In the May issue, I wrote about a study on the state of U.S. manufacturing produced by the National Association of Manufacturers. Since then, I've received quite a bit of feedback from readers puzzled by the overwhelmingly positive tone. As many suspected, there's another side to the report, some of it even more grim than the facts and figures I've been pummeled with over the past few weeks.

“Manufacturers in the United States are facing unprecedented challenges,” warns John Engler, president of NAM. “Pressures range from rising energy and health care costs to trade imbalances and a shortage of skilled workers.”

The manpower shortage is especially perplexing because jobs in manufacturing tend to pay well. Nonetheless, over 80% of U.S. manufacturers say they cannot find qualified workers to fill open positions. And it's likely to get worse because our colleges and high schools are turning out fewer people with technical skills. How bad is it? In 2000, nearly a quarter of all undergraduate degrees awarded globally were in science and engineering. The U.S., at 11%, is well below the average, while China, at 50%, is far above.

Another problem, and perhaps why fewer people are becoming engineers, is that in the U.S., it's often easier to take wealth than create it. We can thank our runaway tort system for that. In Japan, France, Canada, and the U.K., tort costs are less than 1% of the GDP; in the U.S., they're almost three times higher, equalling $250 billion a year, much of it sucked from the manufacturing sector.

Rising health care costs are yet another concern. Driven by escalating malpractice claims and insurance premiums, health care now consumes up to a third of the revenues manufacturers bring in. Were it not for health care, taxes, liability, and regulatory expenses, manufacturing in the U.S. would be more economical than in Germany, France, Canada, and the U.K., and on par with South Korea.

What's particularly disappointing is the negligence of our government in all this. In fact, according to the NAM report, government intervention is part of the problem. Currently, the regulatory load on U.S. manufacturers is about $162 billion, 32% higher than that imposed on manufacturers by our nine biggest trading partners. Manufacturers are also burdened by higher taxes in the U.S., about 40% compared to 28%, and falling, in developed nations with which we compete.

Another way government has an impact is through exchange rates. The stronger the dollar relative to a trading partner's currency, the harder it is to command a fair price for goods. According to NAM, exchange rates triggered the manufacturing recession of 2001. When rates were realigned in 2004, U.S. exports soared to over $900 billion the following year. The rebound would have been even better were it not for the fact that China pegs its currency to the dollar and that, for the past 10 years, it has steadily reduced the percentage of U.S. goods it imports.

Meanwhile, our leaders continue to cut federal spending on vital R&D. In 1985, America invested 0.25% of the GDP in R&D; today it's only 0.13%. “Since World War II, federal support for industrial research has been a key source of American innovation,” says Jerry Jasinowski, NAM official. “But R&D spending is now half of its mid 1960's peak, when it was 2% of the GDP.” By comparison, the U.S. now spends 2% of the GDP on tort claims aimed at the government.

So, yes, there is a flip side to the report. But like the folks at NAM, I believe there are ample reasons we, as a nation, should remain committed to keeping our manufacturing lead. If you'd like a copy of the report, or one for your favorite congressman or representative, log on to www.nam.org/facts and download The Facts About Modern Manufacturing.