of going abroad.
“Wages?” I ask.
His dark eyebrows arch as if I were clueless, then he explains the reality of running a fab -- an electronics fabrication factory. “Wages have nothing to do with it. The total wage burden in a fab is 10 percent. When I move a fab to Asia, I might lose 10 percent of my product just in theft.”
I’m startled. “So what is it?”
“Everything else. Taxes, infrastructure, workforce training, permits, health care. The last company that proposed a fab on Long Island went to Taiwan because they were told that in a drought their water supply would be in the queue after the golf courses.”
So begins my education on the hollowing-out of the American economy, which might be titled: “It’s not the wages, stupid.”
Manufacturing’s share of U.S. employment peaked in 1979 and has since fallen by almost half. Although manufacturing has been a relative bright spot in the dismal economy of the past couple of years, in the last decade, the U.S. lost a third of its manufacturing jobs, with the damage rippling far beyond that base to erode millions of jobs that are dependent on it.
Tomorrow’s Losses
The loss of textile, shoe and toy production to low-wage competitors such as China, and now Cambodia, has devastated a few regions, particularly South Carolina. But the loss of yesterday’s manufacturing isn’t the really painful part: It’s losing tomorrow’s manufacturing: automobiles, electronics, metal fabrication, specialty chemicals, appliances and consumer electronics.
Those industries left the U.S. in search not of cheaper workers, but of more supportive governments. If the U.S. lost manufacturing due to high wages (or unions, labor laws, regulation -- the other commonly cited villains), how do you explain the manufacturing success of Germany and Japan? Germany, the world’s pre-eminent high-end manufacturing economy, has higher wages, stronger unions and stricter labor laws than the U.S. Japan, too, is a high-wage competitor, yet Toyota Motor Corp. still makes 60 percent of its vehicles there. General Motors Co. makes only about 30 percent in North America.
So if wages aren’t to blame, what is?
Policy. But is U.S. government policy really hostile to manufacturing?
Sadly, yes. Take tax policy. Historically, manufacturing was the high-wage sector of the economy -- manufacturing jobs still pay about 30 percent more than service jobs in education and health care -- so tax policy milked it. Manufacturing companies, in the old days, actually paid the corporate income taxes that many others avoided. Commodity producers (oil, timber, agribusiness) lobbied for, and received, federal subsidies, with investors in oil and gas wells simply voiding corporate income taxes on the profits they earned. Banking, retail and services found their own ways around taxes, often by offshoring intellectual property or shifting profit to tax havens. Eventually, manufacturers figured out how to duck taxes as well -- by going overseas.
Varying Regulations
Yet it isn’t just taxes. Wind turbines, for example, are enormous, heavy and expensive to transport -- so there is a big advantage to fabricating them close to the installation point. But consider the predicament of the Spanish wind manufacturer Gamesa Corporacion Tecnologica SA after it began operations in Pennsylvania. Because the George W. Bush administration’s Department of Transportation wouldn’t establish uniform standards for transporting the enormous turbine blades, each state followed its own rules. Whenever a blade crossed a state line it had to be unloaded by a construction crane and then reloaded to conform to the next state’s specifications.
Similar policy failures explain why Minnesota’s Port of Duluth exports iron ore to China and imports wind turbines from Europe. On the way to China, the ore freighters pass Chicago; Gary, Indiana; Cleveland; and Buffalo, New York -- cities where steel could be made and turned into turbine towers. But the U.S. wind market is too small, and the government too focused elsewhere, to make it profitable.
And that Long Island golf-course story? Not unique to New York. During the 1991 California drought, Silicon Valley’s electronics manufacturers were warned by Governor Pete Wilson that the state might have to shut off their water supply. Agriculture, Wilson said, came first. When I asked a Silicon Valley lobbyist in Sacramento if he had quietly received assurances that California would prioritize 21st-century computer chips over 19th-century alfalfa, he said he hadn’t. In fact, he said, some plant expansions initially planned for Silicon Valley were being diverted to Oregon to secure access to water.
In 1991, it was Oregon. Today, it’s Asia. Conventional wisdom blames globalization for the exodus of factories and jobs. Because other countries pay lower wages, the thinking goes, there is nothing we can, or even should, do about it. But the evidence of Germany and Japan -- and the experience of manufacturers in the U.S. -- tells a very different story.
We are not victims of an impersonal Leviathan called “globalization.” We’re the suckers who allowed our government to sacrifice the manufacturing sector while protecting the real winners: commodities, intellectual property, finance and agribusiness. The U.S. didn’t lose its manufacturing leadership; it threw it away.
So who really lost Detroit? Why did the U.S. auto industry’s domestic market share decline from 71.1 percent in 1998 to 44.8 percent in 2009? Why does the U.S. now produce fewer cars than China? And what does this story tell us about the overall causes of decline in American manufacturing?
