Saturday, August 07, 2010

Should We Really Care About Manufacturing?

At Pittsblog, Mike Madison opines as follows on the importance of supporting manufacturing growth during the recovery:

"For a couple of reasons, I remain unpersuaded. One, I usually detect the aroma of nostalgia in almost any discussion of manufacturing in Pittsburgh. Not necessarily nostalgia for steel or for industrial manufacturing, but nostalgia for the idea that Pittsburgh is a place where people make things, and that making things is the right and best route to prosperity and security. That's an important story, but it's a story, rooted in a particular history.

Turn that story around (turn around the causal arrow, in other words), and that leads to the second reason. The idea that the service sector needs the manufacturing sector -- that the former is in some respects servient to the latter -- carries a hint of the nostalgic story, but that idea is also questionable on the merits. So, two, I wonder about the extent to which the regional services economy is really dependent on a flourishing local manufacturing economy. By employment and (I believe) by economic impact, the two largest sectors of the local services economy are medicine and higher education. I can't suggest that these have no dependency with respect to local manufacturing, but I have to suspect that the relationship is weak - and more important, that local manufacturing is now more dependent on eds and meds than the other way around.

Moreover, the services sector that I know best -- legal services -- is increasingly not dependent on demand from locally-based clients. Even in Pittsburgh, and perhaps especially for a regional market like Pittsburgh, the largest law firms are looking nationally and globally for legal work. And large law firms in other urban markets are starting to locate significant parts of their back office work in the broader Pittsburgh region -- in Wheeling and in southeastern Ohio. I find it difficult to escape the impression that measuring Pittsburgh's economy and economic recovery is complicated by its diminishing regional isolation.

I'm not down on manufacturing; a mixed economy is a strong economy. And an attractive climate for new and for growing businesses of all kinds should be a key feature of Pennsylvania's and Pittsburgh's public policy. But making things takes many forms, and increasingly Pittsburgh makes things of the intangible kind -- new ideas, inventions, arts, and technologies that make their ways into medical therapies and motion pictures, among other things. If the Commonwealth is going to design public policy to subsidize growth -- and that's where Harold Miller's argument is meant to take us -- how much of our policy resources should be weighted toward manufacturing, including high-tech manufacturing, and how much should be weighted toward other things?"

Mike's right in the sense that neither manufacturing nor anything else is a silver bullet for the region’s economy, nor should growing manufacturing be a single-minded focus for regional policy. However, the single biggest loss of jobs here during the recession was in manufacturing, so getting back to where we were means either (1) growing manufacturing jobs, or (2) growing jobs in other sectors to replace them.

The challenge in strategy #2 is that it’s not easy to grow jobs in the service sector that are equivalent to those in manufacturing. Most jobs in the service sector have much lower wage rates and benefit levels than those in manufacturing, so it’s not a one-for-one substitute. Moreover, the jobs in the service sector that do have high wages and benefits tend to require a lot more education than those in manufacturing. Manufacturing provides a lot of high-paying jobs for people who don’t have college degrees; in fact, one of the impediments to growing manufacturing nationally is the misimpression many parents and young people have is that the only way to get a really good job is to go to college. This doesn’t mean that manufacturing jobs are low-skill. Quite the contrary. What it means is that the skills are developed primarily through on-the-job-training, building on a solid ability to read and do math, rather than college degrees.

Another key advantage of manufacturing jobs is that they import revenue into the region. Most service sector jobs don’t do that. We are fortunate in the region to have a service sector that is far more national/global than most, but there is a limit to how much growth one can expect from these sectors that is truly export oriented. We have world-class higher education institutions that bring students (and their tuition payments) from all over the world, but does anybody really expect that Carnegie Mellon or Pitt are going to double in size in the near future? We have cutting-edge health care that attracts patients from other parts of the country and other parts of the world, but the vast majority of health care services are delivered to people who live here, and growing national attention to healthcare cost containment will fundamentally constrain growth in this sector. We’re almost as dependent today on health care as we were on steel 30 years ago. These sectors are wonderful to have during economic downturns, but we shouldn’t bet on dramatic growth from them during the recovery.

We do have law firms and architectural firms and other professional services firms that sell their services around the world, and in theory, their growth potential is unlimited. They aren’t heavily dependent on local manufacturing firms for their success today, but it’s important to note that many of these firms built their strength originally by serving manufacturing firms here, and their connection to the region weakens over time as less and less of their business originates here. Pittsburgh was once an ideal headquarters location for international service firms, due to its high quality of life and good transportation connections to the rest of the world. However, the loss of hub status for our airport has significantly diminished Pittsburgh’s advantages for headquarters operations of international professional service firms. So without a solid base of business here, what exactly will stop those firms from deciding they’ve had enough of multi-stop flights with inconvenient schedules, and shifting personnel to other cities that have better access to the rest of the world?

