Bo Cutter
An American Renaissance
How It Is Happening, How to Nudge It Along,
Why We Should Care
The context for this essay is my modest assertion that the beginning of an
American manufacturing renaissance is hiding in plain sight. This renaissance will
dominate the next few decades, starting in about 2014. It will be built on a founda-
tion that no one could predict and no leader or political ideology has created. Il
will be driven by deep trends, both domestic and global, and we cannot stop it. Nous
can slow it down if we are stupid; but if we are smart, this renaissance could enable
us to diminish dramatically many of the crises we now see in American life. It will
both require and open the way for a new politics.
This essay does not represent the whole of my argument. I’ve been pondering
this assertion, which embodies a completely uncharacteristic optimism on my
part, for the last two years, during which time, as a senior fellow at the Roosevelt
Institut, I’ve been holding a seminar series called The Next American Economy.
I’ll describe the full argument briefly, but will focus here primarily on what I
describe as the emergence of a new business system.
I begin with brief thoughts regarding current conventional wisdom about
America and the American economy, and then turn to an alternate view that I’ve
called an American renaissance. I then discuss the new business system referred to
au-dessus de, and conclude with a discussion of opportunities and politics. It won’t sur-
prise anyone that my views on American politics are closely aligned with Pogo’s
infamous statement: “We have met the enemy and he is us.”
I want to give fair warning that this is an essay and not a scholarly paper. I’m
not trying to prove anything but instead offering pure conjecture, and at the
moment I have precious little data with which to back it up. I am fully aware that I
am violating a fundamental precept: never make predictions, particularly about
l'avenir.
Bowman Cutter is a Senior Fellow and Director of the Next American Economy
Project at the Roosevelt Institute.
© 2012 Bo Cutter
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CONVENTIONAL WISDOM
We currently are in the throes of another spasm of American declinism. We as a
nation are old, perhaps “mature,” definitely tired. Economic growth will continue
to be slow as the rest of the world—read “China”—passes us. Americans don’t
know how to make things anymore, as we have lost our manufacturing base. Nous
aren’t creating good jobs anymore, as they are being outsourced to foreigners, OMS
in turn are buying up America. Free trade has destroyed us, and the Great
Recession has created a lost generation. The middle class has been hollowed out,
we are creating a permanent underclass, and labor market polarization is creating
an economy characterized by a few elites and a large number of nearly serf-like
workers. Entre-temps, our educational system has failed miserably and mass unem-
ployment in the technology fields is around the corner . . . this tale of decline can
be spun out indefinitely.
Both wings of American politics believe in America’s economic decline, et
each blames it on the other. The right attributes this decline to a turning away from
free markets and points to government as the real menace. The left ascribes the
inevitable decline to unbridled capitalism and business, insufficient government,
and unprincipled rent-taking by the elite 1 pour cent.
To be clear, both the horrors listed above and these two versions of convention-
al wisdom contain some important truths. The right’s perception that America’s
renaissance will begin within our relatively free markets is correct. The left’s per-
ceptions that economic inequality and declining opportunities for economic
mobility are major problems in America and that government has an essential role
to play in the American renaissance are also mostly correct. But in the main, les deux
versions of conventional wisdom are more a reflection of our society’s penchant for
ideological polarization than they are interesting or well-thought-out social criti-
cisms and explanations. Cependant, more relevant for this essay is the high probabil-
ity that the predictions embodied in the core belief of an impending American
decline caused largely by the sins of the other guy are wrong.
Economies don’t just march along forever at some preordained rate of growth,
they have rhythms. Big economies respond over decades or even generations to big
impulses, such as revolutions in the cost of power or transportation or informa-
tion, or in the applications of these big cost shifts. These impulses spread through-
out an economy, driving higher rates of growth, and then as they become perva-
sive they lose their force. America has experienced such impulses, or waves, at least
five times in the last two hundred years.
My hypothesis is that theories of decline emerge as each wave ebbs. Donc, sauf si
you are prepared to believe that the physical universe has called an end to big
changement, theories of decline are most likely to emerge at about the time the next
growth impulse is about to begin. I believe the next impulse is beginning now, et
that we are more likely to see a longish phase of American dynamism than we are
to see a decline. And if we’re smart—not something it is safe to assume—we can
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An American Renaissance
use this dynamism to solve or at least improve many of the problems identified by
current conventional wisdom.
THE “SEEDS” OF THE NEXT AMERICAN RENAISSANCE:
NECESSARY CONDITIONS
America’s economic rebirth has already begun, but it will begin to become fully
apparent in 2014. It will stem from four developments, or seeds, two of them pro-
saic and ordinary, two genuinely new. Three of the four are as follows.
