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How Tax Reform Could Grow our Economy and Create Jobs

Tuesday, September 19th, 2017

Over 150 countries in the world have shifted a significant portion of their tax mix to border adjustable consumption taxes – value added taxes (VATs) or goods and services taxes (GSTs). Consumption taxes are “border adjustable taxes” and allowed under World Trade Organization rules. Consumption taxes are a tax on consumption – as opposed to income, wealth, property, or wages. Consumption taxes are called goods and services taxes in Canada, Australia, New Zealand or value added taxes in other countries. They are usually a tax only on the incremental value that is added at each level of the supply chain to a product, material or service. Most countries VATs or GSTs are tariff and subsidy replacements, mimicking a currency devaluation if a country raises the VAT or GST and uses proceeds to lower purely domestic taxes and costs.

After 40 years of multilateral tariff reduction, other countries replaced tariffs with VATs but the U.S. did not. American exporters face nearly the same border taxes (tariffs + consumption tax) as they did in the early 1970s. Foreign VATs are export subsidies as they are rebated to companies that export their goods. For example:

Mexico established a 15% VAT after NAFTA
Central American countries established a 12% VAT after CAFTA
Germany raised its VAT to 19% in 2007 to fund business tax reduction for trade competitiveness

The rates range from 12% to 24% and average 17% globally. This means that virtually all foreign countries tax our exports at 17% on top of tariffs. They subsidize domestic shipments abroad with the average 17% tax rebate. The figure below illustrates how it works.

U.S. Local Price = $100

China Local Price = $100

U.S. Price PLUS 17% VAT = $117.00

Chinese Price MINUS 17% VAT rebate = $85.47

The map below shows which nations have consumption taxes (red) and which do not (blue).

Because foreign consumption taxes are border adjustable, companies that export are double taxed. They pay U. S. taxes and the foreign border tax. Importers can sell cheaper products because they receive a consumption tax rebate from their home country and do not pay U. S. VAT.

Eliminate Payroll Tax Burden with the most efficient VAT in world

In written testimony to the House Ways and Means Committee of the U. S. House of Representatives on May 18, 2017, the Coalition for a Prosperous America (CPA) recommended “a new border adjustable consumption tax (Goods and Services Tax) that funds a full credit against all payroll taxes.”

Highlights from the testimony paraphrased or quoted include: “A new U.S. goods and services tax (GST) of approximately 12% should be enacted to shift taxation to consumption using the credit/invoice method. The proceeds should be credited against payroll taxes paid by all workers and businesses. GST proceeds should be applied as a full credit against the 15.3% rate of payroll taxes to reduce the cost of labor in the US while increasing after tax wages.

Exported goods and services would receive a full rebate. Imports would pay the GST. Small business with less than, for example, one million dollars could be exempted without sacrificing significant tax revenue.”

CPA’s written testimony explained, “Domestic prices vs. wages would not worsen because the payroll tax is embedded in the cost of all goods and services. Thus, eliminating the payroll tax lowers the prices for goods and services or increases wages depending upon the particular competitive forces in each product sector. A GST raises goods and services prices, but the GST/payroll tax combination would largely cancel each other out thereby holding the domestic economy harmless.

The more modern GSTs implemented by free market economies are in Canada, Australia and New Zealand. The compliance and administration burdens are relatively low in comparison to other taxation methods. The U. S. can learn from those and other countries’ experiences to implement the most modern, streamlined GST in the world.”

In summary, the proposed GST would

Reduce the cost of labor in the U. S.
Give every worker a raise
Lower price of U/ S. exports
Levy a tax on imports

The following are some of the benefits of a payroll tax credit for manufacturers, ranchers, and farmers:

Regressiveness of VAT offset by elimination of regressive payroll tax
VAT costs on all domestic producers are offset
No impact on prices of domestic goods/services
Imported goods/services prices increase
Cost of production for exports reduced

Change to a Sales Factor Apportionment (SFA) Border Adjustable Profit Tax

Last year, I wrote an article about corporate tax reform at the federal level based on the Sales Factor Apportionment Framework proposed by one of the members of the Coalition for a Prosperous America, Bill Parks. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserted that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explained that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”.

