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Factories 2.0

Manufacturing fell behind the information revolution. That’s about to change.
October 18, 2016

Since 1994, the number of manufacturing jobs in the U.S. has dropped by almost 30 percent. The common explanation has been that domestic factories need fewer workers because they’ve become much more productive.

But that’s all wrong. The problem isn’t that we’re too productive. The problem is we’re still not productive enough (see “Learning to Prosper in a Factory Town”).

Yes, it’s true that since 1994 manufacturing labor productivity has doubled. But if you measure something called “multifactor productivity” you get a different story. Multifactor productivity takes into account how efficiently a factory uses all its inputs—not just labor but also equipment, buildings, energy, purchased parts and services, software, and research and development. Because it includes a wider scope of inputs and costs, multifactor productivity is a better indicator of how innovative and competitive an industry really is.

Since 1994, multifactor productivity has declined in nine out of 18 domestic manufacturing industries. And if domestic manufacturing can’t become more efficient, it will have a tough time competing in the global economy and an even tougher time adding jobs.

But we’re in luck—there’s a simple way that domestic factories can increase their productivity, expand their market share, and hire more workers. The answer (perhaps surprisingly) is to invest more in information technology.

U.S. manufacturers currently put only 10 percent of their capital spending into tech equipment and software, according to data from the Bureau of Economic Analysis. That’s down from 15 percent in 2000 and 12 percent as recently as 2007. Even if we add robots to the picture, the figures don’t change much. North American purchases of robots amounted to only $1.6 billion in 2015, or less than 0.3 percent of total investment by manufacturers.

Compare that with the economy as a whole, where computers, peripherals, communications gear, and software make up 22 percent of nonresidential capital spending. Manufacturers fell behind in the information revolution.

In part, that’s a reflection of how much harder it is to digitize the production of a physical object such as a machine than an “information object” such as a newspaper. But recent advances in technology mean manufacturers are finally getting low-cost wireless sensors that can report back on the state of physical processes, computing systems that can process data in real time, and the algorithms to quickly act on that data to cut costs and improve quality.

Perhaps most important, domestic manufacturers won’t just be producing old products more efficiently; they’ll also be using cutting-edge technology and smart design to create products that were impossible to make before—things like artificial organs and “smart” furniture that adjusts itself to the contours of the people using it. New production capabilities will unleash a flood of creativity that will benefit both consumers and companies.

We’re about to find out that innovation in domestic manufacturing isn’t a job destroyer at all—it’s a job creator.

Michael Mandel is chief economic strategist of the Progressive Policy Institute.

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