Under President Bill Clinton, the U.S.
economy created 257,000 manufacturing jobs. Under President George W.
Bush, it has so far shed nearly 10 times that number. A significant percentage
of the jobs have been lost due to productivity advances, which, while
painful for displaced workers, are nonetheless good for the overall economy.
But an even bigger share has been lost due to a falloff in demand for
manufactured goods and escalating trade deficits -- factors that government
can and should take steps to remedy. Yet the Bush administration, with
many corrective tools at its disposal, has done precious little. In fact,
its muddled and contradictory set of half-policies has actually exacerbated
the situation.
The hemorrhaging of factory jobs is fast becoming a hot political issue for the 2004 elections, particularly because approximately one-third of the job losses have been concentrated in the key political battleground states of the industrial Midwest. To seize the opportunity created by Bush's weakness, Democratic presidential candidates should champion a coherent, forward-looking manufacturing policy vision that realistically address the sector's woes. A candidate could do well by advancing a three-fold agenda that:
- Focuses on creating a technologically advanced, next-generation manufacturing sector capable of rapidly adapting to the challenges of foreign competition.
- Attacks some of the underlying causes of our trade imbalances, such as skyrocketing U.S. budget deficits, a strong dollar policy, and currency manipulation by foreign governments.
- Gives displaced U.S. manufacturing workers the tools they need to make successful transitions into new jobs.
Such an agenda would be a dramatic departure from the policies of the Bush administration.
In fact, as the plight of the manufacturing sector has worsened, the White House reaction has been, at best, confused. Some in the administration want to do something -- anything -- to show that they are responding. That camp pushed for Bush's politically inspired tariffs on steel and lumber.
But there are also die-hard supply-siders in the administration for whom any effort to help a particular sector of the economy -- even a sector as broad as manufacturing -- is tantamount to Soviet-style "industrial policy" and is inherently suspect. For them, there is only one acceptable course: to focus obsessively on tax cuts as an economic cure-all. They seem to believe that if tax cuts are big enough, factory jobs will start to reappear.
The common thread that runs between the camps in the administration is the overarching conservative mission of shrinking the nondefense portion of the federal government. That mission rules out any new public investment in programs to help manufacturing companies or their workers, and it also leads the administration to cut back on existing programs. In the end, the administration's many minds have produced a jumbled grab bag of policy actions and inactions that have acted like a dragging anchor slowing forward progress.
As the biggest component of that muddle, Bush's tax cut-induced budget deficits have reduced investor confidence, sucked in increasing amounts of foreign capital to finance public debt, and kept the value of the dollar higher than it otherwise would be. Combined with the administration's contradictory and vacillating statements about the need to abandon a strong dollar strategy, the exploding national debt has hindered needed market corrections in the value of the dollar that would slow imports and boost exports. Meanwhile, another politically inspired administration blunder -- its protectionist schemes -- has backfired. Even Glen Hubbard, former chairman of Bush's Council of Economic Advisers, has admitted, "The steel tariffs did hurt manufacturing, no question about it."
In the absence of a real plan to boost manufacturing, the administration has pathetically fallen back on largely symbolic actions. Emblematic of this strategy was the president's recent announcement of a new position: assistant secretary of commerce for manufacturing and services -- an absurd notion on its face, since manufacturing and services together make up basically the whole economy. The rest of the administration's all-hat-and-no-cattle manufacturing agenda consists of relabeling initiatives from other policy areas, such as health care and energy.
Adding insult to injury, the administration has quietly moved to slash funding for an array of programs that have proven effective over the years in helping the very manufacturers and dislocated manufacturing workers the administration claims it wants to help. On the budget chopping block are the Department of Commerce's Manufacturing Extension Partnership and Advanced Technology Program, funding to implement the 2002 Enterprise Integration Act, the Department of Defense's Mantech program, and the Department of Energy's Industrial Technologies program.
The Bush team has also taken other positions that specifically hurt manufacturing workers. It has opposed temporarily extending unemployment insurance benefits, cut funding for job search assistance and retraining, proposed cutting funding for adult vocational education, and eliminated the National Skills Standards Board.
Democrats, because they are not constrained by an outmoded laissez-faire ideology, are well-positioned to advance commonsense, effective solutions. But they must start by refusing to give in to the protectionist impulses of core labor constituencies. Given the almost daily press coverage of U.S. manufacturers moving jobs to China, protectionism has a visceral appeal to many voters, particularly to workers who have lost jobs. Perhaps that's why presidential candidate Howard Dean initially proposed that we should trade only with countries that abide by U.S. standards of health, safety, and environmental regulation -- even if that would mean that we end up trading with only a handful of rich nations.