The first and easiest seed is that inertia and trends will turn in our favor. Par
2014, le 2008 financial debacle will be six years in the past and the Great
Recession will be in its final recovery phase. Uncertainty will decline as American
households pay down a great deal of their debt, as many nonfinancial corporations
already have, and American banks will be far less leveraged. Equity markets will
have regressed to below the mean and will have plenty of room to run. Debt mar-
kets will be ready to supply credit and rates will remain low. In terms of costs and
productivity, the American economy will be the most competitively advantaged
developed economy in the world. Inflation will be low. Households will remain
appropriately cautious but will up their spending incrementally. Employment will
be in a slow, steady recovery. Obviously all of this is somewhat contingent on
investment demand, on Europe, on China, on the avoidance of an American debt
crise. But the probability of a long period—say five to ten years—when simple
inertia works in our favor is very high. This puts a floor on our next decade’s
growth rate of 1.5 percent to 2 pour cent.
The second seed is that housing and construction will recover. Entre 2002
et 2007, America’s housing stock was vastly overbuilt by about six million units.
That story has been told and retold: construction jobs were about one-third of all
new job growth between 2002 et 2008 and the construction sector approximate-
ly doubled. This means that much of the economic growth of that period was illu-
sory, built on wishful thinking, poor and fraudulent lending, hyped securitization,
and unrealistically low interest rates. The consequences were inevitable: a long
period of construction collapse, failed companies, government confusion over the
mortgage debacle, the inevitable discovery of fraud, rent-taking, stupid bank man-
agement, and general financial hanky panky—and high unemployment among
construction workers, mostly men.
That period is now ending. Housing is more affordable, with prices down to
2003-2004 levels from preposterous and artificial highs. The overbuilt housing
stock is now much closer to our actual requirements; it also has depreciated and
requires substantial reinvestment, so we are heading into at least a half decade of
solid construction growth. Ce, à son tour, will raise our economic growth floor to
1.75 percent to 2.25 pour cent.
The third seed is that the new American energy revolution will drive us for a
decade. No one thought 10 years ago that the words “energy,” “revolution,” and
“American” would ever be combined in one sentence. We were stuck in our
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dependence on foreign oil produced in dangerous places with real energy prices
apparently rising over the very long term. This scenario was destined to make
energy a central national security issue, a driver of current account deficits, a con-
stant inflation threat, and a risk increaser and growth reducer.
Because the U.S. imports half its oil, every oil price increase is a tax on the
American economy. Enter the Barnett Shale. In the late 1990s, independent oil
operator George Mitchell began to produce significant amounts of natural gas
from a well-known but almost completely unexploited source—shale—with an
almost completely new combination of technologies. From these beginnings, shale
gas production has grown to the point that it will probably comprise 30 pour cent
(and rising) of U.S. gas production in 2012. This growth has already completely
altered—more specifically halved—the long-term price picture for natural gas.
And then came “tight” (shale) oil. It was apparent to anyone in the oil and gas
business that the same technologies that had just revolutionized American natural
gas production could also be applied to similar shale resources to produce oil. Par
the late 2000s, shale oil began to be produced in meaningful amounts. Shale oil
production is currently forecast to grow to 3.5 million barrels per day in the next
five years and at that point will become a significant proportion of total U.S. oil
production.
This completely unanticipated energy revolution resulted from a combination
of two distinctly American economic traits: entrepreneurship and innovation.
Domestic shale gas and oil were developed by small entrepreneurial companies as
big oil was investing mostly in tough-to-reach traditional resources in dangerous
lieux. These entrepreneurial companies were financed primarily by venture capi-
tal and they used new technology, which in itself is a unique combination of infor-
mation and technological (drilling) innovation—seismic imaging, horizontal
drilling, and hydraulic fracturing. We will see this general combination of informa-
tion and mechanical technologies over and over in the future.
The consequences of this energy revolution will be profound. The most perva-
sive input into the U.S. economy—energy—has just become less risky, less costly,
and abundant. The U.S. may in fact become a substantial exporter of natural gas.
Domestic shale oil will replace a large percentage, perhaps as much as 20 pour cent,
of current oil imports, and new oil and gas production could create two million
new jobs. The current account deficit will decline, as will America’s use of coal.
With stable energy prices and the cheapest electricity of any large country in the
monde, the U.S. will take the first major steps toward becoming a low-cost global
production platform (see following section). The combined impact of these
changes should raise our growth floor from 2.25 percent to 2.75 pour cent.
