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First Person: Renaissance or Cyclical Recovery? Strategy for Sustained U.S. Manufacturing Competitiveness Needed

Adams Nager, an economic research assistant at the Information Technology and Innovation Foundation, recently talked with Area Development about the state of manufacturing in the U.S. In his career, Nager has focused on macroeconomic growth, competitiveness, and tax theory.

Q1 2015
AD: Recent articles in the press suggest that the United States is undergoing a manufacturing renaissance. Do you agree?

Nager: No. We took a hard look at the macro statistics surrounding U.S. manufacturing and found there are a lot fewer jobs coming back to the United States, and employment in manufacturing is much lower than is commonly believed.

AD: Can you elaborate on that?

Nager: From 2000 to 2009, we lost a third of our manufacturing jobs in this country. We’ve now had four straight years of modest but stable growth. Unfortunately, that growth represents not structural recovery but cyclical recovery from the Great Recession. So in 2008 and 2009 we lost 2.5 million jobs. From 2010 to 2013, we gained 520,000 jobs. The jobs are coming back to places like the automotive industry, manufacturing of metals, and other industries that lost jobs because the demand wasn’t there.

AD: So have proponents of the manufacturing renaissance misinterpreted or exaggerated the potential positive changes in our competitive position?

Nager: If we really were to see a renaissance, it would include gaining productivity over nations we compete with. But other countries are still gaining on us in terms of their R&D spending, and they are passing us in terms of investing in automation. When we look at where we expect our competitiveness to be, vis-a-vis 2007, we are less competitive now than when we were then. We’ve had four straight years of manufacturing growth, so we are trending in the right direction because we are no longer losing jobs at a rapid rate. However, whether or not this is permanent is a completely different question. At some point we might run out of jobs that are cyclically coming back like in the automotive industry and fabricated metals. If that happens we could potentially return to the pace of decline.

AD: There have been reports that thousands of manufacturing jobs are coming back to the U.S. from overseas. Isn’t this good news?

Adams Nager, Economic Research Assistant, Information Technology and Innovation Foundation
Nager: We are doing a lot better than we were in the 2000s, when millions of jobs were going overseas. The Reshoring Initiative estimates that 30,000 jobs are coming back to the United States annually. Simultaneously about 30,000 jobs are off-shored. There’s the trickle in and the trickle out, but there’s no overarching trend.

AD: Aren’t global shipping costs unusually high, thereby making it easier for the U.S. to produce more for U.S. and European markets at home?

Nager: Global shipping costs were very high from 2005 to 2008. They shot through the roof. However, in 2009, when the global demand for shipping suddenly crashed because of the recession that quickly impacted the rest of the world, global shipping went from undercapacity to overcapacity overnight. So those shipping costs came crashing down. They decreased 93 percent in six months. Since then we’ve been at 2009 levels of very normal rates for global shipping.

AD: Will the shale gas boom give U.S. manufacturing a substantial advantage?

Nager: Shale gas certainly isn’t hurting, and the fact that we have lower electricity costs can’t be a bad thing for our economy. However, it’s hard to see how that would have a substantial impact on the majority of our manufacturing. Energy makes up less than 5 percent of costs for 90 percent of U.S. manufacturing. When you look at the actual impact on industrial energy costs from the shale gas boom, it’s pretty stable. The shale gas boom is not going to have a significant impact for the majority of U.S. manufacturers. Even industries that have high energy costs, and are directly impacted by shale gas as a direct input, have not yet shown growth. I think the shale gas benefits are largely constrained to the actual production of shale gas and inputs of mining and drilling.

AD: If the manufacturing renaissance is a “myth,” how does perpetuating this myth hurt U.S. competitiveness policy? What should be done instead?

Nager: It’s hard to make informed policy when you don’t know where you stand. It’s very easy right now for a policymaker to read the news and say, ‘Great we fixed American manufacturing.’ But when you look at the data, we haven’t fixed anything. We are still in the same hole, and we are still facing the same problems. The myth provides political cover for policymakers to continue to ignore the problems. We need to have a government that is aware of, and can counter, foreign mercantile policies, which are nonmarket policies designed to distort markets and take jobs away from the United States.

AD: Are there any manufacturing sectors that are succeeding? If so, what are they doing right?

Nager: A lot of the automakers have corrected things. It’s wonderful that they survived the recession, and much of the measured growth from 2010 to 2013 is from American automakers returning to full production. The sectors that I think are doing well are those in clusters, like biotechnology in Boston. Lots of firms are in physical proximity to each other, and they are sharing ideas. Places like Youngstown, Ohio, and Raleigh, North Carolina, have a lot of potential to be the backbone of American manufacturing in the future. Those are the kinds of places that our manufacturing policies need to be supporting.

AD: What does the U.S. need to do to remain competitive in manufacturing?

Nager: We identify three main guidelines for actually improving American competitiveness. One is reducing our costs through corporate tax reform. We also need to improve a company’s ability to become more productive by increasing federal incentives and increasing a firm’s ability to conduct R&D. And we need to make sure we excel in high-tech industries here in the U.S. Once jobs leave, it’s very hard to get them back. We need to have policies and a manufacturing strategy that allows the United States to fight back when foreign mercantilist policies threaten American jobs.

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