The conventional wisdom is that wages and union contracts simply made American cars too expensive. During the auto- industry collapse of 2008, the news media bombarded the public with data about how much higher labor costs are in Detroit factories compared with those in non-unionized Southern states. The New York Times reported, for example, that at GM “the average worker was paid about $70 an hour.”
Trouble is, that figure was wrong.
In 2007, the average hourly wage in a unionized Detroit auto plant was $29. The average hourly wage in a non-unionized Toyota plant in Kentucky? $30. In Japan, Toyota paid assembly- line workers about $22 an hour. True, that’s less expensive. But when you consider that wages make up about 10 percent of a car’s cost, it becomes clear that wages are not the reason for Detroit’s struggles.
As for that $70-an-hour figure, it’s the sum of the hourly wage plus the cost of retiree health-care benefits and pensions. U.S. auto companies have carried these costs like a ball and chain.
Society’s Burdens
Detroit for years complained that, unlike German and Japanese competitors, it couldn’t make money on small cars. But U.S. automakers never explained why. As automation and competition shrank Detroit’s workforce, its labor costs didn’t shrink with it. Not because of wages, but because of retiree health care and pensions -- burdens that are borne by society, not manufacturing plants, in every other advanced country. That disparity, the result of policy decisions made in Washington rather than wages negotiated by the United Auto Workers, was the source of most of the labor-cost advantage enjoyed by foreign companies.
That wasn’t all that went wrong in Detroit, of course. A decade ago I met with then-UAW President Steve Yokich to urge him to partner with environmentalists and automakers to develop fuel-efficient vehicles that could compete with those from Japan and Germany. Yokich took me to the window of his office in Solidarity House. Pointing outside, he said, “What do you notice about the parking lot?”
“They’re all American vehicles?” I answered.
“Look again. Almost no SUVs. My guys know crap when they make it.”
Yokich understood Detroit’s ruthlessly short-term business model -- put lots of cheap sheet metal on an outmoded truck chassis and layer on a gargantuan markup. He conceded that Nissan and Daimler would soon start making fuel-efficient, technologically sophisticated SUVs that would steal that market segment, too. Japanese companies were more innovative in part because they enjoyed much cheaper capital; the real interest rate in Japan, suffering through its lost decade, was 0 percent. But for the Big Three, the SUVs being designed in Tokyo and Stuttgart would be “next year’s problem.”
Bob Lutz, the former head of GM, says it was neither uncompetitive wages nor unions that drove the Big Three into decline. It was a management with its eye focused on the bottom line and the short term. That, he says, is the “creeping malignancy that transformed the once powerful, world-dominating, American economy from one that produced and exported to one that trades and imports.”
Trade Deal Effects
When federal fuel-economy rules required Detroit automakers to produce some fuel-efficient cars, they decided to make them in places like Mexico because two decades of trade deals, under Republicans and Democrats, protected American banks, agriculture, drug companies and Hollywood -- but not manufacturing. (Gas-guzzling trucks, intriguingly, continued to enjoy tariff protection -- one reason Detroit made so many.)
The final nail in Detroit’s coffin was also hammered by Washington. It was gasoline priced at almost $4 a gallon. For decades, the U.S. government let the Saudis manipulate the market -- periodically flooding it with cheap oil to discourage the U.S. from making serious efforts to reduce our demand for oil, which, ironically, is the only way to ensure cheap oil. The auto industry treated oil spikes as a routine market perturbation, ignoring the possibility that gasoline might permanently become more expensive. When global demand pushed gas beyond $2.50 a gallon, bankruptcy soon came barreling toward Detroit.
The forces that devastated U.S. auto manufacturing undermined industry after industry: steel, tires, televisions, computers, home appliances. All suffered from dubious tax policy, legacy health-care costs, trade negotiators who put overseas investors ahead of Midwestern factories, inadequate workforce training, decaying infrastructure. Manufacturing employment, which had climbed steadily since World War II, suddenly began declining in 1980.
The financial crisis that began in 2008 transformed decline into collapse. In the first 18 months of the crisis, more than 2 million jobs -- 15 percent of remaining manufacturing employment -- were lost. Very few have come back. Meanwhile, U.S. wages had been falling relative to those in Germany and Japan.
Former Intel CEO Andy Grove warns that the whole “scaling” process by which innovation led to mass production has broken down in the U.S. As he put it in a 2010 essay in Bloomberg Businessweek, “How America Can Create Jobs,” both politicians and business leaders bought into a “general undervaluing of manufacturing -- the idea that as long as ‘knowledge work’ stays in the U.S., it doesn’t matter what happens to factory jobs.”
Lack of Commitment
Even when the federal government made attempts at a smart manufacturing jobs policy, it lacked commitment. The research and development tax credit, first passed 30 years ago, has never enjoyed permanent status. It has expired once and been extended for short periods 15 times. Taxpayers pay for the credit, and lose the revenue, but companies don’t build factories to take advantage of it because they can’t be sure it will be around by the time a factory is complete.
