March 29, 2013    Volume 20, No. 4

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Aspen Institute / MAPI Study Describes Why Manufacturing Is Essential For A Strong U.S. Economic Recovery

By Richard A. McCormack

The American economy could be quite vibrant and healthy over the next decade or more, so long as there is a revival of the U.S. manufacturing sector. But without one, there will be continued hardship in America, according to an analysis conducted by the University of Maryland for the Aspen Institute's Manufacturing and Society in the 21st Century program and the Manufacturers Alliance for Productivity and Innovation (MAPI).

If the United States puts in place policies that increase the manufacturing industry's share of GDP from its current level of 11.6 percent to 15.8 percent -- where it was in 1998 -- then U.S. output would be more than $1.5 trillion higher in 2025 than it would otherwise be if manufacturing continues to shrink and account for 11.1 percent of GDP over that period.

Under a scenario of a "manufacturing resurgence," 3.5 million additional manufacturing jobs would be created and the trade balance would go from deficit to surplus, according to the study titled, "The Manufacturing Resurgence: What it Could Mean for the U.S. Economy, A Forecast for 2025."

But in order for the economy to grow on the strength of manufacturing, which has a large multiplier, other sectors would become less important in the U.S. economic mix, including finance, wholesale and retail trade, professional business services, construction and government.

Trade is the biggest factor involved in turning the manufacturing sector around, accounting for 50 percent of the increased level of manufacturing's growth as a percentage of GDP in a "manufacturing resurgence" scenario. If the United States can boost goods exports at an annual growth rate of 6.5 percent from now until 2025, and hold imports to an annual average rate of 2.7 percent, then the country would create a trade surplus in goods of $730 billion by 2025 (with exports of $3.666 trillion and imports of $2.935 trillion). "Growth of exports is driven by energy-intensive industries such as chemicals, plastics, fabricated metals and steel; and capital goods such as computers, engines, turbines and power equipment, aerospace equipment and industrial products," according to the analysis. "Semiconductors and pharmaceuticals also grow faster than average exports."

If manufacturing were to hold a 15.8 percent share of GDP by 2025, total U.S. output would be 34 percent higher than it is today.

The U.S. government must improve the incentive structure for companies to invest domestically in capital and equipment. "Gross fixed private capital formation needs to grow at an average annual rate of 6.2 percent as opposed to a current baseline projection of 4.7 percent," says the study. Congress and the president must also pursue trade policies geared toward opening foreign markets to U.S. goods and combating foreign trade protectionism. "Some effective action is needed to address the worrisome 'competitive currency devaluations' that can have material impact on trade flows," says the study. "If mechanisms such as the G-20 cannot tame the fires of this competition, careful thought should be given to using existing authority under Article XV of the GATT (now the WTO), in conjunction with IMF consultations under Article IV of its charter, both of which address and prohibit currency manipulation."

There needs to be a "meaningful shift in employment to the manufacturing sector" which can only occur with an improvement in workforce training and skills development. "Not only do we need to fill 3.7 million new jobs, but we must also replace retiring workers," says the study. The average age of workers in the manufacturing sector is 52. A manufacturing resurgence won't occur unless well trained young people want to work in the sector.

Regulations need to be addressed, corporate taxes lowered and public investment in research needs to be directed toward product commercialization and production.

The manufacturing community has been making this case for years without much action by policymakers. Is there hope for this situation to change?

Yes, said Jay Timmons, President of the National Association of Manufacturers. Not long ago, only a few people in Washington were talking about the need for a robust manufacturing sector. "Since that time, there has been a radical shift in public opinion and what policymakers and candidates are talking about," Timmons noted. On election day 2012, NAM's polling indicated that 52 percent of voters took manufacturing into account when they cast their ballots. If such a poll had been taken half a decade ago, "I guarantee you it would have been one-quarter of that," said Timmons. "One of the reasons for that change is this president has talked extensively about the need for a manufacturing resurgence, and others in leadership in the House and Senate are focusing on manufacturing."

It doesn't mean the policies are changing, "we all know that," Timmons added. "But when you have data like this [report provides], which shows what can be achievable and what happens to the economy when we really do focus on growing the manufacturing economy, we will start to get some positive action. The first step is getting the awareness level up and I think we are there. The next step is translating that into policy and there are things coming out of Congress and the administration that will strengthen manufacturing. We have to keep that ball rolling a little bit more, but it is achievable and an aspirational study like this can help make the point."

The report is located at the MAPI web site,

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