The Board of the Directors of the Coalition for a Prosperous America chose to support Sales Factor Tax Apportionment and included the following in their testimony to the House Ways and Means Committee:

“The US corporate tax system harms America’s trade competitiveness, overtaxes income from wages, under taxes consumption, and is bad at actually collecting what is owed. It also enables rampant base erosion through transferring profits to tax havens or countries with lower corporate tax rates. Full reform centered around destination based, border adjustment principles can result in an efficient, trade competitive, and largely tamper-proof tax system.

SFA is a destination based profit tax. Pretax income is allocated to the US in proportion to the percentage of a company’s total sales in the U. S. Pre-tax income earned outside the US is not taxed. Tax rates can be lowered substantially while still meeting revenue targets.”

The Coalition for a Prosperous America favors “a border adjustable business tax (for all entity types) which allocates pre-tax income based upon the destination of sales. Formulary apportionment based upon a single sales factor (sales factor apportionment or SFA) is well established at the state level. It solves most of the base erosion/profit shifting and tax haven abuse problems facing tax writing committees. SFA eliminates the disparate tax treatment between domestic companies (who pay the full income tax burden on worldwide income), multinationals (many of which shift profits to tax havens), and foreign companies (which pay a territorial income tax).

A broad based 12% GST could raise $1.4 trillion in new revenue. Payroll tax revenue in 2015 was 33% of total tax revenue at $1.056 trillion.”

CPA asserts that U. S. “trade competitiveness would be substantially improved because exports are freed from both the GST and payroll tax burden. Imports never include the cost of the U. S. payroll tax, but would pay the GST. This effect has been called Fiscal Devaluation because it mimics a currency devaluation for trade purposes. It only works if you combine a new GST with a ubiquitous domestic tax or cost reduction. The optimal domestic tax reduction is the payroll tax burden.”

The reason for CPA’s support is that “SFA taxes pre-tax income allocated to the U. S. but not profits allocated to foreign sales. Domestic firms can legitimately ‘avoid’ taxation by exporting more. Profits from imports are subject to tax. Domestic, multinational and foreign firms are on an equal tax footing.

The current corporate tax system cannot be fixed because it allows the fiction of intra-firm transactions to erode the tax base. Multinational companies use them to self-deal, strictly for tax purposes, shifting income to tax haven jurisdictions. Companies sell products or services to themselves, governed only by an ‘arm’s length’ principle which allows them to create their own pricing terms subject to a nearly unenforceable ‘fair market value’ constraint.

The intra-company transactions are not free market, ‘arm’s length’ or true third-party transactions. The only economically meaningful ‘sale’ is one to a true third party outside the company. As much of 30% of tax revenue may be lost from profit shifting to tax haven jurisdictions which have effective tax rates of 0-4%. These include Bermuda, Netherlands, UK Caribbean Islands, Ireland, Luxembourg, Singapore, and Switzerland.”

The CPA testimony provides the following example: “Assume a multinational corporation has worldwide sales of $100 billion, $50 billion sales in the U. S. and company-wide pretax income of $10 billion. Fifty percent of the profits, under SFA, are apportioned to the US. So, the profits to be taxed in the USA in this case are $5 Billion. Using a 20% corporate tax rate yields a SFA tax of $1 billion. Intra-company transactions with a Bermuda subsidiary would be irrelevant.

Merely lowering the U. S. corporate tax rate for example to 15% without further reform would not eliminate the tax competition with tax haven jurisdictions. SFA would make tax havens irrelevant because true sales to any foreign country would be ignored. IRS litigation centered around the proper fair market value of intra-firm transactions would disappear. Only profits allocated to the US in proportion to true third-party sales would be taxable.”

CPA asserts that “SFA would allow a significant reduction in the business tax rate while collecting similar revenue because base erosion is largely fixed. By one estimate, a 13% corporate tax rate under SFA would collect the same revenue as the current system…”

In conclusion, CPA recommends, “The U. S. tax system should shift to more border adjustability through destination based taxation. If the House GOP Blueprint does not gain Senate or White House support, the Ways and Means Committee has solid alternatives to meet their goals. CPA supports enacting (1) a new GST to fund a full credit against payroll taxes, plus (2) a shift to sales factor apportionment of global profits as an alternative to our current corporate income tax system.”

We need to take bold action if we want to rebuild our manufacturing industry to create jobs and prosperity. As I visit district offices of our California Congressional delegation as chair of the California chapter of CPA, I am encouraged by the interest these recommendations for tax reform are generating on a bi-partisan basis.

