wind turbine mechanical engineersTwo engineers in Texas perform quarterly service on a wind turbine.Photo: U.S. Department of AgricultureThis piece was cowritten by Kate Gordon, Bracken Hendricks, and Lisbeth Kaufman of the Energy Opportunity team at American Progress.

‘Tis the holiday season, when Santa’s workshop hums with elfin activity. But what about America’s workshop? Now is the perfect time to reflect on the state of America’s manufacturing sector, and our prospects for economic recovery if we lose the ability to make things here at home.

We have come to expect that the lion’s share of the toys under our Christmas trees will say made-in-China. But is it also inevitable that in a globalized economy, the United States should cede its place as a leading manufacturer? We think not. Our nation’s manufacturing base not only provides jobs, wages, and economic security for the middle class, but also drives the process of economic innovation that is essential for our overall competitiveness. Manufacturing truly is the gift that keeps on giving, through new ideas about how to make things better, resulting in new jobs and new companies that can compete ever more effectively in global markets.

So we offer here our “holiday wish list” for American workers to preserve an innovation-led economy that makes stuff and creates good jobs here at home, with a focus on building a strong clean-technology sector.

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In recent years U.S. companies have faced many inducements to shift manufacturing overseas, drawn by low production costs and proximity to burgeoning markets, the result being a hollowing out of our industrial jobs base. The United States cannot and should not manufacture products across all industries, especially in fiercely cost-competitive mass production sectors, but our economy and our jobs market will suffer if we do not actively work to retain our prowess as a producer of innovative products at the leading edge of technology.

The United States became a global economic leader by building a diverse economy driven by a continuous innovation business model-one that values both inventing and manufacturing value-added products and sophisticated technologies. Domestic production is a critical source of family-supporting jobs, especially for the 60 percent of the workforce that lacks a four-year college degree. And our manufacturing base is the mechanism through which our world class investments in science, technology, education, and research are translated into the practical skills of innovative production methods, advanced engineering, and profitable businesses.

Unfortunately, the manufacturing sector is in decline. In 2008, only 13 percent of our national GDP came from manufacturing, down from over 20 percent in the late 1980s. At the same time, our trade deficit in manufactured goods now stands at over $600 billion. As our manufacturing base declines we risk losing our place in the forefront of innovation if we continue to let the leading edge of advanced manufacturing migrate overseas, taking with it millions of jobs and the technical know-how and practical strategies for reaching each successive generation of innovative products. If our country is to maintain its innovation-led strategy for economic growth, we must continue to build manufacturing expertise and intellectual capital here within our borders, not let the decline continue.

Contrary to popular belief, the decline in manufacturing is reversible. There is much we can do to sustain profitable domestic production through focused policy that encourages investment in, and retention of, the most competitive manufacturing industries that currently operate in the United States. In particular, we recommend a strategy that prioritizes innovation in production of clean-energy technologies. But first, let’s look at the benefits of manufacturing in more detail.

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Manufacturing to maintain American innovation

Though our economy is recovering, the process is slow, with 28 million Americans still unemployed. This is why high-quality, well-paid manufacturing jobs are essential to the U.S. economy. One in ten American jobs are still in manufacturing, and these jobs pay an average of 20 percent higher than the national average wage. We need to grow this jobs base, not let it shrink.

While many companies cite lower labor costs as reasons for offshoring manufacturing to other countries, there are plenty of other, and often more important, advantages to producing domestically. For instance, McKinsey Quarterly points out that offshore manufacturing can be problematic and costly due to difficulties of dealing with inventory shipping, obsolescence, and currency exchange rates. Proximity to engineering and design centers, proximity to a strong customer base, access to raw materials, and shorter shipping distances can be valuable benefits of manufacturing in America.

But as we have noted, manufacturing in the United States does more than create jobs; it actually makes the country more productive and enhances our economic innovation. In the long run our economy and our society does not benefit from outsourcing high-end and advanced technology manufacturing to other countries.

