Brookings: Topics - Manufacturing

Widening the Panama Canal and the Future of Global Trade Mapping

Adie Tomer and Joseph Kane — Fri, 17 May 2013 16:25:00 -0400

Up and down the Atlantic coast, US ports are abuzz. Dredging machines, tunnel excavators, and highway pavers from Miami to New York are preparing metropolitan economies and their ports for a newly expanded Panama Canal. As the thinking goes, an expanded Canal promises bigger ships, bigger cargo loads--and each metro wants a piece of the bigger business.

But lost in this port-related arms race is what the newly-widened Panama Canal means for the US economy . Too many metropolitan areas simply assume they’ll immediately acquire new freight business when the expanded Canal opens, or that there will be more business at all. These billion-dollar assumptions ignore a more fundamental question: how and where will the Panama Canal affect US’ global goods trade?

Answering that question requires a broader view, one less predicated on ship size and more on economy size. It also requires metropolitan areas to gain a better understanding of their goods trading relationships, and how those relationships power their local economies.

It’s time to have a frank conversation about what investments like the Panama Canal mean for US trade and economic growth.

First, let’s start with a little context. The Panama Canal, set to celebrate its 100th birthday next year, is one of the world’s most important trade assets. It primarily helps connect US Atlantic and Gulf ports to their trading partners in Asia, Oceania, and South America. Driven by those major markets, the Canal already moves over 330 million tons of freight each year.

However, the Canal suffers from capacity constraints. The world's largest ships can no longer fit through certain locks, meaning the Canal was ill-prepared for its second century. In response, Panama initiated a major overhaul including two new locks, plus widening and deepening several existing channels. When complete in 2015, larger container ships will expand potential trade volumes between the Americas and Asia--and more seamlessly connect global markets in the process. The promise of these larger ships is the inspiration behind the Atlantic ports’ major capital projects.

Yet, as ports carry out such extensive projects, questions and skepticism linger over the future direction of freight movement and the long-term economic implications. How will ports handle the extra time it takes to load and unload the new mammoth ships? How will Pacific port investments in the United States and Canada counter the investments at the Atlantic ports? These uncertainties complicate analysts’ and policymakers’ abilities to identify exactly how the expansion will shift the precise location and scope of all freight flows.

The country and its metropolitan leaders need a way to remove these uncertainties. And it begins with a better understanding of our current goods trading relationships at the metropolitan scale.

As it stands, metropolitan data is scant. There is no geographically-consistent database of what goods metropolitan areas consume and what goods they export. Similarly, there is no database of geographic trading relationships with their domestic and international peers, or which ports facilitate the international side of the trade ledger

Imagine if the United States didn’t know how much electronics it imported from China, or how much oil it imported from the Middle East. That’s the situation metropolitan economic and freight leaders face.

It’s time to get a better handle on these regional trade relationships. Local, state, and federal officials should know which metropolitan areas trade the most goods with Asia, and are therefore the most sensitive to the Panama Canal’s capacity. They should also know how these goods flow between markets—whether they’re more reliant on Pacific or Atlantic ports, and how a capacity change on either coast could shift that equation.

This kind of knowledge also extends beyond just the Panama Canal. As other freight investments come online across the United States and the world, public and private sector leaders should have the statistical tools to know what’s at stake. A more thorough understanding of the country’s metropolitan trading network would help inform local investment decisions like we’re seeing in Baltimore and Norfolk. It would also inform a national freight strategy that prioritizes investments with the highest returns.

The metropolitan reaction to the Canal widening is a microcosm for what the country misses when it comes to freight planning. In a relatively fact-free zone, it’s easy for local ports to justify these major investments. But dredging a port or building a tunnel costs significantly more than simply upgrading our knowledge base.

Even with global trade slowing its growth since the Great Recession, there’s little question that goods volumes will continue to rise in the coming decades, whether through the Panama Canal or elsewhere. It’s time we make sure our metropolitan economies have the knowledge to succeed in that environment.

The Brookings Metropolitan Policy team will aim to address that knowledge gap over the coming year. Working with a team of outside experts, we've assembled a geographically-consistent, globally-oriented goods trade database. In turn, the analytics from that database will help us provide public and private sector leaders with a better understanding of exactly what, where, and how metropolitan areas trade goods and the implications for their local economies. We are excited to start sharing those results this fall.

Authors

Adie Tomer
Joseph Kane

Strengthening U.S. Manufacturing, Region by Region

Mark Muro — Mon, 13 May 2013 16:17:00 -0400

Last week President Obama used his trip to Austin, TX to announce the creation of three more public-private manufacturing research institutes as nodes of a $1 billion National Network for Manufacturing Innovation (NNMI). On the same day, though, there was another intriguing if lower-key announcement on the Obama administration’s manufacturing agenda.

That’s the new Investing in Manufacturing Communities Partnership, the first phase of a two-phase effort aimed squarely at communities and regions, announced by the Commerce Department’s Economic Development Administration (EDA).

Focused squarely on the fact that the locus of U.S. manufacturing prowess is emphatically local and regional, the new competitive solicitation will allow as many as 25 local communities to be awarded $200,000 this year to create smart strategies for leveraging and aligning their public- and private-sector assets to provide a promising environment for advanced manufacturing. These awards will in the near term allow ambitious communities to develop “bottom-up” plans for strengthening their regions’ intellectual, human, and physical infrastructure.

But beyond that, the small grants and the resulting regional strategies will also help prepare a cadre of U.S. regions to compete for the second phase the partnership, which will next year entail a competition that will award (contingent on congressional support) five to six U.S. communities with up to $25 million for the implementation of regional advanced manufacturing strategies. That’s real money that would—like the full build-out of the NNMI initiative—allow for real strides in advancing U.S. manufacturing in the country.

Yet, while such material awards would be welcome, what is key to the Manufacturing Communities Partnership is its four-square focus on the local and regional angle. For several years now we at the Metro Program have been harping on the sub-national underpinnings of manufacturing competitiveness and the importance of recognizing those underpinnings, establishing state and regional innovation centers to foster them, and making sure to embed regional advanced industries hubs in their surrounding industry clusters and supply chains. Most recently my colleagues Bruce Katz and Peter Hamp proposed creating a “Race to the Shop” competition aimed at calling forth bold regional visions for advanced industry growth, rewarding those visions, and better organizing disparate federal programs in support of the strategy.

