AMERICA’S MANUFACTURING CHALLENGE

An Industry At Risk

   American manufacturing has shrunk for the third straight month, the worst contraction since July 2009.  Key indicators such as new orders, production, backlogged orders, and employment contracted, according to the Institute for Supply Management (ISM). The weakest production index (47.2, down from 51.3 in July) since May 2009, a weak new orders measure (47.1, down from 48 in July) and the lowest employment measure since November 2009 (51.6, down from 52 in July) have been reported.

  The only bright spots for this industry, (which accounts for about 11% of the U.S. GDP according to a Brookings Institute study, Why Does Manufacturing Matter) came from pent-up demands on items that consumers could no longer reasonably wait to replace, such as autos.

  The dilemma that this produces for the depressed U.S. economy is of extraordinary importance.  According to the Federal Council on Competitiveness December 2011 report, Make: An American Manufacturing Movement:

   “U.S. manufacturing is more important than ever, employing more than 11 million Americans directly, and creating close to 7 million additional jobs in related industries.  Manufacturers contributed $1.7 trillion to the U.S. economy in 2010.  Manufacturing also boasts the highest multiplier effect among economic sectors, pays higher wages and drives innovation.  Manufacturing accounts for nearly 60 percent of U.S. exports, and those export-related jobs pay even higher wages than non-export related jobs.”

  What happens when a factory closes? A Milken Institute review of American manufacturing reported in The American Prospect that “Close a manufacturing plant, and a supply chain of producers disappears with it.” It noted that for every computer manufacturing job in California, 15 jobs outside the factory are created.

   The Leadership Report, which has been largely ignored by the White House, notes that “As U.S. manufacturing leadership is waning, other nations are investing heavily in growing and revitalizing their manufacturing sectors, and are crafting policies to attract and retain production facilities and multinational companies within their borders.”

   The ISM Report concludes that “…our nation has surrendered important manufacturing sectors.  They were not all lost in the pursuit of cheaper labor or as a result of products becoming low margin commodities.  We have lost production of cutting-edge innovations developed in America because of tax, regulatory, skill, finance and infrastructure limitations that make production elsewhere more competitive.”

  The traditional American role of leading the world in manufacturing output ended in 2010, when China produced slightly more.  For the first time, U.S. output represented less than 20% of the total world figure-coming in at about 18.24%, according to Tom Hemphill and Mark Perry, writing in Business Economics.   

  The impact on the American economy of a depressed manufacturing center is substantial.  As noted in the Brookings study, it provides above-average wages, promotes innovation by accounting for a lion’s share of R&D spending, plays a key role in reducing the trade deficit, and contributes heavily to environmental sustainability.

 The NY Analysis examination of this issue indicates that American manufacturing is being detrimentally affected by a number of factors, including:

·   The highest corporate taxes among industrialized nations;

·   An increasingly burdensome regulatory regime;

·   A weak national and global economy

·   A downturn in federal support for cutting-edge R&D;

·   A slowdown in military procurement of major weapons systems;

·   The rise of China, with its cheaply paid labor force, and that nation’s unfair competitive practices, as well as intellectual property theft;

·   An increasingly poorly schooled workforce; and

·   High energy costs.

   On April 1, 2012, the United States gained the unwanted distinction of having the worst combined federal/state tax rate, at 39.2%, on the planet. Japan, formerly in first place, now comes in second at 38%, followed by France, Italy, Germany, Canada, and the United Kingdom.

   The Competitive Enterprise Institute (CEI)  notes that “Our tax code is among the world’s least friendly toward manufacturing.”

  Numerous analysts and elected officials have recommended that Washington should reduce the corporate tax rate to 25%. Opponents to that concept maintain that existing loopholes allow at least some international business entities to pay less than the full rate, sometimes down to 29.2%, according to aCNNMoney study.

  Consistently, the development of internationally competitive corporate tax rates, and reducing corporate payroll and income tax burdens on manufacturers investing and hiring in America, ranks as a key priority to improving manufacturing prospects within the nation.

