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Los Angeles, California, United States
The blog 'Breaking Bread' is for a civil general discussion, like you might have at the dinner table with guests. The posts 'Economics Without the B.S.' are intended for a general audience that wouldn't have to know the difference between a Phillips Curve, a Laffer Curve, or a Cole Hamels Curve. Vic Volpe was formally educated at Penn State and the University of Scranton, with major studies in History, Economics and Finance, and Business; and, is self-educated since by way of books and on-line university courses. His practical education came from fifty years of work experience in the blue-collar trades as well as a white-collar professional career -- a white-collar professional career in production and R&D. In his professional career and as a long-haul trucker, he has traveled throughout the lower forty-eight. From his professional career alone he has visited many manufacturing plants in the United States, Europe and China. He has lived in major metropolitan areas and very small towns in various parts of the United States. He served three years with the U.S. Army as an enlisted man, much of that time in Germany.

Wednesday, January 2, 2013

Manufacturing: Reviving Our Economy

Economics Without The B.S.**:

[**  Double entendre intended.]

Manufacturing: Part I - Reviving Our Economy

A Growth Strategy

What we need to get out of our economic and fiscal doldrums is a growth strategy to propel the economy – a growth strategy that will revive our manufacturing sector to be the standout in our $16 trillion economy.  If we want to reduce our indebtedness, the best way to do this is not by reducing spending but by initially reinvesting in America to get the economy growing.  Once the economy is growing, spending can be curbed and the increase in tax revenues from the growth in the economy can offset the indebtedness.  The best way to encourage reinvestment is not by cutting taxes, but by increasing public/private expenditures in our infrastructure – manufacturing, research and development, energy, transportation, utilities, and education.  Right now there is over $2 trillion in cash sitting in the coffers of corporate America and approximately $1.4 trillion available for reinvestment at our Federal Reserve.  These possible expenditures await resolving the uncertainties in the business climate with regard to taxes and regulation, to name a few.  And tax reform is needed to make our system more equitable and fair so that incentives are not misdirected.  A comprehensive growth strategy will put us back in business in a competitive position to meet the future.
But aside from fixing our economy an even greater reason for a resurgence of manufacturing is the impact it would have in emphasizing our knowledge of science, math, engineering, and technology.  Manufacturing is a key component of not just our economy, but of our culture.  Unlike the service sector, a manufacturing capability relies on good technical educational skills, based on science, not just for engineers and scientists but also the blue-collar technicians that do the gritty work.  Manufacturing, making things, is a creative process.  People who make things think differently than people whose main occupation is selling something – a different skill set.  People who work in a manufacturing environment, even if they are in the accounting department or personnel department, acquire the manufacturing thought process for creativity and technical issues because of the interplay of factors affecting the success of the enterprise.