We believe all of this is critical because advanced industry dynamism does not grow up just anywhere. Rather, industries reach critical mass in places—most notably, metropolitan places—where firms and workers tend to cluster in close geographic proximity whether to tap local supplier networks, work with local research institutions, draw on local workers, or profit from formal and informal knowledge transfer. In this respect, smart companies are more and more deciding where to locate facilities and hire workers based on the quality of a community’s infrastructure, institutions, and human capital—what the Harvard Business School scholars Gary Pisano and Willy Shih call its “industrial commons” and others its “industrial ecosystem.” The upshot: If U.S. regions—working with their states and the federal government—can bolster the density, efficiency, and vitality of the nation’s regional industrial clusters they will add to overall advanced industry competitiveness.

Broadly then, the EDA and its agency partners are not restricting themselves solely to broad (and needed) national and macro-economic policies on research, trade, taxes, and regulations. Instead, by going local, they are getting at the regional sites in communities where manufacturing supply chains actually come together and generate prosperity. That’s a good place for federal manufacturing policy to be.

Authors

Mark Muro

Image Source: © Aaron Josefczyk / Reuters

DOE’s Clean Energy Manufacturing Initiative Leverages Regions

Scott Andes and Mark Muro — Mon, 06 May 2013 17:26:00 -0400

This spring, the U.S. Department of Energy (DOE) is launching a new Clean Energy Manufacturing Initiative that will support both clean energy and manufacturing competitiveness by promoting greater energy efficiency in the U.S. production sector. Rolled out at Oak Ridge National Laboratory (ORNL) in Tennessee last month, the new initiative advances a smart take on both the nation’s energy and manufacturing strategies. But more than that it reflects a welcome new spatial and geographic emphasis at the Energy Department.

At the most general level, the new initiative marshals a number of DOE offices, research institutions, and private sector partners to map out and implement networks that promote clean energy production and energy-efficient manufacturing. Key to the effort is that this new push—like the Obama administration’s National Network for Manufacturing Innovation (NNMI) proposal—takes an explicitly regional approach to innovation and the diffusion of next-generation technologies.

In this respect, the initiative aims to engage with regional epicenters of advanced manufacturing such as smart automation in Austin, Tex. and low-heat stamping in Denver, Colo. to drive local and national advances. These areas have established production ecosystems and are driving the technological frontier within clean energy; they are prime sites of U.S. innovation. Along these lines, the initiative has already awarded a total of $15 million to five projects in five different regional manufacturing clusters.

Yet the new focus is not just about covering the geographic bases. By supporting centers of excellence close to regional industrial clusters, DOE is leaning on a large body of literature that suggests innovation results from an iterative set of exchanges between production and research activities that more often than not thrive on proximity.

To be sure, old-line thinking continues to maintain that R&D facilities develop prototypes out of whole cloth and then transfer design requirements to manufacturers, wherever in the world plants are located. However, while this may be the case for low-tech industries, the reality for advanced industries is often the other way around. The genesis of many new technologies comes from within the production process via daily interactions with production facilities. These “co-location synergies” emerge as manufacturers adopt new techniques and equipment to increase efficiency and R&D engineers build upon shop-floor technological competencies to create innovate products and services. And within strong regional clusters, particularly metropolitan regions, such co-location benefits are able to penetrate beyond the incumbent R&D performing firm into the local supply chain—creating high-value start-ups and upstream innovation.

And in fact the ORNL launch event highlighted all of this. Led by Assistant Secretary for Energy Efficiency and Renewable Energy (EERE) Dave Danielson with Tennessee Gov. Bill Haslam in attendance, the event highlighted both a very cool DOE facility—the Carbon Fiber Technology Facility (CFCF) at ORNL—and EERE’s emergent regional stance. CFCF is a production line-sized test bed for public and private sector researchers to explore new carbon fiber composites at scale. As such, it offers to both East Tennesssee and the nation a one-of-a-kind piece of shared industrial infrastructure as well as a focal point for local technical exchange. Currently, for example, 45 firms make up the carbon fiber composite consortium that work with CFCF researchers—many of which are small-and medium-sized firms located in East Tennessee. In that way, the CFCF is emerging as the hub of an nascent “industrial commons,” where firms of all sizes can leverage not only CFCF resources but the broader R&D infrastructure at Oak Ridge, the University of Tennessee, and in firms. In other words, the carbon fiber hub and cluster being fostered in East Tennessee—like Austin and Denver—epitomizes the increasingly “bottom-up” feel of U.S. and global innovation systems and likewise highlights a new region-oriented stance at DOE.

While it’s too early to judge the impact of the Energy Department’s Clean Energy Manufacturing Initiative, the new push looks promising. By focusing more of DOE’s efforts on regions, a historically isolated, sometimes obtuse agency may be beginning to align itself with some of the most dynamic technology development exchanges of all—those that happen locally.

Authors

Scott Andes
Mark Muro

Image Source: © Jason Reed / Reuters

Revving Up Manufacturing, Region by Region

Mark Muro and Jessica Lee — Thu, 11 Apr 2013 14:44:00 -0400

For some time now we’ve argued that one of the best ways to drive innovation and economic growth is by connecting critical R&D-focused anchor institutions—like the Department of Energy’s Energy Innovation Hubs or the Advanced Industries Innovation Hubs that we advocated establishing earlier this year—to broader regional strategies that seek to strengthen a region’s innovation ecosystem. In providing intentional support for regional innovation clusters, such strategies nurture these major centers of research by fostering knowledge sharing and spillovers, expediting technology transfer and commercialization, and fostering entrepreneurialism.

Now, a pair of items in the new Department of Commerce budget has picked up on that logic by placing side by side two welcome manufacturing policy initiatives.

Going beyond its funding request for the proposed $1 billion investment in a National Network of Manufacturing Institutes, the first of which was launched in Youngstown, Ohio last August, the budget also calls for the creation of a $113 million Investing in Manufacturing Communities Fund to reward and support regions that develop strategies “that build on the region’s comparative advantages and leverage private-sector resources.” Through these twinned proposals, the Commerce budget seeks funding not only to establish new manufacturing innovation institutes but also to provide incentives for manufacturing-strong regions to craft what are in effect metropolitan business plans—carefully tailored strategies that help regions strengthen their economies by capitalizing on their distinctive assets and attributes.

