Can Manufacturing Play a Major Role in the American Economy's Future?

Manufacturing is back. Or so scream the headlines. And it appears that we really, really want to believe. Because for all the financial engineering and investment wizardry of the past decade, there is some deeply human, atavistic need to make actual stuff.

And so we view the return of manufacturing to the US and Europe as a return of hope for middle class jobs and incomes and hope.

But as the following article points out, the same forces that are bringing it back to developed countries are also delivering the marvels and capacity to the very same developing nations to which it departed. So, sustainable advantage it may not be. We'll take simply being competitive for now. But as with so much about this economy, we are not sure what else to believe in. JL

Michael Lind comments in Ideas Lab (hat tip Ken Jarboe):

Can manufacturing play a major role in America’s economy in the future? While the U.S. manufacturing sector continues to encounter some headwinds, short-term events and long-term trends augur well for a renaissance of manufacturing in the United States. The short-term headwinds include the weakening of the still-weak world economy, thanks to the convergence of Eurozone troubles and the crisis of China’s export-driven economy. If nations with chronic trade surpluses like China seek to maintain employment in the face of overcapacity by dumping products below cost on global markets, the stage could be set for zero-sum protectionism and trade war.

Other short-term trends, however, benefit American manufacturing. These include rising labor costs in China as a result of inflation and the revolution in domestic American natural gas and oil production driven by fracking technology. In addition to benefiting particular industries that use hydrocarbons as feedstocks or supply the infrastructure necessary to build out pipelines, ports and refining facilities, the fracking revolution, by lowering the price of energy inputs, benefits American-based manufacturers as a whole.

In the longer term, the outlook for American manufacturing is encouraging. The declining importance of labor costs in production, as a result of automation, will reduce the comparative advantage of countries with low-wage labor forces and reward advanced nations with innovative technology and abundant capital.

But a rejuvenated American manufacturing sector will be transformed by disruptive innovation in technology, business models and sectoral definitions:
Disruptive technologies.
After long delay, the age of robotic manufacturing has begun to dawn. An even more disruptive innovation may be the large-scale application of rapid prototyping or 3D printing, which holds the potential to revolutionize how we produce valuable goods from raw materials as the PC in the 1980s and 1990s revolutionized how we access and manipulate data. By shrinking supply chains, 3d printing may further encourage the reshoring of production to the U.S., while permitting the replacement of one-size-fits-all “mass production” with “mass customization” by means of on-demand manufacturing.

Disruptive business models. New technologies enable new business models, like “servitization”—the adoption of combined manufacturing and lifetime product servicing strategies by a growing number of corporations. Sensors embedded in products ranging from aircraft engines to household appliances can capture the business of maintenance and repair and even recycling for manufacturers.

Disruptive sectoral redefinitions
The very definition of manufacturing is changing, as technology-driven innovation erodes the walls between formerly-distinct economic sectors. Take medicine, for example. Advanced manufacturing and sophisticated software may transform medicine into an industry in which the production of customized manufactured components, some of them products of biological manufacturing, is as important as the service elements. At the same time, the application of robotics to farming, along with even more disruptive technologies like GM crops and livestock and in vitro “test tube” food production from stem cells, may blur the boundaries between the production of goods and the production of food.

While the U.S. might be able to regain some old-fashioned assembly-line jobs, in the long run all industrialized countries show a similar pattern of productivity-driven increases in output coupled with declines in direct manufacturing employment.

Manufacturing is following the older trend of American agriculture, whose output has expanded by 600 percent even though the agricultural workforce has fallen from 40 percent to little more than 2 percent today. But just as the food production and distribution system in the U.S. employers far more Americans than those engaged directly in farming, so American manufacturing will sustain many jobs in the U.S. even as robots replace workers in assembly tasks.

According to the Bureau of Economic Analysis (BEA), every dollar of final demand for a manufactured product represents 55 cents for the manufacturing sector, narrowly defined, and 45 cents for other sectors of the economy. The federal government estimates that every $1.00 for manufacturing generates $1.34 in other economic sectors, a far larger multiplier than those of retail trade and wholesale trade, which generate only 55 cents and 58 cents, respectively, in other sectors.

Manufacturing’s contribution to America’s industrial and scientific base is even more outsized. Although manufacturing accounted for only 11.7 percent of GDP in 2012, the manufacturing sector was responsible for 70 percent of all private-sector R&D spending. And more than half of America’s exports are manufactured goods.

While the environment for American manufacturing is more favorable than it has been in decades, intelligent public policy is necessary to realize the potential for an American manufacturing renaissance. The priorities for public policy include promotion of mutually-beneficial rather than adversarial trade, publicly-supported infrastructure modernization, tax and regulatory reform, and public investment in basic R&D and technology diffusion, as well as programs by community colleges, universities and other educational institutions to help match workers with needed skills to manufacturers.

Working as partners, the private sector, the public sector and the nonprofit educational sector can help Americans to capture the benefits of the latest industrial revolution for themselves and their children.