Tags:Payroll Taxes, Sales Factor Tax Apportionment
Posted in Economy, General, Taxes/Regulations | No Comments »

How to Fix the Dollar’s Overvaluation & Exchange Rate Misalignment

Saturday, September 9th, 2017

On July 11, 2017, the Coalition for a Prosperous America released a paper titled, “The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It” by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a 30-year veteran of the World Bank and Advisory Board member.

The purpose of the paper is to explain the problem of the dollar overvaluation, to show how to accurately calculate the dollar’s misalignment against trading partner currencies, and to propose a solution this serious threat to America’s future.

The authors point out that “In past centuries, the only reason that people would choose to hold a foreign currency would be to trade with it… But in the last few decades, and especially since the early 1990s, international speculators and traders have invested in dollars, including stocks, bonds, and cash, at the rate of hundreds of billions of dollars a year. The dollar investments of private investors now far outweigh the investments of government investors.”

These private investments shrunk from $1 trillion in 2007 down to $200 billion in 2010 during the recession and have grown back up to about $400 billion.

The authors explain that private investors buy dollars for many reasons: to purchase goods that are priced in dollars (like oil), “as a hedge against depreciation of their own local currencies,” to invest in the U.S. economy, to make a speculative investment, and “in many cases simply because in an uncertain world, the U.S. dollar is viewed as a rock of reliability and stability.”

In economic terms, the authors explain that the current account deficit is “the trade deficit with overseas remittances and other small items added in.” In the past when currency markets still maintained a link between exchange rates and balanced trade, the value of the dollar and the account deficit affect each other; i.e., “When the dollar rises, the current account worsens (larger negative figure as a percent of GDP), and when the dollar falls, the current account improves.”

However, the authors point out this hasn’t been happening for years. For example, “The current account deficit has been strongly negative throughout the last ten years, yet the dollar has not fallen to bring trade back into balance. On the contrary, in mid-2014, despite a trade balance close to -3% of GDP, the dollar suddenly rose more than 15%, and stabilized in 2016, only to rise yet again after the November election.”

They add, “These exchange rate increases are likely to worsen the trade deficit in the next two to four years. The ability of the U.S. dollar to defy gravity despite huge and persistent trade deficits has played an important role in the persistence of those deficits.”

The consequences are: “A dollar that is too high keeps our exports too expensive and makes imports too cheap, prompting Americans to consume more imports and to export less. The impact of an overvalued dollar is hard to overstate.”

Why this is critical is that, “According to Fred Bergsten and William Cline, both of the Peterson Institute, “every 10 percent rise in the dollar adds about $350 billion to the trade deficit and reduces the level of U.S. economic activity by about 1.65%, with a corresponding loss of about 1.5 million jobs.” Since the U.S. has had a more than $500 billion trade deficit since 2003, except for 2009, this helps explain why we lost 5.8 million manufacturing jobs between 2000 – 2010.

Calculating the Currency Misalignment

In 2008, Fred Bergsten and his Peterson Institute for International Economics colleagues developed a methodology to calculate a Fundamental Equilibrium Exchange Rate (FEER) of a currency that will enable a country’s trade to balance (i.e. exports and imports equal) in a reasonably short timeframe. The authors state, “The traditional FEER methodology generally targets getting a nation’s current account to within plus or minus 3 percent of balance…In 2015, Peterson suggested targeting absolute, true-zero trade balances and recalculated FEER levels based on targets of balanced trade. Moving from a target of +/-3% of GDP to a true-zero balance is very important for the United States. Our present current account deficits equal to 3% of GDP cost us the needless unemployment of about three million American workers, according to most estimates of the job cost of imports.”

After “the Peterson Institute issued new global FEER estimates in May using the traditional +/- 3% balance target methodology,” Dr. John Hansen “converted these FEER estimates into true-zero FEER estimates using a methodology agreed with Peterson.”

According to his calculations, “The U.S. dollar is currently 25.5% overvalued compared to its FEER,” which makes it “more seriously misaligned than the currency of any other major trading partner country. “

In contrast, “Germany and Japan – are misaligned in the opposite direction. They are undervalued while the U.S. dollar is overvalued.” Japan’s currency is undervalued by 25% and Germany’s by 23.6%.