   The prospects for reform remain unclear.  Republican presidential candidate Mitt Romney advocates  a 25% rate.  President Obama has proposed a rate of 28% but wants it tied in to other tax increases and closing current breaks, which may eliminate the benefit of the lower rate. This places him at odds with the Council on Competiveness recommendation of replacing the current world-wide double taxation system.

An Industry At Risk

   American manufacturing has shrunk for the third straight month, the worst contraction since July 2009.  Key indicators such as new orders, production, backlogged orders, and employment contracted, according to the Institute for Supply Management (ISM). The weakest production index (47.2, down from 51.3 in July) since May 2009, a weak new orders measure (47.1, down from 48 in July) and the lowest employment measure since November 2009 (51.6, down from 52 in July) have been reported.

  The only bright spots for this industry, (which accounts for about 11% of the U.S. GDP according to a Brookings Institute study, Why Does Manufacturing Matter) came from pent-up demands on items that consumers could no longer reasonably wait to replace, such as autos.

  The dilemma that this produces for the depressed U.S. economy is of extraordinary importance.  According to the Federal Council on Competitiveness December 2011 report, Make: An American Manufacturing Movement:

   “U.S. manufacturing is more important than ever, employing more than 11 million Americans directly, and creating close to 7 million additional jobs in related industries.  Manufacturers contributed $1.7 trillion to the U.S. economy in 2010.  Manufacturing also boasts the highest multiplier effect among economic sectors, pays higher wages and drives innovation.  Manufacturing accounts for nearly 60 percent of U.S. exports, and those export-related jobs pay even higher wages than non-export related jobs.”

  What happens when a factory closes? A Milken Institute review of American manufacturing reported in The American Prospect that “Close a manufacturing plant, and a supply chain of producers disappears with it.” It noted that for every computer manufacturing job in California, 15 jobs outside the factory are created.

   The Leadership Report, which has been largely ignored by the White House, notes that “As U.S. manufacturing leadership is waning, other nations are investing heavily in growing and revitalizing their manufacturing sectors, and are crafting policies to attract and retain production facilities and multinational companies within their borders.”

   The ISM Report concludes that “…our nation has surrendered important manufacturing sectors.  They were not all lost in the pursuit of cheaper labor or as a result of products becoming low margin commodities.  We have lost production of cutting-edge innovations developed in America because of tax, regulatory, skill, finance and infrastructure limitations that make production elsewhere more competitive.”

  The traditional American role of leading the world in manufacturing output ended in 2010, when China produced slightly more.  For the first time, U.S. output represented less than 20% of the total world figure-coming in at about 18.24%, according to Tom Hemphill and Mark Perry, writing in Business Economics.   

  The impact on the American economy of a depressed manufacturing center is substantial.  As noted in the Brookings study, it provides above-average wages, promotes innovation by accounting for a lion’s share of R&D spending, plays a key role in reducing the trade deficit, and contributes heavily to environmental sustainability.

 The NY Analysis examination of this issue indicates that American manufacturing is being detrimentally affected by a number of factors, including:

·   The highest corporate taxes among industrialized nations;

·   An increasingly burdensome regulatory regime;

·   A weak national and global economy

·   A downturn in federal support for cutting-edge R&D;

·   A slowdown in military procurement of major weapons systems;

·   The rise of China, with its cheaply paid labor force, and that nation’s unfair competitive practices, as well as intellectual property theft;

·   An increasingly poorly schooled workforce; and

·   High energy costs.

   On April 1, 2012, the United States gained the unwanted distinction of having the worst combined federal/state tax rate, at 39.2%, on the planet. Japan, formerly in first place, now comes in second at 38%, followed by France, Italy, Germany, Canada, and the United Kingdom.

   The Competitive Enterprise Institute (CEI)  notes that “Our tax code is among the world’s least friendly toward manufacturing.”