Likewise, some U.S. CEOs told themselves they were leading global corporations; it didn’t matter if they made their stuff in Detroit or Shanghai. They bet on one version of globalism. It turned out the Chinese had a very different idea. Cars are indeed being made in Shanghai, but increasingly by companies led by executives named Wu or Chen.
Conservatives in Congress like to say that government shouldn’t pick winners and losers. Yet for three decades the U.S. government picked manufacturing to be a loser -- time and time again putting the interests of favored industries ahead of factories and the people who work in them.
It’s not too late. The U.S. is still one of the two largest manufacturing countries in the world, and manufacturing is the bright spot in our export picture. But we must recognize that if public policy consistently shortchanges manufacturing, a broad- based recovery of the American middle class will remain beyond our reach. In the next part of this series, I’ll discuss how to bring U.S. manufacturing back.
“I am told I cannot talk about industrial policy in polite American company,” Dow Chemical Co. Chief Executive Officer Andrew Liveris told a business audience last March. “I’m not sure why, since the world’s two strongest economies, Germany and Japan, both have such policies.”
Liveris has just published a book, “Make It in America,” the theme of which is that we can, and must, return manufacturing to American shores. The key insight, he said, is this: “Companies cannot compete with countries. Only countries can compete with countries.”
Liveris is part of an emerging consensus that includes New Economy business gurus such as former Intel Corp. CEO Andy Grove, whose essay on the need to rejuvenate manufacturing, “How America Can Create Jobs” is a seminal document. The gospel is infiltrating Silicon Valley, where investors such as Vinod Khosla and his former partners at Kleiner Perkins Caufield & Byers are believers. It has been embraced by the American labor movement, including AFL-CIO President Richard Trumka, United Steelworkers President Leo Gerard, Teamsters’ head Jimmy Hoffa and former Service Employees International Union President Andy Stern.
Liveris’s analysis is bolstered by former General Motors Co. Vice Chairman Bob Lutz, Honeywell International Inc. CEO David Cote and ArcelorMittal’s U.S. CEO Michael Rippey. A growing number of public officials, such as former Pennsylvania Governor Ed Rendell, have come to see manufacturing as the key to economic revival and jobs. Remarkably, there is a fair amount of agreement among this group on the policies necessary to achieve that.
So why isn’t it happening?
Partisan Shots
Ideology, for one. A national industrial policy is anathema to many conservatives. When solar-panel maker Solyndra LLC went bankrupt after receiving $535 million in federal loan guarantees, opponents of industrial policy eagerly cooked the failure into a “scandal.” The attack was not only a partisan shot against the Obama administration, which had signed off on the loans. It was intended to preempt and disqualify federal support for manufacturing in the future.
Although conservatives condemn the notion of a national manufacturing policy, they embrace similar policies on the state level. Daimler AG’s Mercedes-Benz, Hyundai Motor Co. and Bayerische Motoren Werke AG have all been courted by Southern states dangling tax breaks and industrial policies. Governor Rick Perry’s manufacturing-friendly policies in Texas served as the core of his appeal to Republican primary voters. And at the close of the Wall Street Journal conference where Liveris was criticized for his embrace of industrial policy, then-Governor Haley Barbour boasted for an hour of the robustness of Mississippi’s industrial policy. Yet the same participants who had lambasted Liveris posed no objections to Barbour.
Why do we have such a difficult time recognizing that, as Liveris puts it, individual companies (or states) cannot compete effectively with nations such as China, India or Germany?
There are at least two reasons. First, for the Tea Party and its financial backers, like the Koch brothers, weakening the federal government is ideologically more important than strengthening the national economy; if a unified, competitive national economy requires a strong, powerful federal government, the trade-off is not worth it to them. Second, the political leaders who shape federal economic policy are responsive to the sectors that have mastered lobbying -- oil, agribusiness, finance and drug companies. Manufacturing for decades has been left to take care of itself.
Fantasy Economy
Yet the notion of a strong economy without strong manufacturing is a fantasy. “We cannot remain the world’s engine of innovation without manufacturing activity,” the president’s National Science Board reported this month. The number of high-tech manufacturing jobs in the U.S. declined 28 percent between 2000 and 2010, according to the report. It attributed the “erosion” of U.S. leadership in part to investment in education and research by Asian governments.
Other sectors can’t replace the employment and wages of manufacturing. Commodity production no longer generates enough employment -- automation in agriculture and mining has gone too far. Wyoming produces 40 percent of the U.S.’s coal with about 7,000 miners. “Knowledge work” pays well, but draws on a narrow population: How many lawyers and bankers do we need? Facebook Inc. is a remarkable innovator, but it employs only about 3,000 people to serve a customer base of more than 800 million. Personal services, such as restaurants and retail, pay poorly and rely on income streams from other sectors to pay at all.
