Making Things in the Burgh

Off and on at Pittsblog, I've expressed skepticism that a revival of manufacturing holds the key to Pittsburgh's future prosperity. That view brings me into mostly friendly conflict with Harold Miller, who has much more data than I do, and who therefore tells a different story.

Last Saturday, Harold's PG column focused again on this theme:


Because manufacturing jobs are among the highest-paying in the region and
because manufacturing firms are a major source of income for many service firms,
the slow growth we're experiencing in the manufacturing sector is a serious
concern. It is critical that state and local government leaders create a more
competitive business climate to help existing manufacturers recover, and that
private investors and economic development agencies provide the capital and
technical assistance that entrepreneurs need to start and grow new manufacturing
firms.
A slightly more detailed (and more richly illustrated) version of his column is up at Pittsburgh's Future.

For a couple of reasons, I remain unpersuaded. One, I usually detect the aroma of nostalgia in almost any discussion of manufacturing in Pittsburgh. Not necessarily nostalgia for steel or for industrial manufacturing, but nostalgia for the idea that Pittsburgh is a place where people make things, and that making things is the right and best route to prosperity and security. That's an important story, but it's a story, rooted in a particular history.

Turn that story around (turn around the causal arrow, in other words), and that leads to the second reason. The idea that the service sector needs the manufacturing sector -- that the former is in some respects servient to the latter -- carries a hint of the nostalgic story, but that idea is also questionable on the merits. So, two, I wonder about the extent to which the regional services economy is really dependent on a flourishing local manufacturing economy. By employment and (I believe) by economic impact, the two largest sectors of the local services economy are medicine and higher education. I can't suggest that these have no dependency with respect to local manufacturing, but I have to suspect that the relationship is weak - and more important, that local manufacturing is now more dependent on eds and meds than the other way around.

Moreover, the services sector that I know best -- legal services -- is increasingly not dependent on demand from locally-based clients. Even in Pittsburgh, and perhaps especially for a regional market like Pittsburgh, the largest law firms are looking nationally and globally for legal work. And large law firms in other urban markets are starting to locate significant parts of their back office work in the broader Pittsburgh region -- in Wheeling and in southeastern Ohio. I find it difficult to escape the impression that measuring Pittsburgh's economy and economic recovery is complicated by its diminishing regional isolation.

I'm not down on manufacturing; a mixed economy is a strong economy. And an attractive climate for new and for growing businesses of all kinds should be a key feature of Pennsylvania's and Pittsburgh's public policy. But making things takes many forms, and increasingly Pittsburgh makes things of the intangible kind -- new ideas, inventions, arts, and technologies that make their ways into medical therapies and motion pictures, among other things. If the Commonwealth is going to design public policy to subsidize growth -- and that's where Harold Miller's argument is meant to take us -- how much of our policy resources should be weighted toward manufacturing, including high-tech manufacturing, and how much should be weighted toward other things?

Comments

8 Responses to "Making Things in the Burgh"

Harold D. Miller said... 8/07/2010 8:53 AM

Neither manufacturing nor anything else is a silver bullet for the region’s economy, nor should growing manufacturing be a single-minded focus for regional policy. However, the single biggest loss of jobs here during the recession was in manufacturing, so getting back to where we were means either (1) growing manufacturing jobs, or (2) growing jobs in other sectors to replace them.

The challenge in strategy #2 is that it’s not easy to grow jobs in the service sector that are equivalent to those in manufacturing. Most jobs in the service sector have much lower wage rates and benefit levels than those in manufacturing, so it’s not a one-for-one substitute. Moreover, the jobs in the service sector that do have high wages and benefits tend to require a lot more education than those in manufacturing. Manufacturing provides a lot of high-paying jobs for people who don’t have college degrees; in fact, one of the impediments to growing manufacturing nationally is the misimpression many parents and young people have is that the only way to get a really good job is to go to college. This doesn’t mean that manufacturing jobs are low-skill. Quite the contrary. What it means is that the skills are developed primarily through on-the-job-training, building on a solid ability to read and do math, rather than college degrees.

