(The following is an excerpt from Entrepreneurial Nation: Why Manufacturing is Still Key to America’s Future. The views expressed are the author’s own and not those of Reuters)
By Ro Khanna
The conventional wisdom in Washington is that America is losing its competitive edge. As President Obama’s appointee overseeing the U.S. Department of Commerce’s domestic offices, I heard such chatter coming out of the Economic Strategic Roundtables. David Rothkopf, a former trade advisor to President Clinton, organized these closed-door, bipartisan sessions every few months, filling them with current and former Commerce and State Department officials. The participants pointed to China and Singapore as models for attracting foreign direct investment and promoting economic development. Envy of Asia lurked underneath the discussions. According to a senior Obama administration official who was present, one well-meaning participant declared, “China is the Google of nations … America is the General Motors of nations. Let’s get back in the game.” The irony of the analogy, given Google’s run-in with China’s censorship laws, was apparently lost on him.
Fortunately, amidst all this pessimism, former secretary of commerce Norman Mineta counseled me to listen to voices outside of the Washington echo chamber. He promised that I would learn and contribute more if I traveled across our nation than I would if I traveled halfway across the world. He was right. I spent two years crisscrossing the nation, visiting our Commerce offices in cities and small towns. The mission of these regional offices is to assist businesses in exporting and in increasing domestic manufacturing. My colleagues traveled to Shanghai or São Paulo, while I went to places like Oshkosh, Wisconsin, and Boothwyn, Pennsylvania. Although I didn’t mail as many postcards or get as many stamps in my passport as my overseas counterparts, I met some of the most remarkable Americans, who are making the world’s best products right here at home.
Despite cheaper labor abroad, currency manipulation, intellectual property theft, and subsidies to foreign competitors, these American manufacturers are winning. Many of them are small or medium-sized businesses that are family owned. Some are large corporations led by executives who still believe that America is the best place to set up a factory. What they have in common is that they’re creating jobs in local communities, defying the stereotype of our manufacturing going off-shore. In an era when we hear weekly about plant shutdowns, know friends and family members who are being laid off, and are anxious about the career prospects for young people, they are the embers of hope. This book is their story.
The struggle and triumph of cutting-edge American manufacturers is the latest chapter in our national story. Larry Summers, the former director of the White House National Economic Council for President Obama, put our economic difficulties in a historical context. In a recent speech, Summers reminded his audience that there have always been skeptics. Back in the heyday of the Cold War, the skeptics, influenced by college textbooks such as Nobel laureate Paul Samuelson’s Economics, were convinced that the Soviet Union’s GDP would overtake ours by the mid-1980s based on relative “growth rates in the 1950s.” They were wrong. Then, in the early 1990s, the skeptics believed the articles that appeared in prominent business journals predicting that Japan and Germany would be the dominant post-Cold War economies. They were wrong again.
Today, the skeptics are warning that we’re losing out to the emerging Asian giants. The manufacturers I met on my travels, however, refuse to accept second place. Whether they’re owners, workers on the factory floor, or middle managers, they work hard and refuse to quit. Every day they strive to develop new ways to compete, on their own initiative and by listening to their colleagues’ ideas, in a nation that gives them the freedom and the space to do so. If you want to know the secret - the reason it’s not wise to bet against America in the long run - it’s in their spirit. Their spirit, fostered in a democratic culture that values the creativity of ordinary women and men, sets America apart as the “entrepreneurial nation.”
These manufacturers help explain why, against all odds, our nation held the global lead over China in manufacturing output until 2009. What’s extraordinary is that our aggregate output remains competitive with China‘s, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China’s or India’s and significantly larger than Japan’s or Germany‘s. Strong productivity has enabled the United States to increase its manufacturing output over the past 30 years to a greater extent than any other developed nation, more than doubling in size. American manufacturers often have an advantage over their competitors in more authoritarian or bureaucratic nations because participatory governance is preferable to top-down governance, even in the business world. The best American manufacturers consider the intellectual contributions of all their employees. As a result, they provide those employees with healthy work environments and encourage them to be critical and divergent thinkers. Their inclusionary approach enables them to make high-value products through customization, economization, and incessant innovation. This bottom-up philosophy also gives rise to organic clusters that drive collaboration and nurture the entrepreneurial spirit in places like Wichita and Silicon Valley.
The most forward-looking American manufacturers, moreover, are exporting aggressively, overcoming archaic World Trade Organization rules that put them at a tax disadvantage. In certain instances, their diverse workforce is an asset for winning customers in a global economy. Some have even adopted sophisticated metrics to justify domestic production, starting a trend toward onshoring. These metrics include improvements in quality measured through customer satisfaction surveys, reductions in labor hours and shipping costs, and increases in speed to market. The metrics help these companies look beyond labor costs, which usually constitute less than 10 percent of a product’s total cost, in site selection. The news, though, isn’t all positive. We shouldn’t delude ourselves into a false sense of complacency. Although American manufacturing output continues to increase, the sector’s growth rate has declined significantly throughout the last decade and has lagged behind China‘s. And while our share of world manufacturing is declining, China’s share is growing. Our leadership is at risk in a world that has become increasingly competitive. Our businesses are facing foreign competitors of unprecedented scale that are the beneficiaries of unprecedented subsidies. My reporting of the competitive advantages of American manufacturers, therefore, is balanced with an account of their policy requests to be better equipped and unleashed. To paraphrase Winston Churchill, if we give them the tools, they will do the job.
For generations, the American people would have considered it self-evident that the nation should support manufacturing. Our founders spoke not only about government safeguarding liberty, but also about government promoting private industry. In 1791, Alexander Hamilton, our first Treasury secretary, presented to the U.S. House of Representatives a “Report on Manufactures” that opens with the observation that the “expediency of encouraging manufactures in the United States … appears at this time to be pretty generally admitted.” Hamilton went on to note that “not only the wealth, but the independence and security of a country, appear to be materially connected with the prosperity of manufactures.” His insight that American manufacturers require the “aid of their own government” in light of the “artificial encouragements” that foreign governments are offering indigenous manufacturers is perhaps truer today in the age of globalization than it was in his own time. Even Hamilton’s ideological rival Thomas Jefferson, a proponent of an agrarian economy, came to appreciate this perspective. After conflicts with the British over trade, Jefferson wrote that “experience has taught me that manufactures are now as necessary to our independence as to our comfort” and that America “must endeavor to make everything we want within ourselves.”
Ro Khanna practices technology law at Wilson Sonsini, a Silicon Valley law firm, and teaches economics at Stanford. He traveled to over 30 states during his two years in the Obama administration.