How to Grow Manufacturing in the U.S.

After three decades of manufacturing job loss, it's becoming fashionable once again to advocate for an American economy that makes more things and fewer exotic financial instruments. But we must be clear about why this would be a good thing and what kinds of public policies could help us get there.

If the U.S. economy is going to be marked by more innovation, more balanced trade, and more opportunities for less educated workers, manufacturing has to be an important part of the solution. We still need manufacturing to maintain our ability to innovate. Manufacturing employs more than a third of the nation's engineers and creates more new products and production methods than all but a few service industries. Manufactured goods dominate our foreign trade to such an extent that there is no realistic way to close our trade deficit anytime soon by relying on services alone. Finally, manufacturing still offers high pay to production workers while employing a disproportionate share of workers without a college degree.

Stemming or even reversing manufacturing job losses will require reversing more than a decade of trade policies that have encouraged offshoring. The federal government has done little to pressure currency manipulators such as China to allow their currency values to rise. Most U.S. trade agreements do not contain meaningful, enforceable labor and environmental standards, so those agreements have often become vehicles to encourage the movement of manufacturing jobs to countries with lax regulations and artificially low wages.

Beyond trade policy, there are four things federal and state governments should do to encourage more U.S. manufacturing that is innovative and provides good jobs for less educated workers:

First, they should fund advanced manufacturing centers that would conduct research on engineering problems that are useful to a wide range of manufacturers but that are more applied than the problems that typically concern university labs -- for example, joining together different kinds of materials. These centers would also help manufacturers -- especially small and medium-sized suppliers -- apply it. They would help companies implement technologies and business processes that improve coordination between assemblers and suppliers.

Second, state and federal governments should offer competitive grants to self-organized groups of manufacturers and related organizations, such as colleges and unions. These grants would help manufacturers solve problems they have in common, but which they cannot solve individually because of market failures. Groups could be organized on a regional basis within an industry (e.g., aerospace suppliers in Connecticut) to help solve local problems (such as training production workers). They could be organized on the basis of geographically far-flung supply chains (e.g., a U.S. aerospace manufacturer and all its U.S. suppliers) to help assemblers and suppliers work together more effectively.

Third, expanding and modernizing the federal-state Manufacturing Extension Partnership (MEP) program is a priority. This long underfunded program, which helps small and medium-sized manufacturers become more productive, has finally gotten needed additional resources under the Obama administration. The new funding should be used, among other things, to help firms design new products, find new markets for existing products, and distribute products. MEP field agents should also receive training from the advanced manufacturing centers so that they can better help firms find and eliminate defects, understand the true costs and benefits of offshoring, and choose the best materials for their products.

Finally, both federal and state governments should assist only manufacturers that have, or are following a realistic plan to achieve, reasonably high productivity, pay, and benefits given their industry and location. Government assistance to manufacturers makes sense only if helps achieve the goals that make manufacturing worth supporting. Low-productivity, low-paying manufacturers that have no reasonable prospect of improving don't further those goals.

Is it realistic to advocate new government spending to assist manufacturers at a time of fiscal stringency? Yes, because there are other programs that can be cut to provide the funding. Most states have huge budgets to recruit new firms. The federal government has a host of economically unjustifiable subsidies for industries such as oil and gas and agribusiness. Government support for America's existing manufacturing base is important enough to justify cutting state and federal spending in these areas. We can provide that support, or we can continue down our current path of bigger trade deficits, less innovation, and economic inequality of Gilded Age proportions.