According to Nobel Prize winner, Robert Solow, technological innovation makes up at least 80 percent of a nation’s economic growth and increase in living standards.[i] So why is it, during these trying times, that manufacturing, one of the key forces behind innovation, is suffering at the hands of outdated public policy while other nations forge ahead? The United States is responsible for every major advance in science and engineering since World War II, whether in semiconductors, aerospace, computing, telecommunications, and the Internet.[ii] These feats were made possible by public policy that fostered an ecosystem where inventiveness flourished.
Take for instance the government funded research that led to the creation of the Internet, or an immigration policy that allowed us to bring the best and brightest to our shores to work for American companies. Our manufacturing base was a point of pride and gave rise to a thriving middle class. But somewhere along the line, the trajectory of American progress plateaued, and our rank as a global leader is at risk unless Washington adopts public policies that are pro-growth and pro-innovation.
For the first time in three years, U.S. manufacturing contracted, but advanced manufacturing of products like semiconductors on American soil has been declining for years. I find this trend troubling, because if the United States isn’t making high tech products and reaping the benefits of innovation (job creation, intellectual property, capital formation, national security, etc.), another nation is.
Change, particularly in the way of corporate tax reform, will re-strengthen American advanced manufacturing and reinvigorate the innovative spirit that defines the United States.
The semiconductor industry provides a great case study for understanding the important role of advanced manufacturing. Semiconductors are embedded in the fabric of our everyday lives. They’re in our television sets, computers, printers, cellphones, and countless other devices. The U.S. once made up 100 percent of global chip production capacity, but that number is steadily declining as production moves overseas. In 2009, the percentage of global semiconductor production capacity in the United States was 14 percent, down from 25 percent in 2005 and 17 percent in 2007.
Intel is in the process of building a $5 billion chip factory in the Arizona desert, called Fab 42, but according to a recent Reuter’s article, “Many technology executives worry that Intel's new factory is less a sign of things to come than the last gasp of an advanced manufacturing sector that could readily go the way of its lower-tech predecessors -- to Asia.”
In a panel discussion hosted by the Center for Public Policy Innovation (CPPI) in March, William Keitel, Qualcomm’s Chief Financial Officer, explained how, as the United States becomes a less attractive destination for investment, other countries are aggressively courting U.S. companies. “It’s likely that we’ll get a phone call from any number of the country’s economic development boards trying to convince us to invest there…We don’t have that same phenomenon in the United States.
Countless have argued that the “Made in America” days are over, and that our labor force will never be able to compete with countries like China, but I disagree. It is a lack of incentives and an outdated tax code, not the cost of labor, driving American manufacturing overseas. It’s time for a rebranding of American manufacturing, and for public policy to be more reflective of a globalized economy.
In his 2006 testimony before Congress, former Intel CEO Craig Barrett explained some of the disincentives to locating a manufacturing plant in the U.S.: “It costs $1 billion more to build, equip and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference is attributed to taxes…and capital grants. Labor cost is not a large difference..."
Yes, manufacturing offshore may offer short term savings, but some argue that the long term costs are beyond measure and ultimately threaten national security. Massachusetts Congressman John Tierny, Ranking Member of the Subcommittee on National Security, Homeland Defense and Foreign Operations, said that, “The decrease in manufacturing at home has forced the Department of Defense to look abroad to acquire our national defense…When foreign companies or governments control the production of necessary parts, our critical defense needs are subject to geopolitical forces that our beyond our control.”
The threat to national security is heightened by the fact that when manufacturing leaves, R&D isn’t far behind. The two are intrinsically linked, and as more high tech manufacturing takes place on foreign soil, the more innovation that should have taken place here is driving technological advancement abroad. How will the United States ensure the safety of its citizens when our military might is weakened by an inability to remain on the cutting edge of emerging technology?
The United States’ history is rich with life changing innovations and CPPI is committed to fostering a debate that ensures that greatness for generations to come. Advanced manufacturing drives the innovation on which our economic vitality and national security depend, and corporate tax reform is one of the keys to reinvigorating this important sector. It’s crucial that public policy nurture an ecosystem in which advanced manufacturing, innovation and new industries flourish for the United States to remain competitive in the global economy.
I founded CPPI to address the many policy issues affecting American competitiveness. It’s time to say goodbye to the status quo and time for an innovative public policy approach to ensure our nation’s greatness in the 21st century.
[i] Nothaft, Henry. Great Again: Revitalizing America's Entrepreneurial Leadership. Boston: Harvard Business School Publishing, 2011. xvii.