What was surprising to me was that according to Dr. Hansen’s FEER calculations, China only had a 4.7% undervaluation. For the last ten years, I have read article after article about China’s undervaluation of their currency, estimated to be anywhere from 25% – 40%. I didn’t realize this had changed until I searched and found an article from November 18, 2016 by Fred Bergsten of the Peterson Institute, in which he wrote, “China was the champion currency manipulator of all time from 2003 through 2014. During this “decade of manipulation,” China bought more than $300 billion annually to resist upward movement of its currency by artificially keeping the exchange rate of the dollar strong and the renminbi’s exchange rate weak. China’s competitive position was thus strengthened by as much as 30 to 40 percent at the peak of the intervention. Currency manipulation explained most of China’s large trade surpluses, which reached a staggering 10 percent of its entire GDP in 2007.”

According to Bergstrom, China is no longer undervaluing their currency because they have “experienced large outflows of private capital that have driven its exchange rate down and indeed sparked market fears of disorderly renminbi devaluations. To their credit, the Chinese have intervened heavily on the opposite side of the market: Instead of buying dollars to keep the renminbi weak, they have sold large amounts of dollars to prevent it from sliding further.”

As a consequence of the misalignment of the dollar against the currency of two of our major trading partners and to a lesser degree with other countries, “The dollar’s gross overvaluation imposes a tax on the selling price of all U.S. products that can be traded internationally – even if they are not actually traded. It is a tax on U.S. producers trying to export. On U.S. producers competing with imported goods. And it is even a tax on U.S. producers who face the threat of imports. For example, the threat of imported shirts from China can force a New England shirt manufacturer to sell his shirt for 25 percent less than he would otherwise be able to charge if the dollar were not so overvalued.”

Because this tax is a tax on the selling price and not on profits like the income tax, “…the dollar’s overvaluation is such a serious threat to the survival of manufacturing and farming in the United States. The dollar’s overvaluation threatens not only the existence of these two critical sectors. It also threatens the entire economy because these two sectors are by far the most important sources of the exports we need to pay for our imports.”

Contrary to popular opinion, the overvaluation of the dollar is not caused by government currency manipulation The authors assert that “The dollar’s misalignment is primarily caused by the buying and selling decisions of private traders…the dollar is overvalued because private investor decisions are unrelated to the fundamental performance of trade or production in the U.S. or any other economy, and the global monetary system no longer has a mechanism to bring exchange rates back to levels consistent with balanced trade.”

What is the solution?

Dr. John Hansen has developed a Market Access Charge (MAC) “as a system to discourage overseas private investors and return-sensitive official investors such as sovereign wealth fund managers from excessive speculation and trading in U.S. dollar assets.” (For further details, go to his website.)

He believes that “By reducing the incentive for foreigners to invest in dollars, we can gradually and safely reduce its overvaluation, benefiting the U.S. economy and restoring control over our own currency.”

His proposal is to initiate the MAC with a 0.5% charge “on any purchase of U.S. dollar financial assets by a foreign entity or individual…As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit.

The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls… Most importantly, the MAC would have a substantial impact on the dollar’s value, moving it gradually and safely to a trade-balancing exchange rate and keeping it there, regardless of what other countries do. If the trade deficit goes to zero, so would the MAC.”

Dr. Hansen and the Coalition for a Prosperous America believe that this small charge “would be sufficient to discourage foreign inflows of hot money, with no material impact on foreign direct investment in factories and other directly productive activities.”

They agree that, “if properly implemented, the MAC could eliminate the full 25% overvaluation of the dollar, and this could lead to the complete elimination of the trade deficit over the subsequent three to four years.”

How could it be implemented?

The authors believe the MAC could be implemented unilaterally by the U.S. federal government. because “it does not violate IMF rules, which explicitly allow member nations to implement policies needed to rectify international financial imbalances [and] It does not violate WTO rules either.”

However, they “recommend a period of international consultation with G20 members to reduce the risk of misunderstandings and, hopefully, to get them to implement their own versions of the MAC…[which] would benefit the U.S. and the world by restoring a stable foundation for balanced, sustainable global growth.”

They envision that, “The MAC would be a self-financing system since it would generate revenue. We expect the MAC would generate at least $1 billion in annual revenues, and probably more, depending largely upon how much foreign exchange trading in the dollar declines due to increased transaction costs from the MAC.

Because the goal of the MAC is “to reduce and ultimately eliminate the trade deficit,” the revenue would be temporary and would go to zero when the goal is achieved. They propose that at “MAC revenue be earmarked for a “U.S. Competitiveness Fund” supporting short-term spending projects such as infrastructure investment.”