Economic innovation occurs as the result of a complex cycle in which a technology is improved and developed both before and after being manufactured and deployed. Manufacturing a technology in the United States keeps the product and process know-how here at home and allows for a more effective feedback loop between research, development, and production. In contrast, as the Harvard Business Review points out, offshoring manufacturing to other countries ultimately can erode our ability to make high-tech products and to invent new ones. This is because when a country loses manufacturing, it also sheds design and R&D capabilities with that expertise.

Put simply, if you know how to make a product, you can learn how to improve it and eventually figure out how to replace it with something even more innovative. The innovation is obviously more complex than this — chances are high someone else in a competitive marketplace will figure out how to make that next new thing — but the know-how and competitive fire has to remain in the United States for any of these activities to happen at home.

In addition to improving domestic innovation, manufacturing helps maintain the general health of the U.S. economy. 69 percent of U.S. exports are manufactured goods, and the existence of a robust manufacturing sector helps to balance out other sectors to create a stable economy overall. Booz & Co, for example, finds from its work in fossil-fuel dependant economies in the Middle East that economic diversification is the key to long-term sustainable economies. If our manufacturing sector were a smaller portion of the American economy, and financial services and the housing market were even greater, the Great Recession might have been far worse.

As it stands now, the United States often invests in the initial creation and development of new technologies, while other countries manufacture and deploy them. In short, other countries profit from our foundational investments. That’s why we must enact stable policies that foster private-sector investments in advanced ma
nufacturing while creating stable market demand for innovative technologies.

Clean energy and advanced technology manufacturing

Clean energy technology represents exactly the sort of promising area for innovation-led investment where the United States has historically led in dramatic growth and technology-led productivity gains, in turn creating new, well-paying jobs. For instance, energy consultancy Clean Edge recently found that with just a high school degree, electronic equipment assemblers can make an average of $30,300 a year, and Solar Fabrication Technician can make $45,800 a year. With a bachelor’s degree, a wind turbine mechanical engineer can earn $63,300 at entry level, and a senior electrical engineer can make $95,400.

As the education levels and experience levels increase, so too do the salaries. These are not jobs we want to lose to competing countries excelling in clean energy investment.

Unfortunately, while the U.S. clean energy economy stalled in the aftermath of failure to pass national clean energy legislation, our competitors are racing ahead. China, Germany, and Japan (among others) are winning not only the economic gains of advanced production, but the laurels of future global economic leadership. The Economic Policy Institute finds that our trade deficit in clean energy products with China alone totals at over $1 trillion a year. We import 10 clean energy technology products from China for every one product we export to China, a deficit which cost the 8,000 jobs in the United States in 2010. Balancing this trade deficit by manufacturing more advanced clean technology products here at home could bring back these jobs and create new ones as well.

These countries are winning the clean tech race in part because of their strong investments in, and comprehensive policies to support, clean energy and green product manufacturing. The United States must be smart with our policies as well to accelerate growth in our clean energy markets, or risk falling behind.

The American Recovery and Reinvestment Act was an important step in promoting manufacturing innovation and technology deployment. For instance, the Recovery Act’s investment in next-generation batteries has been largely successful. A study by the Duke Center for Globalization, Governance, and Competitiveness found that lithium-ion batteries will be the key to making a shift from oil to electric cars. To accelerate development of U.S. manufacturing capabilities and establish American leadership in creating the next generation of advanced vehicles, President Obama pledged $2.4 billion to 48 new advanced battery and electric drive projects in 2009. As the single largest investment in electric cars ever made, these funds have made the United States a global player in the advanced battery market, propelling it from 2 percent of the global market before ARRA to 16 percent by mid-2010.

According to the White House, the United States is projected to have 40 percent of the worldwide lithium-ion battery market share by 2015, positioning it as a key player in the electric car race. At this rate, the wrapped and beribboned car in the driveway featured in so many Christmas commercials may soon be equipped with advanced electric drive technology that was both developed and manufactured in America.