  Numerous analysts and elected officials have recommended that Washington should reduce the corporate tax rate to 25%. Opponents to that concept maintain that existing loopholes allow at least some international business entities to pay less than the full rate, sometimes down to 29.2%, according to aCNNMoney study.

  Consistently, the development of internationally competitive corporate tax rates, and reducing corporate payroll and income tax burdens on manufacturers investing and hiring in America, ranks as a key priority to improving manufacturing prospects within the nation.

   The prospects for reform remain unclear.  Republican presidential candidate Mitt Romney advocates  a 25% rate.  President Obama has proposed a rate of 28% but wants it tied in to other tax increases and closing current breaks, which may eliminate the benefit of the lower rate. This places him at odds with the Council on Competiveness recommendation of replacing the current world-wide double taxation system.

 Second of a three part series    

 Part one of our review of the crisis facing America’s manufacturing sector outlined the decline in the industry, and the impact of an uncompetitive tax structure

   Regulatory burdens are a key factor depressing manufacturing in the United States.  Kevin Williamson recently wrote in National Review that the cost of regulatory compliance–which may be between one and two trillion dollars annually–is a bigger burden than taxes. He noted that, in addition to the cost, the regulatory burden is more infuriating because “you can boot out your representative if he votes for a tax hike, but you can’t vote out executive-branch bureaucrats.”  In many cases, the regulatory system is geared against the very type of ingenious, highly productive new firms the nation needs to rejuvenate its industrial base in favor of politically connected older companies with the capital to hire powerful lobbyists to influence politicians.

   While American manufacturing has been enduring difficult times for over a decade, the increasing burden of regulations over the past three years, particularly those relating to the environment, have contributed heavily to the acceleration of the crisis.

   Ben Lieberman, writing for the  Competitive Enterprise Institute, notes that “…the biggest recent change–and the most worrisome threat for American manufacturing–has been the accelerated pace of environmental regulation since the election of Barack Obama…Manufacturers worry about a storm of new regulations taking effect in the immediate future, any one of which would seriously harm them, and the cumulative effect of which would be the end of the United States as a major manufacturing nation.”

   The recent (ignored by the White House) presidential study by the Council on Competiveness recommends:

1. Congress should require agencies to begin reducing the costs and burdens of current and proposed regulations.

2. Congress should immediately reform section 404 of the Sarbanes-Oxley Act to increase entrepreneurs’ access to U.S. public capital markets and grow new companies.

3. Congress should reduce the costs of tort litigation from the current level of almost 2% of GDP -some $248 billion-down to 1% by 2020.

4. Congress and the Administration must take action on fiscal reform to achieve $4 billion in debt reductions by 2021.

   CEI notes that “The pace at which the Obama administration has issued new Clean Air Act regulations unrelated to carbon dioxide–most of them targeting manufacturers and the coal-fired power plants on which they (and many homes) depend for electricity–is without precedent in the statute’s 40 year history…”  Estimates of compliance costs are in the trillion dollar range–if compliance can be done at all.  Some of the demands call for the purchase and implementation of technology that is not yet available.

   In response to the growing harm caused by the imposition of numerous regulations, and the anger engendered by the fact that many dramatic alterations to our economy have resulted not from legislation but by executive branch bureaucrats, the House of Representatives has passed H.R. 10: Regulations From the Executive in need of Scrutiny Act, better known as REINS. The bill is not expected to pass the Senate and would certainly be vetoed by President Obama if it ever did.  With only minor exceptions, the vote on the bill followed straight party lines, with Republicans favoring it and  all but four Democrats voting against it.

   The legislation, which is intended “to increase agency accountability for and transparency in the federal regulatory process” is a direct challenge to the White House’s excessive rulemaking activities.  It is also a specific rebuke to the Environmental Protection Agency’s overzealous and often poorly thought out rule making.

  REINS would give Congress the ability to have a say in “major” rule additions or changes, and would require an analysis of how enforcement would impact employment.  It would also allow a court to review whether an agency has completed the necessary requirements for a rule to take effect.