Another key advantage of manufacturing jobs is that they import revenue into the region. Most service sector jobs don’t do that. We are fortunate in the region to have a service sector that is far more national/global than most, but there is a limit to how much growth one can expect from these sectors that is truly export oriented. We have world-class higher education institutions that bring students (and their tuition payments) from all over the world, but does anybody really expect that Carnegie Mellon or Pitt are going to double in size in the near future? We have cutting-edge health care that attracts patients from other parts of the country and other parts of the world, but the vast majority of health care services are delivered to people who live here, and growing national attention to healthcare cost containment will fundamentally constrain growth in this sector. We’re almost as dependent today on health care as we were on steel 30 years ago. These sectors are wonderful to have during economic downturns, but we shouldn’t bet on dramatic growth from them during the recovery.

We do have law firms and architectural firms and other professional services firms that sell their services around the world, and in theory, their growth potential is unlimited. They aren’t heavily dependent on local manufacturing firms for their success today, but it’s important to note that many of these firms built their strength originally by serving manufacturing firms here, and their connection to the region weakens over time as less and less of their business originates here. Pittsburgh was once an ideal headquarters location for international service firms, due to its high quality of life and good transportation connections to the rest of the world. However, the loss of hub status for our airport has significantly diminished Pittsburgh’s advantages for headquarters operations of international professional service firms. So without a solid base of business here, what exactly will stop those firms from deciding they’ve had enough of multi-stop flights with inconvenient schedules, and shifting personnel to other cities that have better access to the rest of the world?

(Continued in next comment)

Harold D. Miller said... 8/07/2010 8:54 AM

(continued from previous comment)

There’s an even stronger, hidden connection between manufacturing and service, though, that most people don’t appreciate. U.S. Steel employs a lot of people in its headquarters operations here, but they aren’t called “manufacturing” jobs in the official statistics anymore, they’re called “management of companies” jobs and they show up in the service sector. U.S. Steel’s research facilities are called “scientific and technical” jobs and they show up in the service sector. Ditto with manufacturing firms like Allegheny Technologies, Medrad, Mine Safety Appliances, etc. How long will all of those jobs stay in the region if the actual manufacturing jobs leave? Most companies want to keep their R&D facilities close to their manufacturing plants, and it’s much easier for a company to move its headquarters if it no longer has manufacturing plants nearby. We’ve been lucky to keep the headquarters and R&D facilities for companies like Alcoa, Heinz, and PPG despite the loss of their manufacturing facilities, but they wouldn’t be here in the first place if they hadn’t been manufacturing things here at some point, and our chances of attracting the headquarters and R&D operations of firms that do their manufacturing in other regions is much lower than our chances of growing new ones by starting successful manufacturing firms here.

It would be one thing if the region were not well suited for manufacturing, and efforts to maintain or grow manufacturing were fundamentally counter to the business interests of those firms. But when you talk to manufacturing firms, you will find that they generally feel the region has many strengths for manufacturing – a good workforce, proximity to markets, etc. The biggest weakness of the region is its business climate – high taxes and an unfriendly regulatory climate, both at the state and local level. If you’re a manufacturing firm, you can locate anywhere you want, and there are other places that have the same strengths as we do, but dramatically lower weaknesses. The business climate can be changed, but only if the public demands that its elected officials do so.

So retaining and growing manufacturing isn’t a nostalgic fantasy, it’s a real opportunity that we’re choosing to lose due to lack of understanding and poor public leadership. Could the Pittsburgh Region survive as a manufacturing-free professional services economy? Perhaps, but that’s a little like saying, let’s put all of our money in the mutual fund that did the best over the past 5 years, and forget about diversifying our economy. Remember that while Pittsburgh had one of the smallest rates of job loss during the recession, it also had one of the smallest rates of job growth prior to the recession, and that’s because we haven’t created an environment that attracts and retains growth-oriented businesses like manufacturing.

BrianTH said... 8/07/2010 9:38 AM

How many of the local attorneys (and paralegals and legal secretaries and so on) actually work for large law firms targeting clients nationally and internationally? I'm willing to entertain the idea there is "diminishing" regional focus in purely relative terms, but I suspect local work remains dominant overall, and will remain so for a long time even at the current rate of "diminishing".

Mike Madison said... 8/07/2010 10:25 AM

@BrianTH: I don't know if there is any way to generate a quantifiable answer to your question. I'm sure that you're aware of the extraordinarily large number of lawyers practicing in Allegheny County. My anecdotal experience is that the globalization of regional law practice is not limited to large law firms (though that was the thrust of the relevant part of my post). Law that is mostly "personal" (such as personal injury law (including relevant insurance law practices, notably workers' comp) and most family law work) remains highly localized. Law that is more "business"-oriented -- whether we're thinking large businesses, small businesses, or even tax and estate planning for individuals -- is increasingly national and global. And those areas of practice are where the money is, where the growth is (if there is growth to be had), and where the jobs are. That globalization doesn't reflect a loss of local demand for legal services generally. Instead it reflects that fact that these clients locally are willing to shop nationally and globally -- and clients in other parts of the country (and the world) are willing to ship their work their work to Pittsburgh. I know solo patent lawyers in Pittsburgh, for example, who do work for West Coast clients.

