MAPI president: Manufacturing is vital to wealth creation

The introductory letter to the new report issues by MAPI and The Aspen Institute on the need for accelerated policy changes in the manufacturing sector.

04/01/2013


The following is the introductory letter to the new report issues by MAPI and The Aspen Institute on the need for accelerated policy changes in the manufacturing sector. In it, MAPI president and CEO Stephen Gold points to some of the key economic drivers in the manufacturing sector:

MAPI and the Aspen Institute’s Manufacturing and Society in the 21st Century program have partnered on this report to provide the framework for how U.S. policymakers can help create a real manufacturing resurgence in this country. But unless you’re making product here, why should you care about the future of American manufacturing?

There are those who don’t, including some notable academics. Columbia University Professor

Jagdish Bhagwati attracted attention by calling the current focus on revitalizing the factory sector a “manufactures fetish.” President Obama’s former Council of Economic Advisers Chair, Christina Romer, made headlines when she pronounced, “A persuasive case for a manufacturing policy remains to be made.” And in a column headlined, “Manufacturing Illusions,” Robert Reich noted, “The fundamental problem isn’t the decline of American manufacturing, and reviving manufacturing won’t solve it.”

With all due respect, they’re wrong. Our broad challenge, at its most fundamental level, is a sustainable increase in society’s standard of living. To ensure (or produce) a rise in living standards, a nation—or more precisely, its citizens and businesses—must create new wealth. As other nations (developing and developed alike) have found, manufacturing is still the greatest wealth-creating tool we have. Here’s why:

  • Manufacturing stimulates economic growth through a higher multiplier effect than other sectors. Every dollar of final sales for manufactured products generates $1.48 in economic activity in other parts of society.
  • Manufacturing raises living standards because it’s a leader in productivity. Over the past quarter-century, manufacturing has consistently experienced higher labor productivity rates than the overall nonfarm business sector—double the rate in the 1990s, and roughly 50% higher between 2000 and 2010.
  • Manufacturing creates new wealth because it’s a leader in exports. More than half the dollars earned from U.S. exports stem from manufactured goods. With manufactures representing 75% of global trade, this country’s best bet to balance its trade accounts is through making more products here—for export and to replace imports.
  • Manufacturing adds value to our economy because it’s a leader in R&D investment and, ultimately, in driving innovation. Manufacturers are responsible for three-fourths of private sector R&D investment, and according to the National Science Foundation, are far more innovative than the business community as a whole.

Even given the overwhelming evidence that manufacturing matters, there are those who still opine that production can move overseas because Americans will generate sufficient wealth through ideas, that is, innovation. Harvard’s Gary Pisano and Willy Shih successfully challenge this notion in their recent book Producing Prosperity: Why America Needs a Manufacturing Renaissance.

First, when production goes overseas, innovation often follows. In many cases, designers and engineers must be in proximity to the process to ensure the steady flow of ideas. In those industries, wherever production takes place, R&D investment and innovation will inevitably follow, as has occurred with consumer electronics. Thus we lose not only our nation’s innovation capabilities, but the knowledge and network spillovers that benefit the broader economy.

Second, when production goes overseas, any ecosystem surrounding it here deteriorates. Large local and regional economic benefits are achieved through the establishment of “industrial commons,” the term Pisano and Shih coined for those close-knit networks of manufacturers, suppliers, researchers, designers, and investors spread throughout our country. When a manufacturer picks up stakes, the commons can collapse like a house of cards. Investments dry up, jobs are lost, and the community stagnates. As Fred Zimmerman and Dave Beal put it in their 2002 book Manufacturing Works, “Profitable manufacturers strengthen communities. The wages, benefits, and taxes they generate lead not only to prosperity and opportunity, but also to pride in community identity.”

That’s why Americans should care about whether or not we experience a manufacturing resurgence in this country. This paper illuminates the drivers behind such a revitalization, and the policy changes needed to boost those drivers. To simulate the demand and supply variables that would promote manufacturing growth, and the associated economic benefits to the rest of society, we relied on economic modeling by the Interindustry Forecasting Project (Inforum) at the University of Maryland. Inforum’s models combine an input-output structure with econometric equations, and can be used to answer “what if” questions on the impact across industries of fluctuation in the macroeconomic environment for manufacturers.

Inforum’s bottom-up approach has several desirable properties. First, the model works like the actual economy, building the macroeconomic totals from details of industry activity, and enabling us to apply various policies and create a manufacturing revival scenario. Second, it describes how changes in manufacturing, such as increasing productivity or shifting international trade patterns, affect other sectors and overall economic output. Third, Inforum’s model permits the incorporation of price inflation by industry, showing causes and effects of relative price changes by industry.

Given manufacturing’s key role in creating wealth, and the detailed analysis contained in this paper of the drivers needed to ensure a manufacturing resurgence, U.S. policymakers have a blueprint here for economic expansion and increased living standards for generations to come.


Stephen Gold

President and Chief Executive Officer

MAPI



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