The U.S. Imbalance in Manufacturing

The U.S. has a long tradition for entrepreneurialism and breakthroughs in business and industry. It was the manufacturing powerhouse of the world into the 1960s.

The U.S.’s entrepreneurial tradition continues – but not where we need it most 

The U.S. has a long tradition for entrepreneurialism and breakthroughs in business and industry. It was the manufacturing powerhouse of the world into the 1960s. However, in the 1970s the U.S. suffered disproportional deindustrialization compared with other advanced nations. In the last 40 years, American breakthroughs have been largely limited to information technology like the Internet, Google, Facebook, and Twitter; marketing like Amazon, Ebay, and fast foods like McDonalds; and military equipment. Except for Elon Musk’s enterprises (electric cars, battery manufacture, space vehicles), and pharmaceutical products, the U.S. has had no commercial manufacturing breakthroughs in decades. Apple products are largely manufactured in China. Weakness in the U.S. manufacturing sector is reflected in our massive trade deficit of $859 billion in 2021, compared with surpluses for advanced nations like Germany, Japan, The Netherlands, and Scandinavian nations.

Manufacturing isn’t just the past; it’s critical today. Manufacturing raised millions of blue-collar workers to middle class through wages and job stability provided by high value-added/labor ratios in manufacturing jobs. Loss of industry led to loss of working-class income and increased income inequality. Manufacturing jobs are not just for the assembly line. Manufacturing involves engineers, buyers, marketing, accounting, environmental, and administrative functions; it has the ability to launch new products lines that will be essential to counter the potential impact of artificial intelligence on loss of jobs.

Claims that manufacturing has maintained stable contributions to U.S. GDP can be supported by statistical indicators. However, arguments that downplay fundamental imbalances overlook the fact that U.S. durable goods manufacturing is concentrated in limited sectors, with productivity gains overwhelmingly concentrated in computers and electronics. Manufacturing, with only 8% of the workforce, makes up 0.53% of U.S. research & development, and this represents a steep decline from the past decades. U.S. manufacturing deficits impede the U.S.’s ability to mobilize an effective national campaign to transform energy use. Pervasive deficits in U.S. manufacturing can be seen throughout the economy:

Maryland’s new commuter rail cars will be manufactured by a Japanese firm and assembled locally; Google‘s book scanners and Boston’s sewage treatment system are German; our advanced hearing aids are German, Austrian, or Swiss (cheap ones are Chinese); C-pap machines are made in the Netherlands; sophisticated medical equipment like MRI’s and X-ray machines are increasingly dominated by German, Japanese, and Korean products; in 2020 the U.S. was just behind Italy in machine tool production, essential for manufacturing; Finland and Italy build those gorgeous cruise liners. In 1955 “U.S. shipyards built most foreign fleets”, but essentially stopped construction of commercial vessels by 1990; solar energy panels are imported from China, and wind turbines for planned offshore wind installations are built in Denmark. Our deficits include U.S. imports of processed minerals that are required for renewable energy technology.

The underrecognized roots of the imbalance. In the 1960s pollution endangered U.S. public health and wildlife. The U.S. responded by creating a uniquely labyrinthine regulatory and permitting system to protect the environment. Manufacturing and industry, major sources of pollution and health hazards, were impacted by adversarial provisions of the 1970s environmental laws. The results led to loss of manufacturing, economic decline, and antagonism between environmentalists and industry. Conflict over environmental regulations ultimately led to political polarization and Congressional gridlock.  40-year old environmental management systems became frozen into place.

A 2014 study found that government regulations for all business types cost companies with less than 50 employees $11,724 per employee per year. However, for manufacturing companies, the cost was $34,671. The disincentive for manufacturing startups is obvious. Timeframes averaging 4.5 years are required to gain permits for major infrastructure projects. Regulations and NIMBY inhibit innovation in renewable energy: 5500 wind turbines operate in European waters while we have 7 in the highest wind-energy corridor along the Atlantic coast. Congressional gridlock prevents reform of tax policies that let companies provide huge executive compensation packages that incentivize short-term corporate profit goals. Contrarily, gridlock blocks needed increases in salary levels for key federal agency leaders.

Conflict between environmentalists and industry is not a formula for progress.  Environmental NGOs have campaigned to shut down pipelines, stop LNG terminals, and export of fuel products based on the assumption that curbing “dirty” fossil fuel production and transportation will force replacement by renewable energy. This campaign has not produced progress in desired directions. It has produced antagonism and defensive policies on the part of industry – which must do the heavy lifting for green energy transformation. We need more flexible approaches to encourage industry to use its financial resources and technology to accelerate the transition to advanced renewable energies, as can be seen in Europe. Examples are a recent report observing that technology developed for fracking operations shows promise in tapping clean geothermal energy, and Dominion Energy’s ongoing completion of the first industry-initiated offshore wind turbine field in the U.S..

From environment or industry to partnership. The 1970s environmental laws that form the basis of current regulatory policy had exclusive focus on controlling environmental pollution. The framers of the groundbreaking  Clean Air Act Amendments of 1970 looked back on a peak in U.S. industrial productivity and assumed lt they framers assumed inexhaustible resilience on the part of industry to accommodate stringent new operating conditions. President Biden has recognized the importance of revitalizing U.S. industry for energy transformation. The U.S. can no longer afford arbitrary limits on its ability to produce commercially viable and state-of-the-art manufactured products. If the administration takes the controversial step of acknowledging the role of outdated regulatory systems, it would not only support energy transformation, but also move toward overcoming political polarization.

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