Mike Madison said... 8/07/2010 10:35 AM

@Harold: As always, thanks for the detailed supplement. And as usual, we disagree -- if we really disagree -- in some areas of emphasis, rather than with respect to the overall picture. One question that I have is whether the following historical premise will remain true in the future: That industrial firms prefer to keep their service and R&D components physically close at hand, meaning that Pittsburgh needs to preserve a solid manufacturing base in order to attract and retain related service and R&D. Complicating the issue is the fact that a lot of contemporary huge firms with enormous R&D budgets either are not manufacturing in a meaningful sense -- Google -- or manufacturing in a partial and/or highly non-traditional sense -- Microsoft, HP. And some very large manufacturing firms have outsourced R&D altogether: they buy new product lines once those have been developed elsewhere. Cisco falls into that class, as does much of Pharma. (Not that Pittsburgh has been a locus of start-up drug discovery firms, but there is drug discovery technology being developed here.) So, talking about that issue likely requires a sector by sector analysis, and likely requires separating historical observations regarding how Pittsburgh developed (I was careful to refer to the nostalgia here as an "aroma," rather than as a fantasy!),from observations regarding the organization of today's economy.

Harold D. Miller said... 8/07/2010 10:52 AM

First of all, I believe strongly in the kind of analytic skepticism that you're expressing, and I wish we had more debates on economic strategy in the region at the level you're engaging in!

I don't really think that a primary reason for attracting or retaining manufacturing is to attract or retain related service jobs; my point is more that one can't assess the impact of gaining or losing manufacturing jobs simply by looking at the jobs narrowly classified as "manufacturing." They have a pretty significant multiplier effect, and I think many people discount the impact of the sector by thinking that all jobs are in discrete silos, rather than interrelated.

Moreover, you're right, many firms like software firms that are classified as "service" are really not much different than export-oriented manufacturing firms; they don't make physical products, so they don't get technically counted as manufacturing, but they pay high wages and bring income into the region from other places. It's all of those firms that we really want, and it's those firms that are most at risk of moving away, or never coming in the first place, because of a bad business climate. We'll always have some hospitals here, but we may not always have manufacturing or software firms here. The manufacturing firms are a little less footloose because they tend to have facilities and equipment that are harder/more expensive to move than software companies, but I don't mean to suggest that our focus should only be on companies that produce physical products. When I talk about manufacturing, I'm thinking of a broader definition of the industry than what the narrow statistics show.

The fundamental issue is that we need to make sure the region is as competitive as it can be for firms that have a choice about where to locate. The evidence indicates that we are not competitive in that regard, and the most visible manifestation of that is in manufacturing, but there are also problems buried in other sectors.

BrianTH said... 8/07/2010 12:51 PM

Hmmm--my sense is that a lot of real estate, employment, commercial litigation, contract work, and so on still has a very large local componennt. I also think it really depends on jurisdictional issues--if the governing body of law, courts, and so on are local, and it is a repeat issue, I think you are more likely to look for local counsel.

Note I'm not denying the direction of the trend, just wondering if it has gotten to the point where the overall predominance of local work, across all the many practices in the area, has ended.

Mike Madison said... 8/07/2010 1:10 PM

@BrianTH:

I can't (and haven't) taken the position that non-local work now dominates local work across Pittsburgh law practice or even against many or several Pittsburgh-area law practices. I think that we agree on the trend.

But cross-jurisdictional practice isn't only in litigation -- where some local counsel is required, though the actual contribution of local counsel may be minor. Instead, I think primarily of transactional and regulatory work, which is, functionally speaking, law- and court- independent. (Just because the contact says "The agreement is governed by the law of the State of X," the parties need not and often do not engage lawyers in the State of X.") There are certainly strong bastions of local practice in this area -- I'm thinking of school law, for example, which is as much of a backwater of local parochialism as exists in the legal profession today -- but generally, deal-makers and compliance lawyers live where they live and have clients (or employers) where they have clients. And those two places need not be the same.

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

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