The advanced energy manufacturing tax credit (known in federal policy circles as 48C for its designation in the tax code), which also was included in the Recovery Act, is another example of a government policy that has been highly successful in leveraging significant new private investment in manufacturing and creating jobs. As the White House reports, the Recovery Act investment of $2.3 billion in tax credits for advanced energy manufacturing facilities will not only strengthen America’s competitive positioning by helping U.S. companies retool to supply emerging markets, it will also directly generate more than 17,000 jobs and incentivize an additional $5.4 billion in private-sector investment and an additional 41,000 jobs.

Though the 48C tax credit was unfortunately not renewed in this legislative session, it must remain on the table as a highly successful tool for enlisting both public and private funds in revitalizing advanced manufacturing through clean energy technology. There is certainly private-sector appetite for it: The White House has noted that the program was oversubscribed by a ratio of more than 3 to 1, reflecting “a deep pipeline of high quality clean energy manufacturing opportunities in the United States.”

Good technologies exist, and companies are ready to manufacture. Likewise, private capital is ready to invest. What’s lacking is proper policies to help bridge the gap between capital markets, predictability in market demand, and advanced manufacturing conversion. A study by the alternative assets research firm Preqin found that as of March 2010, 12 percent of current private-equity vehicles (both venture capital and natural resources funds) in the United States include clean tech investments as part or all of their industry focus, adding up to $48.1 billion in capital commitments or about seven percent of the total capital being sought. The United States must enact smart policies to further tap into the $500 billion global market and bring more capital to companies manufacturing clean technology.

But we must also go beyond support to manufacturers to make a broader commitment to the transition to clean and efficient energy, which would expand markets for the products we already do make here at home. Case in point: Much of the production within the building materials industry remains heavily concentrated in the United States, which means policies to support investment in residential, commercial, and industrial energy retrofits will by their very nature disproportionately support American industries. Producers of furnaces, insulation, and metal ductwork all generate over 90 percent of their manufacturing within the United States, well above the national average for domestic manufactured content.

In addition, due to the economic downturn, and especially the collapse of the housing bubble, U.S. construction and building supply manufacturers are now operating at less than 50 percent capacity so they can rapidly absorb large amounts of new demand. As energy efficiency policies drive new markets and new technology investments, they also shore up these key domestic industries.

The way forward

If the United States implements the right policies to sustain the growth of private markets in clean energy product technologies then the toys under our Christmas trees may still be made in China but the windmills generating the electricity for our Christmas tree lights, and the superefficient furnace keeping us snug in our warm winter beds, will be made-in-America. That’s why our “holiday wish list” of smart manufacturing policies that will sustain America’s innovation advantage includes the following existing programs and policies as well as new programs and policies we believe should be embraced in 2011.

Existing programs

Manufacturing tax credit for U.S. clean energy technology

The manufacturing tax credit for clean energy technology (48C) helps create domestic clean tech manufacturing facilities so that clean energy projects can use products made at home by American workers. The program has already used its $2.3 billion to provide investments in 183 projects in 43 states. Unfortunately to date there is no plan to extend this program, though we think it deserves an additional $5 billion in tax credits.

Treasury grant program

Established under Section 1603 of the American Recovery and Reinvestment Act of 2009, the program provides grants for renewable energy projects (in lieu of the tax credits available under existing law), benefiting small companies that lack adequate tax liability to use tax credits. This program is important for creating a market for clean energy technology in the United States. The larger the market grows, the more domestic manufacturing will be competitive.

The program has been extremely successful creating 4,250 GW of renewable power projects within its first eight months, according to findings from The Lawrence Berkeley National Laboratory. The tax extenders bill signed into law by President Obama this month mandates that the 1603 program will be extended for another year, but a two-year extension would be more effective and would allow developers to obtain the necessary capital and build clean energy projects that would otherwise falter.

Department of Energy loan guarantee program

The DOE loan guarantee program was created by Sec. 1703 of the Energy Policy Act passed in 2005 and funded with $2.5 billion from the Recovery Act to support up to $21 billion in loan guarantees. The program provides 80 percent of the debt on a given clean energy technology project to reduce the risk of private investment in new technologies.

