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Manufacturing Bonds

Manufacturing Bonds

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Jordan Eizenga and James Hairston detail the benefits of creating a manufacturing bond guarantee program to the companies that remain integral to our economy.
Jordan Eizenga and James Hairston detail the benefits of creating a manufacturing bond guarantee program to the companies that remain integral to our economy.

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Published by: Center for American Progress on Feb 13, 2012
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02/16/2012

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1Center or American Progress | Manuacturing Bonds
Manufacturing Bonds
Presenting a Bond Guarantee Program that Could HelpOur Small Manufacturing Companies Survive and Hire
Jordan Eizenga and James Hairston February 2012
Introduction
Manuacuring remains an inegral par o our economy. Manuacuring companiesprovide well-paying, middle-income jobs. U.S. manuacuring wages are, on average,19.3 percen higher han he privae-secor average even hough he secor employs anabove-average share o hose wihou a college educaion.
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Manuacuring also drivesinnovaion. Manuacuring companies accoun or more han hal o all public andprivae research and developmen in he Unied Saes, he benes o which spill overino oher secors.
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 While U.S. manuacuring oday suers rom lower employmen levels and slowergrowh in oupu han in he pas, he secor is by no means a los cause. Much can bedone o bolser is compeiiveness. For one, he ederal governmen can help creae jobs and increase oupu by improving he perormance o manuacurers by increasingheir access o capial.Small manuacurers oday canno easily access nancing o resrucure, grow, andscale up heir businesses. Low-priced bank loans and lines o credi are more dicul oobain or small- and medium-sized manuacurers, he pool o venure capial is smallerhan i was years ago or sarup advanced manuacuring companies,
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and access o bond markes can carry high borrowing and ransacion coss due o he small size o many manuacuring companies. Wihou sucien working capial, small- and medium-sized manuacurers may no be able o grow, which is bad or he economy and bad or job creaion. As one par o a broader sraegy o srenghen he manuacuring secor, we believe policymakersshould explore he idea o creaing a manuacuring bond guaranee program. Tis pro-gram would be available or hose rms ha paricipae in a revamped ManuacuringExension Parnership program, which is run by he Deparmen o Commerce’sNaional Insiue o Sandards and echnology.
 
2Center or American Progress | Manuacturing Bonds
Tis approach could be an inexpensive way o address boh he nancing gap and he jobs shorage in our economy, providing much-needed access o low-cos capial orsmall manuacurers o grow while allowing hem o become more producive, innova-ive, and compeiive by adoping bes pracices hrough he Manuacuring ExensionParnership. Tis issue brie deails our proposal.
 The productivity challenge for small manufacturers
Troughou he pas decade, manuacuring oupu grew more slowly han he economy as a whole. Manuacuring’s conribuion o gross domesic produc—he larges mea-sure o growh in our economy—ell o 11 percen rom more han 14 percen beween1980 and 2010. Employmen in he manuacuring secor also ell paricularly hard inhe pas decade, as he secor as a whole los approximaely one-hird o is jobs.I would be wrong o asser ha he reason manuacuring jobs are leaving he UniedSaes is solely because o low-cos labor overseas. Counries such as Germany have vibran manuacuring secors ha produce a rade surplus despie oering wages ha,on average, are among he highes in he world. Tere are many reasons or he successo German manuacuring, bu he coninued adopion o innovaive pracices and heraining and hiring o skilled and well-paid workers has been criical.Te recipe or success in German manuacuring acually makes sense. Firms ha aremore producive and innovaive are able o inves in new equipmen and raining, as well as pay heir workers good wages. And rms wih higher-paid and more-skilled workers have higher employee reenion raes, which increases produciviy or he com-pany as more experienced employees are less prone o avoid making misakes.
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Similarly, he uure success o he American manuacuring secor will depend onproduciviy increases ha allow or he creaion o well-paying jobs. Indeed, he UniedSaes already has manuacuring companies ha are very producive and oer high wages o heir employees. Ye he number o such companies is oo ew.
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 For many small- and medium-sized manuacuring rms, i is very dicul and cosly omake he kind o invesmens necessary o develop new producs, increase produciviy,and hire new employees. Operaional improvemens migh require muliple changes, which ogeher can be cosly or small manuacurers. As Susan Helper, an economis aCase Wesern Universiy, noes:
Changing to a new production paradigm is particularly expensive and dicult i changes are complementary, that is, i two modications made together yield greater  perormance gains than the sum o the two modications made separately.
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3Center or American Progress | Manuacturing Bonds
Te end resul is ha many low-produciviy, small manuacuring rms adop a sraegy o cuting coss by keeping wages down. Clearly he marke is no always providing herigh incenives or small manuacuring rms o make ecien decisions ha are acu-ally o heir long-erm bene.
Why small manufacturers need capital and lack access today
Manuacuring companies, by heir very naure, require more working capial han rmsin oher indusries. Te reason or his is ha i akes manuacurers a long ime o con- ver heir resources and invesmens ino cash ow hrough sales. Tis means ha manu-acuring rms have much o heir money ied up in invenory and oher pars o heir business or a long period o ime beore i generaes a reurn. For his reason, manuac-uring rms ofen require more working capial han do rms in oher indusries.
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 Te need or nancing is paricularly acue or small manuacurers a he beginning o he supply chain because hey end o operae a he behes o large, secondary manu-acurers. Due o “jus in ime” supply chain sraegies,
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large, secondary manuacurers who exer greaer conrol over he supply chain require ha smaller, primary manuac-urers bear he coss associaed wih soring heir invenory unil he secondary manu-acurer requess hem. Tis reduces coss or larger manuacurers bu resuls in an evenlonger cash-conversion cycle or smaller, primary manuacurers.
9
Te mos common orm o capial or small manuacurers is deb, such as a line o credior a xed-erm bank loan. radiionally, manuacurers use real esae, business equip-men, invenory, and receivables as collaeral o obain nancing. Te problem is ha boh commercial and residenial real esae remain weak, and prices have ye o sabilizesince he bursing o he housing bubble in 2008. Couple his problem wih he broaderighening o credi and he relucance o banks o lend, and he resul is many smallmanuacuring rms are having diculy obaining he necessary working capial.
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  While many manuacurers are holding back on heir expansion plans because o heperceived lack o demand rom consumers and businesses in he U.S. and global econ-omy, here are manuacurers ha would expand i hey could. A 2010 whie paper orhe Naional Insiue o Sandards and echnology, which oversees he ManuacuringExension Parnership, noed ha:
 Even manuacturers whose revenues, margins, prots, suppliers, and customers areunafected by the downturn in the economy… have ound it impossible to maintaintheir current borrowing base, let alone receive the nancing needed to grow. Tese rmsare being penalized by the devaluation o their property, plant, and equipment.
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