Henry Ford paid his workers $5 a day so they could afford to buy his cars. But they also patronized the grocers and carpenters of Detroit. We spent the last two decades paying our grocers and carpenters with cheap second mortgages -- a strategy bound to collapse.
Any attempt at a manufacturing revival should respect Andy Grove’s core insight: that manufacturing is attracted to markets, and that employment is sustained by that interaction. The U.S. did not invent the original technologies of the automotive revolution; they were European. The first major American innovation, Charles Kettering’s self-starter, didn’t emerge until 1912. But the U.S. built the roads and created the markets on which Gottlieb Daimler’s and Rudolf Diesel’s engine technologies drove to scale.
It is this interaction between innovation, markets and manufacturing that drives competitiveness, growth and employment. Oliver Kuttner, who won the X-Prize for his Edison 2 ultra-light vehicle, created it in Lynchburg, Virginia. Why? Because previous nuclear plants in the town had spawned a network of small workshops, places where people knew how to invent the new widgets that Kuttner needed. Those are the skills we need to “make it in America.”
Long-Term Commitment
Markets come first. If the U.S. would commit, long-term, to replacing our outmoded coal-electricity power with energy derived from wind and solar, new clean-energy companies would flock to manufacture in America.
Applied Materials Inc. makes machinery for solar-panel factories. In 2009, the company made a proposal to the Obama administration: It would build solar factories in the U.S. if the government would set up “solar reserves” on unused federal reservations, and buy the power generated from the factories’ output. The new administration couldn’t, or wouldn’t, commit. Applied Materials then shifted much of its focus to China, moving top engineers there to follow the market, which enjoys robust support from the Chinese government. The U.S. still has more outdated, dirty energy to replace than any other country on Earth -- a huge opportunity for clean-energy manufacturing.
To create markets, we must enforce trade agreements and insist on fair play. China has been stealing wind-turbine manufacturing by requiring 70 percent domestic content in its turbines. U.S. manufacturers like General Electric Co. make components in China solely to satisfy that demand. What is good for the Peking duck should be good for the American gander.
In addition, we need to restructure the way we finance industry. Japan’s essentially 0 percent interest rates, and China’s dirt-cheap state-bank loans were key ingredients in the rise of Japanese autos and now of the Chinese solar industry. In the U.S., tax and finance policies still favor nonmanufacturing sectors, and protect sluggish incumbents by cutting off capital for companies and technologies that might disrupt them. In most American states, it’s still illegal for a manufacturing company to produce more clean electricity than it needs and sell the surplus -- the utilities enjoy virtual monopolies.
Tax Help Needed
At the least, the U.S. should provide clean-energy companies with the same tax-favorable investment structures that underwrite oil and gas development. The U.S.’s Advanced Energy Manufacturing Tax Credit, which is capped at $2.3 billion, is oversubscribed by a factor of three, revealing a hunger among clean-energy providers to manufacture in the U.S. The production tax credit for wind expires at the end of this year. On Nov. 15, the Governors’ Wind Energy Coalition, a bipartisan group of two dozen governors, sent a letter to Congress urging lawmakers to extend the tax credit. The letter pointed out that when “Congress allowed the tax credit to expire in 1999, 2001, and 2003, the development of new wind installations dropped significantly, between 73 percent and 93 percent, and thousands of jobs were lost.”
Even when the policies are right, the implementation may not be. The key R&D tax credit is renewed for only two years at a time, keeping manufacturers, who account for 70 percent of the U.S.’s R&D, guessing about the future.
The failure to support manufacturing has been exacerbated by a failure to make public investments at all. Total public spending on infrastructure in the U.S. has fallen steadily since the 1960s and now stands at 2.4 percent of gross domestic product. (In contrast, Europe invests 5 percent of its GDP on infrastructure, and China invests 9 percent.)
Manufacturing jobs in the U.S. transportation sector have fallen from roughly 2 million positions in January 2000 to just over 1.4 million in December 2011. The refusal of Congress to pass long-term funding for rebuilding U.S. roads, bridges and transit systems will only accelerate that decline. Meanwhile, Korea, Japan and China continue to invest in high-speed rail, advanced automotive batteries and other strategic infrastructure.
Our cultural worship of white-collar “knowledge” work has led the U.S. to underinvest in the skills and aptitudes of the hand. We have the best universities in the world, but not the best trained workforce. We applaud innovation and we hunger for jobs, but fail to understand their dependence on manufacturing, or that manufacturing itself is dependent on markets. Finance, markets, manufacturing, employment -- all thrive, or wither, depending on public policy. Manufacturing can still be revived in the U.S., but only Washington can make it happen. Only Washington.
http://www.bloomberg.com/news/2012-...r-against-manufacturing-part-1-carl-pope.html
“I’d love to make this product in America. But I’m afraid I won’t be able to.”
