Archive for August, 2010

“Impact of Recession on California’s Aerospace Industry”

Tuesday, August 31st, 2010

The aerospace industry in California fared relatively well when compared to the overall manufacturing sector according to a recent study by the Northern California Center of Excellence and the Center for Applied Competitive Technologies at Cerritos College.  Between 2004 and 2008, the aerospace industry added over 5,500 jobs, but then experienced a sharp decline in 2009 with the loss of nearly 14,500 jobs over the previous year.  Between 2004 and 2009, the aerospace industry declined only 5 percent compared to 12 percent for the overall manufacturing sector.

California is responsible for about 25 percent of the aerospace industry in the U. S. Besides the strong supplier presence, California has more NASA centers than any other state and has a higher education system that provides a pipeline of skilled workers.  The clustering of aerospace supplier industries promotes knowledge transfer and innovation, reduces operating expenditures, and attracts new aerospace businesses to the state.  There are also four air force bases that support research, design, and testing of commercial and military aerospace systems (Edwards, Vandenberg, Los Angeles, and Air Force Plant 42.)

A few large firms, such as Northrop Grumman and Lockheed Martin, which produce aircraft for the military and private organizations, dominate the aerospace industry. These large firms subcontract with smaller suppliers to manufacture or design parts for the aircraft systems. The aerospace industry is comprised of the following industry groups:

  • Aircraft manufacturing
  • Aircraft engines and engine parts
  • Other aircraft parts and equipment
  • Aircraft support
  • Missiles, space vehicles and parts
  • Search, detection and navigation instruments

In 2008, there were about 5,300 aerospace companies located in California, with the majority located in Los Angeles County (1,850), followed by Orange County (790), the Silicon Valley (610), and the San Diego and Imperial Region (450).

The study divided the state into ten regions, with Los Angeles, Orange, San Diego/Imperial, and the Inland Empire, and South Central providing the most jobs.  While four of the top five regions lost jobs, the San Diego/Imperial region gained over 3,000 jobs, indicating a unique competitive position relative to the other regions.

The aerospace industry generated over $27 billion in sales in 2009, with the Los Angeles region generating 42 percent of the total revenue.  Orange County Silicon Valley, and the San Diego and Imperial region were high performers in terms of generating revenue.

Between 2009 and 2014, the ten fastest-growing aerospace occupations are: machinists, aircraft mechanics/service technicians, computer-controlled machine tool operators, industrial engineers, computer software engineers, business operation specialists, aerospace engineers, and engineering and other managers.  A bachelor’s degree is required for six of the ten occupations, with the remaining four occupations requiring work experience, on-the-job training or a vocational training certificate.

The problem with the machinist occupation is that there is already a shortage of skilled machinists that will be exacerbated as the baby boom generation retires, and there are few vocational training or apprenticeship programs to generate the skilled workers to replace the retirees.  For example, there is only one college in San Diego that provides a training program for machinists, San Diego City College.  A student can get a certificate in machine technology or an A. S. degree.  The entry-level salary in San Diego for the lowest paid occupation of a computer-controlled machine tool operator is $12 – $15 per hour depending on the size of the company.  The program graduates about 20 – 25 students per year.

The highest paid of these occupations is engineering managers, with median earnings at $62 per hour or approximately $129,000 per year, but of course, there are very few of these positions.  The aircraft mechanics/service technician occupation provides good wages at $27 per hour or about $57,000 per year and has a large number of projected job openings over the next five years.

The aerospace manufacturing industry is expected to experience slow growth in the next five  years, regaining less than half of the jobs lost in the previous five years.  Orange County and the San Diego and Imperial region are expected to experience the largest gain with the addition of about 1,550 and 1.630 jobs respectively.  Unfortunately, the region with almost 50 percent of current employment, Los Angeles is expected to continue to decline by about 4 percent or nearly 3,300 jobs by 2014.

