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Can American Cities Manufacture Again?

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Can American Cities Manufacture Again?

Industry needs lower taxes and fewer regulations, rather than more economic-development policies. Winter 2021
Economy, finance, and budgets
Cities

The coronavirus pandemic has intensified concerns about America’s industrial base. Our inability to ramp up production swiftly of masks, ventilators, and medical supplies revealed that we’re not the manufacturing powerhouse of yesteryear. These worries reinforced earlier ones about the flight of industry from depressed regions, such as the Midwest’s long-suffering Rust Belt. Many Washington politicians, including Republican senator Marco Rubio, think that the government should revive the idea of “industrial policy” and subsidize certain manufacturing sectors and lagging regions. Many state and local politicians are trying to stimulate manufacturing “clusters,” or groups of related industries, in their own backyards.

Yet government has had little success in such ventures. The emergence of industry in one city and not in another is often due to happenstance, or to long-standing historical ties not understood by contemporary politicians. To comprehend the peculiar problems of America’s manufacturing cities, we need to recognize the entrepreneurial culture that made them thrive—and how it can best be revived.

Industry doesn’t grow or move just anywhere, and there are many types and causes of concentrated manufacturing. For example, every nation or economic region has an industrial heartland with a disproportionate share of factories and industrial production, usually for geographical reasons.

The confluence of the Great Lakes and their tributaries helps explain why the large area that comprises St. Louis, Pittsburgh, Rochester, and Milwaukee has dominated U.S. manufacturing for more than a century. While manufacturing employs only about 7 percent of the workforce in most states, these numbers remain at about 14 percent in much of the Rust Belt, and at over 16 percent in Wisconsin and Indiana. One finds a similar zone—called an industrial “banana,” ranging from Essen in Germany down to Milan in Italy—that has dominated European industry for generations. Its location in Western Europe’s center, which includes the intersection of the Rhine and the Danube, helped establish its preeminence.

Even when the importance of geography wanes, these industrial heartlands remain powerful. One reason is that existing industries inspire the creation of new infrastructure. New canals, railroads, highways, and airports attract more industry and then more infrastructure in a virtuous cycle. And the output of one industry, such as steel, is often the input of another, such as cars, so that the industries benefit from proximity and from being near to that burgeoning infrastructure, too.

Whether inside or outside these industrial heartlands, many areas specialize in a particular type of industry—what Harvard Business School professor Michael Porter calls an “industrial cluster.” The birth of a cluster can often be attributed to a single individual. For instance, in the 1890s, a bright young teenager named Catherine Evans created a new type of quilt- and carpet-weaving in Dalton, Georgia. Her weaving company, along with its many imitators, made Dalton a global center of carpet manufacturing. Similarly, after helping invent the transistor at Bell Labs in New Jersey, William Shockley moved to the San Francisco Bay Area in 1955 to care for his ailing mother. He founded Shockley Semiconductor, and thus birthed Silicon Valley.

Industrial clusters have also evolved from the residue left by previous industries. New York City was the entrepôt for European books and magazines, which helped it become the center of domestic publishing, which, in turn, birthed the advertising industry and Madison Avenue, which eventually helped the city become the center of modern media. Likewise, the dominance of Standard Oil in New Jersey allowed the state to specialize in petrochemicals, and then chemicals in general—and soon, attached industries such as fragrances and flavors. Today, chemicals and their by-products remain Jersey’s largest manufacturing sector.

These local clusters and their offspring persist partly because they can draw on nearby workers who are knowledgeable in the trade, as economist Alfred Marshall recognized back in 1890: “When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously.”

Despite a national obsession with high-tech clusters like Silicon Valley, manufacturing industries and their workers are much more concentrated than service industries. The most concentrated industries in America are sectors such as carpet-weaving (still based in Dalton), paper products, and steel-rolling. Though proportionally a small part of our economy, these clusters are a matter of life and death for their home cities.

Concerns about the flight of industry from American cities are nothing new. While manufacturing remains concentrated in some regions and around some cities, it’s no longer concentrated inside those cities. In fact, manufacturing has been fleeing the center of cities for almost 100 years.