We’re encouraged that these proposals made it into this year’s budget request. Ideas like the Investing in Manufacturing Communities Fund offer a glimmer of the kinds of smart thinking needed to boost economic growth, one region at a time.

And though the fate of this particular budget request is uncertain at best, it points to the types of pragmatic action that production-oriented metros can take on their own to make the most of their manufacturing prowess and strengthen their economies in the process.

Authors

Mark Muro
Jessica Lee

The Paradox of Worker Shortages at a Time of High National Unemployment

Darrell M. West — Wed, 10 Apr 2013 16:56:00 -0400

At a time of high national unemployment, it has become a truism that there are few worker shortages and employers have numerous applicants for every available slot. After all, that is the very definition of joblessness. High unemployment results when there are many more workers seeking positions than available jobs.

Yet the paradox of the contemporary situation is that in this time of stubbornly high unemployment, a number of fields report a shortage of American workers and problems filling key positions. For example, even as the country as a whole experiences high unemployment, the Bureau of Labor has found that there are over 3.5 million open jobs – openings across the country and across sectors. In some specialized sectors, such as high-tech, advanced manufacturing, and medical specialties, unemployment rates are as low as three, four, or five percent. And on the labor-intensive side of the economy, agricultural companies report difficulty finding workers to pick vegetables and fruits, and hotels and restaurants indicate they have problems filling key positions.

The ripple effects of job vacancies spread throughout the economy. Companies that have been unable to fill key positions have closed down, moved entire operations abroad or delayed expansion plans. Conversely, filling worker shortages allows companies to better compete, grow, and create more jobs for American workers.

This report aims to provide a roadmap for where worker vacancies exist, and how they can most effectively be filled to help companies grow and expand. Labor shortages are identified through analysis of job outlook surveys, government reports, and interviews with business and labor leaders. To estimate the impact of filling these shortages in specific industries across the economy, interviews were conducted with business and labor leaders in the accommodation, agriculture, food service, health care, manufacturing, technology, and life sciences sectors.

The data and interviews confirm that worker shortages exist in each of the sectors, and that these shortages cannot be filled by available American workers, even with high unemployment across the nation, due to retirements, demographic gaps, geographic differentials, and the failure of educational institutions to deliver employees in key sectors. Examples of the costs of shortages in various industries include:

Agriculture: Lack of access to workers has led to (1) food processing operations for frozen broccoli and cauliflower moving to Mexico, (2) some of the nation’s most productive farms closing down, and farmers from states like Wisconsin, North Carolina, Maryland, Louisiana, and Washington delaying expansion plans.
Health Care: At a time where increased retirements and new mandatory health insurance promise to dramatically increase the demand for medical care, 30 percent of hospitals are already reporting shortages in specialty services. The shortages of nurses alone are estimated to top 115,000. 80 percent of hospital CEOs are currently making efforts to increase the number of primary care physicians.
Manufacturing: Employers in the manufacturing sector report difficulty filling available high-skilled positions. Even at the height of the Great Recession in 2010, companies reported 227,000 open jobs. Factory owners note that is difficult to bring manufacturing jobs back when they cannot find the talent they need to expand.
Technology: Microsoft has 200 employees in its software center in Vancouver because it couldn’t get engineers into the US. Google developed its news aggregator outside the US for similar reasons, and companies like ON Semiconductor in Phoenix are revving up their overseas hiring because they cannot find workers in the US. The problem is especially acute at the governmental level, where more than half of state governments (54.8 percent) report difficulty filling vacant IT positions.

There are two potential ways to fill these gaps, and both should play an important part in the country’s economic recovery. The first is to retrain American workers to ensure that their skill sets match the needed requirements. The second is to take advantage of foreign workers with the skill set and mobility to fill the existing gaps.

These two solutions to worker shortages—training American workers and bringing in foreign-born workers—need not be in opposition. There are two competing theories on the role of immigrant labor in America – do they compete with or complement American workers? In the framework of compete, the American economy and labor force are seen as a zero-sum game and every job taken by an immigrant workers is one less job for an American worker. But economies are more complex than that, growing and generating new jobs as companies innovate and expand, creating new jobs, or in some cases, new industries and sectors of the economy. In this context, immigrant workers can be seen as complementing American workers. Immigrants tend to have different skill sets and different education levels than American workers.

They are more likely to have a PhD and less likely to have finished high-school. As a result, immigrant workers can complement American workers by filling in specialized roles at both ends of the economy.

The findings presented in this paper are consistent with prior research in this area. For example, research by the World Economic Forum and the Boston Consulting Group projects that within the decade there could be as many as “20 million vacant U.S. jobs unless the current education-to-employment system undergoes significant changes.” The takeaways from these findings are clear. Addressing worker shortages — whether through job retraining or immigration—is a necessary part of our economic recovery that will create more American jobs.

When skill and labor shortages aren’t met, the economy suffers. A smart immigration system can help prevent this by filling needs so companies can expand operations in the U.S. and don’t have to move them overseas. But America’s immigration system is not designed for today’s economy, and remains largely unchanged since 1965. In fact, of the approximately one million green cards given out by the U.S. in 2011, around 139,000 (or 13 percent) were given out for economic reasons, a number far too small to meet the needs of the world’s largest economy. By comparison, Canada provides a much higher percentage of employment-based visas than the U.S. even though it has a much smaller population. America’s immigration system must always help families reunite and provide a safe harbor for refugees and asylum-seekers. But as America rethinks its immigration system, there is a unique opportunity to secure growth and prosperity by ensuring that it meets the needs of a 21st century economy.

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Authors

Darrell M. West

Image Source: © Marvin Gentry / Reuters

An American Future Filled with Promise

Michael E. O'Hanlon and Gen. David Petraeus — Mon, 08 Apr 2013 12:29:00 -0400

As politicians in Washington focus on reining in America’s worrisome deficit, they tend to have attitudes of doom and gloom. They convey fears of shortchanging future generations, overtaxing workers, depriving the needy, killing the fragile economic recovery and failing to make crucial investments.

