Thursday, February 9, 2012

In Defense of Manufacturing—Again: National Security

Christina D. Romer produced an opinion piece for the New York Times: Do Manufacturers Need Special Treatment? She argues that the answer is "no." Her conclusion is that effort placed on general benefits to the economy would be a better investment. Some of the statements made about manufacturing in the US demand a response. We have previously discussed one of her contentions here: In Defense of Manufacturing: Industrial Clusters. Now we will focus on her elimination of national security as an argument for investing in our manufacturing capabilities. 

Romer raises the issue of national security, but then dismisses it with this statement:

"The possible externality of greatest concern may be national defense. The argument that we need a strong manufacturing base in case of war must be taken seriously. But it still doesn’t follow that all manufacturing deserves special treatment. Which industries are truly essential in a war effort? And might normal production in military industries, as well as existing supply arrangements with allies, provide adequate protection?"

Romer misses the point again! The issue with manufacturing is not to support selected industries. What is required is the maintenance of the type of environments in which manufacturing can thrive. Paul Krugman refers to this as an industrial ecology.

Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on."

"This, in turn, makes a case for policy to promote or preserve such clusters."

Krugman indicates the rebirth of the US auto industry and the plummeting unemployment rates in Michigan as evidence that the auto bailout salvaged not just the auto companies themselves, but also the industrial ecology that supported and was sustained by them.

Romer questions whether or not we will be able to manufacture what we need during a time of war. That is the wrong question to ask. The purpose of our national defense posture is not so much to wage war as to ensure that we do not have to wage war. The functionality of the US manufacturing capability must be evaluated within that context.

Maintaining a world-wide national security presence is tremendously expensive. It can only be accomplished with the backing of a healthy economy. Historians like to argue that military powers fail because they have first failed economically. To claim that one is maintaining a strong economy while letting the manufacturing sector be hollowed out is absurd.

The US was able to provision a multinational two-front war seventy years ago because it had a huge and broad-based industrial sector that could be rapidly converted to military production. We had a self-sufficient economy that depended little on other nations. The situation our defense planners face today is quite different. Rather than turning to the domestic economy for assistance when needed, the Pentagon must support its own defense economy.

The Pentagon requires specialized products like fighter aircraft. At one time there were several producers of commercial aircraft who could bid on military contracts. Now we have only Boeing. In order to avoid having to depend on a single contractor, the military is forced to provide enough work to keep at least two companies in "competition" for its programs. It does not have enough business to support multiple companies on a single product line, so the big companies gobble up other companies and maintain their cash flow by competing on multiple products. What one ends up with are a few conglomerates who compete on just about everything. In a variation on the "too big to fail" theme, the Pentagon needs to distribute its business in such a way that it ensures multiple bidders will continue to exist. A contractor who loses on one bid is more likely to win the next. This system has the appearance of competition, but it does not lead to the efficiencies one would expect from market forces.

It is not clear whether the contractors are captives of the Pentagon, or the Pentagon is a captive of the contractors.

The chosen defense contractors will then create their own needs for specialized products that will be necessary to fulfill their contractual requirements. This is where weakness in the domestic manufacturing sector begins to impact cost and efficiency. If the contractors cannot find a domestic vendor for a component, then they either have to go overseas or create the manufacturing capability on their own. Subcontracting defense needs to another country is often acceptable, but usually not desirable. When the components have sensitivities associated with design or materials that option is not available. In that case the contractor has the option of a lengthy—and risky—development effort, or modifying the design so that it can be produced by an existing vendor. One option degrades efficiency, the other degrades capability. Neither serves our national security interests.

We need a robust industrial ecology to serve our national security needs. That industrial base must have an even more robust domestic manufacturing base to feed from.

A recent article announced that Sandia National Laboratories had designed and tested a self-guided bullet. It was suggested that the concept had demonstrated sufficient capability to correct its trajectory that military effectiveness was a given. All they had to do now is figure out a way to manufacture it in large numbers and at low cost. If such a capability was available today it would be a life saver for troops in combat. If deemed effective, the military would want large numbers, and they would want them immediately.

In addition to some sort of propulsion mechanism this new type of bullet is likely to include an array of sensors and microprocessors. Who has most experience in how to quickly and efficiently build millions of electronic gadgets? This article explains why Apple felt compelled to move its assembly operations to China. While the labor costs are much lower there, that was not the principal reason.

"....building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility."

In other words, we have let our industrial ecology decay away. It is not just a matter of building a plant to manufacture such a bullet, one would have to train workers and develop a network of suppliers with "sufficient speed and flexibility." The alternatives are to dummy down the design to make it cheaper but less accurate, spend an awful lot of money in developing a slow and expensive manufacturing path—or we could just ship our defense work to China.

So, yes, our lack of manufacturing infrastructure can impact our national security. And it is time to focus on regaining lost capabilities.

No comments:

Post a Comment

Lets Talk Books And Politics - Blogged