According to estimates of the 12 companies receiving loans, together the projects will generate or save 50,000 jobs, while producing 3 GW of clean power and avoiding more than 30 million tons of carbon dioxide, or CO2, each year. Despite the program’s success, the outgoing National Economic Council director, Lawrence Summers, and energy policy czar Carol Browner have recommended ending its funding. What this country needs is just the opposite: The program’s funding should actually be increased to get more large-scale new clean energy technologies manufactured and deployed.

New programs and regulations

These proposed programs will either provide investment for domestic manufacturing of clean technology, or they will help to create the markets in which domestically produced clean energy technologies can compete. These proposed programs will help incentivize wide-spread deployment of clean energy technology, which will create a larger market for clean energy technology in the United States, in turn allowing domestic manufacturers to benefiting from economies of scale and proximity to projects.

Clean Energy Deployment Administration

CEDA, also known as the Green Bank, which has been proposed in a number of bills in Congress, would act as a public financing entity working in partnership with the private sector to invest in and accelerate the manufacturing and deployment of clean energy technologies across our nation By investing in newer, untested but important clean energy technologies, CEDA would reduce the risk of investment and attract additional private capital at all stages of the innovation to boost development, manufacturing, and deployment of clean technologies.

Energy Independence Trust

As proposed in a report by the Center for American Progress and the Coalition for Green Capital, the Energy Independence Trust would be a nonprofit independent lending institution that would work in concert with CEDA, providing low-cost funding with a specific focus on near-term and widespread deployment of already-commercialized clean energy and energy efficient technologies. By reducing the cost of capital, the Energy Investment Trust would reduce the cost of large-scale deployment of clean energy, creating a larger market for clean tech goods manufactured in the United States.

Feed-in tariffs

Feed-in tariffs offer renewable energy generation developers long-term fixed-rates contracts at rates higher than fossil fuel rates. These proposed tariffs would incentivize developers to invest in and build renewable power electricity generation because they provide acceptable return on investment as well as guaranteed power purchases and grid access. In the European Union, feed-in tariffs have successfully directed private capital to clean technology manufacturing and deployment. In Germany, for example, a country not famous for its sunshine, feed-in tariffs have helped create an entire photovoltaic module manufacturing sector to feed domestic demand for solar panels and made Germany a global solar leader. As a result, in December 2009 alone, Germany installed 1.5 GW of new solar PV capacity. While feed-in tariffs do result in higher rates for consumers, in Germany the rates amounted to just six-tenths of a Euro cent or eight-tenths of a U.S. cent per KWh to each monthly consumer electricity bill.

Renewable or clean electricity standard

Establishing a nationwide renewable electricity standard will help create strengthen the market for domestically produced clean energy technology. Thirty states already have some form of a renewable energy standard ranging from 7.5 percent of total energy to 40 percent. A bipartisan bill (S. 3823) has been introduced by Sens. Jeff Bingaman (D-N.M.) and Sam Brownback (R-Kan.) that proposes 15 percent of U.S. electricity be generated by renewable sources by 2021. While renewable-energy-rich states look forward to a nationwide renewable energy standard, other states with more fossil fuels are wary.

To address this, a more flexible vehicle, such as a “clean energy standard,” could allow for variations in approved technologies or approaches across regions while maintaining a nationwide standard. For instance, this new standard could set a target of 25 percent that includes a base of 15 percent renewable energy with an additional 5 percent commitment from energy efficiency, and the remaining 5 percent coming from regionally appropriate clean energy resources on a state-by-state basis.

Either a renewable energy standard or a clean energy standard would create certainty on renewable energy consumption, which would lower the risk of investing in clean energy, directing more private capital to clean technology manufacturing and deployment.

Kate Gordon is the Vice President for Energy Policy, Bracken Hendricks is a Senior Fellow, and Lisbeth Kaufman is a Special Assistant on the Energy Opportunity team at American Progress.