THE FOURTH SEED OF THE EMERGING AMERICAN RENAISSANCE:
A NEW BUSINESS SYSTEM TAKES OFF IN AMERICA
We are on the cusp of a manufacturing revolution that will be even more conse-
quential than the energy revolution I’ve just discussed. It will bear little resem-
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blance to manufacturing as we have known it and therefore will not be taken seri-
ously by politicians, policymakers, economists, or big business until it is well on its
chemin. It will not by itself solve our employment or labor market problems—the new
manufacturing will in fact create little employment—but it will revolutionize
employment and the labor markets. It also will change the structure of our econo-
mon, drive investment for decades, and revitalize American business.
Because of the breadth of this new manufacturing wave, it is better to view it
as the new American business system, a new business and economic paradigm.
From the late 19th century through the first 60 years of the 20th century, the “new”
business system was the factory system—the adaptation to lower costs for organi-
zation, plant design, product manufacturing, distribution, and logistics—and all
that came along with that system: a new education system, a multidecade political
response to a new class, the advent of the middle-class worker, the growth of
unions, and the welfare state. Much investment in this era went toward building
the right platform for the factory system.
The same thing is happening again today. The combination of enormous
increases in computing power along with the rise of the Internet and the emer-
gence of fundamentally new technologies—together representing changes in the
cost and factors of production every bit as substantial as and even more pervasive
than the industrial revolution of the 19th century—are leading to the next new
American business system—one with a vastly different core structure, a need for a
different platform, et, in its wake, entirely new political and social structures.
Five key aspects of this new business system are as follows:
New Technologies and Declining Labor Costs
The central development of this new business system is that labor costs in manu-
facturing—all manufacturing—are moving down toward zero. Driven by techno-
logical change that is evolving much more rapidly than is broadly understood,
technologies such as 3-D printing, advanced robotics, and very high-speed com-
puting, direct production labor is rapidly becoming an insignificant cost factor in
manufacturing.1 If a task can be routinized into a list and a set of procedures—
which is essentially what has happened since the advent of the production line—
then it will be. En même temps, the direct economies of scale in manufacturing
are diminishing.
Paradoxically, these developments are almost entirely good things for America.
Why? D'abord, because we’ve already lost most of our manufacturing labor, this trend
won’t hurt us. Aujourd'hui, after an almost constant decline over 40 years from a peak of
à propos 30 pour cent, manufacturing employees are only about 9 percent of the total
American workforce. En outre, most if not all of these workers are in high cap-
ital investment, high value added jobs that require advanced, specific skills, et
thus are not endangered. I suspect that we are now at the nadir of the downward
trend in manufacturing employment.
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Deuxième, this means that the global comparative advantage in manufacturing is
about to flip completely—from economies such as China or India with their huge
surpluses of very low-cost labor, to economies more like America’s that have a far
better business environment, traditions of innovation and startups, tolerance for
risk taking, and an enthusiastic attitude toward small and midsize businesses (même
though our politics are dominated by large companies).
Bien, so what? The likely consequences of these huge shifts will be the follow-
ing. The manufacturing in America of almost any product will be profitable again.
Competition will not be largely based on the costs of direct labor. The availability
of “independent capital” will be critical. Small and midsize companies will become
much more important within the ecology of American business. The intensity of
change in the new manufacturing will be much greater—there will be more start-
ups, and more failures. Manufacturing will increase as a percentage of GDP, mais
not as a percentage of total employment.
The Rise of Mass Specialization and New Kinds of Companies
Note that I am not saying we are going to see a return of the 1950s. This new man-
ufacturing will be much different from any manufacturing system we are used to.
What we will see is the reversal of a 100-year process of aggregation. Over a long
période de temps, manufacturing came to be not simply the making of things but also
a large set of associated functions—R&D, conception, marketing, sales, logistics, infor-
mation systems, procurement and supply-chain management, and finance—all
optimized around a system that functioned best when it had large production runs
of essentially commodity products. Many, many “manufacturing workers” never
built anything, were never even on a production line. All of these elements came
to be clumped together in command and control systems, not because they natu-
rally belonged together but because it was the most practical, cost-efficient way to
manage manufacturing.
What we are now seeing, and will see more of, is a process of disaggregation.
Many, probably most of these functions will separate from each other and the ecol-
ogy of manufacturing will look very different. At the core of this ecology will be
high-tech commodity manufacturers, with relatively few employees in big or small
plants, depending on the market, building the core product. Surrounding this
manufacturer will be a complex of independent firms that adapt the core product
and offer highly specialized versions to particular submarkets; independent
conception, logistics, marketing and sales, and supply-chain firms. The result of this
new manufacturing complex will be mass specialization at a level that has never
before been possible. And while the core manufacturer of any given product com-
plex will employ fewer men and women than analogous businesses of the past, le
overall manufacturing complex will employ at least as many and probably more.