They also clarify that “no Americans would pay the MAC charge. Only foreign-based individuals and entities are liable to pay the MAC.” Until the MAC achieves its goal, the Government will enjoy increased tax revenue because the MAC will greatly stimulate U.S. competitiveness and thus overall output, profits, wages – and thus the tax base.”

They “believe the MAC could eliminate the trade deficit entirely over a period of several years,” but emphasize that “there is still a clear need for other U.S. trade policies focused on eliminating unfair trade practices and non-tariff barriers. The MAC should be seen as complementary to, not competitive with, such trade policies. Though in remission now, currency intervention and manipulation by governments is likely to resume, and the U.S. government should not hesitate to act to stop or counteract such activities.”

The Coalition for a Prosperous America “favors actions to strengthen the monitoring, definition, and enforcement of remedies to counteract currency manipulation, dumping, and other unfair trading practices.” I strongly agree with their recommendation to implement a Market Access Charge to reduce dollar overvaluation, discourage unwanted investment in the dollar, bring down the dollar’s value, significantly reduce America’s trade deficit and stimulate economic growth, employment and personal income.

Tags:account deficit, currency manipulaton, trade deficit
Posted in Currency Misalignment/Munipulation, Economy | No Comments »

Do Low American Savings Rate Cause Trade Deficits?

Saturday, September 2nd, 2017

Mainstream trade news continues to assert that trade deficits don’t matter. Economists help reporters write these fake news stories by claiming that America’s failure to save money is the problems, not foreign trade cheating. On June 20, 2017, the Coalition for a Prosperous America released a research paper titled “Do Savings Rates Cause Trade Deficits? by Michael Stumo (CEO) and Jeff Ferry (Research Director) that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low US savings, relative to investment, causes our trade deficit. For example, Harvard professor and former Reagan administration advisor Martin Feldstein.has said that the US fiscal deficit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces [thus saving little], it must import more than it exports.’”

These macroeconomists “claim that Americans spend too much, save too little, produce too little, and thus must import to support their gluttony.” They are incorrect.

White House economists use the “savings rate causes trade deficits” claim to create the false illusion that nothing can be done. But the real problem is that a few foreign countries – like China, Japan, Germany and South Korea – have economic strategies to overproduce, under consume and ship their overcapacity to the US. Their growth strategy is their full employment program. They export their unemployment to the US.

DISTINGUISHING CAUSES FROM MATHEMATICAL INTERRELATIONSHIPS

To macroeconomists, the ”National savings, investment and net trade are variables within equations or formulas known as ‘national income identities’. Because the variables are within the identity, they are called “endogenous’ and are explained by the equation.” But they do not explain what causes the changes.

“The basic Gross Domestic Product equation is referred to as a national income identity, expressed in the following equation:

GDP = C + I + G + NE

C = Consumption; I = Investment, G = Government and NE = Net Exports. Net Exports are also expressed as X – M in another version of this equation. When the Net Exports is a negative figure as it has been since 1979, this reduces the GDP. According to previous research by the Coalition for a Prosperous America, “the annual trade deficit has reduced each year’s GDP by some 3% to 5.5% each year, and those reductions compound over time.”

The purpose of the paper is to explain “how to distinguish (a) causation from (b) mathematical interrelationships in the national income identity or equation that underlies this debate. For reasons explained below, real world changes (exogenous factors) outside the identity are the true causes. These real-world changes directly impact one or more variables within the identity, transmitting through the equation by mathematical necessity. In short, national savings is related to the trade deficit in an accounting sense but does not cause it.”

Government policies often affect each one of the variables of the above equation. For example, the income tax rate may affect Consumption. If rates are high, then American consumers have less money to devote to consumption. If Government consumption and expenditures through procurement is down as it was under Sequestration, then companies that sell to the government make less money and have less money to buy products as business and corporate consumers.

To clarify the relationship between savings and trade deficits, the authors cite Robert Scott of the Economic Policy Institute: “Accounting identities do not, and cannot, explain the causal relationships between savings, investment, and trade flows. Do low savings rates cause trade deficits, or does causation run in the other direction? A trade deficit reduces the incomes of domestic workers, pushing many into lower income brackets. Families with lower incomes generally find it much harder to save. Therefore, increasing trade deficits can and do reduce national savings.”

