This is the second part of the three part series that reviews three of the most compelling economic policy
studies on the California economy completed in 2009.

This report, Manufacturing 2.0, A More Prosperous California completed for the California Manufacturing
Technology Association, CMTA by the Milken Institute illustrates that California’s economy has been built
on the success of manufacturing.

The report illustrates California’s manufacturing history started with the development of mechanized
agronomy at the end of the 19th century, continuing into aerospace and the dominance of computers
and software in the 20th, to the growth of biotechnology specifically in the 21st.

The report compares California’s manufacturing sector to the manufacturing sectors and the state
programs of Arizona, Indiana, Kansas, Minnesota, Oregon, Texas, and Washington.  The information
used covers 2000-2007. 

The view of the report illustrates the historic leadership of California’s manufacturers as pioneers who
were not only creating businesses and jobs but also whole new industries.

And while the report shows that manufacturing—both traditional and high-tech—still drives California’s
economy, the report claims the state is losing ground to other states and nations because of its regulatory
climate, tax burden and reputation as a difficult and costly place to do business.

The report illustrates that manufacturing is a critical engine of economic growth and a catalyst for innovation,
and that the manufacturing sector is an excellent indicator of the economy of California.  The report uses a
metaphor, that manufacturing is to California’s economy like a canary is to coal miners in a coal mine.  And
apparently based upon this report, California's economy must be sucking wind. 

While this report is chocked full of information and presents some good ideas for enhancing the business
environment of the Golden State, it is unfortunately a difficult read.  It is a disjointed, fragmented and a choppy
read that takes too much time to digest taking away from the valuable information presented.

For example as identified above, the reasons identified why California is losing ground in the manufacturing
sector is due to government spending as though this concept was added as an after thought or it illustrates
that the report was written in sections by different people and when combined this issue was not incorporated
in a earlier section hence a cause for a disjointed read.

It is unfortunate too, because the report calls California, the ’Cradle of American Ingenuity’ and the report
additionally states that ingenuity begins with California manufacturers and their capacity to compete.

This phrase should have been the title for this report.  In addition, the progenitor’s of this report should have
laid out its methodology in a succinct format, e.g., purpose of the report, value of manufacturing, California’s
manufacturing sector 2000-2007, comparing California, then identify how to build a better manufacturing
sector in California by illustrating ‘Best Practices’ from across the nation and globe or new concepts to be
implemented to enhance the state’s business environment to ensure manufacturers have the capacity to
compete.

For example, it identifies an element in the section ‘Need to Action’ the concept of creating a network of
education, training, research, and business incubation centers, but no reference is made to the existing
programs in the state like UC’s Connect program which so many from across the nation want to replicate. 
Nor does it even discuss innovative approaches such as the California Innovation Center being created
at Beale AFB as a leader in the development of autonomous technology- robotics program, which California
manufacturers have become a innovative leader.

In addition, it leaves the reader wondering if the problem with California is with the corps of business,
community and economic development, work force and redevelopment professionals and if so, why did
they not state that as an issue for resolution to enhance the state’s business environment?

The report continues on by illustrating that California faces two broad, yet distinct, competitive disadvantages:
The state’s regulatory climate and the state’s tax burden (again leaving out government spending). But the report
provides only antidotal information for this claim using a variety of national indices that rate the states based
upon regulatory environment and taxes.  California is ranked in the bottom of many of these the national rankings. 
According to Jed Kolko of the Public Policy Institute of California, the state consistently scores poorly on business
climate rankings. These rankings, however, focus primarily on tax and regulatory costs, which are only one part
of the business climate. The business climate should instead be defined to include all costs and benefits that
businesses face from locating in California. The business climate also should take into account the skill level
of the workforce, the availability of capital and support for new business and the amenities that make California
an attractive place to live.