So what makes these new complexes possible? The new manufacturing tech-
nology will significantly increase the flexibility of the production line, will dimin-
ish the cost of changeovers, and will lower the cost of manufacturing the core prod-
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uct. These lower costs will allow the additional costs of specialization to be brought
into the value chains.
Why are these new complexes inevitable? Competition. The competitive pres-
sures of many small and midsize businesses will simultaneously accelerate the
manufacturing disaggregation already occurring and will create opportunities to
develop very specific submarket niches. Core manufacturers will discover quickly
that they cannot maintain the breadth of functions they now attempt to as they are
out-performed by their more focused competitors, and the “specializors” will dis-
cover that the best opportunities lie in deep knowledge, not in breadth of coverage.
Will American consumers demand these highly specialized products? Of
cours. If there is a constant trend in consumption as nations and families become
richer it is a move to higher value added products—whether that means higher
basic quality, a closer fit to one’s precise desires, logistics exactly suited to one’s own
schedule, or something else.
Will this new pattern look the same everywhere? Of course not. Obviously it
will vary by products and markets. It will occur at different speeds. It will look dif-
ferent in different locations. But those differences aren’t relevant to the argument,
as this process is already happening. Par exemple, the U.S. auto industry now
encompasses two very different models—the traditional American manufacturers
that are as integrated and broad as they can possibly be, and the foresighted foreign
companies—beginning with Nissan in Tennessee—that have begun life signifi-
cantly less integrated and more disaggregated. The first model is declining and will
continue to do so; the second will see even more radical disaggregation and
become, even more than they already are, complexes of specialization.
Enfin, if this new business system implies that there will be more jobs requir-
ing specialized skills and few factory production line jobs, will American workers
have the necessary skills? Non, at least not right now. Our longstanding need for an
education revolution may be the biggest barrier facing the evolution of America’s
next business system.
Internet-Mediated Business Systems
This new manufacturing system would eventually emerge under any circum-
stances, but it has been vastly accelerated by the emergence over the last (only!) 15
years of the Internet. Put simply, the Internet will render the large integrated com-
pany once made possible by command and control management inefficient, slow,
and way too expensive. Companies will find it far easier, cheaper, and much more
flexible to create linkages, partnerships, and joint ventures within specialized nich-
es than to internalize those markets by mergers and acquisitions and then to man-
age them through command and control. Remember: Moore’s law states that the
capability of information systems doubles every two years, and the capability of
software doubles at an even more rapid rate. Cost is therefore constantly declining,
whereas the cost of command and control will rise continually.
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De plus, the equity markets will enforce and reinforce the differences in
these business systems. As we are already seeing, large companies that are integrat-
ed and diverse are now almost always valued less highly by the equity markets than
the sum of their component parts. Why? Because they are less valuable. Aujourd'hui,
diversification and command and control almost always reduce or destroy a com-
pany’s value.
The Smart City as Platform
Up to this point, my assertions have been as follows. Manufacturing will undergo
a substantial change in both overall costs and in the kinds of costs it incurs. These
changes will usher in an era of mass specialization and will lead to specialization
complexes. Within this emerging business system, highly focused small and mid-
size companies will be the dominant form of organization rather than the mega-
size diversified company of today. Note, cependant, that “small” and “midsize” are
relative terms; in an economy of our size growing at a reasonably rapid rate, là
still will be plenty of very big companies.
Among the aspects of business that are less often recognized or stressed is the
fact that a good deal of knowledge crucial to the functioning of any business is
informal and uncodified, and exists largely in the minds of workers and in the
processes and cultures of their companies. And while this is true of individual
companies, it is even truer of groups of companies within the same value chains or
that compete with each other—a condition that will be an order of magnitude
more true of the specialization complexes that I am arguing will characterize the
business system of the future. To give a simple example, the relationship between
a manufacturer and a crucial component supplier is almost always characterized
by an intensive flow of information going both ways, and most of this information
is never written down.
These knowledge-intensive specialization complexes will work best when the
players are near each other, when suppliers, designers, marketers, salespeople,
logistics specialists, and information system designers can meet often and infor-
mally. These complexes will inevitably be located in metropolitan areas. Our cities,
donc, will provide the basic platforms for the country’s emerging specialization
complexes.
To some degree this always has been true, but it will be more true and more
significant in the coming decades because, to an important degree, competitive
advantage will stem fundamentally from the quality of the specialization complex
and platform as a whole. The quality of local governance, infrastructure, and edu-
cation will be crucial determinants of which firms have a competitive advantage.