The purpose of the study was to assess and map the workforce and economic trends of the aerospace sector for ten regions in California.  The information will be used b the California Community College’s Centers for Applied Competitive Technologies (CACT) to determine how to best serve the industry.  The CACTs specialize in providing workforce training and technical consultation to help businesses solve operational, personnel, and technical problems in the manufacturing environment.  The CACTs offer technology education, manufacturing training, and consulting services that contribute to continuous workforce development, technology deployment, and business development.  The goal of the CACTs is to provide companies the technical expertise they need to compete successfully in changing markets and the global economy.  There are 12 CACTs statewide, six of which are located in the top aerospace industry regions.  To learn more, please visit

Proposition 24 – Good or Bad for California?

Tuesday, August 17th, 2010

In the California budget crisis of 2009, legislators voted to impose the highest-ever tax increase to ostensibly balance the budget and eliminate the $20 billion deficit.  This was supposed to be a temporary two-year increase in sales, income, and car taxes.  As part of the compromise for the 2009 budget agreement, there were certain corporate tax breaks scheduled to take effect in 2010.

Faced with another more than $20 billion budget deficit after nearly three years of recession and continued mismanagement of state finances, the Democrat majority in the legislature now want to repeal the corporate tax breaks, delay rolling back the income tax surcharge, and increase alcohol taxes, along with a host of other proposed taxes and fee increases.

To help Democrats repeal the corporate tax breaks, the California Tax Reform Association qualified Proposition 24, originally referred to as the “California Corporate Loophole Repeal Initiative” or “The Tax Fairness Act.”  The official title is “Repeals Recent Legislation That Would Allow Businesses to Lower Their Tax Liability.” The California Teachers Association is the main sponsor of Proposition 24 and donated $500,000 to kick-off the initiative process and pay for the pay-per-signature petition drive to collect the required signatures to qualify the initiative for the ballot.

The supporters of Proposition 24 tout that it would end $1.3 billion in special tax loopholes for big corporations that don’t require the creation or protection of a single job in California and ensures that big corporations pay their fair share of state taxes at a time when the state is making drastic budget cuts to public schools, health care, and public safety.

The tax breaks to be repealed include:

  • The “single-sales factor” that allows multi-state corporations to choose whether they will be taxed on their total sales occurring in California or on a combination of their sales and their operations …including payrolls and property.”
  • “Loss carry-backs” that allow corporations that are experiencing losses in California’s current economy to get refunds for taxes paid up to two years previously.
  • “Tax credit-sharing” that allows companies with more tax credits that they can use to distribute the tax credits to affiliates.

A study by Charles Swenson, a Marshall School of Business professor at the University of Southern California finds the use of a “single-sales factor” would create nearly 144,000 jobs and increase state tax revenue b $411 million.  Swenson concludes it would “stimulate business and industrial growth in the state as measured by increased employment, help attract business into the state, help retain and expand business and industry and create increased job opportunities for all Californians.”

California businesses already find it harder to compete because of the increasingly unfriendly business climate.  California ranks 48th in the 2009 Small Business Tax Index by the Small Business & Entrepreneurship Council (SBE Council).  This low overall ranking was based on California’s ranking in the following specific taxes rates:

  • 4th highest personal income tax rates (10.55)
  • Highest state gas and diesel taxes (.0486)
  • 3rd highest capital gains tax (10.55)
  • 8th highest corporate capital gains tax rates
  • 9th highest corporate income tax rates

In December 2008, Governor Schwarzenegger appointed a 14-member bi-partisan Commission on the 21st Century Economy to make recommendations on ways to update and improve California’s out-dated revenue system to make it more reflective of our state’s economy.   After ten public hearings held through the state, hundreds of hours of expert and public testimony, and rigorous analysis and debate by the members of the Commission, a final report was released on September 29, 2009.  The report contains recommendations that would dramatically overhaul the state’s tax structure.  The full report may be viewed at the following website: There is no evidence that anything has been done in the last year by the State legislature to implement any of the reforms in California’s revenue and tax system that were recommended in the report.

