German lessons for American manufacturing
WASHINGTON -- In late June, U.S. President Barack Obama travelled to Carnegie Mellon University in Pittsburgh to launch a new $500-million initiative aimed at strengthening American manufacturing. This Advanced Manufacturing Partnership, a cooperation between industry, universities, and the federal government, will seek to identify areas of needed manufacturing investments. More generally, however, the initiative’s partners have, in the president’s words, the broader mission to “renew the promise of American manufacturing” and to help make sure that America remains “a country that makes things.” Achieving this “renaissance of American manufacturing” will require deeds, not just words.
Manufacturing has been in relative decline both in the United States and in many other developed nations for years. Its contribution to America’s gross domestic product has decreased from about 25 percent in 1947 to 11 percent in 2009. American manufacturing employment peaked at 19.6 million in 1979 and has generally been falling ever since. Today there are only about 11 million jobs left in the sector. Despite this, the United States remains the world’s largest manufacturer in terms of dollar value of manufactured goods. In the past year, American manufacturers have added nearly 200,000 jobs, the most in more than a decade, encouraging signs that suggest this sector can have a future. Still, persistent high unemployment in the United States -- no small degree because of lost jobs in manufacturing -- brings new urgency to the questions of where and how new jobs are going to be created. Services, once expected to provide those new employment opportunities, have not delivered.
For answers to America’s dilemma, some observers point to Germany, a country with a traditionally strong manufacturing sector that still “makes things.” Germany’s impressive economic performance coming out of the Great Recession, they say, is an example of how a modern economy can retain its industrial base and remain competitive even in the face of new manufacturing powerhouses in Asia and elsewhere. And indeed, despite stagnating population growth, Germany’s economy grew at a rate of 3.5 percent in 2010 and could expand by around 3 percent in 2011. Unemployment has reached the lowest level in 20 years, and manufacturing exports have risen sharply.
For sure, the German example comes with a number of caveats. So far, much of the country’s recent growth merely represents a significant rebound after experiencing a greater slump than many other nations during the economic crisis. In addition, Germany’s dependency on exports also makes it vulnerable to potential slowdowns in global demand, especially as unresolved problems in the eurozone are clouding economic prospects all over Europe, by far Germany’s largest export market. Furthermore, the increased competitiveness of the German economy has come at the price of dramatic wage moderation over the past decade, which, together with the strong focus on exports, has led to a neglect of domestic demand as a source of growth. It is far from certain that Germany’s current positive economic trends are sustainable.
Still, some lessons can be learned from the German example, especially regarding the future role of manufacturing. Germany’s manufacturing success is based on a number of factors, from a strong focus on advanced technologies to a balanced mix of small, medium, and large enterprises operating across a multitude of industrial sectors, creating regional innovation networks. Underlying all of this is a strong commitment to preserve and encourage key industries (and the accompanying production jobs) at home, even if parts of the manufacturing process are moved abroad. Additionally, there is a long-term emphasis on continued skills training for workers, strong apprenticeship programs, and other policies that specifically focus on employment. Germany’s “short-work” policy (Kurzarbeit), for example, allowed companies to keep their skilled workforce employed through the economic crisis by reducing hours while the government covered parts of lost salaries. This enabled the German economy to kick-start as soon as global demand picked up.
To boost American manufacturing, the government should introduce a number of new policies. First, a stronger focus on manufacturing employment is needed. Manufacturing jobs have functioned as the backbone of middle-class jobs in the United States for decades, fulfilling an important social function in times of a “squeezed” middle class. Focusing significantly more resources on continued vocational training and apprenticeship programs are first steps. Implementing short-term work schemes in the United States, while initially costly, would prevent some of the social costs of further unemployment during downturns while securing valuable worker skills. In addition, an even stronger focus needs to be placed on innovation. Manufacturing, which already is responsible for 70 percent of all private-sector R&D spending in the United States, is indispensable for innovation, as manufacturing and services, like research, design, and maintenance, are increasingly complementary. The notion that high-end R&D can thrive successfully on its own fails to acknowledge the importance of the actual manufacturing process to the development of new products, especially across subsequent technology life cycles. Defending and expanding public investments in research and development, for example through a permanent extension of existing R&D tax credits, will therefore be imperative even in times of austerity.
America needs to revive its manufacturing sector. There are lessons to be learned from the German experience. But, at the end of the day, although certain aspects of German manufacturing policies can inform and benefit the American debate, the “Renaissance of American manufacturing” has to be a “made in America” effort.
Peter Sparding is a Program Officer with the Economic Policy Program of the German Marshall Fund in Washington.
Volkswagen Factory Photo by ilovebutter
The views expressed in GMF publications and commentary are the views of the author alone.