My host, a NASA engineer turned Silicon Valley entrepreneur, has just conducted a fascinating tour of his new clean-energy bench-scale test facility. It’s one of the Valley’s hottest clean-technology startups. And he’s already thinking of going abroad.
“Wages?” I ask.
His dark eyebrows arch as if I were clueless, then he explains the reality of running a fab -- an electronics fabrication factory. “Wages have nothing to do with it. The total wage burden in a fab is 10 percent. When I move a fab to Asia, I might lose 10 percent of my product just in theft.”
I’m startled. “So what is it?”
“Everything else. Taxes, infrastructure, workforce training, permits, health care. The last company that proposed a fab on Long Island went to Taiwan because they were told that in a drought their water supply would be in the queue after the golf courses.”
So begins my education on the hollowing-out of the American economy, which might be titled: “It’s not the wages, stupid.”
Manufacturing’s share of U.S. employment peaked in 1979 and has since fallen by almost half. Although manufacturing has been a relative bright spot in the dismal economy of the past couple of years, in the last decade, the U.S. lost a third of its manufacturing jobs, with the damage rippling far beyond that base to erode millions of jobs that are dependent on it.
Tomorrow’s Losses
The loss of textile, shoe and toy production to low-wage competitors such as China, and now Cambodia, has devastated a few regions, particularly South Carolina. But the loss of yesterday’s manufacturing isn’t the really painful part: It’s losing tomorrow’s manufacturing: automobiles, electronics, metal fabrication, specialty chemicals, appliances and consumer electronics.
Those industries left the U.S. in search not of cheaper workers, but of more supportive governments. If the U.S. lost manufacturing due to high wages (or unions, labor laws, regulation -- the other commonly cited villains), how do you explain the manufacturing success of Germany and Japan? Germany, the world’s pre-eminent high-end manufacturing economy, has higher wages, stronger unions and stricter labor laws than the U.S. Japan, too, is a high-wage competitor, yet Toyota Motor Corp. still makes 60 percent of its vehicles there. General Motors Co. makes only about 30 percent in North America.
So if wages aren’t to blame, what is?
Policy. But is U.S. government policy really hostile to manufacturing?
Sadly, yes. Take tax policy. Historically, manufacturing was the high-wage sector of the economy -- manufacturing jobs still pay about 30 percent more than service jobs in education and health care -- so tax policy milked it. Manufacturing companies, in the old days, actually paid the corporate income taxes that many others avoided. Commodity producers (oil, timber, agribusiness) lobbied for, and received, federal subsidies, with investors in oil and gas wells simply voiding corporate income taxes on the profits they earned. Banking, retail and services found their own ways around taxes, often by offshoring intellectual property or shifting profit to tax havens. Eventually, manufacturers figured out how to duck taxes as well -- by going overseas.
Varying Regulations
Yet it isn’t just taxes. Wind turbines, for example, are enormous, heavy and expensive to transport -- so there is a big advantage to fabricating them close to the installation point. But consider the predicament of the Spanish wind manufacturer Gamesa Corporacion Tecnologica SA after it began operations in Pennsylvania. Because the George W. Bush administration’s Department of Transportation wouldn’t establish uniform standards for transporting the enormous turbine blades, each state followed its own rules. Whenever a blade crossed a state line it had to be unloaded by a construction crane and then reloaded to conform to the next state’s specifications.
Similar policy failures explain why Minnesota’s Port of Duluth exports iron ore to China and imports wind turbines from Europe. On the way to China, the ore freighters pass Chicago; Gary, Indiana; Cleveland; and Buffalo, New York -- cities where steel could be made and turned into turbine towers. But the U.S. wind market is too small, and the government too focused elsewhere, to make it profitable.
And that Long Island golf-course story? Not unique to New York. During the 1991 California drought, Silicon Valley’s electronics manufacturers were warned by Governor Pete Wilson that the state might have to shut off their water supply. Agriculture, Wilson said, came first. When I asked a Silicon Valley lobbyist in Sacramento if he had quietly received assurances that California would prioritize 21st-century computer chips over 19th-century alfalfa, he said he hadn’t. In fact, he said, some plant expansions initially planned for Silicon Valley were being diverted to Oregon to secure access to water.
In 1991, it was Oregon. Today, it’s Asia. Conventional wisdom blames globalization for the exodus of factories and jobs. Because other countries pay lower wages, the thinking goes, there is nothing we can, or even should, do about it. But the evidence of Germany and Japan -- and the experience of manufacturers in the U.S. -- tells a very different story.
We are not victims of an impersonal Leviathan called “globalization.” We’re the suckers who allowed our government to sacrifice the manufacturing sector while protecting the real winners: commodities, intellectual property, finance and agribusiness. The U.S. didn’t lose its manufacturing leadership; it threw it away.
So who really lost Detroit? Why did the U.S. auto industry’s domestic market share decline from 71.1 percent in 1998 to 44.8 percent in 2009? Why does the U.S. now produce fewer cars than China? And what does this story tell us about the overall causes of decline in American manufacturing?