This narrative contains elements of truth. But it is too pessimistic and contributes to our psychological and political paralysis, reinforcing convictions held by members of both parties that they must not yield on core principles, lest the country’s future be compromised. There is, however, a more positive and more accurate reality. The United States could be on the threshold of a period of remarkable progress. It has a number of unique opportunities, including:

An energy revolution. We are the world’s largest producer of natural gas, with a 100-year supply, and we are on track to become among the largest producers of crude oil.
A manufacturing revolution. We are rapidly developing robotics and 3-D printing, areas in which the United States is among the world’s leaders.
A revolution in life sciences. Genetics and stem-cell technology offer great potential in fields such as agriculture and pharmaceuticals and fundamentally new approaches in medicine.
The IT revolution and the transition to cloud computing, in which we are also leading.

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Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: The Washington Post

Jobs Alone Do Not Explain the Importance of Manufacturing

Scott Andes and Mark Muro — Wed, 03 Apr 2013 12:41:00 -0400

When it comes to American manufacturing the U.S. media seems a bit confused. Last year, a bunch of stories (example here) argued that manufacturing job losses over the last decade don’t matter because productivity looks so good. Now, stories like this one are suggesting that manufacturing itself doesn’t matter much after all because the sector isn’t creating enough jobs. The current argument in vogue maintains that job growth figures just haven’t been robust enough in manufacturing to warrant policies that support the sector.

What the authors miss is mass employment is not the fundamental reason we need a healthy and vibrant manufacturing sector. Manufacturing—or rather advanced manufacturing—is essential to the U.S. economy because it is the main source of innovation and global competitiveness for the United States. Simply put, advanced manufacturing is the U.S. pipeline for new products and productivity-enhancing processes. While the sector makes up just 11 percent of the economy, manufacturers conduct 68 percent of private sector R&D, as reported by our colleagues Sue Helper and Howard Wial last year. And on average, they noted, 22 percent of manufacturers introduce new processes to increase productivity compared to just 8 percent of non-manufacturers. This is important because innovation that emerges from America’s manufacturing sector also fuels growth within the service sector because intermediary goods—the machines used by services (e.g. automated self check-out kiosks at grocery stores)—drive service sector productivity.

Some ask, meanwhile, why the nation should not simply import the advanced machinery needed for service-sector productivity. The problem with this argument is that services are, and will remain, largely non-traded. Regardless of how productive services become, the sector’s growth will be tethered to domestic demand. No amount of efficiency will allow a domestic grocery store to service international consumers. If the U.S. economy becomes one in which the U.S. imports all of the machinery that makes the service sector productive and no longer export any products of our own then inevitably we will consume more than we produce and incomes in services and manufacturing will decline. This is overwhelmingly clear in recent trade statistics. In 2012 manufacturing represented roughly 60 percent of U.S. exports despite only being 11 percent of the economy. By punching far about its weight class in exports the manufacturing sector is vital to U.S. global competitiveness.

In sum, the number of jobs within manufacturing is important, but taken by themselves employment figures miss the real reason manufacturing is an American imperative. U.S. quality of life, the ultimate benchmark of the direction of the economy, is contingent upon the competiveness of our traded sector and the speed at which innovative products and processes reach the market. On both metrics manufacturing is essential.

Authors

Scott Andes
Mark Muro

Natural Gas Liquids: The “Other” Driver of the U.S. Oil and Gas Supply Resurgence

Charles K. Ebinger and Govinda Avasarala — Mon, 01 Apr 2013 14:36:00 -0400

The fundamental changes in the U.S. hydrocarbon production landscape are now widely acknowledged. Analysts and pundits liberally discuss the prospects for U.S. “energy independence” and becoming “Saudi America.” What is less understood and discussed, however, is the role that rapid increases in the production of Natural Gas Liquids (NGLs) will play in the U.S. hydrocarbon revolution and the important impacts of NGLs for the industry.

According to the Energy Information Administration (EIA), total domestic NGL production increased from just over 1.7 million barrels per day (mmbd) in 2005 to nearly 2.5 mmbd in October 2012. In the years to come, NGLs will be a critical component of the industrial sector’s ability to take advantage of the U.S. hydrocarbon resurgence, and will play a large role in the country’s ambitions for energy “self-sufficiency.” By 2025, EIA estimates that NGLs production will account for roughly one-quarter of U.S. liquids supply.

In this Natural Gas Briefing Document, the first in a new series of briefings by the Energy Security Initiative at Brookings (ESI) on developments in the natural gas market, the authors explain what NGLs are and why they are important, before exploring some important considerations for policymakers interested in capitalizing on this economic opportunity.

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Authors

Charles K. Ebinger
Govinda Avasarala

Image Source: © Reuters Photographer / Reuters

U.S. Productivity Growth: An Optimistic Perspective

Martin Neil Baily, James M. Manyika and Shalabh Gupta — Fri, 29 Mar 2013 00:00:00 -0400

ABSTRACT

Recent literature has expressed considerable pessimism about the prospects for both productivity and overall economic growth in the U.S. economy, based either on the idea that the pace of innovation has slowed or on concern that innovation today is hurting job creation. While recognizing the problems facing the economy, this paper offers a more optimistic view of both innovation and future growth, a potential return to the innovation and employment-led growth of the 1990s. Technological opportunities remain strong in advanced manufacturing and the energy revolution will spur new investment, not only in energy extraction, but also in the transportation sector and in energy-intensive manufacturing. Education, health care, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities for innovation and change but because of a lack of incentives for change and institutional rigidity.

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U.S. Productivity Growth: An Optimistic Perspective

Authors

Publication: International Productivity Monitor

Tax Policy and U.S. Manufacturing in a Global Economy

Fri, 15 Mar 2013 08:50:00 -0400

Event Information

March 15, 2013
8:50 AM - 12:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Register for the Event
In his 2013 State of the Union address, President Obama stated "Our first priority is making America a magnet for new jobs and manufacturing." His “Framework for Business Tax Reform” would support this priority by focusing and deepening the existing tax deduction for domestic manufacturing activities. Others, including Senator Orrin Hatch, ranking minority member of the Finance Committee, are cool to the idea, saying, "We're starting to come back in manufacturing, and I don't think you need the government to show the way for them."

