I got my first exposure to economics studying abroad in Portugal. The year was 2005, and the conversations we had in class were mainly about the differential economic growth in EU member countries, an issue that the world would become intimately familiar with during the recession and the Euro crisis.
The problem, my teacher explained, was that Germany and the core EU countries were growing quickly, while Portugal, Italy/Ireland, Greece, and Spain (the PIGS, an acronym whose English meaning was not lost on my classmates) were either stagnant or growing slowly.
He showed a graph that looked like this:
The PIGS were supposed to catch up with the core over time, but even when they continued to grow, they ended up further away from their neighbors than when they started. Although this foreshadowed the currency problems the area would face, the more pressing was: why the PIGS were growing so slowly?
The main problem from our teacher’s perspective was that Portugal couldn’t catch up because it had lost the ability to compete at either end of the economic spectrum. Portugal was once a center of textile production – in another time, it was Europe’s sweatshop. In the globalization of the 21st century, Portugal had been caught out: it could not compete against the low wages of China or Hungary, but it also couldn’t easily shift into the high margin production of Germany or the high culture fashion of Paris or Milan. Portugal was stuck in a middle gear, with no infrastructure to perform at that level.
This fairly simple observation is one that has affected my thinking ever since. Even accounting for the Portuguese penchant for melodrama and nostalgia, this accurately described a cause of economic malaise in Portugal as in many places.
I have observed similar questions facing manufacturing in all kinds of places in the US: the question of the missing middle. These type of questions help me explain the immense gulf between believers and doubters of the manufacturing renaissance as outlined in Part 1.
When paths toward economic stability diverge, there is often a shrinking middle ground for countries that do not totally commit themselves towards one or the other. The middle ground represents healthy economic capacity that needs careful support and planning. This missing middle can be interpreted three ways: in terms of labor, products, or companies.
The Missing Middle Quality Products
At the risk of Oregonian self-parody, I like to know where the products I buy come from. When it’s possible, I like to support local manufacturers and craftspeople, who are more likely to circulate that money locally.
Based on my informal research, I have found a few consistent roadblocks to depending on local goods. When it comes to goods manufactured for personal consumption, there’s no middle ground: there are very low quality products (often produced abroad) and very high quality products, with prices to match. A number of platforms have sprung up to connect people to locally produced goods including Etsy and CustomMade, but many of them have sky high prices that keep out all but the most well off.
I think there is a huge market developing for that next level down that people have not yet figured out how to fulfill. Furniture, for example, that costs a bit more but not so much more – the equivalent of affordable organic produce. This is starting to emerge, but in many places the only choice is either shoddy products or handcrafted art pieces produced for wealthy patrons.
The Missing Middle Skill Work
When academics talk about the US competitive advantage in manufacturing, they usually mention that wages are low and productivity is high, relative to other developed countries, and that our top universities are the best in the world. There’s an inherent problem in this, though: usually places have at most one of these characteristics – it’s very difficult to have both rock bottom wages and excellent human capital. Most places operate somewhere in the middle, not at the extremes of low wages or at the absolute technical peak of a National Laboratory.
This may not always be a problem. The US provides a huge breadth of work environments within the borders of a single country or even many states. A major competitive advantage to the US is that we can have a low wage area like a Mississippi or a Tennessee a short distance from knowledge centers like Huntsville or Oak Ridge National Laboratory (to use some Southern examples).
The problem arises when it comes to particular places that have neither: small, disconnected regions, legacy cities, rural areas. This is a question of middle skill work, similar to the position Portugal found itself in. How is a mid sized city in Ohio supposed to compete with either Cambridge, MA or Mississippi? It will never have the technological capabilities of the first or the low wages of the second.
What about a mid-level state, one with neither outstanding educational institutions, rock bottom wages, or other advantages like natural resources? Consider Massachusetts. It’s in an odd position: while widely perceived as high tech and high end, many areas outside of Boston areas have the disadvantages of the rust belt: high costs, high unemployment among large numbers of unskilled workers while benefiting only marginally from the excellent schools and wealth of the state capital.
Another concern is that without this middle skill work, we prolong the belief that we can support a two-speed or two-focus economy, with low skills and low wages in some parts and high wages and high skills in others. Maybe we can. The growing gap between rich and poor in this country, though, gives at least some cause for concern. Graphs of the United States since the 70s look remarkably similar to the one my professor drew on the board (if not worse). A two speed economy could further the creation of Portugals and Germanys within the same country.
The good news is that within particular manufacturing companies, middle skill employees are in high demand. Most companies do not need many more assembly-line automatons or people with PhDs in engineering. They need reasonably educated and self-motivated competent middle-skill people. The “missing middle” I’m talking about is in the demand for places, not people. There just isn’t the demand there needs to be for Youngstown, OH or Gary, IN.
A Missing Middle Tier to Growth
Finally, there’s a missing middle set of firms that will enable actual growth in the sector. Many of the most valuable manufacturers are small and medium size enterprises that react to changing circumstances with the necessary speed but are also large and established enough to keep the ship upright in a storm.
The media’s need to construct a narrative is obscuring this important issue. In newspaper headlines, manufacturing is either booming or falling apart. Selective coverage gives the impression that every manufacturer operating in this country is a mega-corporation moving back from overseas or tinkerers operating out of their garage.
Germany has a legendary group of businesses called the Mittelstand that has sustained family owned businesses, humane practices and economic growth in that country for decades. These companies have built a reputation for providing extremely high quality goods, being responsive to customer concerns, and working collaboratively to train and support their workforce.
Generations of job destruction in manufacturing means that the middle size companies that remain are among the most hardened and devoted companies, a perfect basis for an American Mittelstand. However, they lack the number, standing, or self-image of their German equivalents. In the quest for stability in the manufacturing sector, the US is missing its own Mittelstand to form a support structure.
It’s no coincidence that Mittelstand translates as the “middle tier”. Without these missing middle tier firms, goods and work, the American manufacturing experiment of the 21st century is likely to crumble from its center.