Category: Business

Innovation Drives The Small Manufacturing Boom—If It Can Survive Regulatory MeddlingInnovation Drives The Small Manufacturing Boom—If It Can Survive Regulatory Meddling

Contrary to the claims of certain politicians, lots of stuff is still made in the United States. Enough stuff that it hit a new peak in output as of the first quarter of this year, in fact. Even more surprising is that, despite the automation that reduces costs and makes much domestic production possible, there’s even some growth in manufacturing jobs (though the numbers remain far below their past heights). That small resurgence in jobs may be because of the recent boom in small, urban-based manufacturers.

It’s an encouraging trend, but don’t get too attached to those new businesses and their employees. Regulators are busy trying to kill them off.

“The renewal of manufacturing is not an abstract economic issue: It is very much an urban issue,” the Massachusetts Institute of Technology trumpeted in 2014.

“Because of changes in technology and consumer tastes, smaller-scale manufacturing is making a comeback in urban areas around the country,” NPR’s Marketplaceadded just a few weeks ago.

Technologies like 3D-printing allow companies to produce small runs of automotive parts, custom truck bodies, and the like. Crowdfunding lets small businesses simultaneously raise capital and reduce costs to produce American-made clothing and gear at reasonable prices. And targeted production makes it possible to serve niche markets that might have gone overlooked in years past. It’s innovation across the board, generally based in cities that had been losing old-style industry, but which still offer easy access to people, transportation, and resources.

But warning signs of trouble to come were already there in the 2014 MIT article. “Can new manufacturing fit in with the ongoing evolution of cities, and if so, how?” it asked.

The problem—and it’s a big problem—is that cities are centers of creativity not just in generating new ideas for serving markets, but also in developing shackles for hobbling economic activity. The entrepreneurs creating new manufacturing businesses work in close proximity to people “evolving” the cities in which they live in more highly regulated directions that raise costs, impose hurdles, and choke off opportunities for creating jobs and prosperity.

“The biggest single drag on U.S. manufacturing has been the decades-long encroachment of the regulatory state—with an army today of 300,000 regulators and an annual budget of $60 billion,” Mark P. Mills of Northwestern University’s McCormick School of Engineering and Applied Science noted in a report issued in June of this year by the Manhattan Institute. “Complying with regulations costs manufacturers an average of $20,000 per employee per year, twice as great a burden as for other businesses. For the smallest manufacturers (i.e., those with fewer than 50 employees), that annual cost is $35,000 per employee per year. In surveys, America’s manufacturers routinely rank regulatory burdens as the top impediment to growth; a large majority also say that regulatory burdens are higher in America than in other nations.”

Mills refers to regulatory challenges that are daunting to manufacturers doing business anywhere in the United States. So long as they’re in place, keeping the manufacturing sector healthy, let alone growing it, will be an uphill battle for American entrepreneurs.

But matters are even worse for the small manufacturers who have been fighting to bring jobs and innovation to American cities. Janet Adamy and Paul Overberg examined the recent decline in American mobility for a Wall Street Journal article. They found that the bitter urban-rural cultural divide and unwillingness to leave behind support networks and social services play a role, as does occupational licensing, but another major problem is found in high housing costs resulting from restrictive regulations. “While small-town home prices have only modestly recovered from the housing market meltdown, years of restrictive land-use regulations have driven up prices in metropolitan areas to the point where it is difficult for all but the most highly educated professionals to move.” That’s a problem for everybody. “This drop in mobility is not only keeping rural residents from climbing a ladder to better livelihoods, it is choking off the labor supply for employers in areas where jobs are plentiful.”

And too many cities seem determined to make the problem worse.

“Many of these production jobs pay around $10 to $15 an hour,” Marketplace notes in its piece about new manufacturers. That means these jobs may not keep up with living costs driven sky-high by urban red tape. They may also fall afoul of the national campaign to raise the minimum wage to $15 per hour—a campaign that is already killing jobs in Seattle. With some employers already reducing or delaying hiring in that city after the minimum wage hike, it seems likely that the costs imposed by the law could smother some new businesses, and prevent others from ever opening their doors.

Unless they can move beyond the law’s reach, that is. Many manufacturing start-ups are locating not in major urban centers, but in smaller cities in the Midwest and the South, points out urbanist Joel Kotkin. “The reasons for this shift vary, from strict environmental laws in Northern cities, as well as stronger unions, and cheaper land elsewhere.”

Separately, Kotkin’s Center for Demographics and Policy at Chapman University has torn into California officials for urban land-use policies that raise costs in overregulated cities. “In recent decades, land use policies have generally included ‘urban containment’ strategies that impose ‘urban growth boundaries’ and related policies that significantly restrict or even prohibit new suburban detached housing tracts from being built on greenfield land.”

So smaller cities remain something of a haven from the costs and regulatory fervor that make larger cities relatively unwelcoming to start-up manufacturers. These businesses can’t escape the high national regulatory burden examined by Mills for the Manhattan Institute paper—not without following other businesses overseas, anyway. But they can still escape locally imposed costs by avoiding big cities in favor of smaller ones that aren’t so eager to regulate every activity. Smaller cities, incidentally, are more culturally and economically accessible to rural residents who would be best-served by moving where the jobs are.

Sure enough, the small manufacturers profiled by Marketplace are located in Duluth, Minnesota, with a population of 86,000 and a below-average cost of living. But if Minnesota wants to hold on to those businesses, officials might want to loosen up, regulation-wise, and improve the state’s small business environment (ranked #47 by the Small Business and Entrepreneurship Council, and graded an overall C by Thumbtack).

The recent trend toward flexible, innovative small manufacturers driven by creative practices and new technology is a wonder to behold. It’s evidence of the continuing health of the entrepreneurial spirit. To succeed, that drive to create needs only willing customers—and a reprieve from regulators’ equally innovative efforts to meddle and destroy.