On March 15, the Urban-BrookingsTax Policy Center and the International Tax Policy Forum hosted a conference to assess the current state of U.S. manufacturing, its contribution to U.S. economic growth, and whether tax reform should maintain, deepen, or eliminate preferential income tax treatment of manufacturing income.

Brookings Co-Director of the Tax Policy Center William Gale gave introductory remarks and moderated the first panel with Brookings Director of the Initiative on Business and Public Policy Martin Baily, and Tax Policy Center Director Donald Marron served as a panelist. Former member of the Council of Economic Advisers Laura D’Andrea Tyson delivered the keynote address. After each panel, speakers took questions from the audience.

Audio

Tax Policy and U.S. Manufacturing in a Global Economy

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Finding the ‘New’ Mexico in Querétaro

Joseph Parilla and Alan Berube — Fri, 15 Mar 2013 00:00:00 -0400

Nearly five centuries after the arrival of Hernán Cortés on its shores, Mexico is being rediscovered again. After years in which drugs and thugs led the Mexico headlines in Western media, no less than the Economist, Foreign Affairs, and the Financial Times now highlight the country’s rapid federal reforms, booming middle class, and strong current and projected economic growth. Mexico City, which was largely spared from the recent wave of violence, is booming with new residential and commercial construction, including what will be the tallest building in Latin America. And upon visiting Monterrey, Mexico’s third largest region, New York Times columnist Tom Friedman described “How Mexico Got Back in the Game.”

But the “new” Mexico—site of this year’s Global Cities Initiative international forum—is exemplified best by neither Mexico City nor Monterrey. To see it, we drove two and a half hours northwest of the capital to the city and state of Querétaro. For decades, the 2 million-person state was perhaps best known as the site where Mexico’s current Constitution was ratified in 1917. Now, Querétaro is ground zero for the country’s economic revolution, achieving average annual GDP growth of 5.5 percent over the last decade, highest among Mexico’s 31 states. It is home to major multinational corporations like GE and Samsung, a burgeoning middle class, new golf courses, and what will soon be Latin America’s second-largest shopping mall, all within a stone’s throw of an immaculately preserved colonial center (a UNESCO World Heritage site).

What accounts for Querétaro’s economic energy? Both state leaders and local residents credit the 2005 arrival of Bombardier, the Canadian aerospace and transportation manufacturer, as the catalytic investment that put Querétaro on the global map. The firm was attracted to the region’s well-educated population and the promise from federal and state governments to locate a new aerospace university, UNAQ (Universidad Aeronáutica en Querétaro), to supply the budding cluster with skilled workers. Of the 1,800 workers at Bombardier, nearly two-thirds were trained at UNAQ, and the firm works closely with the university to tailor the curriculum for all rungs of the aerospace career ladder—from production workers to engineers.

Beyond its local assets, Querétaro lies at key intersection of North American advanced manufacturing. It sits at the convergence of Mexico’s road, rail, and telecommunications network, right along the “NAFTA Highway” that allows parts to be shipped to Wichita and Toronto for assembly much more quickly than from China. Bombardier’s plant abuts the brand new Querétaro International Airport, whose runways the state hopes will test the first entirely Mexican-made aircraft within a decade. And with Querétaro producing fuselages, wings, and electrical harnesses; Wichita offering design and assembly; and Montreal providing research and development, Bombardier’s supply chain for the Learjet 85 benefits from the distinct specializations of three metropolitan economies all within two time zones and one free trade area.

Queretaro’s story exemplifies the increasingly important role Mexican metropolitan areas play in advanced industry supply chains—such as aerospace, automotive, and appliances—that unite North America as one de facto economic market that not only trades goods, but co-produces them for the rest of the world. Nearly 20 years after NAFTA’s passage, 40 percent of what the United States imports from Mexico is actually American-made content. With global economic winds like the shale gas revolution, eroding cost advantages for Chinese labor, and the “just-in-time” production imperative at North America’s back, the continent has clear incentives to integrate further to compete with Asia, Europe and the rest of Latin America.

Yet the administration of newly elected Mexican President Enrique Peña Nieto recognizes that the country can no longer simply integrate into global value chains. Its economic strategy seeks to move Mexican firms up those value chains by boosting productivity, innovative capacity, and entrepreneurial dynamism in key sectors. To do so, it must build from the sort of strengths evident in regions like Querétaro, which are building expertise and infrastructure to accommodate higher-value activities like research, design, and finance.

Mexico’s rise could usher in an even more prosperous next 20 years for North America, but not without stronger cooperation between the three nations. With the Obama administration still focused on the Middle East and the “pivot to Asia,” regional and state leaders in the United States have a unique opportunity to change the conversation. U.S. cities and states should get to know Querétaro, as its progress pinpoints the challenges and opportunities of the maturing economy to our south, and holds some lessons for its northern neighbors, too. And they might learn, as we did, why signs greeting visitors say, Suertudo, vives en Querétaro (Lucky you live in Querétaro).

Authors

Joseph Parilla
Alan Berube

Regional Innovation Clusters Begin to Add Up

Mark Muro — Wed, 27 Feb 2013 00:00:00 -0500

One frequent criticism of the Obama administration’s welcome conviction on economic regionalism—epitomized by its programs to stimulate regional industry clusters with small matching grants usually in the $1 million to $2 million range—is that it remains small bore.

It’s true that the enormity of the nation’s economic problems calls for large-scale interventions that transcend the marginal. After all, as we at the Metro Program keep stressing, the nation has a lot of work to do to reorient a drifting U.S. economy beyond consumption and more toward innovation, production, and exports. So no wonder we and others have hankered for more heft in Washington’s economic responses. Surely, for that matter, the desire for more weighty action explains part of the interest that has been generated by the administration’s $1 billion proposal (talked up in the State of the Union address) to create a network of 15 institutes for manufacturing innovation around the nation.

And yet, what if small ball—engaged in persistently—begins to add up to something larger? That was the thought that crossed my mind when I happened onto an intriguing dot map last week that locates no less than “56 federally funded cluster initiatives” scattered across the Lower 48 states and Alaska.

The map yields genuine insight. Arrayed all across the map, the Google map push pins assembled by the Small Business Administration call out an impressive array of future-leaning collaborations aimed at advancing next economy clusters in diverse industries all over America.

