New Rules for Hard Times

Manufacturing is down even in China. Now what?
July 1, 2009 AT 3:00 AM
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

A year ago, I would have said yes, and I would have started with a proposition that has proven very durable over the past couple of decades: Build on your strengths. But since the economic meltdown last fall, I'm not so sure. The rules of the game have changed so much, it's hard to know what will work and what won't.

Back in the 1970s, the highest-profile economic development efforts for many cities and states focused on attracting large, new businesses--often factories--whether or not the region had the labor force or other assets to support those businesses. Most of the time it didn't work out so well.

So economic developers came to an almost unanimous conclusion that the best way toward prosperity is to figure out what you have already and build on it. If your city or region is lucky enough to host a big medical-device manufacturer or biotech company, then figure out who supplies them and who feeds off them. If you've got a skilled labor force, target the industries that use it. If you've got a university, take advantage of the research that the professors undertake and students are being trained to do.

But that seems a little dated in 2009. What if your strength is creating or building something the world no longer needs as much of as it used to? Then what do you do? What if you're really good at building automobiles and parts for automobiles, as so many of our Midwestern cities are. That would be a valuable asset--if there was a market for it. But if the current recession has made one thing glaringly clear, it's that there is too much automobile manufacturing capacity in the world right now. It's not just that American cars are too expensive to make. It's that there are too few people with any reason to want one.

The conventional answer to this dilemma is that your local workers should be retrained for new jobs. But that really begs the question. What new jobs--in what new industries?

So applying "build on your strengths" to a fast-changing world economy is a whole lot more complicated than just finding an exciting new brand of car for auto-factory workers to build. It means figuring out what other economic advantages your region has, where those advantages might fit into the growing parts of the world economy, and learning how to capitalize on them in both the short run and the long run.

The most promising new thinking comes from American states and regions that are talking about how to exploit opportunities in the world's manufacturing economy to create more "high value-added" functions.

That might work. While the number of manufacturing jobs is on the decline, not only in the United States but even in China, the world's manufacturing output keeps going up. Different parts of the manufacturing process have moved to different parts of the globe, but those portions of the process where the most economic value is added are staying in the United States. According to the World Bank, the United States still leads the world--by far--in the amount of economic value added through the various stages of manufacturing. In 2004, the U.S. realized $1.5 trillion in manufacturing value added, compared with $960 billion in Japan and $740 billion in China.

In other words: Nobody in the world is increasing the supply of manufacturing jobs. But nobody in the world is better at creating wealth through manufacturing than the United States. The trick for any state or region is to figure out how to transform that wealth into new jobs, and subsequently transform those jobs into prosperity for the ordinary worker.

Not long ago, I met a smart young guy who's spent his whole life in manufacturing--both old and new. He grew up in a blue-collar Cleveland family of Middle European descent and worked his way through college on the factory floor. But he also was a math whiz and soon wound up as a graduate student at the University of California, San Diego. Now he works for San Diego biotech companies doing "data mining." But he's not mining customer databases to figure out how to sell more products. What he's doing is mining information from the precision machines that manufacture biotech products, and looking for ways to improve both quality and productivity.

In a sense, he still is a factory worker--searching for ways to create more American wealth from making things that people use. And it's unlikely he'd be all that good at his job had he never worked on a traditional factory floor to see how it works. Of course, he's in San Diego now, not Cleveland--an example of the regional imbalance in innovation in the United States. But I think he represents the future of the American economy--and states and regions would do well to spend their energy and resources learning how to combine research, knowledge, and traditional shop-floor skills to enhance their prosperity, just as one smart young man in San Diego has enhanced his own.