Then the report proceeds from the State of Manufacturing to another section entitled the Challenges to California’s
Manufacturers.  It goes on to identify that in 2007, the California manufacturing industry paid an average wage of
$66,200, well above the national average and substantially more than health care and social assistance services—
California’s fastest-growing job sectors. Workers in California’s "five best-paying manufacturing industries—three of
them in high-tech manufacturing—earned more than $100,000 annually on average. Great information, but no data
on what the salary levels were in the subsectors that have declined.  Additionally the report discusses the large
number of manufacturing businesses leaving the state. Again it is only antidotal information about the number of
business moving out of the state and then it it is unfounded.  The most recent report on the subject by the Public
Policy Institute of California identified that the state loses very few jobs to other states. Businesses rarely move
either out of or into California and, on balance, the state loses only 11,000 jobs annually as a result of relocation—
that’s just 0.06 percent of California’s 18 million jobs. Far more jobs are created and destroyed as a result of
business expansion, contraction, formation, and closure than because of relocation. Business relocations,
although highly visible, are a misleading guide to the overall performance of the California economy. The
employment growth rate, which takes into account job creation and destruction for all reasons—not just
relocation—is a much better measure of the state’s economy.

Thus, it appears more literature review should have been considered and three sections should have been
consolidated from the information presented - the State of Manufacturing, Challenges to California’s
Manufacturers and Why Manufacturing Matters.

Need for Action
The report calls out several recommendations in a section entitled Need for Action. These apparently are items
that need to be implemented to help bolster the manufacturing beyond the levels of venture capital funding and
amount of research and development spending that already exist in the state.  The authors believe California has
great capacity to innovate but isn’t living up to its potential. The reader is left to determine what the potential is. 
But the report does not identify what that potential is, but identifies it must require an action to bridge this gap, an
action identified as a new partnership between manufacturers and the public sector. And this cooperative
undertaking should include the following initiatives:

• Streamlining the regulatory procedure for manufacturers, increasing transparency and accountability
  in the regulatory process, and encouraging long-term investment through new policy tools—all of
  which can be achieved without relaxing or changing a single regulatory standard

• Enhancing public incentives for manufacturers through better planning, coordination across government
  agencies, and partnering with the private sector

• Launching an industry-led campaign to encourage Californians to pursue careers in manufacturing,
  highlighting the attributes of modern manufacturing, its importance to the economy, its record of
  environmental stewardship, and its high wages

• Creating a network of education, training, research, and business  incubation centers around the state
  to develop a highly qualified manufacturing work force, to invent and commercialize advanced 
  manufacturing techniques, and to assist start-up businesses

• Creating a public-private initiative to conduct research, develop new  technologies and processes, and
  commercialize more efficient and environmentally sustainable manufacturing practices with incentives to 
  facilitate adoption of new standards

In addition the report identifies that government plays an extremely important role in shaping the competitiveness
of manufacturing, the overall business climate, and the robustness of the economy, but the report fails to provide
insight on the level of government action, e.g. by state, regional or local governments.

The report continues, illustrating that whether the goal is to retain companies and help them grow or to attract new
ones, governments have numerous tools:

• Off-setting certain costs through tax credits;
• Improving infrastructure and the workforce;
• Facilitating access to credit;
• Funding or encouraging basic research;
• Helping promote industries or products;
• Convening key stakeholders to increase cooperation and create economies of scale.

Curiously, it leaves the reader wondering whether the elements used by government are not used or
under- used or should be enhanced? And of further interest, the report previously identified that the two
key issues facing manufacturers is the regulatory environment and tax burden, but there was no reiteration
of how such actions would amend the regulatory and tax environments.  They did not apply any examples and 
the report makes sweeping statements. 

A Call to Action for California
The report identifies in the section,  A Call to Action for California, a series of policies issues that the future of
California manufacturing will be influenced by, specifically the method and extent to which the public and private
sectors individually and cooperatively address the industry’s challenges. This section includes big and small ideas
to consider in the face of today’s economic challenges. These suggestions are guided by the following principles:

• Broad economic reforms are needed in addition to specific initiatives to improve the competitiveness of the
  state’s manufacturing sector;
• Limited resources are better spent on improving existing government programs rather than creating new
   ones and on coordinating efforts across different jurisdictions in the state to avoid duplication and 
   realize efficiencies;
• Government incentives should focus on the inputs critical to manufacturing rather than on specific reforms;
• Public-private partnerships should be greatly enhanced to leverage collective resources and coordinate
  and improve efforts;
• Increasing the state’s manufacturing base requires long-term planning rather than short-term, ad hoc policy
   initiatives;
• Investments should focus on increasing productivity by leveraging technology and innovation;
• Removing as many inefficiencies in the business-government relationship   as possible is critical to enhancing
  competitiveness;
• Improving the transparency and accountability of government decision- making, including how incentives
  are used—to ensure effectiveness and equity;
• Encouraging environmentally sustainable manufacturing processes will to make production more efficient
  while reducing the impact on the community.