There’s an even stronger, hidden connection between manufacturing and service, though, that most people don’t appreciate. U.S. Steel employs a lot of people in its headquarters operations here, but they aren’t called “manufacturing” jobs in the official statistics anymore, they’re called “management of companies” jobs and they show up in the service sector. U.S. Steel’s research facilities are called “scientific and technical” jobs and they show up in the service sector. Ditto with manufacturing firms like Allegheny Technologies, Medrad, Mine Safety Appliances, etc. How long will all of those jobs stay in the region if the actual manufacturing jobs leave? Most companies want to keep their R&D facilities close to their manufacturing plants, and it’s much easier for a company to move its headquarters if it no longer has manufacturing plants nearby. We’ve been lucky to keep the headquarters and R&D facilities for companies like Alcoa, Heinz, and PPG despite the loss of their manufacturing facilities, but they wouldn’t be here in the first place if they hadn’t been manufacturing things here at some point, and our chances of attracting the headquarters and R&D operations of firms that do their manufacturing in other regions is much lower than our chances of growing new ones by starting successful manufacturing firms here.

It would be one thing if the region were not well suited for manufacturing, and efforts to maintain or grow manufacturing were fundamentally counter to the business interests of those firms. But when you talk to manufacturing firms, you will find that they generally feel the region has many strengths for manufacturing – a good workforce, proximity to markets, etc. The biggest weakness of the region is its business climate – high taxes and an unfriendly regulatory climate, both at the state and local level. If you’re a manufacturing firm, you can locate anywhere you want, and there are other places that have the same strengths as we do, but dramatically lower weaknesses. The business climate can be changed, but only if the public demands that its elected officials do so.

So retaining and growing manufacturing isn’t a nostalgic fantasy, it’s a real opportunity that we’re choosing to lose due to lack of understanding and poor public leadership. Could the Pittsburgh Region survive as a manufacturing-free professional services economy? Perhaps, but that’s a little like saying, let’s put all of our money in the mutual fund that did the best over the past 5 years, and forget about diversifying our economy. Remember that while Pittsburgh had one of the smallest rates of job loss during the recession, it also had one of the smallest rates of job growth prior to the recession, and that’s because we haven’t created an environment that attracts and retains growth-oriented businesses like manufacturing.


Anonymous BrianTH said...

I think you have made a convincing case that encouraging local manufacturing is at least an important diversification strategy (and one would think Pittsburgh of all places would appreciate the need for economic diversification).

But I wanted to note that I don't think we should treat the relatively poor quality of entry-level service jobs as an immutable fact. Entry-level manufacturing jobs were also at one point relatively poor quality, but various conscious policies changed that fact. We could do the same with entry-level service jobs, and arguably we must if we are going to get our economy back on a sustainable path.

9:44 AM  
Anonymous kejad said...

I don't think you'll find a lot of people with qualms about hosting the management, business functions, and R&D for manufacturing industries. What concerns a lot of people is that some Pittsburghers want actual manufacturing jobs to come back here, and not the high-skill ones like semiconductors and pharmaceuticals. (Heck, even those have largely moved overseas.) Because of our relatively low levels of education and relatively high labor rates, we don't have the comparative advantage for it. Why would I pay a Pittsburgher with a weak high school education $30/hr when I can pay a Thai employee with the same education level $4/hr? (No idea what the actual rates are.)

10:59 AM  
Blogger Jared McLaughlin said...

What entry level manufacturing jobs are better than Sheetz? The pay is the same, and Sheetz's benefit's are better than the norm in manufacturing. The few companies that do offer decent wages and benefits are mostly dead-ends to a degree. You can, over time, attain wages good enough to be considered middle class, but you won't go any further. There is a severe and unnecessary glass ceiling to manufacturing jobs in Pittsburgh.

It's a shame, too. As has been hinted at, much of this economic activity happens at an international level. I've made alot of products for overseas customers. As countries like China and Taiwan ramp up their capabilities, we will remain stuck in a 1980's mode of production. I've work at relatively new startups who's manufacturing is text book 1950's... low wages, terrible working conditions, ignorant management. I've also seen the opposite, but even those are slow to keep up with the state of the art.

That's what Pittsburgh really needs in manufacturing: cutting edge. We have some companies that make products that are highly competitive on the international stage, but as a rule we aren't cutting edge. Not in wages, not in training, not in equipment, and not in management practices. Manufacturing isn't an industry that sits still, but we treat it as if it does. Most of the training for entry level positions is for positions that existed 20 years ago. Today's manufacturing work force needs to understand computers and advanced mathematics.

6:06 PM  
Blogger The Johnsons said...

Interesting thought.
However, I'm not so sure that this can easily be acheived without long-term effects. Raising wages raises the price of the service or goods. Manufacturing has been able to keep the prices of goods at a relatively low rate of inflation (if not deflation) due to improvement in efficiences by incorporating new technologies, etc. The service sector has not been as effective at doing this. (ie - look at the rapid rise in health care costs over the past 15+ years). So, unless other service sectors find a way to drastically improve their efficiences, I doubt that the market will support continued price increases.

11:31 AM  

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