The multistory brick goliaths that once surrounded many downtowns and that now provide attractive loft living grew in those places because of local power sources and transportation options. These factories were powered by steam boilers that moved a series of leather belts, which then turned the various machines inside the buildings. It was more efficient to move the belts up rather than out, so factories rose tall. The factories’ need for coal and other supplies kept them near railroads or riverbanks.

The unleashing of electricity in the 1910s and 1920s enabled factories to spread their machines along vast, one-story plants, such as Ford’s River Rouge plant in Dearborn, Michigan. And the replacement of railroads with internal-combustion engine trucks made it possible for industry to move to suburban locations. No longer beholden to the vagaries of waterside deliveries or railroad schedules, factories became footloose. Yet those suburban factories inspired a backlash. As economist William Fischel has shown, this period saw some of the earliest suburban zoning laws, enacted to push industry out of its new home. Factories then moved to even farther-flung industrial parks and roadside warehouses, typically situated around small cities and towns, usually at a significant distance from larger metros. This pattern helps explain why the Midwest has the most “sprawling” employment of any region in the United States.

“The difference now is that industry isn’t just moving but shrinking, and the extent of the shrinkage is unprecedented.”

One consequence of this flight was that the old downtown industrial districts became mini–Rust Belts, zones of joblessness and urban decay. As early as 1924, one article asked, “Is the Big City Doomed as an Industrial Center?” Though large midwestern cities like Cleveland and Youngstown were the fastest growing in the nation in the first two decades of the twentieth century, they had already begun losing companies and residents during the 1930s. The tire and rubber plants that ruled Akron in the late nineteenth century started to spread to places like Alabama as early as the 1920s.

The difference now is that industry isn’t just moving but shrinking, and the extent of the shrinkage is unprecedented. The percentage of American workers in manufacturing has been declining for decades. But the raw numbers of people working in industry kept growing into the 1970s, peaking at about 19 million. The number remained stable for the next 30 years, but since 2000, America has shed almost 30 percent of its manufacturing jobs. In 1984, Democratic presidential candidate Walter Mondale predicted the emergence of a “rust bowl.” It took another 20-odd years for his prediction to become a reality, now known as the “rust belt.”

In fact, for all of America’s former industrial success, it has deindustrialized faster than the rest of the developed world. Manufacturing employment has shrunk in almost all advanced economies. But in Germany, about 20 percent of the workforce remains in manufacturing; in Italy, 19 percent; and in Japan, 17 percent. In the U.S., less than 10 percent of the workforce remains in the sector.

The Ford Rotunda in Dearborn, Michigan, in the 1930s (KEYSTONE/HULTON ARCHIVE/GETTY IMAGES)

Manufacturing’s erosion in America has caused unique difficulties for the regions that specialized in it. One problem arises from the fact that the nation’s industrial economy was more concentrated than just about anywhere else. Research in what is called the “new trade theory” has shown that areas with free trade tend to create more specialized manufacturing zones. Since America itself was the greatest free-trade area on earth, it’s not surprising that manufacturing came to rule the heartland. In the mid-twentieth century, 70 percent of American manufacturing was located there; moreover, inside that heartland, many cities were dominated by one type of industry. By contrast, in Europe, each country developed its own industries, manufacturing clusters, and markets. Just compare America’s Big Three automakers, each located in Detroit, with European competitors such as Fiat, Ferrari, BMW, Volkswagen, Citroën, Renault, Rolls-Royce, and Bentley, scattered across the continent. The concentration of industry has made its flight even more damaging for the American cities that once relied on it.

That a few large industries often dominated Rust Belt towns brought other challenges. As economist Benjamin Chinitz noted in 1961, cities with a handful of large employers, like Pittsburgh with its steel giants, tended to inhibit networks of entrepreneurship, compared with places with many small employers, like New York City. Pittsburgh had fewer banks lending to small employers, fewer independent suppliers willing to sell to small businesses, and fewer independent accountants selling their services—which made it harder to start new businesses. A small number of overbearing companies in a city can choke off competing growth.