   The past three and one-half years have been difficult ones for domestic energy production and refinement, as the White House has blocked the Keystone pipeline, significantly stopped offshore drilling, kept ANWR off limits, and engaged in other activities limiting the use of American sources and the refining thereof.  The resulting cost of energy, both at the pump for motorists and in the factories for manufacturers, has been a drain on the economy in general and manufacturing in particular. These actions, combined with already burdensome regulatory issues, directly affects the viability of American manufacturing.

   CEI notes that “it takes energy to run a factory, and rising energy prices tend to reduce manufacturing output.  Disproportionately high energy prices in one country encourage the outsourcing of manufacturing to others.”

   The U.S. Chamber of Commerce  reports that approximately 90% of jobs in the fastest growing occupations require some level of postsecondary education and training.  However, 80 to 90 million adults, about half the workforce, do not have the skills required to get or advance into “family-sustaining” wage jobs.

    But it’s not just the lack of a degree.  Our primary and high schools are turning out individuals who are deficient in the basic skills necessary for manufacturing or other employment.  The problems begins early, according to the Chamber, with 8th graders not proficient in the most basic subjects, reading and math.  30% of students fail to graduate high school in four years, and those that do eventually graduate lack the skills needed for employment

 Part one of our review of the crisis facing America’s manufacturing sector outlined the decline in the industry, and the impact of an uncompetitive tax structure.  Part Two reviewed the impact of excess regulation, inadequate education, and energy policy.

   Richard McCormack, writing in the American Prospect, notes that “the U.S. manufacturing sector never emerged from the 2001 recession, which coincided with China’s entry into the World Trade Organization.” An article inForbes written by Professor Baizhu Chen notes that “The average manufacturing wage in 2010 [was] $2.00 in China and $34.75 in America.”

   The rise of China renders any obstacle to U.S. manufacturing growth even more counterproductive.  The  University of Chicago Law Schools notes that “Chinese exports were important in declining trends in the [US] manufacturing during the past 20 years.”

   In his testimony before the U.S. House Steel Caucus, Thomas Conway, International Vice President of the United Steel Union (USW) noted that “A greater and greater amount of manufactured goods is being imported and more and more U.S. companies are off-shore manufacturing.  The Economic Policy Institute estimates that our trade deficit with China alone from 2001-2008 caused the loss of 2.4 million manufacturing jobs here.”

According to the Alliance for American Manufacturing, “China’s blatant use of illegal government subsidies and a web of predatory trade practices on a massive scale are undercutting companies in the U.S.auto supply chain.”

   Costs may be going up in China, however, reports The Economist.”Costs are soaring, starting in the coastal provinces where factories have historically clustered.  Increases in land prices, environmental and safety regulations and taxes all play a part…labor costs have surged by 20% a year for the past four years.”

  Beijing’s intellectual property theft, and the propensity to demand technology transfer as a “cost of doing business” in China, renders the threat to American manufacturing, especially the crucial high technology sector, significant. NSA director Keith Alexander recently noted that China’s espionage efforts have resulted in the greatest transfer of wealth in history.  This year, for the first time in U.S. history, an economic espionage trial was conducted, convicting a Chinese-born naturalized American citizen, Dongfan Chung, of stealing $2 billion in trade secrets related to Space Shuttle technology from Boeing.

 Advanced Technology & Defense

  Manufacturing is a research and development-intensive industry.  According to the Brookings study, “Domestic company R&D spending is 3.6% of domestic manufacturing sales, compared to 2.4% of domestic non-manufacturing sales…According to the National Science Foundation‘s 2008 Business R&D and Innovation survey, 22% of manufacturing companies but only 8% of non-manufacturing companies introduced a new or significantly improved good or service between 2006 and 2008.”

  A drop in manufacturing eventually leads to a drop in R&D capability, which is crucial to America’s future in the realms of both economy and defense.

