Thursday, September 2, 2010

Manufacturing: The Missing Element in the Policy Discussions

The manufacturing of products is critical to the economic prosperity of our country and our state. While talking to voters in my campaign, the loss of jobs in manufacturing has been particularly commented upon, in large measure because our state and region have been hit hard by the loss of jobs in the auto and related industries.

Manufacturing products which are sold outside of the country or state is important to replenish the wealth in an area. Money which circulates in a state economy changes hands over and over again, because an expense to one party is income to another. However, to the extent that we import more products (and services as well, but services tend to be more localized) than we export, money leaks out of the system, leaving less and less money to be shared among the area’s residents, making the area poorer and poorer – unless the money is replenished by sales outside the country or area. On the local level, this fuels the “Buy Local” efforts of chambers of commerce and other groups.

But what can we do to encourage manufacturing? The report Manufacturing Strategy for Jobs and a Competitive America, National Association of Manufacturers, June, 2010, lays out the NAM recommendations, which in general are:

  • “Tax policies to bring America more closely into alignment with major manufacturing competitors and foster innovation
  • Government investments in infrastructure and innovation
  • Trade initiatives to reduce barriers, open markets to U.S. exports and protect intellectual property
  • A dynamic labor market that allows companies to attract the best, most talented workers from around the world to work in the United States
  • A common-sense, fair approach to legal reform
  • A regulatory environment that promotes certainty and economic growth
  • A comprehensive energy strategy that embraces an “all of the above” approach to energy independence
  • Health care reform that drives down costs.”
    2010 NAM Labor Day Report, National Association of Manufacturers, September 1, 2010.

The 2010 NAM Labor Day Report raises another very important point, when it says that

“[N]ow is not the time for policymakers in Washington to focus on an agenda that will increase costs, further elevate uncertainty and reduce the ability of our workers and companies to successfully compete in the global economy.”
. . .

“The current level of business uncertainty is illustrated by the funds available to invest by companies sitting on the sidelines. As of the first quarter of 2010, net corporate cash flow (mainly undistributed profits and funds set aside to replace depreciating capital) stood at $1.5 trillion, or 10.5 percent of GDP. This level is significantly higher than any similar period (three quarters into an economic recovery) during the past 60 years and a clear sign that firms remain hesitant to expand operations due to concerns about the U.S. business climate.
. . .
Asked if uncertainty about the business outlook is delaying their plans to expand employment or capital spending, nearly three-quarters (74 percent) responded “yes.” Of those who reported that uncertainty is affecting their expanding capital investment and hiring, the main areas of concern were the state of the U.S. economic recovery (46 percent) and possible regulatory or legislative changes from Washington (37 percent).

Businesses, workers and the American public simply have no clear sense of how actions by Congress and the Obama Administration could reshape the economy, employment and our country’s ability to successfully compete in the global economy.” [Emphasis added.]

Specific legislation, laws and regulations identified in the report as magnifying the uncertainty that afflicts the economy and negatively affecting American workers included:

  • “Expiration of the 2001 and 2003 tax cuts
  • The Environmental Protection Agency’s (EPA) proposed new regulatory regime to control greenhouse gas emissions and raise energy costs
  • Government implementation of the new health care laws, with their numerous mandates on employers, insurers and consumers as well as a myriad of unintended consequences
  • Failure to achieve an ambitious trade agenda necessary to ensure and expand global market share for U.S exporters
  • Labor policies, such as the Employee Free Choice Act, that could rob the U.S. economy of its dynamic growth potential.”

In other words, much of the Obama/Congressional Democrat agenda is creating the uncertainty which is retarding economic recovery, while at the same time spending billions in “Stimulus money”. This is equivalent to sitting in a car pressing on the gas pedal and the brakes simultaneously, and wondering why the car won’t go.

“Instead, policymakers should focus their efforts on progrowth, pro-worker and pro-manufacturing policies that structurally improve the competitiveness of the U.S. economy and increase the certainty that our country will remain the most competitive, dynamic and innovative economy in the world.
. . .
Our economy stands at a crossroads. The path our country takes will determine the long-term competitiveness of the U.S. economy and the American worker. With more competitive tax policies that encourage innovation and investment, lower and more certain costs in the areas of regulation, litigation and energy, and a committed effort to lower trade barriers overseas and support U.S. exporters, the prospects for a competitive U.S. economy that supports highly productive and compensated workers are very real. Without the right policies in place, the U.S. economy and the American worker will lose out to fierce global competition. The choice is ours to make.”

Increasing Our International Competitiveness

I had the opportunity to discuss our international competitiveness with David Huether, the NAM Chief Economist today. Besides the points discussed above, highlights of the discussion were:

  • We need to be very careful about legislation, regulations and other actions that increase our costs which cannot be offset by productivity increases. To the extent that wages in the state have been negotiated lower and unemployment has lessened wage demands, we have thereby increased our competitiveness. We must guard against complacency as the auto industry recovers, or that improvement may be quickly lost.

    The cost of fringe benefits is another factor we must control. One of the elements discussed in the need for “health care reform” was the possibility of shifting the cost of health care from employers to a broader set of participants (i.e., taxpayers) to put our employers and manufacturers on a more equal footing with our international competition which are not saddled with the same health care costs. The effects of the National Healthcare Reform, aka “Obamacare” are still unknown, with most sources believing that employers’ health care costs will actually increase due to the act, rather than being helpful.

  • The devaluation of the U.S. dollar will put our manufacturers in a better position to compete, as our exports will be cheaper for others to import and imports into our country will be more expensive. Challenges remain with the Chinese Yuan being pegged to the U.S. dollar, but it is expected that the Yuan will ultimately be allowed to appreciate, which would be an improvement in our manufacturers’ competitiveness. Of course, our leverage to influence Chinese policy is limited, given the amount we owe the Chinese government due to our enormous national debt.

  • We must continue to work for free trade agreements with numerous countries (such as Columbia, Panama and South Korea), because if we do not, the free trade agreements by the European Union effective January 1 will begin to push U.S. exports out of the market. Even if these negotiations are successful, the US will have FTA’s with only 22% of the global economy vs. 37% by the European Union.

  • We must fight to redress violations of existing trade agreements.

  • Last, but not least, we must increase our productivity. This can be accomplished to some extent by investing in basic research and infrastructure. But, we can do more by having a more educated work force in science, technology, engineering and math, as well as promoting a greater work ethic and eliminating job rules that include featherbedding (paying people for doing nothing productive) and other such nonsense.

Some of these elements are out of the control of the Michigan Legislature, but we certainly can have an impact on the avoiding unnecessary cost increases for our businesses and working to increase our productivity. That will be part of my focus on improving the environment for businesses to prosper, grow and create jobs here in Michigan. After all, businesses create jobs, not government. The best government can do is create the environment in which businesses can emerge and flourish.

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