The conventional wisdom is that wages and union contracts simply made American cars too expensive. During the auto- industry collapse of 2008, the news media bombarded the public with data about how much higher labor costs are in Detroit factories compared with those in non-unionized Southern states. The New York Times reported, for example, that at GM “the average worker was paid about $70 an hour.”
Trouble is, that figure was wrong.
In 2007, the average hourly wage in a unionized Detroit auto plant was $29. The average hourly wage in a non-unionized Toyota plant in Kentucky? $30. In Japan, Toyota paid assembly- line workers about $22 an hour. True, that’s less expensive. But when you consider that wages make up about 10 percent of a car’s cost, it becomes clear that wages are not the reason for Detroit’s struggles.
As for that $70-an-hour figure, it’s the sum of the hourly wage plus the cost of retiree health-care benefits and pensions. U.S. auto companies have carried these costs like a ball and chain.
Society’s Burdens
Detroit for years complained that, unlike German and Japanese competitors, it couldn’t make money on small cars. But U.S. automakers never explained why. As automation and competition shrank Detroit’s workforce, its labor costs didn’t shrink with it. Not because of wages, but because of retiree health care and pensions -- burdens that are borne by society, not manufacturing plants, in every other advanced country. That disparity, the result of policy decisions made in Washington rather than wages negotiated by the United Auto Workers, was the source of most of the labor-cost advantage enjoyed by foreign companies.
That wasn’t all that went wrong in Detroit, of course. A decade ago I met with then-UAW President Steve Yokich to urge him to partner with environmentalists and automakers to develop fuel-efficient vehicles that could compete with those from Japan and Germany. Yokich took me to the window of his office in Solidarity House. Pointing outside, he said, “What do you notice about the parking lot?”
“They’re all American vehicles?” I answered.
“Look again. Almost no SUVs. My guys know crap when they make it.”
Yokich understood Detroit’s ruthlessly short-term business model -- put lots of cheap sheet metal on an outmoded truck chassis and layer on a gargantuan markup. He conceded that Nissan and Daimler would soon start making fuel-efficient, technologically sophisticated SUVs that would steal that market segment, too. Japanese companies were more innovative in part because they enjoyed much cheaper capital; the real interest rate in Japan, suffering through its lost decade, was 0 percent. But for the Big Three, the SUVs being designed in Tokyo and Stuttgart would be “next year’s problem.”
Bob Lutz, the former head of GM, says it was neither uncompetitive wages nor unions that drove the Big Three into decline. It was a management with its eye focused on the bottom line and the short term. That, he says, is the “creeping malignancy that transformed the once powerful, world-dominating, American economy from one that produced and exported to one that trades and imports.”
Trade Deal Effects
When federal fuel-economy rules required Detroit automakers to produce some fuel-efficient cars, they decided to make them in places like Mexico because two decades of trade deals, under Republicans and Democrats, protected American banks, agriculture, drug companies and Hollywood -- but not manufacturing. (Gas-guzzling trucks, intriguingly, continued to enjoy tariff protection -- one reason Detroit made so many.)
The final nail in Detroit’s coffin was also hammered by Washington. It was gasoline priced at almost $4 a gallon. For decades, the U.S. government let the Saudis manipulate the market -- periodically flooding it with cheap oil to discourage the U.S. from making serious efforts to reduce our demand for oil, which, ironically, is the only way to ensure cheap oil. The auto industry treated oil spikes as a routine market perturbation, ignoring the possibility that gasoline might permanently become more expensive. When global demand pushed gas beyond $2.50 a gallon, bankruptcy soon came barreling toward Detroit.
The forces that devastated U.S. auto manufacturing undermined industry after industry: steel, tires, televisions, computers, home appliances. All suffered from dubious tax policy, legacy health-care costs, trade negotiators who put overseas investors ahead of Midwestern factories, inadequate workforce training, decaying infrastructure. Manufacturing employment, which had climbed steadily since World War II, suddenly began declining in 1980.
The financial crisis that began in 2008 transformed decline into collapse. In the first 18 months of the crisis, more than 2 million jobs -- 15 percent of remaining manufacturing employment -- were lost. Very few have come back. Meanwhile, U.S. wages had been falling relative to those in Germany and Japan.
Former Intel CEO Andy Grove warns that the whole “scaling” process by which innovation led to mass production has broken down in the U.S. As he put it in a 2010 essay in Bloomberg Businessweek, “How America Can Create Jobs,” both politicians and business leaders bought into a “general undervaluing of manufacturing -- the idea that as long as ‘knowledge work’ stays in the U.S., it doesn’t matter what happens to factory jobs.”