Perhaps the most important legacy of America’s concentrated manufacturing was that it was one of the nation’s few economic sectors that relied on an uneducated but well-compensated workforce. Despite their often meager schooling, industrial workers long earned more than other laborers, and if they toiled in the heartland, they even earned 50 percent more than other manufacturing employees. Unfortunately, the abundance of these jobs meant that many heartland residents saw no need for school. As economists Claudia Goldin and Lawrence Katz showed, the high school movement that swept America in the first four decades of the twentieth century was less prevalent in states with more manufacturing work.

For a long time, education simply didn’t pay, individually or socially, in places like Cincinnati, Buffalo, and Youngstown, so these and kindred cities never developed the infrastructure to educate, and they continue to rank low in their numbers of high school and college graduates. Given the high correlation between education and economic growth, this deficit continues to plague such cities. The sad truth is that the specialized skills of workers in, say, steelmaking or paper-pulping didn’t transfer to new kinds of businesses as well as the accumulation of schooling did.

But all is not lost: America has peculiar strengths that can help the people and cities affected by the manufacturing collapse.

America’s deindustrialization is not only a story of failure. One reason U.S. manufacturing has declined is that we have been more successful in other spheres, partly because of our light-touch employment regulations. Economists Stian Westlake and Jonathan Haskel have shown that a positive relationship exists between the relative laxness of job regulations—that is, how easy it is to hire and fire people—and the amount of investment in “intangibles,” or nonmanufactured things like brands, software, and job training. Europe’s strict labor regulations encourage tangible investments and large-scale factories, for instance, since these can succeed even with stilted, immobile labor forces. But such regulations discourage the more ethereal investments and mobile workers who power the freer American economy.

Deindustrialization in the U.S. owes perhaps less to factors driving factories away than to the pull of productive and tradable service industries, such as software and movies. A Brookings Institution study ranked the U.S. as having one of the globe’s best manufacturing environments, a reality reflected in how, despite our proportionally smaller workforce, we still produce more real goods than any other country, though we’re now neck-and-neck with China in that regard. But America has an even more dynamic service industry. We wouldn’t want to follow the European path and revive manufacturing at the cost of discouraging mobility and eroding the nation’s dominance in service industries, which make up more than 80 percent of our economy.

The flip side of America’s large internal goods market is a large internal market for labor. American workers can thus move farther and faster than workers elsewhere in searching for jobs. The average American still moves almost three times as often as the typical European, and usually moves greater distances. One advantage of such mobility is that local economic problems don’t have to cause individual suffering, as long as people can escape them.

American mobility, however, helps explain the dramatic shrinking of U.S. manufacturing towns. The large metro areas that have lost 5 percent or more of their residents over the past ten years are all old manufacturing cities like Youngstown, Ohio; Binghamton, New York; and Decatur, Illinois. Though much smaller than these, Johnstown, Pennsylvania, was once home to a veritable empire of steel plants; it has lost almost 10 percent of its population in just a decade. For the center of such cities, the story is often worse. Five of the largest Rust Belt cities—Buffalo, Cleveland, Detroit, Pittsburgh, and St. Louis—have lost more than half of their center-city population since 1950. Most Western European countries, despite slower population growth overall, don’t have equivalent metros and cities with such large population losses.

The best solution for many Americans in these declining areas is indeed movement. We need to encourage even more of it by removing restrictions on the portability of some welfare benefits, such as housing vouchers, and on the zoning rules that constrain housing supply and prevent more people from moving to high-wage areas along the coasts.

For those cities and workers left behind, constructive policies can help. When politicians consider any course of action, their mantra should be the same as doctors’: “First, do no harm.” Unfortunately, many efforts to revive manufacturing are actually hurting industry and the towns that depend on it. Tariffs, for example, have shown little success. Because of the complex interconnection of global supply chains, trying to protect one sector, like steel, with tariffs can end up sabotaging many others, like autos and appliances. Today, more than 20 percent of American manufacturing is composed of parts from foreign countries, and almost half of American manufacturing is exported. The Trump administration’s tariffs wound up costing more manufacturing jobs than they saved. That’s why the largest industrial lobbying group, the National Association of Manufacturers, has opposed this policy.

