Dean Barber

A Kick in the Gut: What Really Happened to American Manufacturing

In Uncategorized on April 15, 2012 at 6:02 am

The Florida economic developer was being kind. We were having a telephone conversation, and he said that he read my blogs “religiously” and took what I wrote as “gospel.” But he said this the day after Easter, which made me squirm.

“Now look here,” I protested. “I can get things wrong.”

And so I can. Now how often do you hear that from a business consultant?

Yes, it’s an absolutely fact — your all-knowing, sage-like consultant has gotten some things wrong, and for that I do apologize. I could ignore it, which might make better business sense, but the journalist in me (I was a newspaper business reporter a long time ago), compels me to get it right. The site selection consultant in me (today) demands as much.

During a high-profile government hearing, a critic of the influential British economist John Maynard Keynes  accused him of being inconsistent. Keynes shot back: “When the facts change, I change my mind. What do you do, sir?”

So what has been the error of my ways? Well, it’s on a subject that I have a great passion for and thought that I knew a lot about – manufacturing. It just goes to show, when you think you might know something, sometimes you can be in for a shock. But only if you keep an open mind. Learning is a wonderful if not humble thing.

My Big Toe

Now the bandwagon happy story is that we are about to see a big wave of re-shoring or on-shoring in this country, meaning that manufacturers have either recognized the errors of their ways or a new reality and will soon be returning production to the United States. It all started with a report by the Boston Consulting Group.

Just this week, I read a couple such articles, one from a big commercial real estate firm in Atlanta, espousing the same thing. But most of these articles, always citing rising transportation costs, rising wages in Asia and issues on quality, offer about as much in-depth analysis and hard data as my big toe.

In short, I cannot help but conclude there is a whole lot of shakin’ and wishful thinking going on. Certainly you can point to anecdotal evidence that some re-shoring has and will take place. GE appliance and Caterpillar are examples that come to mind and there are more. But the predicted huge wave has yet been but a small ripple. And it may remain so.

There is a magazine publisher who is predicting 3 million new manufacturing jobs in the Southeast alone. Truly I don’t know how he came up with such numbers. I will say that whatever he might be smoking could very well be illegal. (I doubt that I will be writing for him anytime soon.)

I’m Guilty, Too.

But my skepticism does not make me any more accurate. I have been just as guilty in my spread of misinformation. I have perpetuated upon you, my good readers, the myth that most job losses in the US manufacturing have been the result of great strides in production efficiencies. You know, automation and robots.

The magnitude of the manufacturing job loss in the first decade of this century is staggering. From January 2000 to January 2010, the U.S. lost one-third of its manufacturing jobs, almost 5.5 million jobs. This surpasses even the rate of loss in the Great Depression, according to a startling report that I am about to tell you about.

And yet many economists have postulated that U.S. manufacturing, which has been adding jobs for the past two years, is doing great. They look at the change in real manufacturing value-added relative to real GDP.  They see industrial output as being steady with fewer people, meaning that the manufacturing sector is more efficient and more productive.

And while I am no economist, nor do I play one on TV, I bought the party line.

Slapped and Kicked

My turnaround moment came a result of recent report from the Information Technology and Innovation Foundation, which while not gospel does offer a more compelling view on the state of manufacturing in this country. And I will tell you right now that it was a kick in the gut.

Even the title of the report slaps you up beside the head. “Worse Than the Great Depression: What the Experts Are Missing about American Manufacturing Decline,” debunks widely held myths about productivity gains, restructuring, and a manufacturing renaissance and reveals the stark reality of a historic decline in U.S. competitiveness and unprecedented deindustrialization.

In reviewing the productivity of different manufacturing industry sectors, the ITIF found that 13 of the 19 manufacturing sectors (employing 55 percent of manufacturing workers) were producing less in 2010 than they there were in 2000 in terms of inflation-adjusted output. That would be a first in US history or at least since World War II.