Lack of Commitment
Even when the federal government made attempts at a smart manufacturing jobs policy, it lacked commitment. The research and development tax credit, first passed 30 years ago, has never enjoyed permanent status. It has expired once and been extended for short periods 15 times. Taxpayers pay for the credit, and lose the revenue, but companies don’t build factories to take advantage of it because they can’t be sure it will be around by the time a factory is complete.
Likewise, some U.S. CEOs told themselves they were leading global corporations; it didn’t matter if they made their stuff in Detroit or Shanghai. They bet on one version of globalism. It turned out the Chinese had a very different idea. Cars are indeed being made in Shanghai, but increasingly by companies led by executives named Wu or Chen.
Conservatives in Congress like to say that government shouldn’t pick winners and losers. Yet for three decades the U.S. government picked manufacturing to be a loser -- time and time again putting the interests of favored industries ahead of factories and the people who work in them.
It’s not too late. The U.S. is still one of the two largest manufacturing countries in the world, and manufacturing is the bright spot in our export picture. But we must recognize that if public policy consistently shortchanges manufacturing, a broad- based recovery of the American middle class will remain beyond our reach. In the next part of this series, I’ll discuss how to bring U.S. manufacturing back.
“I am told I cannot talk about industrial policy in polite American company,” Dow Chemical Co. Chief Executive Officer Andrew Liveris told a business audience last March. “I’m not sure why, since the world’s two strongest economies, Germany and Japan, both have such policies.”
Liveris has just published a book, “Make It in America,” the theme of which is that we can, and must, return manufacturing to American shores. The key insight, he said, is this: “Companies cannot compete with countries. Only countries can compete with countries.”
Liveris is part of an emerging consensus that includes New Economy business gurus such as former Intel Corp. CEO Andy Grove, whose essay on the need to rejuvenate manufacturing, “How America Can Create Jobs” is a seminal document. The gospel is infiltrating Silicon Valley, where investors such as Vinod Khosla and his former partners at Kleiner Perkins Caufield & Byers are believers. It has been embraced by the American labor movement, including AFL-CIO President Richard Trumka, United Steelworkers President Leo Gerard, Teamsters’ head Jimmy Hoffa and former Service Employees International Union President Andy Stern.
Liveris’s analysis is bolstered by former General Motors Co. Vice Chairman Bob Lutz, Honeywell International Inc. CEO David Cote and ArcelorMittal’s U.S. CEO Michael Rippey. A growing number of public officials, such as former Pennsylvania Governor Ed Rendell, have come to see manufacturing as the key to economic revival and jobs. Remarkably, there is a fair amount of agreement among this group on the policies necessary to achieve that.
So why isn’t it happening?
Partisan Shots
Ideology, for one. A national industrial policy is anathema to many conservatives. When solar-panel maker Solyndra LLC went bankrupt after receiving $535 million in federal loan guarantees, opponents of industrial policy eagerly cooked the failure into a “scandal.” The attack was not only a partisan shot against the Obama administration, which had signed off on the loans. It was intended to preempt and disqualify federal support for manufacturing in the future.
Although conservatives condemn the notion of a national manufacturing policy, they embrace similar policies on the state level. Daimler AG’s Mercedes-Benz, Hyundai Motor Co. and Bayerische Motoren Werke AG have all been courted by Southern states dangling tax breaks and industrial policies. Governor Rick Perry’s manufacturing-friendly policies in Texas served as the core of his appeal to Republican primary voters. And at the close of the Wall Street Journal conference where Liveris was criticized for his embrace of industrial policy, then-Governor Haley Barbour boasted for an hour of the robustness of Mississippi’s industrial policy. Yet the same participants who had lambasted Liveris posed no objections to Barbour.
Why do we have such a difficult time recognizing that, as Liveris puts it, individual companies (or states) cannot compete effectively with nations such as China, India or Germany?
There are at least two reasons. First, for the Tea Party and its financial backers, like the Koch brothers, weakening the federal government is ideologically more important than strengthening the national economy; if a unified, competitive national economy requires a strong, powerful federal government, the trade-off is not worth it to them. Second, the political leaders who shape federal economic policy are responsive to the sectors that have mastered lobbying -- oil, agribusiness, finance and drug companies. Manufacturing for decades has been left to take care of itself.
Fantasy Economy
Yet the notion of a strong economy without strong manufacturing is a fantasy. “We cannot remain the world’s engine of innovation without manufacturing activity,” the president’s National Science Board reported this month. The number of high-tech manufacturing jobs in the U.S. declined 28 percent between 2000 and 2010, according to the report. It attributed the “erosion” of U.S. leadership in part to investment in education and research by Asian governments.
Other sectors can’t replace the employment and wages of manufacturing. Commodity production no longer generates enough employment -- automation in agriculture and mining has gone too far. Wyoming produces 40 percent of the U.S.’s coal with about 7,000 miners. “Knowledge work” pays well, but draws on a narrow population: How many lawyers and bankers do we need? Facebook Inc. is a remarkable innovator, but it employs only about 3,000 people to serve a customer base of more than 800 million. Personal services, such as restaurants and retail, pay poorly and rely on income streams from other sectors to pay at all.
