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Fighting For Manufacturing

Insights: A recent book from Dow’s CEO warns about the decline of American manufacturing and offers remedies

by Alexander H. Tullo
February 14, 2011 | A version of this story appeared in Volume 89, Issue 7

At a flea market in Newark, N.J., last summer, I bought a 1960s-era Smith Corona electric typewriter for $10. My seven-year-old daughter was fascinated by the exotic machine and inspected it thoroughly. “You see, Daddy?” she said. “Not everything is made in China. This typewriter says ‘Made in the U.S.A.’ on it.”

I realized then that the decline in U.S. manufacturing isn’t only because it’s too expensive to make cheap goods like toys and toasters here anymore. In many cases, the things that used to be made in America no longer exist, and their replacements are being made elsewhere. Is the U.S. manufacturing sector, I wondered, becoming as obsolete as that typewriter?

Andrew N. Liveris seems to think so. And he has written a book, “Make It in America: The Case for Re-Inventing the Economy” (Hoboken, N.J.: John Wiley & Sons, 2011), on the topic. “In 2008, 1.2 billion cell phones were sold worldwide,” he writes. “Not a single one was built in the United States.”

As chief executive officer of Dow Chemical, Liveris is in a unique position to understand the problem. Chemical companies primarily sell their products to other manufacturers. Dow is the second-largest chemical company in the world. Its employees must have a working knowledge of thousands of products their customers make and the processes used to make them.

The decline is undeniable. The number of U.S. manufacturing workers peaked at 19 million in 1979. The percentage of manufacturing workers on nonfarm payrolls reached its height of 32% in 1953. Productivity improvements can explain away some of the decline. U.S. manufacturers, after all, produce more stuff today than they did in 1979 or 1953. But Liveris points out that production hasn’t kept pace with the increase in the U.S. population and that our share of global industrial output has been shrinking.

The decline of the manufacturing sector is a real threat to the prosperity that Americans take for granted, Liveris says. We cannot hope to sustain our vast economy if we write off its greatest engine of job creation. Liveris cites a 2009 study by the Manufacturing Institute that says every $1.00 in sales by a manufacturer generates $1.40 in economic activity elsewhere in the economy.

And Liveris makes the frightening point that Americans can’t necessarily earn a living from innovating products domestically and outsourcing the manufacturing abroad. Companies, including his own, inevitably establish R&D centers close to where they make things.

“More than two-thirds of the money spent on R&D in the United States is spent on manufacturing,” Liveris writes. “Without a vibrant manufacturing sector, that R&D will be done not by the United States but by its major competitors. Over time, that will leave America dependent on intellectual property that’s created in other countries.”

Liveris’ key insight is that the U.S. isn’t necessarily losing ground for the reason most people think: low wages in developing countries. High productivity in the U.S. makes up for much of that, he points out.

Instead, countries such as China and Singapore are attracting companies with generous incentives. Foreign governments offer companies tax holidays, low-interest loans, capital, and free land. Some are even willing to pay a portion of workers’ salaries. “Around the world, countries are acting more and more like companies: competing aggressively against one another for business,” Liveris writes.

If you can’t beat ’em, join ’em, Liveris says. The U.S. needs to offer incentives to attract more investment. He suggests reducing taxes for manufacturers and making the R&D tax credit permanent and more generous. He also backs feed-in tariffs and other subsidies for renewable energy. He even suggests that we create a National Economic Growth Bank to dole out incentives to industry.

These kinds of ideas are somewhat self-serving, and Liveris admits as much. That shouldn’t discredit them. The R&D tax credit and reduced taxes for manufacturers won’t cost the government much, and they may fatten national coffers by attracting investment.

The growth bank is a harder pill to swallow. I can hear the complaints of cronyism and corporate welfare already. And the kinds of incentives Liveris has in mind are considerable. He says incentives from Michigan and the federal government allowed Dow’s board to approve an investment in the firm’s Dow Kokam battery joint venture in “nanoseconds.” What he doesn’t mention is that the help amounted to $341 million in grants and tax credits out of an investment of a little more than $600 million.

But my disagreement is with the details, not the concept. Maybe only $241 million would have induced Dow’s battery investment.

The era when the federal government can offer nothing but gratitude in return for investment dollars is probably over. States and localities offer incentives to attract investment away from other communities all the time. Maybe the entire country should try to do the same to stem the manufacturing decline.



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