The question must be asked why were these not identified in a methodology and appear to the reader before the
Need for Actions?

Nevertheless, the report does provide an excellent analysis on the loss of jobs and corresponding wage and
salaries, in the section, Why Manufacturing Matters, but it fails miserably in measuring the enhanced manufacturing
performance of California’s workforce specifically identified by Christopher Thornberg of Beacon Economics. 
According to Thornberg, between 1997 and 2008, manufacturing output in the United States increased by 30 percent
in real terms, as identified by the U.S. Bureau of Economic Analysis. Over the same period, manufacturing output
increased by 90 percent in California – three times the national average. Some of this increase was driven
by the unprecedented productivity gains in information technology. But even without information technology,
manufacturing output in California has outperformed the nation as a whole.

In addition, in a report by Jed Kolko of the Public Policy Institute of California workers in California, on average, earn
12 percent more than the national average—even when adjusting for differences in workers, occupations, and
industries. However, output per worker in California is 13 percent above the national average. Thus, California’s
higher productivity fully offsets the higher average wages. California’s immediate neighbors—Nevada, Oregon,
and Arizona—all pay their workers less and have lower output per worker.

Again another criticism of this report is that it presents the importance of manufacturing and its value almost mid way
through the report. It would have been of greater value to have had this information presented sooner.

To retain and attract manufacturers in the Golden State, the report examined what other states are doing but lacked
details other than policy in nature that supposedly have created business-friendly policy frameworks, tax incentives,
and other assistance programs. Again, the report compared California to the states of Arizona, Indiana, Kansas,
Minnesota, Oregon, Texas, and Washington.

The report identified that the most successful models include a complementary set of incentives and initiatives
that address the impediments to creating a more favorable climate for manufacturers. These models have the
following critical elements:

• Focus on key high-value industry clusters with potential for growth such as life sciences, high-technology,
   renewable energy, and aerospace;
• Access to a publicly supported pool of risk capital;
• Enhanced university-based R&D funded by the government;
• Public-private-university partnerships to facilitate commercialization of government-funded research;
• Centers of excellence to educate workers in the skills needed by key sectors;
• Support for entrepreneurs through business assistance programs and incubators offering low-cost
   commercial space and access to mentoring, "financing, and peer networks.

Again few if any examples are identified from the other states and their success in bolstering manufacturing.

Then the report reiterates the five actions to improve the business environment-
1. SMART Regulation
2. Enhanced Incentives
3. Modern Manufacturing, Public Awareness
4. Centers of Excellence – Education, Innovation  and Entrepreneurship
5. Public-Private Initiative

One of the key elements illustrated is streamlining the regulatory processes  throughout California. The report talks
about making California more competitive without relaxing a single regulatory standard by making the process
smarter, more open, and more efficient and by holding all government officials accountable for  their decisions. 
The action to achieve this is based upon embracing technology, specifically e-commerce and the use of the internet.
But there is no discussion about the needed investment to accomplish this, particularly in an era when public
sector budgets have been slashed and employees have been laid off.

Additionally, although the report never states that economic developers are to blame for these issues either directly
or indirectly, the issues of lack of service in the section Call to Action in response to the challenges issued certainly
illustrate it is this professions’ fault.

The report has some good points, but lacks examples supporting its recommendations.  There are good items such
as Made Green in California certificate and the California Green Awards for Manufacturers, but the report makes no recommendations who should lead this direction.

Finally, it is exhausting trying to read this report. It is fragmented, disjointed and poorly organized.  But the five major recommendations do deserve to be reviewed because the elements identified need to be fully fleshed out and vetted,
because  it should be determined  who in the business, community and economic development, workforce training and redevelopment professions should or could help address these issues? And lastly, to determine if the economic
developers are to blame for the lack of a coordinated statewide incentive program and failure to steward
regulators to help manufacturers.

To read the report, go to the California’ Manufacturing and Technology Association website at
www.cmta.org.  Go to the homepage top of the page to download the report.