  Problems in American manufacturing can also be linked to the decline in two cutting edge areas: defense and aerospace technology.  The drop in American defense inventory has been nothing short of stunning: a navy that has lost over half its ships, an air force that has lost almost half of its combat wings, and an army that has been reduced from 18 divisions to 10.  The elimination of both the manned space program and the dwindling down of the robotic space program further eliminate the vital technology infrastructure and support so substantially needed for a healthy and advanced modern manufacturing industry.

  The national security crisis related to manufacturing is more than just the current weapons inventory, as terrible a threat as it is.  It also includes the capacity to grow our military might in times of crisis, the very capacity which allowed us to win World War II and the Cold War.

   The importance of this capacity has been recognized for over half a century, as noted by McCormack.  In 1948, Congress passed the National Industrial Reserve Act “based on the idea that the defense of the U.S. requires a national reserve of machine tools for the production of critical items of defense material.”  Almost forty years later, President Reagan, despite being a leading advocate for free trade, supported a Voluntary Restraint Agreement with Japan and Taiwan on imports of machine tools based on national security grounds.

   For reasons involving both cost and the lack of domestic capability, the Pentagon now looks overseas to supply some of its needs, including high technology items.  Dr. Joel Yudken’s report entitled “Manufacturing Insecurity” notes that “Ironically, the Pentagon and industry calls for greater reliance on foreign sourcing–often argued in efforts to weaken Buy America requirements in defense procurement–are a tacit recognition that the United States lacks the commercial manufacturing capacity to supply vital products needed by America’s defense industrial base.  The DoD has conceded that there are advanced technologies critical to military systems–armor plate steel, defense-specific integrated circuits, night vision goggles–for which domestic sources are inadequate.”

   The importance of a strong manufacturing sector to the American economy, to reducing the federal debt, to our national security, and to the employment rolls is obvious.  Why have so many elected officials and bureaucrats acted in a manner that has clearly harmed this industry?

  The Washington Time’s Paul Driessen has called the Environmental Protection Agency “the biggest single job-killing agency in government.”  Kurt Bauer, writing in Wisconsin’s Journal Interactive, notes that just one of EPA’s new rules, Boiler MACT, would lead to the closing of 11 paper mills and the loss of 7,500 jobs in his state.  Similarly, Bauer notes the costly effects of the highly pro-union partisanship of the National Labor Relations Board.

  Some observers attribute these actions to an archaic mindset that manufacturing is an industry of polluting, grimy factories providing low-paying, low-skill jobs that constitute an increasingly obsolete way of making a living. A whole panoply of clichéd capitalist vs. workers and anti-environment stereotypes, none of which are true, misinforms the biased view of current Environmental Protection Agency and NLRB bureaucrats.

   Making the openly hostile attitude of the Environmental Protection Agency under the Obama administration towards manufacturing more ironic is the fact that, as noted by the Brookings study, “manufacturing makes a disproportionately large contribution to environmental sustainability…the clean economy is nearly three times as manufacturing-dependent as the overall economy.  Of the clean economy’s 2.7 million jobs, 26% are in manufacturing, compared to 9% of U.S. jobs overall.

   In great cities such as New York, this incorrect perspective has led to land use planning policies that have resulted in consistently high blue collar unemployment and an urban economy that is increasingly fragile.

  New York City’s Pratt Center for Community Development reports that “Even as the demand for goods in New York City remains strong, city government’s own policies are threatening manufacturers’ ability to do business here. When Mayor Bloomberg came into office in 2002, New York City had 12,542 acres of land where manufacturing businesses could legally operate. Today, thanks to zoning changes, it has fewer than 10,746, and another 1,800 acres would be converted to other uses under additional rezoning proposed by the Bloomberg administration.  If the planned rezoning goes through, New York City will have lost 20 percent of all its manufacturing space in the span of just a few years.  Of the 95 New York City rezonings from 2003 to 2008, one-quarter converted manufacturing districts into some other category of land use…not one added a single acre of new space for manufacturers.”