There are some 18 advanced manufacturing collaborations, working on new materials, new processes, new control systems, and skills development in places as diverse as East Tennessee and Iowa and Southern Arizona and greater Philadelphia. There are 10 clean energy technology projects ongoing in Southeast Michigan, Florida, San Diego, Oregon, the Carolinas, and elsewhere. There are initiatives working to rally various actors in the food industries of New England, Bristol Bay, and the Finger Lakes region. And there are other efforts focused on IT, the space economy, water technology, and wood products—all collaborative, all aimed at convening the actors in a regional cluster, coordinating disparate efforts, and reducing the risks of innovation and investment.

Nor is that all. Beyond all of that, another map on the Economic Development Administration website identifies another 19 regional innovation projects that have been funded through the EDA’s i6 program. Similar to the cluster efforts, the i6 effort provides matching support to innovative initiatives that propose accelerate technology commercialization, new venture formation, job creation, and economic growth in U.S. regions.

The inescapable conclusion: Proliferating under the radar, the Obama administration’s “small bore” regional initiatives in economic development are beginning to add up to something meaningful. As of now some 74 cluster initiatives and region-focused innovation efforts are underway, helping to catalyze more linked effort and creative economic development in the nation’s regional centers of innovation. Through these initiatives some $250 million is being used to raise matching money and catalyze regional efforts to strengthen the nation’s regional innovation ecosystems.

To be sure, it’s a big country, and the cluster grants remain tiny. But the fact remains, as Bruce Katz and I have discussed, that well-designed cluster and accelerator strategies—ones that require sizable local matches through competitive award processes—are a low-cost way to stimulate a significant amount of collaboration, innovation, and new economic activity in the local economic regions that are the ultimate source of national prosperity. For that reason, it’s good to see the map filling up. The nation badly needs to avoid big mistakes slashing federal R&D investments through the sequestration. And it needs to deliver on game-changers like immigration reform while implementing bold experiments like the manufacturing hubs. But it also needs to maintain and extend the broad array of modest partnerships that the map shows are gradually renewing the innovation commons in U.S. industries, region by region, cluster by cluster.

Authors

Mark Muro

Chicago’s Promise as a Manufacturing Policy Leader

Howard Wial — Tue, 26 Feb 2013 00:00:00 -0500

Editor's Note: In tandem with his newly released paper, "Locating Chicago Manufacturing: The Geography of Production in Metropolitan Chicago", Howard Wial examines Chicago's manufacturing economy, specifically its strengths, weaknesses, and distribution. Wial also discusses Chicago's past and current manufacturing strategies, which lead the nation.

A handful of states and major metropolitan areas have become seedbeds for local and regional public and public-private strategies to strengthen American manufacturing. Initiatives are planned or underway in Massachusetts (at the state level), Baltimore, northeast Ohio, Louisville and Lexington (KY), and Newark (NJ). The public-private National Additive Manufacturing Innovation Institute, run by a regional consortium and based in Youngstown, OH, is the first member of President Obama’s proposed National Network for Manufacturing Innovation.

The national leader of the current generation of manufacturing strategies, though, is metropolitan Chicago. Chicago is home to the Austin Polytechnical Academy (one of the nation’s leading manufacturing-focused public high schools), the Chicago Manufacturing Renaissance Council (a public-private partnership that has been influential in shaping city policy on manufacturing), the advanced manufacturing component of the Plan for Economic Growth and Jobs (an initiative of World Business Chicago, the city’s nonprofit economic development arm), and the University of Illinois’ proposed Illinois Manufacturing Lab (intended to give local manufacturers access to computer simulation, workforce training, and faculty resources to help them become more productive and competitive).

As I note in the Center for Urban Economic Development’s new briefing paper “Locating Chicago Manufacturing: The Geography of Production in Metropolitan Chicago,” Chicago’s leading position in the current generation of regional manufacturing strategies makes eminent sense.

In 2011, metropolitan Chicago had about 411,000 manufacturing jobs, more than any other U.S. metropolitan area except Los Angeles.
Manufacturing is an economic specialization of the Chicago area. About 9.5 percent of the area’s jobs are in manufacturing, compared to 8.5 percent nationwide.
The Chicago area specializes in 11 different major manufacturing industries, ranging from printing to fabricated metals to machinery to pharmaceuticals.
Even though Chicago lost 32 percent of its manufacturing jobs between 2001 and 2010, it is more specialized in manufacturing now than it was a decade ago. The percentage of its jobs that are in manufacturing was 1.11 times the national percentage in 2011, up from 1.08 in 2001.
From early 2010 through the fall of 2012, Chicago manufacturing employment grew by 5 percent, compared with 4 percent nationwide.
In 2011, average annual earnings were 16 percent higher in manufacturing jobs than in all jobs in the metropolitan area.

In its report on Chicago manufacturing, released this morning, the Chicago Metropolitan Agency for Planning underscored the metropolitan area’s advantages as a manufacturing hub.

Yet with all these advantages in manufacturing, why does Chicago need manufacturing strategies at all? One obvious reason is that, as in other parts of the country that have experienced manufacturing job growth since early 2010, that growth is just a drop in the bucket compared to the previous decade’s losses. Other important issues that Chicago manufacturing strategy needs to address include:

Technology. Chicago specializes in pharmaceutical manufacturing and in a range of moderately high technology industries (non-pharmaceutical chemicals, electrical equipment and appliances, machinery, and petroleum and coal products). Yet the region lost jobs in very high technology industries (a category that includes pharmaceuticals) during the last two years, while the nation as a whole gained them. The Chicago area gained jobs in moderately high technology industries, but not as rapidly as the entire United States. The most promising routes forward for Chicago are to strengthen existing industry specializations with new technologies, build new industries out of those specializations, and support high-wage, high-skill production in all industries.
Decentralization. During the last decade, the city of Chicago and Cook County lost manufacturing jobs more rapidly than most outlying counties in the metropolitan area. Yet Cook, the metropolitan area’s central county, still has nearly half of all Chicago-area manufacturing jobs. In manufacturing, as in many other industries, density means higher productivity. Numerous executives and analysts have underscored the importance of the many benefits that flow from the presence of a dense and regional industrial commons. Therefore, Chicago-area manufacturing policy should preserve and promote dense agglomerations of manufacturing jobs and try, if possible, to offset the incentives that led manufacturing to decentralize.