The road forward to restored prosperity must include a more business-friendly environment where California businesses can grow and create new jobs.  Unemployed people and struggling businesses cannot generate adequate tax revenues to fund schools, transportation, health care, and other government services.  Increasing taxes by repealing tax breaks for corporations will hurt businesses already struggling and encourage more companies to relocate to other more hospitable states.  With California’s unemployment rate at 12.6 percent and some two million Californians out of a job, the last thing needed is the loss of more jobs.

Remember that California is a state of small business, over 90 percent employing less than 100 people.  We aren’t a state of large corporations with “deep pockets.”  On July 5, 2010, the Los Angeles Business Journal reported that state tax regulators estimate that about 120,000 businesses would lose these breaks if voters approve Proposition 24.  In this same article, Ben Nielsen of Cambridge of California, a furniture manufacturer in Gardena, said, “We’re barely surviving now as it is, with the economy as tough as it is and the foreign competition.  Those tax breaks were our hope for the future.  If they hadn’t been enacted, I would already have closed my doors.  Take them away, and I’ll probably have to shut down and throw 27 people out of work.”

A group called “Stop the Jobs Tax” is opposed to the initiative.  More than 500 businesses and associations have joined the coalition to oppose Proposition 24.  Some of the more well known organizations are:  California Taxpayers Association, California Association of Independent Businesses, California Chamber of Commerce, BIOCOM, CONNECT, California Manufacturers & Technology Association, and the San Diego Regional Chamber of Commerce.  A few of the long list of companies includes:  Abbott, Biogen Idec, Genentech, Gen-Probe, Hewlett Packard, Intel, Johnson & Johnson, Qualcomm, The Walt Disney Company, and Time Warner.  If you would like to join the opposition group to Proposition 24, sign up at

Rather than repealing a couple of tax breaks for corporations, we desperately need sound tax and regulatory reform to improve California’s business climate and help pull California out of the recession to put people back to work.

Is an American Manufacturing Renaissance Possible?

Tuesday, August 10th, 2010

The Committee to Support U. S. Trade Laws (CSUSTL) is organizing a “Conference on the Renaissance of American Manufacturing” at the National Press Club on September 28th in Washington, D. C. to discuss how to get the United States back in business as a world leader in manufacturing and create political momentum going into the fall congressional elections that will lead to changes in government policies to benefit U. S. manufacturers and their workers. Other issues to be discussed include structural changes needed in the United States; what must be done to bring manufacturing back; how to make trade laws and trade agreements effective for the manufacturing sector; and the politics of rebuilding manufacturing.  The conference is open to the public.  To register, send an email to

The CSUSTL is an organization of companies, trade associations, labor unions, workers, and individuals committed to preserving and enhancing U. S. trade laws.  CSUSTL’s members span all sectors, including manufacturing, technology, agriculture, mining, energy, and services.  CSUSTL is dedicated to ensuring that the already weak trade laws are not further weakened through legislation or policy decisions in Washington, D. C., in international negotiations, or through dispute settlements at the World Trade Organization and elsewhere.

Gilbert Kaplan, president of CSUSTL, said “A lot of people are concerned about manufacturing all across the spectrum, in the Democratic and Republican parties. But we keep losing manufacturing jobs, and plants are moving off-shore.  The question is why haven’t we made progress and what do we need to do to make more progress?” (Friday, July 30, 2010 Manufacturing & Technology News)

As reported on September 9, 2009 in PRNewswire, CSUSTL submitted comments to the Office of the U. S. Trade Representative regarding the proposed U.S.-Korea Free Trade Agreement.  CSUSTL strongly objected to the antidumping (AD) and countervailing duty (CVD) provisions of the section on trade remedies, citing concerns that the proposed measures would result in changes to the related legal processes, ultimately jeopardizing the ability of U. S. business to seek relief when harmed by unfairly-priced foreign imports

Mr. David Hartquist, Executive Director of CSUSTL, remarked, “While there is no doubt that the Agreement offers some economic benefits to U. S. industry, there is a strong risk that these U.S.-Korea Free Trade Agreement provision could seriously put at risk the integrity and enforceability of U.S. AD/CVD laws, which should be at the core of U. S. trade policy . . . they would set a very dangerous precedent for future free trade agreements the United States may enter with other countries.”

