15 September 2009

Seeking Growth, Manufacturers Look to High-Tech Products

Policy changes recommended to revitalize manufacturing sector

Satellite phones may work better thanks to the world’s largest commercial satellite built by the California-based Space Systems/Loral.

By Katherine Lewis
Special Correspondent

Washington — In past recessions, growth in U.S. manufacturing led recoveries as factories hired workers and increased production more quickly than other sectors.

But this time, most experts agree, the traditional industrial production lines are not acting as engines to end the recession in the United States.

Instead, economists are pointing to manufacturers of advanced technology — such as satellites, computer hardware and software, clean energy equipment and processes, agricultural inputs and biotechnology products — to drive recovery in the United States and around the world. Once the global economy begins to revive, U.S. high-tech exports should rebound, they say.

“Businesses have put off business investments in the last year or two because of the panic and credit crunch,” said Mark Zandi, chief economist at Moody’s Economy.com. “There’s a lot of pent-up demand for those kinds of technologies.”

The manufacturing sector accounts for 60 percent of U.S. exports and 70 percent of research and development, and has the largest multiplier effect on the economy of any job sector, according to Leo Hindery, chairman of the New America Foundation’s smart globalization initiative. Every $1 of direct spending creates $1.40 of additional economic activity, and every manufacturing job creates 2.5 jobs in other sectors, he testified to a U.S. Senate subcommittee in July.

But the subset of high-tech manufacturing is even more remarkable for its positive ripple effects: Every job in the high-tech area creates 16 additional ones, according to Hindery.

Industries with high-tech components have weathered the recession better. The agricultural biotechnology market, for instance, grew 30 percent from 2007 to 2008, according to a report by Phillips McDougall, an agricultural consulting company. “The agricultural biotechnology market is still driven by technology uptake, which overcomes the impact of the farm and general economy on the marketplace,” the report says.

American innovator Habib Dagher came up with composite shell technology, which can be used to build small bridges in just one day.

For the overall U.S. manufacturing base to reorient toward high-tech products, workers must learn new skills and the private and public sectors must invest in research and development.

The Obama administration hopes to encourage research and development and help valuable innovations find their way to the global marketplace. In April, the administration launched the National Innovation Marketplace, an electronic platform that helps match inventions with investors, manufacturers, buyers and distributors.

Traditional U.S. manufacturers are likely to make a successful transition to producing high-tech products as long as U.S. universities and labs produce cutting-edge research. Research facilities will continue to do just that as long as they are able to attract bright students from around the globe, said David Cross, president of Market Outlook, an economic consulting company based in San Diego.

The Obama administration should help keep that talent in the United States by reforming the system of export controls to let foreign students stay in the country after they earn their degrees and make it easier for U.S. scientists to collaborate with overseas colleagues, a panel of the National Academy of Sciences and National Academy of Engineering recommended early this year in a report called “Beyond ‘Fortress America.’” It also calls for a “one-stop shop” for all export-license applications, a repeal process for applicants denied licenses and other reforms.

The Obama administration began an interagency review of the U.S. export control system in mid-August. Manufacturing advocates also want the U.S. government to take an aggressive stance and support U.S. manufacturing more directly — similar to the stance taken by trading partners that subsidize their domestic industries.

The United States needs “an all-of-government national manufacturing and industrial policy designed to simultaneously ensure the competiveness of U.S.-based businesses and grow high-value jobs in America,” Hindery told Congress in July.

But other economists say such an industrial policy would be a prescription for disaster as it would skew market incentives. “Policies directed to specific manufacturing industries have not been successful in stemming the long-running decline of these industries,” said Zandi at the same hearing. He proposed “lowering the costs of production and opening global markets for all businesses.”

As initiatives proceed on several fronts, one thing is certain: The issue will not be resolved quickly.

“We’re going through the worst recession we’ve seen in most of our lifetimes, so the recovery in demand, when it comes, will be all that much stronger,” Cross said. “[But] it’s going to be a tough slog over the next few years.”

The full texts of Hindery’s and Zandi’s testimonies are available on the Senate Banking Committee Web site. The full text of the report “Beyond ‘Fortress America’” is available for purchase on the National Academies Web site.