Opinion Article – Author: Brian Linville. Published in the Pittsburgh Post-Gazette on January 13, 2023.

The Pittsburgh region is key to an American industrial renaissance

America emerged from the Second World War as an industrial colossus. With its human and physical capital relatively unscathed by the destruction of war, robust growth generated unprecedented — and broad-based — prosperity. More people than ever could move up socially and economically. Americans believed in their chance for a better future.

But after that, things changed. The past half century, by contrast, witnessed the outsourcing of much of our manufacturing base, and with it many of the ladders to opportunity that the working class had relied upon. America today is poised to reverse this trend, and developments in the Pittsburgh region are key facilitators.

What led to de-industrialization in the first place? People and businesses respond to incentives and do what is in their self-interest. With respect to allocating capital, this usually translates into investments that maximize the risk-adjusted return on investment.

Consider a scenario: it’s 1980 and a company is evaluating where to build a new manufacturing facility. The firm’s directors consider a variety of sites — the U.S., East Asia, Latin America, Western Europe. They must consider factors including human capital, proximity to suppliers and customers, technology, capital markets, property rights (physical and intellectual), infrastructure, corruption, energy costs, labor costs, tariffs, regulations, and taxes.

The U.S. looked attractive in many areas, but had a huge disadvantage in labor costs. That often drove companies’ decisions to move production elsewhere. This happened often, and the total effect was profound. The Federal Reserve reports that America lost roughly 7 million manufacturing jobs between 1980 and 2020, despite the population increasing by over 100 million.

Now imagine a similar scenario today. Directionally the status quo remains: American labor continues to be more expensive, but we compare favorably across many other categories. What has changed is the magnitude of our relative advantages and disadvantages, and these changes have the net effect of making the U.S. much more desirable as a destination for investment than it was previously.

Two of the most significant shifts have been in labor and energy costs, and developments in the Pittsburgh region have been critical to both.

First, consider labor: manufacturing has become more capital intensive and less labor intensive. This has not occurred at the same speed across industries, but in general it is now possible to produce a larger quantity of widgets per employee. The relative significance of unit labor costs has declined as a result.

Pittsburgh, and especially the ecosystem that has developed around Carnegie Mellon University, is a global hub for robotics, industrial automation, and artificial intelligence, all key drivers of this trend. Furthermore, the magnitude of our disadvantage per unit of labor has declined as labor unions have lost influence in the U.S. and foreign workers have gradually demanded higher compensation.

Meanwhile, a massive advantage in energy costs has emerged. Here again the Pittsburgh region, and more specifically the fracking of the Marcellus and Utica Shales, has been critical. Industrial production tends to be highly energy intensive, and energy costs in the U.S. are a fraction of those faced by firms in Europe and Asia.

The U.S. also has an advantage in energy security. Robust domestic supply makes rationing, blackouts, or other constraints on commercial usage comparatively unlikely.

While these two changes are among the most important, other factors come into play. For example, post-Covid supply chain issues highlighted the advantages of having production close to end markets and the risks of just-in-time inventory systems and far-flung supplier networks. The perceived risk of tariffs has increased, both due to the China trade war and increased hawkishness on the subject by politicians in both parties.

Tax reform in 2017 made U.S. corporate taxes much more competitive globally. The importance of our deep and liquid capital markets has grown as production has become more capital-intensive. Risks of intellectual property theft and government interference, especially in the case of China, have become more salient.

Taken together, these changes enhance the appeal of investments in America and set the conditions to reinvigorate our economy and reverse a decades-long trend of deindustrialization. This applies to America writ large and there will be robust competition within the U.S. for this investment.

We should look to further enhance our advantages while mitigating disadvantages. Areas of opportunity include promotion of domestic energy production and infrastructure, improved permitting processes, enhanced research and development either directly or by incentivizing the private sector, “upskilling” and career advancement programs, and skills-based immigration reform.

Whether by accident or design, there is a tremendous opportunity before us to ensure that the 21st Century, like the 20th before it, is an American Century. Carpe Diem.

Brian Linville, a native of Washington County, lives in Pittsburgh where he works in the financial services industry, after serving as a Submarine Officer in the U.S. Navy. His previous article was “The high costs of an accelerated green transition.”

First Published January 13, 2023, 12:00am

Brian Linville: The Pittsburgh region is key to an American industrial renaissance | Pittsburgh Post-Gazette

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