On March 19th, over 100 business leaders met at the community center of the City of Brea in Orange County for the “Manufacturing in the Golden State – Making California Thrive” economic summit. The summit was hosted by State Senator Mark Wyland in partnership with the Coalition for a Prosperous America and many other regional businesses and associations. The purpose of the summit was to discuss how our national trade policies and tax policies are harming California manufacturers and what policies should be changed to help them grow and thrive.
After State Senator Wyland welcomed attendees, Michael Stumo, CEO of the Coalition for a Prosperous America, provided an overview of the schedule for the day.
I provided an overview of California manufacturing in which I briefly discussed the history of manufacturing in California, pointing out that California is the 8th largest market in world and ranks first in manufacturing for both jobs and output. Manufacturing accounts for 12.5 % of the California’s Gross State Product and 9% of California jobs. California leads the nation in monies spent on R&D, and California companies received over 50% of all Venture Capital dollars invested in the U. S. in 2011. California’s high-tech exports also ranked first nationwide, totaling $48 billion in 2011.
California dropped to 50th in ranking for its business climate by the Small Business Entrepreneur Council Survival Index of 2013 because of its high personal and corporate income & capital gains taxes, its high gas and diesel taxes, high state minimum wage, high electric utility costs, high workers’ compensation costs, and stringent environmental and air quality regulations.
As a result, California lost over 600,000 manufacturing jobs since the year 2001, which represents 33.3% of its manufacturing industry. I mentioned that all of us had undoubtedly heard the latest ad by Texas Governor Rick Perry touting that 50 California companies had relocated to Texas in the last two years.
I then moderated a panel of the following local manufacturers, who gave their viewpoints of the challenges of doing business in California:
- Bob Lane, President, laneOPX
- Dana Mitchell, President, Advanced Mold Technology Inc.
- Tim Nguyen, President, Alva Manufacturing
- Nick Ventura, Co-founder WearVenley.com
Ms. Mitchell, Mr. Nguyen, and Mr. Ventura highlighted the difficulty in competing against Chinese prices and finding skilled workers. Their other comments provided examples of some of the above-cited disadvantages of doing business in California.
Dr. Greg Autry, Adjunct Professor of Entrepreneurship, Marshall School of Business, University of Southern California, led off the national panel with the topic of “Currency Valuation and National Security Concerns with the Current U.S. Trade Regime.” He began by showing the falsity of classical assumptions behind “free trade” by Ricardo and Hume ? absolute advantages are non-transferable, there are no externalities, such as pollution and military expenses, trade is in kind, there are no fiat currency distortions, and no strategies that are time constrained.
Autry then discussed the currency manipulation models of Japan and China, showing how China’s currency manipulation affects our national security. While China has adjusted the valuation of their renminbi (yuan) slightly since they drastically devalued it in 1994, it has still not reached the level that it was at that time. To keep their currency valuation low they either keep the dollars they get from their trade surplus in reserve or buy U. S. Treasury bonds. The dollars they earn from our trade imbalance and the interest they earn from buying our debt in the form of bonds has funded the dramatic buildup of their military.
Our technical superiority in military systems will not assure our national security any more than the technical superiority of Nazi Germany’s aircraft and tanks did for them. Economic superiority is what matters. The manufacturing industry of the U. S. out produced Germany during WWII and the Soviet Union in the Cold War. Autry stated, “An economy that builds only F-35s is unsustainable – productive capacity is what wins real wars. Sophisticated systems require complex supply chains of supporting industries. They require experienced production engineers and experienced machinists.” He concluded that we cannot rely on China to produce what we need for our military and defense systems. We should not be relying on Russia’s Mr. Putin to launch our satellites and space vehicles and provide us a seat to get to the international space station.
Next, Michael Stumo presented “Can Consumption Taxes Create Jobs and Help Regain American Prosperity?” He said, “America has no strategy to win… in terms of being a successful producing and exporting nation. Growing exports, expanding two-way trade, and establishing global supply chains makes us losers.Unilateral trade disarmament makes us losers.We should want to win and not be ashamed of pursuing our national interest.”
Stumo described the math about how a consumption tax could reduce our income tax burden, include imports in our tax base, and shrink the trade deficit, and increase U.S. production while maintaining progressivity. He explained that our national Gross Domestic Product (GDP) equals Consumption plus Investment plus Government Procurement plus Net Exports (Total exports minus Total Imports). Because our imports exceed exports, our economy is smaller than it would be if the U.S. balanced trade.
More than 150 countries have a form of consumption tax, either a goods and services tax (GST) or a value added tax (VAT), with an average 17% level. These countries rebate these taxes on their exports, which is a subsidy. The taxes are “border adjustable” because they act as a 17% tariff on our goods sent to other countries.
After NAFTA, Mexico replaced its tariff reduction by establishing a 15% VAT, and Central America did the same, establishing a 12% VAT after CAFTA. Other countries use consumption taxes to offset income, payroll, or other employer taxes to help their manufacturers be more competitive in the global marketplace or to offset other costs like national health care or pension programs.