The Advantages Of Manufacturing
            We have sacrificed manufacturing jobs for service jobs and this is a mistake.  Investments in manufacturing have a better payoff/multiplier effect than all other sectors in our economy.  Each dollar of manufacturing output supports approximately $1.40 in other sectors of the economy.  This is more than twice the payoff of the wholesale/retail trade, which is less than sixty cents.  [Source: The Manufacturing Institute:  The Facts About Modern Manufacturing, 2009; computed from U.S. Bureau of Economic Analysis, Input/Output Data Tables] The payoff for manufacturing has approximately a twenty percent advantage over the next closest sectors of the economy – the information sector, the agriculture/forestry/fishing sector, and the construction sector – with the transportation sector trailing that and the sectors related to professional and business services and educational services/healthcare/and social assistance being half the payoff of the manufacturing sector.
            Even if modern day manufacturing plants employ few workers there is still a derivative effect for the automation that is in modern plants today.  Automation means that there are electrical controls in the building.  Electrical controls require maintenance – calibration and
 re-calibration.  This may be done by plant employees for operator maintenance but for more complex maintenance which is required periodically an outside service company (like Johnson Controls or Siemens) is called into the plant to do the work.  Manufacturing plants, whether they are automated or not, require re-design every so often – changing the layout, adding/subtracting processing lines, rerouting processing lines.  This requires the input of an assortment of engineers (industrial engineers, electrical engineers, mechanical engineers, sometimes civil engineers, etc.), technicians/draftsmen, as well as skilled and unskilled labor (millwrights, electricians, ironworkers/pipefitters, carpenters, etc.).  When the plant is in China, it is not doing the U.S. workforce any good, even if you send high skilled workmen overseas to fix a problem.  Buildings require maintenance also; but, this is true regardless of whether the building is a manufacturing plant or an office building or a retail outlet.  And there are good jobs related to this for roofing, air-conditioning/heating/ventilation, painting, upkeep of the grounds outside the building, etc.  All of these employees, be they engineers, technicians, blue collar tradesmen, require tools of the trade – computers, software, instruments and test equipment not to mention ordinary coveralls, work shoes and gloves, safety glasses, etc.   Do you want this money spent in China or your hometown?
            In addition, the manufacturing sector has a much higher multiplier effect than other sectors because of the nature of manufacturing.  It uses a lot of other resources in other sectors of the economy; e.g., energy, raw materials, business services, engineering, research and development, educational services.  These resources can be cost drivers in the manufacturing process, like energy for example.  So manufacturing facilities with high energy costs are always on the lookout for ways to reduce these costs and look to the energy sector and service sectors of the economy for innovative ideas, which affects R&D in energy development, distribution, and technology.  Also, some of the functions of manufacturing are linked or out-sourced to other sectors, like transportation and logistics.  In the case of transportation, with long-haul trucking in particular, fuel costs are the number one cost driver for these companies, outranking capital costs and labor costs.  So trucking companies, like manufacturing enterprises, are initiators for cost reduction efforts concerning energy.
Manufacturing employs people at all tiers of income, from high and middle incomes to lower income levels.  For middle income and lower income jobs, which can be tied to skill level or even a minimum skill level, manufacturing jobs generally pay better than what most of these employees would earn in other sectors.  And this impact stretches into other sectors that work with manufacturing.  Other sectors of our economy just do not have the vast outreach into related sectors like the manufacturing sector.
Look around a town that has manufacturing facilities.  It has a bustle to it.  People eat at local eateries during the work day.  Shop for needed supplies at local stores.  They use the local dry cleaners, sometimes just for getting their uniforms cleaned.  They get married.  Raise their families there.  Kids go to the local schools.  Families do their shopping locally.  Now look at a town that has lost its manufacturing.  It is hollowed out.  It becomes depopulated and strips self-sufficient livelihoods from communities.  If people find work in the retail trade or service economy the wages are for thirty percent less.  What happens to a community whose income is reduced by twenty-five to thirty percent?
We have had a short-sighted view of business enterprises by emphasizing share holder value over stake holder value.  What is good value for an individual business is one thing; but, when many businesses react in the same way, especially when it comes to locating manufacturing facilities overseas, it becomes a foreign policy for a nation and an industrial policy for our defense establishment.  Do we want isolated business decisions to affect our foreign affairs and our defense policy in addition to our national economic competitiveness?  I am not asking for an establishment of the National Planning Committee, but business leaders that emerged out of World War II certainly had a viewpoint of their business that took into consideration the community they were in and the nation they were serving while still engaging in international trade.
Let’s fix our economy with a growth strategy – annual growth rates of 3-1/2 to 4% for real GDP (real GDP growth is minus the inflation rate) – and some fiscal restraints in lieu of an austerity budget that hacks into our social safety net that has been in place for many, many decades and let’s stop the monetary tinkering around that has created one bubble after another.  Let’s get back to making things and providing ‘real’ services.  We can get back to a full employment economy and national debt at no more than 60% of GDP  in ten years.  It does not take decades of tinkering or hacking.  That will take care of a lot of the problems we currently have.  And if all who work in the economy, regardless of their station, could share in the productivity of the economy (and I did not say equal share) we would all be better off.  And if the tax code were fairer that would be a big help also.  Let’s unlock and unbridle the creativity in our people to propel the economy.
I will continue this discussion in other articles – follow the links.  I look forward to any comments but I will tell you right now I do not buy the present argument that the manufacturing segment of the future will be staffed by few in our population much like agriculture was transformed one hundred years ago.  By the way, I live in a county next to Los Angeles that still depends on agriculture and when things are going well our local economy is quite balanced between agriculture, government services (including the military), manufacturing, export/import, and high tech industries.  Check my bio for my background.

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