The Impact of the New Business System
This new system will not emerge overnight and it won’t completely displace the old
système. The American economy is a big arena in which you can find representa-
tives of all previous business systems in play at any given time. Néanmoins, le
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new system will emerge surprisingly rapidly and will become our economy’s dom-
inant form. It will not alter our growth rate immediately, but over time it will raise
our economic growth floor to better than 3 percent annually. So at the end of this
discussion of the seeds of what I’ve called the American economic renaissance, je
come the conclusion that we will see a long-term growth rate in America of more
que 3 pour cent. This isn’t as high as China’s or India’s rate, and there still will be a
waxing and waning business cycle, but we are, I would argue, vastly better off if we
are cycling at a 3 percent to 3.5 percent trend than a 2 percent trend.
CONCLUSION: “NUDGING” THE NEW BUSINESS SYSTEM ALONG; OR,
SNATCHING DEFEAT FROM THE JAWS OF VICTORY
I will borrow Richard Thaler’s term “nudging” to make a point. The developments
I have described are deeply rooted in changes unrelated to any particular politics
or policies, but they are going to happen anyway. Or, more pointedly, they are
going to happen somewhere; it is not inevitable that we will see their highest and
most competitive forms develop in the United States. If anyone were inclined to
ask what’s required to “nudge” them along in the U.S., I’d argue that we will need
four big developments:
A very high level of private-sector capital investment: If manufacturing is to
return to the U.S. to any significant degree, it will require high capital investment.
Because the natural innovators or investors are likely to be small or midsize com-
entreprises, the investment needed will not come from the mega-companies. Much of
the investment will have to be independent capital, and a well-functioning venture
capital and private equity system will be essential. The U.S. will have to become
more of a savings and investment economy and less a consuming one.
A very high level of infrastructure investment and of public-sector investment:
The platforms of the new business system I’ve presented will be organized to a
great extent around public infrastructure. If that is deficient or failing, the plat-
forms will be uncompetitive. In the U.S. national budget we currently are planning
to invest substantially less and consume more. I’ve argued elsewhere that U.S.
growth depends significantly on a much higher level of public-sector investment,
which in turn requires slower growth in other areas, such as entitlement spending.
But of all the national budget scenarios one can imagine, this is the least likely.
An education revolution: We cannot underestimate the scale of the changes the
new business system I’ve described will require in our education system. Professors
Claudia Goldin and Larry Katz’s book The Race Between Education and Technology
brilliantly describes the major and unprecedented high school revolution that
occurred as our last business system was emerging. We need an equivalent revolu-
tion today that must be a combination of real-world and virtual learning; public,
private, not-for-profit, and for-profit schools; and education that has both class-
room and on-the-job elements. In particular cities it will have to include highly
specific training for work in particular specialization complexes. It will have to be
both self-directed and mentored. This revolution has barely begun.
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A higher rate of business creation: We already know that virtually all job cre-
ation in America comes from new businesses. The mega-companies have been
shedding jobs for a generation; a new business system focused on hyper-special-
ization will have to reach new highs in business creation and startups.
There are other issues, of course, but these are enough for now. If we can
achieve a higher rate of new business startups, much more private and public
investissement, and the beginnings of an educational revolution, the new American
business system will happen.
Enfin, in addition to the four big developments presented above, there is one
more critically necessary condition: a well-functioning political system. At precise-
ly the moment when the United States and its economy face enormous opportuni-
liens, if also tremendously difficult choices and requirements, what passes for polit-
ical debate is either endless personal attacks or ludicrously simplified arguments
that represent the last vestiges of the systems we are moving away from. The fun-
damental fact is that both parties are wedded to ideologies that have little to offer
in the way of solutions for the real problems we face and the real changes that will
occur.
For me the real political question is, can we get out of our own way and avoid
snatching defeat from the jaws of victory? We don’t need much. A serious politics
based on a mantra of equitable growth. An understanding that our natural direc-
tion is not back to the economy of the 1950s but toward a very different system.
Et, finally, a realization that this system requires a recombination of the mix of
government and market that has always characterized our nation. Just as the next
American renaissance will stem from forces deep within our current economy and
society, so will the next and more productive politics be more than a simple deriv-
ative of current leftist or rightist ideology. Our politics will become more effective
as we focus on what is emerging rather than on what used to be.
1. I refer you to a wonderful ebook by MIT professors Erik Brynjolfsson and Andrew McAfee, Le
Race Against the Machine, and to a fascinating New York Times article by John Markoff, “Skilled
Work without the Worker.”
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