Nov. 15 (Bloomberg) -- Given how desperately the U.S. needs jobs, it’s amazing how little effort Congress and the president devote to revitalizing manufacturing, the most potent of all job creators. For more than 30 years now, economists and policy makers have instead worshipped the false God of “comparative advantage,” believing that the U.S. could prosper by specializing in innovation while letting China and other nations do the manufacturing.
But the worshippers of this economic religion, built entirely on the altar of innovation, delude themselves if they think that high-tech manufacturing is of little value today. After all, we still live in a world of things -- from cars and cutlery to computers and cell phones -- and somebody still has to make them. If the U.S. doesn’t, then obviously it buys them from countries that do.
That explains why the $30 billion trade surplus in high-tech products that the U.S. enjoyed 10 years ago has become a $56 billion deficit.
The consequences of America’s offshoring craze run far deeper than trade deficits. The wholesale transfer of production offshore has also weakened the nation’s engine of employment, crippled its ability to bounce back from the recession and seriously eroded not only middle-class prosperity, but also our capacity to invent the products, and make the medical advances, of tomorrow.
Recovery From Recession
In the past 30 years, average real weekly wages for men in the U.S. have fallen by a staggering 28 percent. The loss of manufacturing has also exacerbated capitalism’s natural boom-and-bust cycle. After the first seven post-World War II U.S. recessions, it took an average of only four months for employment levels to return to their pre-recession levels. But after offshoring became widespread in the 1980s, recovery from recessions started to take much longer. After the 1990-1991 recession, it took 19 months to return to normal. After the 2000-2001 bust, with even more manufacturing jobs offshore, it took 30 months for employment to reach pre-recession levels.
How long will it take to regain the 8 million jobs lost in the latest recession, let alone the 4 million additional ones needed to keep up with population growth? It has been almost 30 months since the trough in June 2009, yet we’ve made almost no progress.
Manufacturing is also crucial to retaining our ability to invent the new technologies that will drive future prosperity. When manufacturing is sent to other countries, it turns out, innovation inevitably follows it.
In 1980, the U.S. produced 42 percent of the world’s semiconductors, devices Americans invented more than 50 years ago. Today, we produce only 14 percent, and U.S. semiconductor companies have moved their research and development offshore as well. One-fifth of total U.S. R&D is now done in other countries, according to the National Science Foundation.
This is hardly surprising when you think about it: Manufacturers conduct 70 percent of all R&D in the U.S., so R&D will naturally follow them when they move offshore.
Americans invented the solar cell almost 60 years ago, but today the Chinese have most of the jobs and social wealth produced by the solar industry. Many people assume that there’s nothing we can do about this, since Chinese labor costs half as much as ours. But labor represents only 7 percent of operating costs in solar manufacturing, so even a half-price workforce gives the Chinese only a 3.5 percent cost advantage.
The greater source of China’s almost 20 percent cost advantage comes from the generous tax holidays and capital grants provided by the government, as Craig Barrett, the former chief executive officer of Intel Corp., has noted.
Germany also has a robust semiconductor-manufacturing sector, yet German labor costs are actually 38 percent higher than those in the U.S. Here again, German manufacturing vitality is supported by capital grants and tax incentives, which have transformed Dresden -- once called the “Detroit of Germany” -- into the modern chip hub of Europe.
Holidays and Grants
China and Germany aren’t the only countries that woo manufacturers while the U.S. perversely prides itself on its “lean startups” in social media, which create less than a 10th the number of jobs that previous generations of startups produced (see chart). Every single nation in the Organization for Economic Cooperation and Development, except the U.S., also offers tax holidays and capital grants, and they do so for one simple reason: Manufacturing is the greatest economic force multiplier on Earth.
Indeed, for every job it creates on the shop floor, manufacturing produces as many as 15 additional jobs elsewhere. And when technological innovation creates wealth, manufacturing is what enables it to diffuse beyond a small elite to the rest of society.
Simply put, manufacturing is what created an American middle class that was the envy of the world. Its loss is now destroying that middle class.
It’s not too late to rebuild our manufacturing sector -- and the middle class along with it. We just need some pragmatic, nonpolitical reforms:
-- First, let’s join the rest of the world and provide federal tax incentives for manufacturers to create jobs in the U.S. This would make it attractive not only for incumbents such as Intel but also for startups in capital-intensive sectors such as advanced semiconductors and LED illumination to boost employment here rather than in China or Germany.
-- To make manufacturing more attractive to investors, Congress should reduce capital-gains taxes on investments in manufacturing startups and, like Germany, offer capital grants of as much as 50 percent of the cost of equipment for such startups.
-- All manufacturers should be allowed to fully expense the cost of new equipment through 2015.
-- Congress should create a permanent 20 percent R&D tax credit, as is typical in Europe.
-- President Barack Obama’s 20 percent cut in vocational school funding should be reversed, and funding should instead be doubled, in order to push into high gear this proven engine of well-paying jobs. This would help ensure a decent future for the two-thirds of Americans who will never graduate from college.
-- Finally, statutory corporate-tax rates should be reduced to what the OECD calls the “optimal revenue-maximizing” rate of 25 percent. (At the same time, corporate-tax loopholes should be closed.) As things stand, the U.S., with the second-highest tax rate in the world -- both statutory and effective -- is driving jobs away.
For 30 years, Washington has treated manufacturing as the vestigial tail of a bygone industrial economy. It’s actually the wellspring of our future prosperity, if only we’d tap it.
(Henry R. Nothhaft is a veteran entrepreneur and the author of “Great Again: Revitalizing America’s Entrepreneurial Leadership.” The opinions expressed are his own.)
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