There is no doubt that a rising trade deficit in goods ($628 billion in the second quarter of 2003, at an annualized rate) has contributed to job loss. But trade is not the principal culprit. The Progressive Policy Institute calculated that an increase in the trade deficit has caused about 30 percent of manufacturing job losses during the Bush administration. A more important factor is the higher rate of productivity in the manufacturing sector, which has accounted for about 40 percent of the loss of manufacturing jobs. High productivity means that manufacturers can produce more with fewer workers. The remaining 30 percent of the job loss has been attributable to the decline in the consumption of factory goods -- particularly important capital goods, such as machinery and computers -- relative to the growth in consumption of services.
Government should not intervene to prevent job losses resulting from higher productivity, because productivity growth is, on balance, a positive force in the economy. It raises incomes and improves standards of living. But because 60 percent of the manufacturing job losses under Bush have been unrelated to productivity, government has an important role to play in spurring revitalization of the U.S. manufacturing sector.
Promoting innovation is step one. That is the best way for U.S. manufacturers to guarantee their international competitiveness. They must develop a new generation of innovative products, and they must continue to use technology to dramatically boost their productivity. There are a number of promising areas, including new nanotechnology-based materials, intelligent process controls and systems to further automate factories, increased production flexibility to allow more efficient mass customization, and online order fulfillment to reduce costs of product delivery systems.
Partnerships between the federal government and industry can help to ensure that U.S. manufacturing is technologically far in the lead. Congress should take several steps, including: establishing a next-generation manufacturing R&D initiative to invest in research on machinery and equipment, materials processing, and nano-engineering; creating an Industry Research Alliance Challenge Grant fund to match industry consortia funds invested in research at universities and federal labs; and doubling the funding of the Manufacturing Extension Partnership to help small and medium-sized manufacturers modernize.
In addition to steps that will help create a next-generation U.S. manufacturing economy, it is important to open new markets for U.S. products. That will require getting trade policies right. It is a mistake to erect trade barriers in an effort to preserve U.S. manufacturing jobs. We should instead work more closely with the International Labor Organization to ensure that developing nations have robust labor standards and more active labor union movements. We should also target development aid to those nations that take tangible steps to improve their labor and environmental standards.
Meanwhile, we should work to ensure that the prices of currencies, including the dollar, adjust to reflect trade imbalances. Market responses to an almost $550-billion annual trade deficit would drive down the value of the dollar, which in turn would make imports more expensive and exports cheaper. The United States must lead by example by first abandoning its strong dollar policy and letting the price of the dollar be set solely by market forces, not government intervention.
To ensure that strategy's success, we must take dramatic steps to reduce the U.S. national debt, so that we attract less foreign capital, which has the effect of keeping the value of the dollar artificially high. We should also put pressure on other nations that purposely undervalue their currencies to gain competitive advantage. The most notorious example is China, which pegs the value of its currency, the yuan, to a fixed percentage of the value of the dollar. Thus, as the U.S.-Chinese trade deficit has gone up, the value of the yuan has defied market forces and remained constant, and that contributes to an artificial inflation of the value of the dollar. The Bush administration has rightly stepped up pressure on China to abandon its currency policy, but it should do more -- and it should not stop with China. There are other offenders, including Japan, where the leading national bank has stemmed an appreciation of its currency by selling yen and buying dollars.
But even with an aggressive set of corrective policies, government cannot completely protect manufacturing workers from a changing economy. So government must provide help to laid-off U.S. manufacturing workers in their transitions to new jobs. As the Progressive Policy Institute has recommended, that means expanding and modernizing the unemployment insurance system, consolidating federal training programs into a National Skills Corporation, transferring funds now going to dislocated worker programs into a more flexible New Economy Scholarship Program for dislocated workers to use for training or outplacement services, and expanding health insurance tax credits for laid-off workers.
The right policy framework will help to ensure that U.S. manufacturing stays strong and the trade deficit shrinks. Such a framework could also halt the recent trend of job losses, and possibly even produce modest increases in new, better-paying factory jobs. But such measures would go against the guiding principles of a conservative administration like Bush's. So it's up to Democrats to step into the breach.
