First Up -- The Case for Investing in Manufacturing

Our ability to field competitive domestic manufacturing industries is deteriorating, says one economist, and too few understand the implications for the U.S. economy.

The world is upping its game for manufacturing superiority. Many are content to see basic industries leave the United States, assuming that there is an inevitable evolution in a developed economy toward high-tech industries. They see the drop in manufacturing employment over the past decade as a necessary byproduct of globalization and increased efficiency. The answer is to pursue new manufacturing opportunities such as electric cars and wind turbines, and to focus on the service sector.

But as National Institute for Standards and Technology (NIST) economist Gregory Tassey argues in his provocative analysis of the United States' competitive status in manufacturing, the nation must see manufacturing as a series of complex supply chains rather than individual industries and dramatically change its policies to encourage research and development.

Tassey makes a compelling case in "Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D Strategies" that the U.S. economy's future depends on a strong manufacturing sector. He notes that "the high-income economy must be the high-tech economy" and that manufacturing is a necessary element, as it supports 70% of industry R&D spending. He also points out "the majority of trade is still in products," and the United States cannot fix its huge trade deficit by relying on services. Moreover, he says international competitors are targeting high-tech services. With the advent of the Web, many of these services can be provided from Bangalore as easily as from Boston.

High-tech manufacturing and services are closely tied together, and the competitiveness of one is hampered by the absence of the other.

Developing economies are not content to keep competing in manufacturing strictly through low-cost labor that produces someone else's designs, Tassey says. "China already is producing 30,000 patents annually, and its patent application rate trails only the United States and Japan," Tassey reports. That's where current trends in R&D investment prove so troubling. Where once the United States spent a greater percentage of its resources on R&D than any other country, it is now eighth and has not changed its percentage of investment since the 1960s. Some abhor the idea of the United States employing a manufacturing strategy, but Tassey argues that one of the major competitive challenges facing U.S. manufacturing firms is that they are operating as separate entities "against a growing number of national economies in Europe and Asia in which government, industry and a broad infrastructure -- technical, education, economic and information -- are evolving into increasingly effective technology-based ecosystems."

Tassey says many mainstream economists have failed to appreciate the complexity of the manufacturing sector and the need for multi-tiered supply chains and clusters of facilities that facilitate the communication and collaboration needed for product development, testing and rapid entry into commercial production. Tassey warns that our manufacturing policies must support the whole technology lifecycle, not just basic research. Otherwise, new technologies developed in the United States are rapidly assimilated and capitalized on in other countries. That results in a significant loss of value to this country and is one of the reasons employment and incomes are stalled.

To support a technology-based manufacturing sector, Tassey recommends tax incentives that would boost the average R&D intensity for domestic manufacturers to 6% (the Obama administration is proposing 3% for the economy as a whole). He also stresses the need for more government R&D funding to support "long-term, breakthrough research" and more efficient R&D performance through the use of regional technology clusters and better R&D portfolio management. With these and other necessary steps, Tassey says, expect the rebuilding of American manufacturing to be a long-term project.

Steve Minter is IW's chief editor. He is based in Cleveland.

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