The report also finds that between 2000 and 2010 U.S. government data significantly overstated manufacturing labor productivity by 122 percent, in part by vastly overstating value-added growth in the computer and electronic products sector and by miscalculating the price of imports of intermediate manufacturing inputs.

A Disturbing Truth

“What we discovered flies in the face of nearly all the reporting and commentary on manufacturing and reveals a disturbing truth,” said ITIF President Robert D. Atkinson, the report’s chief author. “U.S. manufacturing jobs have been lost not simply because the sector is more productive. It is producing less.

“And unlike some high-wage nations, America is not replacing low-value-added manufacturing with high-valued-added manufacturing or opening new plants to replace closed ones. There is difference between restructuring and decline. American manufacturing is in decline.”

As you can see, Atkinson is not one who pulls punches. But he sincerely believes, as do I, that manufacturing, which adds $1.6 trillion to GDP, remains critical to our nation’s economic health, and that this train can be turned around if only we muster the political will and gumption to do it. I had the opportunity to speak with Atkinson on Friday who said his report was getting considerable pushback.

“There are people who are used to think that it was all productivity, but then they looked at the data and have changed their view. I put myself in that category,” Atkinson said. “Then there are people who just don’t bother to look at the data, who look only at the one topline number. And then there are the people who read all of what we have said, look at it, and say, “So what, I still think it’s productivity.”

You Want More?

Among the findings in the ITIF report are the following:

• Output: Rather than rising by 16 percent from 2000 to 2010, according to government data, manufacturing output during that period actually fell by 11 percent. If manufacturing output had increased at the same rate as the rest of the business sector, the US would have 3.8 million more manufacturing jobs and the multiplier effect would have added another 4 to 6 million jobs.

• Job Losses: Today, more Americans are unemployed – a total of 12.8 million – than there are Americans who work in manufacturing, 12 million. On average, every day for the last 12 years, the US lost 3,643 jobs – 1,243 net manufacturing jobs plus 2,400 additional jobs because of manufacturing’s multiplier effect.

• Manufacturing Capital Stock: While the amount of capital (e.g. machines, factories, computers) grew by between 20 and 40 percent per decade prior to 2000, in this last decade it grew by less than 2 percent.

• Plant Closings: Since 2000, a net 60,300 manufacturing plants closed. That’s 15 a day.

• Recovery: While the economy has been adding manufacturing jobs during the current recovery, for every six jobs lost in the 2000-2010 period, only one was restored as of January 2011. At the rate of job gain in 2011, it would take until 2020 to restore manufacturing employment to where it was at the end of 2007.

ITIF said the U.S. manufacturing sector lost jobs because it lost output, and it lost output because “its ability to compete in global markets — some manipulated by egregious foreign mercantilist policies, other supported by better national competitiveness policies, including much lower corporate tax rates — declined significantly.”

Maintaining Our Vibrant Base

We mentioned the pushback this report has generated. The National Association of Manufacturers (NAM) has remained curiously silent, but not so with the Manufacturers Alliance for Productivity and Innovation. (MAPI)

“ … Rob Atkinson isn’t saying manufacturing’s not important. He’s saying this nation (from its government policies to its cultural evolution) has done little in recent decades to help maintain US manufacturing competitiveness in an increasingly global marketplace,” said Stephen Gold, president of MAPI.

“ITIF’s report just adds to a growing list of studies (e.g., Michael Porter and Gary Pisano in the January edition of the Harvard Business Review) that demonstrate a need for new efforts to maintain and increase manufacturing competitiveness. These reports all share a common underlying theme: the US needs to maintain a vibrant manufacturing base.”

Do the Right Thing

Despite the huge losses, Atkinson said if the US will only muster the political (bi-partisan) will to do so, it can enact pro-manufacturing policies, such as lowering the corporate tax rate and getting tough with China on unfair trade practices, that could indeed create millions of manufacturing jobs. He is reminded of a quote from Winston Churchill.

