Commentary / News

DOD Manufacturing Report: American System Needed!

By Nancy Spannaus

Oct. 17, 2018—After more than one year of study, a Defense Department task force set up by President Trump released a 139-page report  on Oct. 5 entitled “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States.” Not surprisingly, it concluded that “all facets of the manufacturing and defense industrial base are currently under threat.” The report concentrates on five “macro forces” which the researchers identify as the key threats: 1) U.S. government budget practices; 2) reductions in the capabilities and capacity of the U.S. manufacturing base; 3) government bureaucratic procedures vis-à-vis procurement; 4) the industrial policy of “competitor” nations; and 5) gaps in the skills of the U.S. workforce, especially in the area of STEM (Science, technology, engineering and math).

High-tech manufacturing in action. (DOD report)

In the face of these challenges, this unclassified version of the report recommends a series of specific measures directed to ensuring supplies, providing direct investment to some areas of the industrial base, supporting suppliers in trouble, and accelerating the training of a workforce skilled in STEM. Scattered throughout the report as well, are many references to the need to clamp down on competitors, especially China, due to their huge advances in certain strategic sectors.

Will Congress take up the admittedly long-term, and crucial, challenge documented in this report?  That remains to be seen. What does seem clear to me from reviewing the report are three things:

  1. It grossly underestimates the crisis of the U.S. industrial base, especially by omitting the fragility and obsolescence of our infrastructural base in power, water, and transportation.
  2. It glaringly omits the role of big finance, epitomized by Wall Street, and its enabling by government deregulation over recent decades, as the central “macro force” creating the current industrial base collapse, and the need for trillions of dollars of funding to reverse that process.
  3. The most productive approach to dealing with the alarming trends identified in the report is to return to the Hamiltonian/FDR paradigm(American System) to making new leaps in technological progress for our nation and mankind. That means returning to financial regulations such as Glass-Steagall; setting up a federally-backed credit institution to fund especially great projects; and posing a “new frontier” to inspire the nation, especially youth, to build a prosperous future.

The Hamiltonian View

There is an almost exact parallel between the mission President Trump set for this DOD taskforce, and that which President Washington and the Congress set for First Treasury Secretary Alexander Hamilton nearly 229 years ago. Hamilton was charged with turning his attention “to the subject of Manufactures; and particularly to the means of promoting such as will tend to render the United States, independent on foreign nations for military and other essential supplies.” The Defense taskforce was directed “to conduct a whole-of-government effort to assess risk, identify impacts, and propose recommendations in support of a healthy manufacturing and defense industrial base.” Both proceed from the standpoint that national security (military and beyond) depend upon the health of the manufacturing base.

The DOD report’s authors showed their awareness of this parallel by quoting Hamilton’s report at the beginning of their Introduction. They chose a recommendation Hamilton made in the section on iron (which dealt heavily with munitions), for the Federal government carrying out an annual purchase of U.S.-manufactured weapons, in order to permit the creation of arsenals that could be used when crises arose. (They would propose a similar policy today.)

The Harpers Ferry arsenal in 1862, originally established by George Washington.

The similarity extends to the fact that both reports produce a review of various crucial industrial sectors, which, of course, have drastically changed over the intervening centuries. Whereas Hamilton’s dealt extensively with raw materials, the DOD report (in Appendix two) reviews the state of shipbuilding, space, aircraft, electronics, machine tools, materials, software, and the workforce.

In other respects, however, the two reports substantially diverge.  As readers of this blog may recall, Hamilton devotes the bulk of his Report on Manufactures to discussing their contribution to the productivity (productive powers) and prosperity of the nation as a whole, and the responsibility of the Federal government to go against the “natural course of things” (the British-dominated free market) and  subsidize and promote manufacturing, by measures as diverse as tariffs, bounties, improving infrastructure, and promoting research and development. This contrasts with the DOD report’s emphasis on blaming China, and other “competitors,” for shortfalls in performance, and virtually ignoring the role that financialization has played in de-industrializing the nation over the period of more than 40 years.

Some Stark Reminders

While the collapse/outsourcing of U.S. manufacturing is already widely known and even accepted, it is useful to report some of the shocking figures contained in the report.  The U.S. manufacturing workforce peaked in 1979, and job losses between then and 2017 amount to 7.1 million, 36% of the industry’s workforce. The process has accelerated since 2000. The job losses have been most pronounced in primary metals, electronics, chemicals, and machinery.

Employment in manufacturing vs. other industries (DOD report)

This decline forces the defense sector, among others, to rely on imported components, even from non-allied nations. In vital areas there is only one American manufacturer, or the suppliers are on the verge of collapse. Tens of thousands of defense-related manufacturing firms have shut down in the last decade.

The discussion of the skills gap of the workforce is also striking. Manufacturers repeatedly complain of being unable to fill positions, particularly in what would be call the “medium skill” level, i.e. those which do not require a university degree, but considerable STEM skill. The Report expresses particular concern over the danger that the older skilled workforce, approaching retirement, is not set to be replaced.  The age profile is shown in the chart below:

Manufacturing employees by age (DOD report)

From the standpoint of the potential for a full recovery, the above workforce problem is especially important in the area of machine tools. As Stuart Rosenblatt’s recent in-depth study of FDR’s World War II mobilization stressed, machine tools lie at the crux of translating scientific and technological discoveries into the manufacturing process, and thus improving Total Factor Productivity in the economy as a whole. The sector has been rapidly shrinking in the U.S. since the 1980s, and since the 2000s, in particular, China’s role in the global machine tool sector has soared, in tandem with its orientation toward infrastructure and industrial expansion.

Real National Security

While I disagree with one of the fundamental premises of the Trump report–the assumption in the National Defense Strategy that the United States has to prepare for potential war-fighting because of alleged threats from “revisionist” China and Russia–its assertion that a healthy manufacturing base is vital for national security is absolutely correct. Without a constantly more productive physical economic base, populations are doomed to dividing up an ever-shrinking pie, and eventually to die. The founders of the American System understood and applied that throughout our history.

In addition, history, especially in the U.S., is rife with examples of technological breakthroughs made for warfare being translated into qualitative leaps in the productivity and general welfare of the civilian economy as a whole. One need only mention the medical advances made in the First and Second World Wars, and the development of nuclear power and nuclear medicine from the development of the nuclear bomb in World War II, to make the point.

The Watts Bar nuclear plant run by the TVA.

One useful move in the right direction which the Trump Administration has mooted is the declaration that the “free market” has to be violated in the nuclear power industry, because its destruction would be a threat to national security. But so far, the failure to take on the Wall Street factor has resulted in inaction, even as vital nuclear plants are shut down nationally because deregulated markets, and “renewable energy” subsidies, put the nuclear plants at an economic disadvantage. The Trump Administration’s proposed approach would be appropriate for other industries as well.

The truth is that the United States will not achieve true national security (from threats ranging from disease to enemy attacks) without re-adopting the American System approach in all areas;  that is going to require war against the biggest enemy the American people have, the Wall Street financiers. What is needed is a real industrial policy, which provides credit for long-term, high-technology economic development. The tools for doing, starting with Glass-Steagall and plans for a Hamiltonian National Infrastructure Bank , need only be taken up.

Hamilton and FDR showed the way. When will today’s policy-makers learn from their examples?

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