State and local governments should stop trying to use planning to nurture new and supposedly exciting industrial clusters. As Josh Lerner has shown in his book Boulevard of Broken Dreams, the globe is littered with unsuccessful government-funded incubators and industrial parks, as well as countless mostly empty regions with names like the “Brittany Silicon Valley.” Almost every American state has tried to fund the creation of biotech clusters, projects that almost inevitably end with weeds growing through the parking-lot pavement and a trail of corrupt bargains. An economist who studied more than 700 industrial clusters found only a single government-inspired success—the Hinshu semiconductor center in Taiwan. And Hinshu’s flourishing had more to do with the dogged work of Morris Chang and his TSMC semiconductor company than any government effort.

Mayors and governors can do some things, though, to help manufacturing. One concerns labor law. A study by University of Minnesota economist Thomas Holmes found that states with right-to-work laws have attracted more industrial plants, especially in their border counties, than nearby unionized states. This helps explain the recent industrial success of states such as Indiana and Wisconsin, both of which passed right-to-work laws in recent years and have also retained the most manufacturing workers. (See “The New Landscape of Labor,” Summer 2016.)

Lower taxes are also a big help—especially rate reductions on things like the personal property of businesses, since those levies tend to inhibit the physical investments necessary for industrial production. Both Ohio and Michigan got rid of such personal property taxes a few years ago, and have reaped the benefits.

General Motors’ Orion assembly plant, near Detroit: recent tax cuts in places like Michigan have helped encourage more industrial investment. (WILLIAM WIDMER/REDUX)

America’s regulatory costs are excessive, and manufacturing firms feel the full weight of them. Recent studies show that, while the benefits of air-pollution control are substantial, continuing increases in water-pollution regulations bring only marginal gains. Some of the more burdensome water regulations on manufacturing can thus be eased without affecting the quality of life that draws people to cities. More generally, as urban economist Gilles Duranton says, politicians who want to encourage industry should focus on the costs that they impose on businesses, rather than on ways to make the businesses themselves more productive, in which politicians have zero expertise.

Today, good schools remain a key avenue to good jobs. In recent years, many Rust Belt cities have invested in high schools and higher education. Even areas with population decline, like Pittsburgh, have seen a rapid rise in the proportion of their workforce with college degrees over the past years—in Pittsburgh’s case, led by people surrounding the University of Pittsburgh and Carnegie Mellon.

Schooling is important not just for its own sake but because it helps support the social networks that enable economies and cities to thrive. In sociologist Sean Safford’s book Why the Garden Club Couldn’t Save Youngstown, he compares the social networks of Youngstown, Ohio, and Allentown, Pennsylvania. One reason Allentown had more success in reviving its economy after the steel industry’s collapse was its social networks, which extended throughout the city and included numerous social and economic groups, often linked via schools. Encouraging what sociologists call the “strength of weak ties,” or broad associations outside one’s immediate family and friend network, can nurture new economic connections—and eventually, new businesses.

Companies can also help build networks that stretch beyond their immediate suppliers and customers. More than a century ago, Alfred Marshall described how groups like the Manchester Cotton Association and the British Pottery Manufacturing Association developed industry standards, shared knowledge, and facilitated new deals, giving smaller companies the advantages of collaboration without the necessity of merging. Many early innovators in Silicon Valley remember how the Western Electronic Manufacturers Association became a hub for sharing ideas and reaching agreements. Michael Porter has identified these intercompany organizations, often centered on training schools or institutions of higher education, as the essence of a successful industrial cluster; local policies should seek to support their more benevolent forms.

Most importantly, businesses, governments, and schools can partner on training and apprenticeship programs. Apprenticeships in America are less than one-eighth as common as in Europe, where those with mechanical aptitude are often directed into innovative positions straight out of high school. Some European firms, such as Siemens, have partnered with American high schools and community colleges to bring these apprenticeship programs here. They have helped tens of thousands of students, often with top math grades, move directly into high-paying manufacturing jobs. (See “You’re Hired!,” Summer 2020.)

