Manufacturing: The New Economy

Manufacturing is suddenly a hot topic in Washington. As anemic new-job creation continues to retard the economic recovery, politicians, policy experts, and national journalists have suddenly recognized that manufacturing has been a relative bright spot, one of the few sectors showing growth and the potential to increase exports and generate new, high-paying jobs.

President Obama has begun making weekly photo-op appearances at automotive factories and other plants, touting the importance of a strong manufacturing sector while also attempting to take credit for bailing out GM and Chrysler. And recently the House of Representatives overwhelmingly passed the National Manufacturing Strategy Act of 2010, a bill which, among other things, calls on the president to develop a national manufacturing strategy based on the recommendations of a manufacturing task force.

OK, a Washington task force alone is not going to reverse the long-term trends that have seen the loss of 16% of U.S. manufacturing employment since 2007. Only action like tax cuts, currency reform, and expanded R&D tax credits — in combination with continuing productivity improvement by manufacturers — will do that. But at least these developments show a rising recognition that manufacturing is a critical sector that needs investment and support.

That recognition is not universal, however. Perhaps predictably, as the national spotlight has begun to turn to manufacturing, naysayers have begun popping out of the woodwork to argue that manufacturing isn’t worth saving. In some cases, their positions reveal a profound misunderstanding of what manufacturing is all about.

Take Kevin Hassett, for example. Director of economic policy at the American Enterprise Institute and a Bloomberg News columnist, Hassett this week wrote a column in which he called the increased attention being given to manufacturing issues an “unhealthy fixation.” The decline in manufacturing from 28% of the gross domestic product in 1950 to 11% today is not a crisis, he said, nor is it “necessarily a cause for concern.” This trend, he insists, is simply “economic evolution, a natural and positive force.”

But here’s where Hassett goes way off the rails. He says the “new economy”—unlike the old, manufacturing-centric economy — is “ideas economy.”

“Over the past few decades, our economy has transformed dramatically, and the importance of innovation has increased sharply,” Hassett asserts.

The implication, of course, is that manufacturing is not driven by new ideas and innovation.

This, of course, is completely false. In 2007, U.S.  manufacturing companies made $157 billion worth of investments in research and development, representing 58% of all private R&D investments. Those investments have enabled an unprecedented level of productivity improvement in the manufacturing sector, one of the many factors that has depressed manufacturing employment.

Need more evidence of innovation and “new ideas” in manufacturing? Check out the winners of Managing Automation’s PM100 Awards. Over the past seven years, 350 manufacturing companies have been recognized for their ability to boost competitiveness and achieve growth by embracing innovative new technologies and, yes, “new ideas.”

Before writing off manufacturing as a lost cause, Hassett and people like him need to spend some time outside of the Beltway, meeting with some of the manufacturers on the PM100 list. They’ll learn that manufacturing is all about innovation.