July 11, 2013    Volume 20, No. 9

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America Can't Be An 'Innovation' Economy Without Manufacturing: Politicians Had Better Figure That Out


By Ralph Gomory

Manufacturing was once widely recognized as the outstanding strength of America and the basis of its prosperity, but manufacturing has a more recent history of being almost a pariah. This newer view equated computer chips with potato chips, asserted that manufacturing is better left to others, and suggested that the United States is actually fortunate to be losing manufacturing, replacing it with design, research and services.

But many Americans, witness to the loss of jobs and the devastation of what had been major industrial centers, have not been converted to this new perspective. Polls have clearly shown that most Americans still think that manufacturing matters, and these polls had an impact last year at election time. Politicians of every stripe suddenly rediscovered manufacturing, with high-ranking government officials quickly writing respectable economic studies that cast a more favorable light on manufacturing.

With the 2012 elections over, the public discussion about manufacturing has changed course, with the loss of manufacturing being addressed in a different way. Since Americans can't be persuaded that manufacturing doesn't matter, they hear instead: "Don't worry, manufacturing is coming back." There has been a steady stream of articles and studies announcing -- on the flimsiest evidence -- that manufacturing is returning to America. But the claims are closer to fiction than they are to fact.

Innovation, in contrast with manufacturing, is immune to the ups and downs. Day in and day out, innovation is everybody's favorite economic subject, with constant claims that America must innovate to survive; that America must innovate to compete in the global economy; and that Americans can do it because Americans are inherently innovative.

This discussion of innovation is backwards. It does not make sense to talk about innovation as if innovation is an end in itself. The country can innovate until the cows come home, but if it can't translate that innovation into something substantial -- something that adds to the economic output of the United States -- it does little for America. If the U.S. strategy is to generate new ideas that other countries acquire as the foundation of new industries or to gain an advantage in old ones, then Americans will incur the expense and glory of being innovators, but other nations will reap the economic benefits. And this is exactly what is happening now.

In this era of globalization and of worldwide profit seeking, global corporations are strongly motivated to move their manufacturing abroad where there is cheap labor for labor-intensive industries and where there are government subsidies for industries that are not dependent on cheap labor. Manufacturing innovation goes abroad with manufacturing.

Innovation in manufacturing matters: Innovation in manufacturing is what turns ideas into things that change the world. It took the steam engine 150 years of steady improvement to evolve from being something that barely worked into a machine powerful enough to create the industrial revolution. Sixty years of continuous miniaturization of the transistor has produced a cell phone that can be carried in a shirt pocket with computing power that once required several large rooms to hold.

In a less spectacular way, the manufacture of steel, paper, glass or automobile tires follow the same path. There are ideas and then innovation in the manufacturing process steadily improves them. Much of the progress and the competition in manufacturing is based on incremental innovation whose cumulative effect is enormous. But manufacturing's steady improvement also means that once a country loses an industry it's hard to get it back. Workers' skills are out of date and the underlying networks of suppliers have gone out of business.

This picture of innovation -- tied to manufacturing and incremental in nature -- is very different from the popular picture of a few dedicated young programmers putting together a startup company that sweeps the world. But it is this popular picture of innovation that dominates many discussions on how to increase innovation in America.

Why can't we just stick to this attractive startup picture? Do we really need the hard work of manufacturing and manufacturing innovation in America? We know we do need manufactured goods that are a part of daily life, but isn't there some other way to get the manufactured goods we need?

There are three ways to can get them: produce them in America; trade something else we produce for them; or buy them with dollars that don't get spent on American goods but simply remain in foreign hands as future claims on our economy. Today the third option is increasingly what we do.

The Chinese government, alone, now has more than $2 trillion generated by America's trade deficits, and this amount grows daily. China has an enormous resource available whenever needed to buy promising or even full-grown technology and companies. Is there anyone who believes that in today's world a buyer with $2 trillion to spend cannot wield major economic and even political power?

Despite this, many policymakers, economists, financiers, executives with multinational companies and the lobbyists and PR people they hire in Washington still proclaim that free trade benefits everyone. The proof is lower prices for imported Asian products. But lower prices are not low if you lose your job to get them, and the mutual gains predicted by free-trade theory do not in fact materialize in a world where well thought out subsidies and controls of foreign governments create persistent trade deficits for the United States.

Americans continue to allow manufacturing -- the great innovation engine that turns ideas into reality -- to vanish quietly from the country's shores. Global corporations may be benefitting from this, but most Americans are not.

It is time for the steady wasting away of manufacturing and the consequences of that wasting away to become a matter for national debate and for it to remain a matter for national debate until the problem is resolved. A strong response should be considered with a full understanding of the enormous importance of what is really happening to the U.S. economy. Action is needed.

-- Ralph Gomory became Director of Research for IBM in 1970 and served as IBM Senior Vice President for Science and Technology until retiring from IBM in 1988. He became President of the Alfred P. Sloan Foundation and served there until December 2007 to become a Research Professor at New York University's Stern School of Business.


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