In the 1980s, the city of Chicago pioneered local manufacturing strategy by creating planned manufacturing districts, a zoning tool subsequently copied by other cities seeking to preserve manufacturing jobs. Thirty years later, metropolitan Chicago is once again poised to lead in addressing today’s regional manufacturing challenge: to spur a more productive, more innovative, and growing manufacturing sector as a contributor to a strong metropolitan economy.

Authors

Howard Wial

Locating Chicago Manufacturing: The Geography of Production in Metropolitan Chicago

Howard Wial — Mon, 25 Feb 2013 00:00:00 -0500

Editor's Note: Howard Wial examines Chicago's manufacturing economy, specifically its strengths, weaknesses, and distribution. Wial also discusses Chicago's past and current manufacturing strategies, which lead the nation. This paper was originally published on February 25, 2013 for the Center of Urban Economic Development, University of Illinois at Chicago.

Recent small gains in manufacturing employment nationwide have led to a resurgence of interest in public policies to strengthen America’s manufacturing base. In his 2013 State of The Union Address, for example, President Obama pledged to create three new Manufacturing Innovation Institutes to complement the one that currently exists in Youngstown, Ohio, and urged Congress to fund a network of 15 such institutes. At the metropolitan level, Chicago is a leader in developing creative manufacturing policies and policy proposals. The city’s Austin Polytechnical Academy, founded in 2007 by the Chicago Manufacturing Renaissance Council, is among the nation’s leading public high schools focused on manufacturing and engineering.

The Chicago Manufacturing Renaissance Council itself is a unique public-private partnership that has had considerable influence in shaping city policy on manufacturing and in initiating key reforms in secondary and post secondary education for manufacturing. Making Chicago a leading hub of advanced manufacturing is the first of 10 strategies included in the Plan for Economic Growth and Jobs released last year by World Business Chicago, the city's nonprofit economic development organization. This year the University of Illinois announced plans for a privately funded manufacturing-oriented R&D center to be located in Chicago. The university's proposed Illinois Manufacturing Lab would give local manufacturers access to computer simulation, workforce training, and faculty resources to help them become more innovative and competitive.

The paper's findings include:

The Chicago metropolitan area is one of the nation's major manufacturing centers, and manufacturing has become a more important specialization of the area over the last decade despite large manufacturing job losses.
The Chicago metropolitan area specialized strongly in 11 manufacturing industries, with moderately high technology industries more important in the region than very high technology industries.
Almost half of all manufacturing jobs in the Chicago metropolitan area are in Cook County.
In metropolitan Chicago, manufacturing offers higher wages than other industries.
During the last two years, metropolitan Chicago gained manufacturing jobs more rapidly than the nation as a whole.

Read the paper » (PDF)

Authors

Howard Wial

Publication: Center for Urban Economic Development, University of Illinois at Chicago

The Hollowing-Out of Japan’s Economy: Myths, Facts and Countermeasures

Wed, 20 Feb 2013 13:30:00 -0500

Event Information

February 20, 2013
1:30 PM - 5:15 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The skyrocketing cost of importing energy combined with an uncertain electricity supply, a maze of regulations, a contracting domestic market, and the appreciation of the yen have led the Japanese economy to be in peril of deindustrialization. The hollowing-out of the Japanese industrial base as companies seek new business opportunities through overseas manufacturing has become an issue of pressing concern in the Japanese national debate.

On February 20, the Center for Northeast Asian Policy Studies at Brookings hosted a discussion to address the future of the Japanese economy, whether it will become a high-end manufacturing economy or a post-industrial economy based around services and repatriated income from overseas investment. Presentations examined the extent to which fears of deindustrialization are warranted, the extent of internationalization of Japanese manufacturing activities, and assess possible countermeasures in the areas of deregulation, promotion of inward investment, and the encouragement of innovation.

Audio

Transcript

Transcript (.pdf)

Event Materials

Manufacturing Hubs: What and Why?

Mark Muro and Kenan Fikri — Wed, 13 Feb 2013 00:00:00 -0500

Last night President Obama proposed the launch of "a network of manufacturing hubs" through which industry, universities, community colleges, and governments will work together to develop and deploy new manufacturing technologies. That line in the State of the Union address probably had a lot of folks scratching their heads, wondering where it came from. After all, we as a nation have gotten out of the habit of thinking much about manufacturing, how innovation works, and the work of inventing things.

So what is it all about?

As it happens, and as I wrote last summer, Obama’s manufacturing hubs proposal is not a one-off idea out of nowhere but in fact is one very smart and plausible idea that Congress and the nation really should embrace.

Basically, the manufacturing hubs idea reflects an emerging consensus among a large number of industry leaders, technology analysts, and economic development professionals that regions are the place to work on technology-based development and that regions need to be anchored by hubs of collaborative R&D where industry can work with academia and government to solve tough problems and foment technology gains.

Creating such hubs was the idea behind our companion proposals at Brookings for the creation of a network of regional energy discovery-innovation institutes and the establishment of a program to aid and abet nascent clusters with competitive grants. And it is also the point of the Department of Energy’s Energy Innovation Hubs program as well as the several regional innovation cluster programs now running, including at the Department of Commerce’s Economic Development Administration, that have moved along these lines. More recently, my colleague Devashree Saha and I proposed creating a similar network of advanced industries hubs in both energy and manufacturing.

The ultimate point: Industries and the regions in which they are located profit from the presence of structured centers of excellence in which industry led consortia of firms, universities, community colleges, state and local governments, and other actors collaborate to solve innovation and technology deployment challenges of critical interest to advanced industries. That’s the point of innovation hubs.

So it is welcome to see the Obama administration moving to publicize and build out a potential network of regional manufacturing institutes aimed at tackling tough problems in advanced manufacturing.

Piloted last year with the launch of a new public-private institute for “3-D printing” in Youngstown, OH, the proposed new National Network for Manufacturing Innovation would launch 15 innovation centers akin to those boosting national competitiveness in leading innovation and manufacturing nations, such as Germany to Taiwan, as noted by David Hart, Stephen Ezell, and Robert Atkinson of the Information Technology & Innovation Foundation.