On Thursday, August 5, 2010, CSUSTL commended U. S. Senators Ron Wyden (D-OR) and Olympia Snowe (R-ME) for their legislation introduced to combat the evasion of U. S. trade remedy laws through custom fraud.  CSUSTL President Gilbert Kaplan said, “Passing this legislation will give the U. S. government the tools it needs to prevent bad actors from committing fraud and evasion to avoid paying antidumping and countervailing duties.  This is particularly crucial for U. S. companies struggling to recover from the recession that have trade orders in place.  It is now more important than ever to have strong and enforceable trade laws in this country.”  The Enforcing Orders and Reducing Circumvention and Evasion Act of 2010 (ENFORCE Act) gives the Department of Commerce the authority to investigate possible circumvention of AD/CVD orders.  It establishes, for the first time, a procedure whereby U. S. industry can petition the U. S. government to investigate specific allegations of AD/CVD evasion.

Roger Schagrin, Chairman of CSUSTL’s Government Affairs Committee urged the House and Senate to “act on enforcement legislation this year, so that we can end evasion that reduces the utility of trade remedy orders and impedes economic recovery.”

The United States and the Republic of Korea signed the U.S.-Korea Free Trade Agreement on June 30, 2007, but Congress hasn’t ratified it yet.

During his presidential campaign, then Senator Barack Obama pledged to “create good paying jobs here in America” in a speech to the United Steelworkers Union in 2008, but now as President, “his insistence to forge ahead with a trade pact negotiated under the Bush administration and almost universally loathed in his own party has baffled some, who say it is a betrayal of his campaign promises on trade.”  While some Congressional Democrats have vowed to fight against the agreement, many critics are now calling for the agreement to be renegotiated instead of scrapped altogether.

In a letter to the president, Senators Sherrod Brown (D-OH) and Debbie Stabenow (D-MI) wrote, We believe the Administration must focus on driving a hard bargain with Korea – one that shows success in gaining market access while combating unfair trade practices, and providing a new framework that gives confidence to American producers and manufacturers that global trade deals product jobs and better living conditions at home and abroad.”

According to the Economic Policy Institute’s estimates, the agreement could cost as many as 159,000 American jobs and increase the trade deficit by $16.7 billion in just the first seven years.  With unemployment hovering around 10 percent and an employment gap of nearly 11 million jobs, the last thing needed is a trade agreement that will cost more American jobs and raise the trade deficit.

Would it be any different on trade issues if Republicans took back control of Congress in November?  Not according to Senate Minority Leader Mitch McConnell.  On August 2, 2010, he reportedly said that voters could expect less spending and government intervention and a renewed push to finish free trade deals with Colombia, South Korea and Panama.

It would seem that no matter which political party controls Congress, American manufacturers and their workers lose, either through oppressive regulations and taxes that drive jobs overseas or through free trade agreements that entice the export of jobs.  Will either party ever come to the realization that what the American people need is jobs?   If our elected representatives don’t wake up, it will not be possible to have an American manufacturing renaissance that would create the jobs our country needs.

Has Government Become the “Big Bad Bear?

Tuesday, August 3rd, 2010

Do you remember playing a game when you were a child where you tried your best not to walk on any cracks in the sidewalk so the “big bad bear” wouldn’t get you?  If the sidewalks were old, there were so many cracks that you had to tip toe to get by without stepping on any.  Well, businesses are being forced to play a similar game with government today, and the “cracks” are getting so close together that it’s almost impossible to tip toe through the maze of “cracks” that come in the form of government taxes and regulations.