“Americans can always be counted on to do the right thing … after they have exhausted all other possibilities.”

Ladies and gentlemen, it is time for us in the country, Democrats and Republicans, conservatives and liberals, to come together and develop a national manufacturing strategy that protects and grows what I would argue is the most important part of our nation’s economy. Said Atkinson:

“We will need new policies to build a new manufacturing foundation. This is a central economic task for America for this decade.”

I’ve been wrong before, but on this one, I’m convinced. We can do the right thing.

Dean Barber is the principal/owner of Barber Business Advisors, LLC., a site selection and economic development consulting firm based in Plano, Texas. He can be reached at 972-767-9518 or at dbarber@barberadvisors.com Please visit our website at www.barberadvisors.com

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  1. Dean – Sobering analysis. I’d also add my concern that manufacturing is key to America’s innovation. Outsourcing manufacturing is a formula for eroding our capability to innovate. There is a reason the saying “Necessity is the mother of invention” has stood the test of time. You invent to solve problems or create efficiencies, and the opportunities are both uncovered and understood when you get dirt under your fingernails by making things. To be clear, manufacturing does not drive 100% of invention. But, I believe it drives a significant enough percent that it cannot be ignored if our Nation expects to remain globally competitive. Here is a link to a piece I authored on this subject – http://strengtheningbrandamerica.com/blog/2011/08/is-manufacturing-a-key-enabler-of-innovation/

    • In reply to this comment: I would like to say that the fact we do invent and create efficient means of producing products is great. The fact that most of the inventions and processes of producing them has been sent to foreign countries. This may be good for the inventor but is is bad policy for the American workers and our country. Don’t miss understand that innovation is a neccessarypart along with manufacturing. Innovation presents the desire for and process of and producing the product produces the economic value of both.

  2. Here’s another report on productivity and it’s impact on our competiveness.
    http://www.businessweek.com/magazine/what-the-revised-productivity-rate-will-mean-10202011.html

  3. While not saying the the U.S. should even try to copy the German model wholesale, Germany is a very bright exception to our own economy and offers some strong lessons for us. First of all the institutions that support U.S. job growth like the Export-Import Bank, a world-class public school system and vocational training combined with work experience should be strengthen. Also lets concede the jobs that are based on the lowest labor cost to other countries. Lets concentrate on niche manufactoring that require high quality of labor (cheap labor is very expensive) and lots of capital (you cannot have capitalism without capital). Also by giving workers a say in management real labor/management reform can be realized. Another major point is that Germany does not emphasize short-term profit. These are all lessons (within limits) on how our economy can profit by coping the best features of the German model.

    • Absolutely. As a Brit, the frustrations expressed in this thread as endemic in the US economy are parallelled here and there are real lessons to be learned from the German mittelstand business model. As a country we have been and still are innovators of note but one factor which has been telling in the erosion of our once proud position in that regard is a matter which is worthy of note: culturally the innovators and manufacturers have been sidelined in favour of non productive occupations to an alarming degree. It appalls me that otherwise talented youth of my country would rather pursue “educations” in the performing arts or “media studies” or somesuch, and end up all but unemployable. In
      Germany engineering is seen as a profession of status and note. In UK and perhaps in USA it is perhaps seen as the cultural and intellectual inferior to say the law or medicine. That should start to change or the loss of pace to each of our economies may NEVER be regained.
      Chris Morrison. LlB DBA (Dunelm) of the Inner Temple, Barrister

  4. Thanks Dean for a very thoughtful article. You have told the people of this country the truth. Our peoplestill just don’t get it. Our politicans are ignorant of the truth. This is both the democrats and republicans. Neither pary cares about this country except trying to implement their on selfish wants.It is our manufacturing people who support this country. A service economy won’t support the people of this country. It may support the government through it’s tax policy but will not support the people.Where is any new wealth or capital created by serving something that has already been manufactured? How much of our ecenomy is service based today? Why is our national growing by leaps and bounds today. The only real solution to our debts is JOBS AND JOBS AND MORE JOBS FOR THE AMERICAN PEOPLE. THANKS YOU.

