By and large we are exporting our intellectual property so foreign companies and subsidiaries around the world can engage in manufacturing. Unfortunately, when manufacturing exits a country R&D funding dwindles in direct response, thereby creating an enormous problem. This has been and will continue to be an acute problem for the United States moving forward. With countless manufacturing jobs already gone what the American economy thrives on is intellectual property, particularly in the form of innovation.
This is an issue that has come to mind are the result of a recent article in POLITICO titled As factories die, income gap grows. This article starts by telling the tale of a married couple from Reading, Pennsylvannia, Dave and Barbara, who back in 2008 were making $22 and $19 an hour respectively working for Baldwin Hardware, a unit of Stanley Black & Decker Corp. Layoffs came, long term unemployment followed, and now the couple are among the tens of millions of Americans who are under employed. They had to run through all their retirement savings to stay afloat, and now they each make $10 an hour; Dave as a janitor and Barbara cleaning houses while she looks for something permanent.
The American story of lost manufacturing jobs dates back for decades. Bruce Springsteen’s song My Hometown, which is actually about my hometown of Freehold, New Jersey, immortalized the tale of a textile mill closing down, jobs leaving and never coming back, which leads to vacant stores throughout the town. The line ? Foreman says these jobs are going boys and they ain’t coming back” ?has proved to be eerily prophetic, repeated in once thriving manufacturing and industrial communities all across America.
It doesn’t need to be this way! There is something that can be done, but turning the economy around requires our leaders to consciously focus on facts and reality rather than politics, myths and fear-mongering.
Would it surprise you to learn that China has but a 3.5% cost advantage for manufacturing compared with the United States? Regulations, taxes and an environment that makes it practically impossible to start a new business creates the disadvantage, and thoughtful policies to revitalize U.S. manufacturing would produce dividends, lead to a broader middle class, provide an economic boon to the entire country and lead to greater national security because we wouldn’t be relying on foreign producers for everything, like we are today.
If you don’t believe that a thoughtful national manufacturing policy is the answer then you need to read Great Again: Revitalizing America’s Entrepreneurial Leadership. A central and often repeated theme of Great Again is that America’s decision to give up on manufacturing has not only caused the obvious problems associated with job loss, but it has and is causing an enormous loss of intellectual property assets as well. The author, Hank Nothhaft, who was an extremely successful start-up CEO in Silicon Valley with many years of experience, quotes what Harvard Business School Professors Willy Shih and Gary Pisano told him: “decades of outsourcing manufacturing has left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy.”
Nothhaft explained it this way in a speech in January 2011 in Washington, DC, at the Innovation Alliance Conference:
For 30 years now we have all been fed the carefully cultivated myth, that so long as America did the creative work, the inventing, then we can let other nations like China do the so called grunt work, the manufacturing. Simply, we would think; they would sweat. So we let manufacturing go and in so doing we lost the greatest economic force multiplier in history. For manufacturing not only supplies middle class incomes to the three-quarters of all Americans without a college degree, it also creates up to 15 additional jobs outside of manufacturing for every position on the factory floor.
Every engineer in the world knows that innovations don’t always (if ever) ramp up from the micro level to the macro level as one might predict. So when we outsource manufacturing we are handing over the follow-on innovation that will take place on the factory floor. Therefore, by outsourcing manufacturing to the lowest bidder abroad not only have we destroyed the working middle class in America, but we are increasingly turning over our last economic advantage.
Short-sighted decisions by CEOs and the lack of any leadership, let alone meaningful leadership, in Washington, DC, has placed America on the path of economic ruin. The lack of manufacturing in America coupled with the increasing loss of associated intellectual property and innovation explains the “new normal,” which is represented by stagnant growth, high unemployment and substantial under employment. And don’t give me the government-line about how unemployment has dropped. The only reason unemployment has dropped is because people give up looking for work. The employment participation rate is just 62.8%. It hasn’t been this low since 1978. To get a sense of just how bad this is take a look at this chart, which shows the labor participation rate since 1978. The trajectory continues down at an alarming rate.
Unfortunately, the collective narrative supports the erroneous conclusion that there is nothing that the United States can do to turn things around on the manufacturing front. While simply untrue, our political leaders have so far not wanted to offer a business friendly environment calculated to make America a strong manufacturing nation once again. According to Nothhaft, “It’s the U.S. government’s myopic policy, not China’s lower payroll costs, that make our nation uncompetitive in the all-important solar and other high-tech manufacturing sectors.”
In Great Again Louis Vintro, vice president and general manager of the semiconductor product division at equipment maker ESI explains: “What we see from our data is that China has a roughly 50 percent advantage in labor costs. But since labor represents an average of only 7 percent of operating costs across all of the semiconductor sectors, that means China has a 3.5 percent overall cost advantage.”
But with that 3.5 percent Chinese cost advantage comes uncertainty. The United States still offers a solid rule of law and there is not the political unrest here that could (and likely will) emerge in China as the rising middle class wants more and demands freedom. But even this 3.5 percent advantage can be closed, as Nothhaft explains: “If you take as a guide the roughly 30 percent tax that Intel has paid in recent years on 10 percent operating profit, that would mean a 3 percent lower cost of operating a plant here. Add in an enhanced, permanent 20 percent R&D tax credit equal to what other nations offer… and China’s advantage drops to 1 to 2 percent.” At 1 to 2 percent advantage is it worth the headaches of doing business in China?
What America needs to do is clear. Congress and the President need to work together to reduce taxes on manufacturing in the United States. Approval processes for everything at every level need to be streamlined. R&D tax credits should be increased. Job killing regulations, as well as regulations that given incentive for companies to decrease hours, need to be repealed. And, it shouldn’t have to be said, but making electricity cost more by killing coal fired power plants without any viable alternative technical solution is just idiotic, as is not moving forward with the Keystone pipeline, which would create jobs and reduce our dependency of oil from outside of North America.
A proactive manufacturing policy is what the United States needs, but will it be what the United States gets? It seems doubtful. When 82% of Americans think the Keystone XL pipeline is in our national interests and politics still stand in the way how could you think for a minute that our leaders would even consider common-sense, entirely reasonable solutions aimed at fostering an American economic recovery?
Folks like David and Barbara no doubt would benefit from a forward looking manufacturing policy, and so would everyone. An undeniable truth, whether literally or figuratively, a rising tide lifts all boats.