The new Health Care Reform Act has vastly expanded the requirement for businesses to file IRS Form 1099s for all payments over $600 annually.  Current law requires a business to provide a completed 1099 form to any independent contractors, subcontractors, freelancers, etc. that are not employees or corporations to whom they made more than $600 in payments over the course of a year.  The new law extends this requirement to corporations as well.  This could mean that a business would have to provide a 1099 to their utility company and every other vendor to which they pay more than $600 a year for services.  For metal manufacturers, such as machine shops, sheet metal fabricators, stampers, and casting companies, this could mean they                            have to provide a 1099 for companies that provide surface finishing services such as painting, plating, or powder coating.

A new survey by the National Association for the Self-Employed (NASE) found that self employed and micro-businesses (under 10 employees) are “expecting this new regulatory burden to greatly or somewhat increase the amount they spend on tax preparation.”  With over 40 percent of survey respondents still preparing their own taxes, this added workload will significantly increase the time business owners spent on tax preparation or force them to hire an accountant, adding to their cost of doing business.  This is another example of how the indirect costs of complying with government rules and regulations are just as burdensome to businesses as the direct costs of taxes and regulatory fees.

A study by the Regulatory Studies Program at George Mason University’s Mercatus Center in 2001(“A Review and Synthesis of the Cost of Workplace Regulations”) found that workplace regulations have a significant cost. The researchers surveyed 100 manufacturers in the United States, ranging from 7 employees to 65,400 employees.  The survey showed:

Complying with workplace regulations cost an average of $2.2 million per manufacturing firm or about $1,700 per employee

  • Smaller firms (less than 100 employees) faced higher costs than large firms (500 or more) with costs of $2,573 per employee and $1,530 per employee respectively

The survey revealed which types of regulations affect manufacturers the most:

  • Worker Health and Safety regulations, including OSHA, accounted for one-third the cost of compliance
  • Regulations governing employee benefits ranked second, making up 27 percent of the cost of compliance
  • Civil rights, labor standards, and labor-management relations regulations each made up about 10 percent of the cost of compliance

If these amounts were extrapolated to all manufacturing firms in the United States, the total cost of compliance would be about $32 billion.

A 2005 study on “The Impact of Regulatory Costs on Small Firms” by W. Mark Crain, Lafayette College for the Small Business Administration Office of Advocacy showed that small businesses continue to bear a disproportionate share of the federal regulatory burden.  The cost of compliance with all federal economic, workplace, environmental, and tax regulations is an average of $5,633 for all sized firms.  However, for companies under 20 employees, the cost was $7,647 compared to $5,282 for companies over 500 employees.  In the manufacturing sector, the cost per employee is $10,175; nearly double the average for all firms.  For small manufacturers, the cost is $21,919 per employee compared to $8,748 for large firms.  For medium-sized firms, the compliance cost per employee is $10,042.  In the service sector, regulatory costs differ little from small to larger firms.

A recent NAM study showed that U. S. manufacturers face a 22 percent cost premium compared to its trading partners due to excessive regulation and other external costs.   U. S. manufacturers cite the massive amount of government regulation imposed on them, especially environmental regulation, as one of the prime reasons they have made the decision to outsource manufacturing offshore.   Countries such as China may have environmental and labor regulations on the books, but government officials who have been told to look the other way do not enforce them.

If Federal lawmakers want to “save American manufacturing,” they need to wake up to the fact that adding burdensome government laws and regulations will actually reduce the tax revenue the federal government receives by driving manufacturers to export jobs overseas.  There is some talk in Congress about repealing this provision of the Health Care Reform Act.  I certainly recommend that they do so, but this is just another example of the unintended consequences of lawmakers voting on bills they haven’t read.  It’s almost as if government is choking “the goose that lays its golden eggs.”