Other ways to revive factories in U.S.

At his speech this week in Cincinnati celebrating a deal to save 1,000 jobs at a Carrier factory in Indiana, President-elect Donald Trump promised to usher in a “new industrial revolution.” If we take Trump at his word, it’s hard to convey how big of a shift that is from U.S. policy over the past several decades.

While President Barack Obama took some steps to boost manufacturing — through bailing out the auto industry, for example, and starting centers for research and development — it never amounted to a serious attempt to muscle the composition of the labor force from services back to goods. Although many nations have developed modern economies by targeting and supporting key industries, an approach known as “industrial policy,” that’s typically derided as “picking winners and losers” in America.

And lo, American manufacturing employment was cut almost in half from 1979 to its low point in 2009, going from 1 in 4 U.S. workers engaged in the industry to fewer than 1 in 10. Policymakers and economists rationalized the drop by saying it’s smarter for the United States to focus on the areas in which it has a comparative advantage: professional services, engineering and design, invent-

ing the goods that other countries produce and sell back to U.S. consumers. We didn’t try to save jobs in agriculture, after all, when they fell victim to tractors and threshers. We came up with new jobs.

But maybe that was wrong.

Has that ship sailed?

Over the past few years, there’s been a rethinking of the role of manufacturing. It’s necessary to retain some level of domestic production capacity in case a war breaks out, for example, and to keep our trade deficit from getting too out of control. While we’re going to need all kinds of industries to keep America working, maybe it’s just worth preserving certain kinds of jobs because we like the idea of producing tangible goods, and we don’t believe that a service economy will deliver enough jobs to keep everyone gainfully employed.

Consider the analogy of gentrification: It seems unfair when people are displaced from their homes by tides of economic change, so many cities impose rent controls, or require that a percentage of new units be priced at below-market rates, to help people to live the lives they’ve been used to. It might not be economically efficient, but with regard to jobs, this is what the voters who elected Donald Trump seem to want.

Of course, as many have pointed out, that ship has mostly sailed at this point. Unions, which served as the connective tissue that brought new people into the trades and trained them, have been nearly ground out of existence. The root system of suppliers that larger factories depended on has withered. And perhaps most crucially, industrial processes have become so automated that even when new factories are built, they employ a fraction of the people they used to.

If the United States is really serious about bringing manufacturing back, it’s going to require a lot more than PR jobs like the deal Trump struck with Carrier.

Headwinds

One of the biggest headwinds for American manufacturing, for example, is the strength of the dollar, which makes our exports more expensive for overseas buyers. Another obstacle has been unfair competition by China, which for several years dumped its excess steel production on the world market. But that’s already slowed a lot.

While Trump has promised aggressive enforcement of international trade rules, the Obama administration was no slouch in that regard either.

Trump has proposed slashing the corporate tax rate, which theoretically would provide incentives for businesses to reinvest profits earned overseas in U.S. production. That’s not a bad idea in principle, as long as it’s offset by a commensurate hike in taxes on personal wealth.

But it probably wouldn’t save manufacturing, for several reasons: First, corporations like Carrier’s parent company, United Technologies, already pay a much lower effective tax rate, limiting the impact of any cuts. Second, much that “overseas” money is actually sitting in American banks, already circulating in the economy, just not being taxed as corporate income. And third, companies have demonstrated over the past several years that any extra profits they have are likely to be invested in dividends and stock buybacks, rewarding investors instead of creating jobs.

Finally, Trump seems bent on scrapping regulations such as those embodied in the Dodd-Frank Act, designed to avert another financial collapse — the kind of thing that ends up being really, really bad for factory workers (and almost everyone else).

Germany’s Mexico

For a few ideas that could work, Trump might turn to Germany, which has maintained nearly 20 percent of its workforce in manufacturing — among the highest levels in the developed world. To achieve it, Germany didn’t reject imports or suppress unions. Rather, Germany focused on what it did well: precision engineering of “producer goods” (i.e. machines that make other stuff) and high-end niche markets like fancy cars, stereos, optics and kitchen appliances.

According to American University professor Stephen Silvia, who has extensively studied German industrial history, German companies also have outsourced the most labor-intensive parts of their supply chains to lower-wage neighbors. “The Czech Republic, Hungary and Poland have become Germany’s Mexico,” Silvia says. (Another reason why squeezing trade with Mexico wouldn’t be good for the U.S.)

The German government supports a robust network of research and development institutes, as well as an apprenticeship system that allows young people to become highly skilled on the job — one of the biggest reasons U.S. manufacturers say they have trouble expanding domestically.

And of course, none of this would work if German companies weren’t selling to the rest of the world. Currently, exports account for nearly half of economic activity in Germany, compared with 12.6 percent in the U.S.

“Exporting is ingrained in German businesspeople,” Silvia says. “When you talk to German corporate leaders in manufacturing, they will almost uniformly tell you that a viable company has at least one-half of its sales abroad.” For that reason, Germans were particularly astonished that Congress decided to cripple its Export-Import Bank, an institution of the sort that many countries use to promote exports.

None of this is a quick fix. But if the Trump administration is serious about promoting manufacturing, it would push ahead with these and other long-term policies — not just bully one company into staying, declare victory and go home.