These border adjustable consumption taxes have been a causative factor in increasing our trade deficits with our trading partners, which was $471.5 billion in 2013, $318 billion with China alone. CPA advocates changes in U. S. trade policy to address this unfairness which tremendously distorts trade flows. The goal of a U. S. consumption tax should be:
- Neutralize foreign tax (tariff/subsidy) advantage
- Reduce non-border adjustable taxes: Income and/or Payroll
- Replace them with border adjustable consumption taxes like a GST
- Be revenue neutral
- Be distribution/progressivity neutral
- Minimize fight over exemptions, deductions, and location of profits
Pat Choate (Economist; Author, Saving Capitalism: Keeping America Strong) covered the importance of protecting Intellectual Property to the future of American manufacturing. He said that the U. S. is the most innovative country in the world, issuing more patents than any other country, and California represents 25% of all U. S. patents. Choate highlighted how our current trade policies do not address patent infringement, trademark counterfeiting, and the outright theft of our trade secrets by China and other Asian countries. The intellectual property clauses of the Trans-Pacific Partnership would exacerbate the problems already created by the passage of the America Invents Act in 2012 converting the U. S. from a “first-to-invent” to “first-to-file” that has hurt our innovation. Any future trade agreement must address intellectual property theft.
The next speaker was Mike Dolan, Legislative Representative for the Teamsters, who has long experience working for Fair Trade (fighting expansion of the job-killing NAFTA/WTO model). If we build and maintain a strong bipartisan mobilization, we can stop Fast Track trade authority from being granted to the President and stop the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) Agreements from being passed. Dolan called the TPP “NAFTA on steroids” said that TTIP is just as bad. Dolan concluded that the path to victory on sensible trade policy is not possible without the Coalition for a Prosperous America and the constituencies it represents — small business, particularly in industries that are sensitive to trade fluctuations, family farmers and ranchers, working families and “trade patriot” activists including Tea Party groups.
Keynote speaker Dan DiMicco, Chairman Emeritus of Nucor Steel Corporation, spoke about “Seizing the Opportunity.” He led off by shocking the audience with facts about the real state of our economy and our unemployment rate. By December 2013, we still had not reached the level of employment that we had when the recession began in December 2007 although 72 months had passed. We lost 8.7 million jobsfrom December 2007 to the “trough” reached in February 2010, but because our recovery has been much slower than the previous recessions of 1974, 1981, 1990, and 2001, the gap in recovery of jobs compared to these recessions is actually 12,363 jobs.
In contrast to the misleading U-3 unemployment rate of 6.7% for December that is reported in the news media, the U-6 rate was 13.1%. The government’s U-6 rate is more accurate because it counts “marginally attached workers and those working part-time for economic reasons.” However, the actual unemployment is worse because the participation in the workforce has dropped from 66.0% to 62.8%. In other words, if the December 2013 Civilian Labor Force Participation Rate was back to the December 2007 level of 66.0%, it would add 7.9 million people to the ranks of those looking for jobs.The manufacturing industry lost 20% of its jobs, and the construction industry lost 19% of its jobs.
Unemployment Data Adjusted For Decline in Civilian Labor Force Participation Rate
(Adjusted For Decline from December 2007 Level Of 66.0% to 62.8% in December 2013)
|Reported Unemployed U.S. Workers||10,351,000|
|Involuntary Part-time workers||7,771,000|
|Marginally Attached To Labor Force Workers||2,427,000|
|Additional Unemployed Workers With 66% CLF Participation Rate||7,896,000
|Unemployed U.S. Workers In Reality||28,445,000|
|Adjusted Civilian Labor force||162,833,000|
|Unemployment Rate In Reality||17.5%|
We got in this position from 1970 until today because of failed trade policies allowing mercantilism to win out against true FREE Trade. We bought into wrongheaded economic opinions that America could become a service-based economy to replace a manufacturing-based economy. Manufacturing supply chains are the Wealth Creation Engine of our economy and the driver for a healthy and growing middle class! The result has been that manufacturing shrank from over 30% to 9.9% of GDP causing the destruction of the middle class. It created the service/financial based Bubble Economy (Dot.com/Enron/Housing/PONZI scheme type financial instruments.)
In addition, we have had 30 years of massive increases in inefficient and unnecessary Government regulations. These regulations, for the most part, in the past have been put in place by Congress and the Executive Branch. However, today they are increasingly being put in place by unelected officials/bureaucrats as they intentionally by-pass Congress.
American’s prosperity in the 20th century arose from producing more than it consumed, saving more than it spent, and keeping deficits to manageable and sustainable levels. Today, America’s trade and budget deficits are on track to reach record levels threatening our prosperity and our future.
Creating jobs must be our top priority, and we need to create 26-29 million jobs over the next 4-5 years. There are four steps we can take to bring about job creation:
- Achieve energy independence,
- Balance our trade deficit,
- Rebuild our infrastructure for this century.
- Rework American’s regulatory nightmare
We need to recapture American independence through investment in our country’s people, infrastructure, and energy independence, and by reversing the deficit-driven trends that currently define our nation’s economic policy. In conclusion, DiMicco said, “Real and lasting wealth IS, and always has been, created by innovating, making and building things — ALL 3 ? and servicing the goods producing sector NOT by a predominance of servicing services!”
Now is the time for all Americans to put aside their political differences and work together to restore California to the Golden State it once was and restore the United States to the land of opportunity it once was.