Helping U.S. Manufacturers: What Works?

May 21, 2018

One of the profound viewpoints in today’s political economy relates to manufacturing. Broadly speaking, many elites believe the one-two punch of trade and robotics has effectively knocked out manufacturing. Many people disagree and believe with the right policies, we could support more factory jobs in more places than we do now.

 

Then there is Economist Tim Bartik, who wrote a paper published by the Center on Budget and Policy Priorities Full Employment Project called “Helping Manufacturing-Intensive Communities: What Works?”

 

Bartik who works at Michigan’s Upjohn Institute, begins by noting, of course, manufacturing employment has fallen, especially since 2000, a period often referenced as the “China Shock,” due to the sharp increase in the flow of Chinese imports. But here is Bartik’s value added: Of the over 100 local labor markets with populations over 200,000 and above-average shares of manufacturing jobs, 22 managed to do well, adding private sector jobs and beating the national employment growth rate, 2007-15.

 

Those areas applied some combination of three strategies. Call them the “three habits of highly successful manufacturing-intensive communities”:

 

  • Customized services for small and medium-sized manufacturers help them to overcome financing and information barriers, improve their technology and product design, and link them up to global supply chains;

  • Infrastructure and land-use investment includes improving the transportation infrastructure and other services associated with a neighborhood’s land to make it more attractive for business development;

  • Life-cycle skill development, including high-quality child care, preschool, K-12 education, college scholarships, and adult job training. Bartik finds that “better skills for local workers help attract and grow higher-wage jobs.”

 

Take note of what is not on the list. To quote the author, “I find no evidence that job growth in these areas is significantly spurred by cutting business taxes or increasing business tax incentives.” It’s not that tax cuts or incentives are always a waste of money. But Bartik’s rigorous analysis finds a much smaller bang for tax cuts/incentives bucks than for these other interventions (incentives, for the record, are better than cuts because they can be more narrowly targeted).

 

To study cost-effectiveness, Bartik first calculates the local benefits of a job created for one year. This turns out to be less than the job’s paycheck, because some of the new workers hail from outside the community, and they generate new costs. Net all that out, and the local benefits average around $12,000.

 

Now, look at his cost-effectiveness figure below. Customized job training costs $3,000 per job-year, manufacturing extension $2,700, and neighborhood/land around $1,000. Business tax cuts and incentives, conversely, cost many multiples of the local benefits they generate.

 

Bartik cites Grand Rapids, Michigan, as a real-life example of what can happen when state and local officials take these findings seriously. The figure below shows how the city handily beat the national trend in factory jobs, 2010-15.

 

Here’s what Grand Rapids did:

 

  • The city put significant economic-development resources into locating a branch manufacturing extension services office.

  • Michigan devotes more resources than the average state to customized job training programs.

  • The local economic-development organization has invested great effort in developing clusters of related manufacturing industries that can work together to identify and solve common problems (e.g., skill needs).

  • The local area has a high-profile initiative, Talent 2025, which is trying to improve the area’s skills development from early childhood through adulthood.

  • Extensive infrastructure investments have been made in downtown Grand Rapids.

  • Local business interests put up funds for extensive subsidies that helped attract the medical school of Michigan State University to locate in Grand Rapids.

 

The bottom line is this: Before we accept the diagnosis that U.S. manufacturing is toast, there is way more to do. First, we need to apply Bartik’s local lessons, which at the state level implies raising the revenue needed to fund these investments. Thus, no tax cuts.

 

At the federal level, we must expand the Commerce Department’s Manufacturing Extension Partnership program. The feds can also help fund skill-building initiatives, from early childhood care for disadvantaged kids up through local customized training initiatives for displaced workers.

 

Next, while Trump’s protectionist agenda is chaotic and incoherent, trade economists widely agree that some of our trading partners tilt the playing field their way by managing exchange rates. This was one reason for the shock in the 2000s, when manufacturing employment fell by 3.5 million jobs, and that was before the recession. As Bartik points out, if the sector is taking hits of that magnitude, there is nothing localities can do to offset the damage.

 

Finally, there is another elite consensus in this manufacturing debate that is incorrect. The robots are not taking all the jobs. The new, subtly titled article — “The epic mistake about manufacturing that’s cost Americans millions of jobs” — features the research of economist Susan Houseman showing how the automation effect is concentrated in computer production, which accounts for less than 15 percent of manufacturing output. Take that sector out, and there is no evidence of job-displacing robots at work.

 

To be clear, the point is not that American manufacturing can be massively revived. Advanced economies always lean toward services as they grow. But there are many other advanced economies out there with more robust factory sectors than the U.S., employing a much larger share of their workforce and spinning off much more productive R&D.

 

What Bartik argues is let us not give up without a fight, which in this context means the application of smart policies at every level of government.

 

Bernstein, Jared. (2018). "Helping U.S. manufacturers: What works?" Retrieved from https://www.washingtonpost.com/news/posteverything/wp/2018/05/09/helping-u-s-manufacturers-what-works/?utm_term=.dbada5b413ed.

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