Henry Ford paid his workers $5 a day so they could afford to buy his cars. But they also patronized the grocers and carpenters of Detroit. We spent the last two decades paying our grocers and carpenters with cheap second mortgages -- a strategy bound to collapse.
Any attempt at a manufacturing revival should respect Andy Grove’s core insight: that manufacturing is attracted to markets, and that employment is sustained by that interaction. The U.S. did not invent the original technologies of the automotive revolution; they were European. The first major American innovation, Charles Kettering’s self-starter, didn’t emerge until 1912. But the U.S. built the roads and created the markets on which Gottlieb Daimler’s and Rudolf Diesel’s engine technologies drove to scale.
It is this interaction between innovation, markets and manufacturing that drives competitiveness, growth and employment. Oliver Kuttner, who won the X-Prize for his Edison 2 ultra-light vehicle, created it in Lynchburg, Virginia. Why? Because previous nuclear plants in the town had spawned a network of small workshops, places where people knew how to invent the new widgets that Kuttner needed. Those are the skills we need to “make it in America.”
Long-Term Commitment
Markets come first. If the U.S. would commit, long-term, to replacing our outmoded coal-electricity power with energy derived from wind and solar, new clean-energy companies would flock to manufacture in America.
Applied Materials Inc. makes machinery for solar-panel factories. In 2009, the company made a proposal to the Obama administration: It would build solar factories in the U.S. if the government would set up “solar reserves” on unused federal reservations, and buy the power generated from the factories’ output. The new administration couldn’t, or wouldn’t, commit. Applied Materials then shifted much of its focus to China, moving top engineers there to follow the market, which enjoys robust support from the Chinese government. The U.S. still has more outdated, dirty energy to replace than any other country on Earth -- a huge opportunity for clean-energy manufacturing.
To create markets, we must enforce trade agreements and insist on fair play. China has been stealing wind-turbine manufacturing by requiring 70 percent domestic content in its turbines. U.S. manufacturers like General Electric Co. make components in China solely to satisfy that demand. What is good for the Peking duck should be good for the American gander.
In addition, we need to restructure the way we finance industry. Japan’s essentially 0 percent interest rates, and China’s dirt-cheap state-bank loans were key ingredients in the rise of Japanese autos and now of the Chinese solar industry. In the U.S., tax and finance policies still favor nonmanufacturing sectors, and protect sluggish incumbents by cutting off capital for companies and technologies that might disrupt them. In most American states, it’s still illegal for a manufacturing company to produce more clean electricity than it needs and sell the surplus -- the utilities enjoy virtual monopolies.
Tax Help Needed
At the least, the U.S. should provide clean-energy companies with the same tax-favorable investment structures that underwrite oil and gas development. The U.S.’s Advanced Energy Manufacturing Tax Credit, which is capped at $2.3 billion, is oversubscribed by a factor of three, revealing a hunger among clean-energy providers to manufacture in the U.S. The production tax credit for wind expires at the end of this year. On Nov. 15, the Governors’ Wind Energy Coalition, a bipartisan group of two dozen governors, sent a letter to Congress urging lawmakers to extend the tax credit. The letter pointed out that when “Congress allowed the tax credit to expire in 1999, 2001, and 2003, the development of new wind installations dropped significantly, between 73 percent and 93 percent, and thousands of jobs were lost.”
Even when the policies are right, the implementation may not be. The key R&D tax credit is renewed for only two years at a time, keeping manufacturers, who account for 70 percent of the U.S.’s R&D, guessing about the future.
The failure to support manufacturing has been exacerbated by a failure to make public investments at all. Total public spending on infrastructure in the U.S. has fallen steadily since the 1960s and now stands at 2.4 percent of gross domestic product. (In contrast, Europe invests 5 percent of its GDP on infrastructure, and China invests 9 percent.)
Manufacturing jobs in the U.S. transportation sector have fallen from roughly 2 million positions in January 2000 to just over 1.4 million in December 2011. The refusal of Congress to pass long-term funding for rebuilding U.S. roads, bridges and transit systems will only accelerate that decline. Meanwhile, Korea, Japan and China continue to invest in high-speed rail, advanced automotive batteries and other strategic infrastructure.
Our cultural worship of white-collar “knowledge” work has led the U.S. to underinvest in the skills and aptitudes of the hand. We have the best universities in the world, but not the best trained workforce. We applaud innovation and we hunger for jobs, but fail to understand their dependence on manufacturing, or that manufacturing itself is dependent on markets. Finance, markets, manufacturing, employment -- all thrive, or wither, depending on public policy. Manufacturing can still be revived in the U.S., but only Washington can make it happen. Only Washington.
http://www.bloomberg.com/news/2012-...r-against-manufacturing-part-1-carl-pope.html
