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Securing Americas Future: The Case for a Strong Manufacturing Base Securing Americas Future:
The Case for a Strong
Manufacturing Base
A Study by Joel Popkin and Company, Washington, D.C.
June 2003
Prepared for the NAM Council of Manufacturing Associations

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EXECUTIVE SUMMARY


Securing America's Future: The Case for a Strong Manufacturing Base
A Study by Joel Popkin and Company


U.S. manufacturing is the heart of a significant process that generates economic growth
and has produced the highest living standards in history. But today this complex
process faces serious domestic and international challenges which, if not overcome, will
lead to reduced economic growth and ultimately a decline in living standards for future
generations of Americans.
Manufacturings innovation process is the key to past, present and future prosperity and
higher living standards. The intricate process starts with an idea for a new product or
process, prompting investments in research and development. R&D successes lead to
investments in capital equipment and workers, and to spillovers that benefit
manufacturing and other economic sectors. This process not only generates new
products and processes, but also leads to well-paying jobs, increased productivity, and
competitive pricing. Yet while this process produces wealth and higher living standards,
most of it is hidden from view and poorly understood.

Manufacturings innovation process provides enormous benefits for the entire U.S.
economy:

Grows the Economy - Manufacturing growth spawns more additional economic
activity and jobs than any other economic sector. Every $1 of final demand for
manufactured goods generates an additional $0.67 in other manufactured products
and $0.76 in products and services from nonmanufacturing sectors.

Invents the Future - Manufacturers are responsible for almost two-thirds of all
private sector R&D $127 billion in 2002. Spillovers from this R&D benefit other
manufacturing and nonmanufacturing firms. R&D spillovers are enhanced by
geographic proximity.

Generates Productivity Increases - Manufacturing productivity gains are
historically higher than those of any other economic sector over the past two
decades, manufacturing averaged twice the annual productivity gains of the rest of
the private sector. These gains enable Americans to do more with less, increase our
ability to compete, and facilitate higher wages for all employees.

Provides More Rewarding Employment - Manufacturing salaries and benefits
average $54,000, higher than the average for the total private sector. Two factors in
particular attract workers to manufacturing: higher pay and benefits, and
opportunities for advanced education and training.

Pays the Taxes - Manufacturing has been an important contributor to regional
economic growth and tax receipts at all levels of government. During the 1990s,
manufacturing corporations paid 30-34 percent of all corporate taxes collected by

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state and local governments, Social Security and payroll taxes, excise taxes, import
and tariff duties, environmental taxes and license taxes.
Meanwhile, other nations, recognizing that a strong manufacturing base is the proven
path to a world-class economy, have been learning from the American example and are
forging their own innovation processes to compete with ours.

Americas manufacturing innovation process requires a critical mass to generate wealth
and higher standards of living. If the U.S. manufacturing base continues to diminish at
its present rate that process may deteriorate beyond repair and with it the seedbed of
our industrial strength and competitive edge.
The most serious challenges to the long-term viability of the U.S. manufacturing base
and the innovation process that underlie it are:

Loss of Jobs -

U.S. manufacturers historically lead the way in an economic expansion, but
are still struggling to recover from the recent recession. Since July 2000, manufacturing has
lost 2.3 million jobs, many of which have been outsourced or relocated overseas.
Manufacturing output has shown virtually no growth since December 2001 the official end
of the recession in the weakest manufacturing recovery since 1919.

Loss of Export Potential - Manufacturing exports as a share of GDP have
contracted since 1997, reflecting the strong dollar overseas, the impact of the
recession on our trading partners, the terrorist attacks in the United States in
September 2001, and increased global competition. The U.S. trade deficit has
ballooned to historic highs reflecting an increase in purchases of foreign-made
goods, especially from countries which do not freely float their currencies.

Investments are Going Elsewhere - U.S. manufacturing's share of capital
investment and R&D expenditures, once a dominant feature of our nations
commitment to progress, is diminishing. While U.S. manufacturers conduct two-thirds
of private R&D, their R&D spending between 2000 and 2002 grew at only half the
pace of the previous decade.

Needs More Skilled Workers - Despite the loss of 2.3 million jobs, manufacturing is
facing a potential shortfall of highly qualified employees with specific educational
backgrounds and skills, especially those specific skills needed to produce
manufactured goods. If the skills and knowledge of the American workforce do not
improve it will be detrimental to manufacturing's competitive edge and to the
prospect for economic growth.

Faces Dramatically Rising Costs - The cost of doing business in the United States is
rising dramatically, in large measure because of significant costs related to healthcare,
litigation, and regulation. As a result, many U.S. manufacturers shut down or move
production overseas to countries where they do not face, to the same extent, those kinds of
impediments to reducing productions.

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U.S. manufacturings innovation process leads to investments in equipment and people,
to productivity gains, to beneficial spillovers, and to new and improved products and
processes. This intricate process generates economic growth and higher living
standards superior to any other economic sector. But serious challenges threaten to
undermine the critical mass of manufacturing necessary to maintain a dynamic
innovation process. If the U.S. manufacturing base continues to shrink at its
present rate and the critical mass is lost, the manufacturing innovation process
will shift to other global centers. Once that happens, a decline in U.S. living
standards in the future is virtually assured.

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I. Introduction

Manufacturing has long been recognized as the engine of our economic growth.
Over half of the acceleration in labor productivity over the past 10 years can be
attributed to strong gains in total factor productivity in the manufacturing sector.
Productivity growth is the major contributor to our prosperity: our tangible wealth and
standard of living. Manufacturing's contribution to U.S. prosperity may be most visible in
the enviable position of the United States in Gross Domestic Product (GDP) per capita:
In 2002, the United States ranked 40 percent above the average for the 15 countries in
the European Community, 35 percent above Japan and 20 percent above Canada on a
GDP per capita basis.
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But there has been concerned discussion, if not alarm, voiced recently that the
growth engine is losing steam. U.S. Representative Vernon Ehlers of Michigan recently
stated: Manufacturing in the United States is in trouble [and] the public doesnt even
understand what manufacturing is. We have to revitalize the public perception."
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This
paper is a first step toward accomplishing that.

Manufacturing can be described as the set of activities that transform agricultural
and mineral resources into finished goods. This process usually involves several steps
within manufacturing, as the sector encompasses all activities from the first
transformation of raw materials to the final assembly of finished goods.

The U.S. manufacturing sector should not be taken for granted. It is at the heart
of a process that is critical to the health of the U.S. economy the process of
generating prosperity, i.e., wealth and real income gains. Because this process
basically an innovation process is intensely interactive, its maintenance requires a

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GDP per capita in Purchasing Power Standards, Eurostat, April 15, 2003. This is based on per capita
GDP measured using purchasing power parities (PPPs). PPPs are country price relatives and are
considered a more accurate way of producing comparable GDP numbers than using market exchange
rates. The Organization for Economic Co-operation and Development (OECD) and Eurostat (the
European statistical agency) produce the PPP measures. Luxembourg has a per capita GDP measure
that