The centers will seek to accelerate technology deployment, operate demonstration facilities and test beds, support education and training, and perform applied research on new manufacturing processes—all unlikely activities for private industry on its own.

Nor will they do this just anywhere. Selected and designated through a competitive process, the hub consortiums will reflect not just technical excellence but regional excellence and regional concentrations of expertise and opportunity. In that sense, the theory and practice behind the hubs is compelling and sensible, as I wrote last year with my colleague Jessica Lee, and reflects a critical aspect of innovation and technology development:

Innovation, and its deployment, does not happen just anywhere. It happens in places and, most notably, within metropolitan regions where firms and workers tend to cluster in close geographic proximity, whether to tap local supplier networks, draw on a pool of skilled workers, or profit from formal and informal knowledge transfer.
If properly channeled, these “co-location synergies,” as economist Greg Tassey has dubbed them, will ensure that value added through innovation spreads through and remains within the domestic manufacturing supply chain. Nor is this only a “soft” benefit. Such local synergies—accumulated region by region—can foster greater efficiency within and across manufacturing supply chains and add to the nation’s competitiveness.

In sum, the proposed new manufacturing hub network is far from random, or sudden. In fact, it’s not only smart and necessary for rebuilding U.S. manufacturing competitiveness, it also draws on some of the most fundamental wellsprings of economic exchange known.

Authors

Mark Muro
Kenan Fikri

The U.S. Must ‘Race to the Shop’ to Spur Economic Growth

Bruce Katz and Peter Hamp — Tue, 12 Feb 2013 00:00:00 -0500

Editor's Note: Bruce Katz and Peter Hamp outline investment opportunities for the U.S. economy as President Obama embarks on his annual State of the Union address. This article was originally published for Ideas Laboratory on February 12, 2013.

At the State of the Union, President Obama should move past fiscal gridlock and refocus attention on job creation and economic growth.

We all know the major challenges facing our country: sluggish GDP growth, a jobs deficit of 10.3 million, and a growing opportunity gap, with the number of people that are poor or near poor in America rising from 81 million in 2000 to 107 million in 2011.

We should all know the solution: invest in a smart, targeted way in growing the productive and innovative sectors of our economy, such as advanced manufacturing.

A confluence of highly disruptive dynamics – rising wages in China, America’s emerging energy independence, the shifting location of production facilities and supply chains, the continued evolution and application of information technology, and new breakthroughs in production technology like 3D imaging and digital fabrication – is fueling a resurgence in advanced manufacturing and raising confidence about America’s economic future.

After thirty years of being told that the U.S. was resigned to be a post-industrial economy, we are suddenly realizing that our future lies in the interplay of production and innovation and of domestic markets and global demand. Manufacturing is an important source of quality, well-paying jobs that offer a significant wage premium – nearly 20 percent higher average weekly earnings that non-manufacturing jobs – and are more likely to provide health care and retirement benefits. Manufacturing also accounts for the lion’s share of the country’s R&D and innovation activity. While the sector comprises only 9 percent of all U.S. jobs and 11 percent of total GDP, it employs 35 percent of engineers, represents 68 percent of private-sector R&D spending, and produces 90 percent of all patents generated in the United States. Further, it generates about 65 percent of all U.S. trade (both imports and exports), making manufacturing a critical component of any strategy to reduce America’s growing trade deficit. In short, a strong manufacturing sector is crucial for America’s ability to compete in the global economy.

Despite the resurgence of manufacturing activity post-recession, the U.S. faces a number of challenges that must be addressed in order for this sector to be a viable engine of long-term growth. Among the most important is the inadequate supply of young workers with the necessary skills for advanced production jobs.

An October 2012 study by the Boston Consulting Group (BCG) found that the current gap between high-skilled manufacturing job openings (e.g., machinists, technicians, etc) and workers with skills necessary to fill them is only about 80,000 to 100,000 unfilled positions – less than 1 percent of the total U.S. manufacturing workforce. Yet, with the average age of high-skilled production workers in the U.S. being 56 years old, BCG estimates that this gap could rise to 875,000 by 2020 as a growing share of the “baby 1 boomer” generation reaches retirement age.

The problem, of course, is that the U.S. education system is not producing enough graduates with the credentials and skills required for many advanced manufacturing jobs. In recent decades, the federal government and many state governments have de-emphasized and under-funded vocational education, sending a clear signal that it is an unequal alternative to the path towards a four-year college degree.

In FY 2011, the federal government spent only $1.1 billion on career and technical education – just 1.7 percent of the Department of Education’s total discretionary budget authority that year and less than 0.2 percent of total non-defense discretionary spending in FY 2011. Further, the money that Washington does invest in career and technical education and workforce development is often too prescriptive and inflexible to meet the disparate demands of state and regional labor markets.

To address these challenges and drive long-term growth, the federal government should initiate a Race to the Shop competition to reform workforce education and skills training support for advanced manufacturing. Similar in many ways to the Obama Administration’s Race to the Top program in the education arena, a $150 million per year Race to the Shop competition would challenge states and metropolitan areas to develop long-term plans, investment strategies, and regulatory and administrative reforms to better address the workforce and training needs their top advanced manufacturing sectors.

An inter-agency Race to the Shop Partnership, composed of representatives from the Departments of Commerce, Labor, Education, Defense, and the National Science Foundation, would review submissions and award annual implementation grants (averaging around $15 million over three years) to the five states and five metropolitan areas with the strongest and most comprehensive plans. In addition to receiving federal grant money, each winning state and metropolitan area would be given increased
flexibility to invest existing federal resources (e.g. Workforce Investment Act or career and technical education funding) in the areas most likely to strengthen their top advanced manufacturing sectors; perhaps, for example, by creating a network of manufacturing high schools or by aligning local community college curricula to fit the varying skill demands of their labor markets.

Even at a time of fiscal austerity, the annual cost of a Race to the Shop initiative is only $150 million. How to pay for it: “cut to invest” by reducing spending on federal programs that are outdated and non-performing.

The return on this relatively small federal investment?

More and better jobs at home, and a higher-skilled workforce to boost American competitiveness in the global economy. That’s something both sides of the aisle can stand and applaud.

Authors

Publication: Ideas Laboratory