Despite concerns about handouts to businesses, mayors and governors should consider offering tax breaks or grants to attract new industrial plants to their area. Since factories often pay property-tax rates at least as high as local residents, and they use hardly any of the human services (including health care, welfare, and schooling) that consume state and local budgets, almost any tax income from such a plant is superior to none. Ideally, all local businesses would pay lower but broader tax rates. Until we get there, selective breaks for some businesses, as long as they don’t go too far, can still be beneficial. A study by economists Michael Greenstone, Richard Hornbeck, and Enrico Moretti showed that those counties winning plants by offering local tax breaks raised local labor income by 1.5 percent and even helped grow local budgets.

Manufacturing cities can also look beyond manufacturing for their future. For decades, industrial-policy proponents have argued that without a manufacturing base, the high-tech and service industries that relied on factories would leave, too. They’ve been proven wrong. As late as the 1990s, the majority of Silicon Valley technology jobs were still in hardware, and the region was surrounded by “fab” plants building the silicon semiconductors that gave the region its name. Today, Silicon Valley has only about half a dozen small fab plants, but it remains the dynamic global center of the technology industry. Nationwide, total computer manufacturing employment has dropped to a third of its previous level, while software workers have increased fivefold. Likewise, New York City’s fashion industry has survived and thrived despite the flight of 98 percent of the sewing jobs that powered its Garment District, once the nation’s largest manufacturing cluster. The same could be said for New York’s still-dominant publishing industry, which no longer relies on rolls of newsprint unspooled in skyscraper basements.

Many of these cities have tried to zone vast swaths of land for industrial uses, with the hope that this will keep rents down and lure manufacturing companies back. From the special needlework zoning of New York’s Garment District to the Production, Distribution, and Repair zones of San Francisco, these efforts have generally resulted in underused loft space. Instead, these cities need to let the market repurpose those areas into their highest and best uses, so that new businesses—whether manufacturing or other—can thrive there.

When sociologist Daniel Bell coined the term “post-industrial society” in 1974, people viewed it as a shocking forecast of the future. “Industrial” was then synonymous with development, and most thought that manufacturing would continue to be at the forefront of growth. Today, the postindustrial society, or something approximating it, is an undeniable reality. Industry is no longer the most important part of our economic life.

The shrinkage of industry has created new challenges, just as the shrinkage of agriculture before it did. But we should remember that the service-oriented economy of the United States remains one of the richest and most productive in the world. The average American is 20 percent to 30 percent richer than most European peers. West Virginia, by some measures the poorest state, has roughly the same gross domestic product per capita as Britain. The U.S. economy, based more on intangible investment, limited manufacturing, and constant mobility, is a success. For the sake of one sector that employs fewer than one in ten workers, we should not jeopardize that.

Politicians may want to protect some industries vital for national defense—certain types of medical supply, say. But we should not let this rationale dictate our decisions on all forms of industrial work, and we should not summon false hopes of a full-scale manufacturing revival. The percentage of developed countries’ workforces in manufacturing has dropped from 27 percent in 1970 to about 13 percent today, a decline that will likely continue. That is a natural and, in many ways, positive development that we should let take its course, just as we did in agriculture.

Politicians who care about our industry-based cities can still reform property taxes, encourage flexible labor laws, reduce burdensome regulations, support good schools, and ease mobility. None of these actions is a silver bullet, but they can help current as well as former manufacturing workers. Most important, all of America’s industries would benefit from federal, state, and local governments getting out of the way of change. It’s the government’s job to keep the soil fertile and to let things grow, rather than trying to direct where and when new life will sprout. We don’t know where the next Catherine Evans will come from, but she needs to emerge on her own terms.

Top Photo: Detroit, like many manufacturing cities, saw its industrial base erode. (BERTRAND DESPREZ/AGENCE VU/ REDUX)

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