  5. New Wealth… measured in U.S. dollars (capital), can only be created by physically connecting human and natural resources. But the current mix of labor and materials, now manipulated and controlled by yesterday’s capital, has exclusively favored Wall Street’s one-sided rule, a maximum return to the rich and successful… a minimum wage to the not-yet-successful and poor.

    We need an innovatively unique consumer cooperative, that challenges this one-sided zero-sum game of winners and losers with a win-win mutual benefit… creating clusters of product and service business opportunities… mutually owned by their cooperative hands-on workers and their consuming customers… delivering an equitably fair and balanced ownership reward to both stakeholders; the invested consumers and co-invested workers.

    From this new citizen-controlled economy, the People will build for each participant… an every generation strategy… a full lifetime of real economic security.When every American owns their- piece-of-the-action… the now un-met needs of “all the people” will stop being a problem and start being an ever-expanding opportunity.

    Only when every American owns their- piece-of-the-action… will the now un-met needs of “all the people” stop being a problem and start being an ever-expanding opportunity.

  6. Dean, what do you think Stephen Gold was referring to when he pointed to our cultural evolution as a cause for the stagnation of manufacturing in the U.S.? While I think that our politicians will eventually get on the right path with the policies that need to be adopted, I am less confident about the cultural changes that are necessary.

    The one area I am particularly concerned about is this sense of entitlement that has infected every class of society. I’m not referring to just the welfare system. Our business leaders, politicians, and most of the people that follow them seem to think they are owed something and that they should be able to take all the shortcuts that they want to get what they desire. The manufacturers that I work with have told me that the reality TV culture where people get paid to eat, drink and make a fool of themselves has contributed to a trend where people under the age of 40 in this country don’t seem to know how to put in a hard days work anymore. And I am only 28, so I’m not just some grouchy old Gus lamenting a lazy younger generation.

    What other areas of out cultural evolution do you think Mr. Gold was referring to, and how should we go about changing them?

  7. Thank you for this important information. There are many things that we can do to increase productivity — but I’ll just mention one. That would be to transform the property tax into a public services user fee.

    Today’s typical property tax is a barrier to business productivity. Owners who invest in new buildings (or improve existing ones) face higher taxes. Those who allow buildings to deteriorate are rewarded with lower taxes. These economic incentives are upside-down.

    Some might dismiss this issue by noting that the typical property tax is only 1% or 2% of value. But unlike a sales tax (that is paid only once), the property tax on improvements is paid each and every year that an improvement adds value to a property. A net-present-value calculation shows that this stream of tax payments has the economic impact of a 10% to 20% sales tax on the cost of construction labor and material. That’s a substantial barrier to production. At a time when analysts note the importance of retrofitting existing buildings for energy conservation or alternative energy utilization — and various subsidy schemes are proposed — we nonetheless ignore this 10% to 20% cost hurdle that the traditional property tax throws in our way.

    Some jurisdictions have remedied this situation. They are using value capture to transform their property tax into a public services user fee. This is accomplished by reducing the tax rate applied to building values and increasing the tax rate applied to land values. The lower tax on buildings makes them cheaper to build, improve and maintain. The higher tax rate applied to land values reduces speculative demand for land, and actually helps keep land prices more affordable. And because the value of land is related to the value of public goods and services provided to various sites, the tax is paid in proportion to public benefits received — like a public services user fee.

    Lower land costs and lower costs for building construction, improvement and maintenance can free up funds for more productive investments.

  8. One critical point about manufacturing is the fact: The manufacturer has the ability to determine if a product is to be manufactured and at what price. The best if ideas and designs is nothing until you have a manufacturer is is willing to produce it at a price the people of a country can afford which really determines it’s success.

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