DEBUNKING THE MORALITY VS SAVINGS RATE HYPOTHESIS

International economists in important positions “implicitly argue that no policy action is necessary or effective because US citizens simply do not save enough. We have caused our own problem. Our immoral, gotta-spend-it-now culture must become more austere.”

However, the authors explain that “National savings, in the context of the national income identity, is the aggregate of household, business and government savings. It is the extent to which national income exceeds private and public spending.

Household savings can, for example, go down if family earnings fall but they spend the same as before on necessities. Taxes or interest rates could go up causing consumers to spend less. Neither cause has anything to do with financial morality.”

Instead, government policies can and do affect savings rates. The authors state, “Surplus countries such as Germany and China have been deficit countries in the past… with low savings rates and trade deficits. Their cultural propensity to spend or save did not miraculously change…policy changes in the 1990’s and 2000’s caused transfers of wealth from households to industry forcing less consumption and more production at increased scale and with very competitive prices. The result was more national savings and trade surpluses.”

HOW OVERSUPPLY IS TRANSFERRED TO DEFICIT COUNTRIES

The authors show how the oversupply (overproduction) of some countries is transferred to other countries causing them to become deficit countries. They write; “All countries cannot run trade surpluses. Offsetting deficits must exist elsewhere. The primary reason for a country to engineer persistent surpluses is to spur domestic employment by excessive reliance upon foreign consumers. The deficit country, however, experiences devaluation of its formerly well employed labor.”

They point out that in 2005, “then-Federal Reserve Board chairman Ben Bernanke argued that the large and growing U.S. current account deficit is caused not by anything happening in the U.S., but by decisions taken by emerging economy nations to run very high savings rates, pursue export-led growth, and lend money to other countries, especially the U.S. He called the situation a ‘global savings glut.’ These excessive inflows of foreign savings raise the U.S. dollar exchange rate, drive down our interest rates, and force our economy into a trade deficit.”

The method by which this transfer takes place is described by Professor Michael Pettis, quoted in the paper:

“If any country takes steps to change the gap between its total domestic savings and its total domestic investment, then those steps must also affect its trade balance. Because a change in one country’s trade balance must be matched with an opposite change in the trade balance of all other countries, there must also be an opposite and equal change in the gap between the total domestic savings of the rest of the world and the total domestic investment of the rest of the world.”

Other factors affecting this transfer are “wage suppression (intentionally as in Germany) or because high volumes of new workers are entering the labor market (as in Asia) and redirect household resources to investment. The result is that productivity increases faster than wages. Increased production outstrips the ability of domestic households to consume. Domestic supply exceeds demand and the country must rely upon foreign consumers to soak up the excess.”

What Tactics Do Surplus Countries Use?

The authors explain that “Export-oriented or investment-oriented countries can utilize policies to reduce consumption, increase production and export at very competitive prices.”

China:

Wage growth is constrained to well below the growth in worker productivity
Undervalued exchange rate…for much of the past two decades
Government subsidizes Chinese manufacturing exporters
Financial repression of Chinese households
Vast amounts of surplus labor that produces more than it consumes.

In essence, the authors state “They export oversupply, deflation and unemployment. The result is excessive reliance on demand from consumers in deficit countries.”

Germany

Holds down domestic wages
German banks provide direct loans and vendor financing to foreign countries to buy German products
Impose a 19% consumption tax (VAT) that is rebated to exporters

As a result, “The economic distress caused by the German-policy-induced crisis in other eurozone countries perversely holds down the value of the euro” making Germany’s exports more price competitive in the global marketplace.

SOLUTIONS TO REBALANCE TRADE AND CAPITAL FLOWS

The authors present the following recommended solutions to reduce trade deficits:

Fix currency misalignment, especially the overvalued dollar.
Implement a US consumption tax, such as a goods and services tax (GST), in a revenue neutral and distribution neutral way by completely offsetting the payroll tax burden.
Adopt a territorial business income tax called sales factor apportionment (SFA)
Consider broadly applied tariffs to counter the unearned advantages of trade surplus countries
Apply selective tariffs to high value or strategic products that the US wants to produce

In conclusion, the authors state: “…the level of US savings and investment cannot and do not ‘cause’ our trade deficit. The true causes are surplus country policies, misaligned exchange rates and global labor oversupply. Persistent trade surplus countries export their oversupply and unemployment to deficit countries characterized by open economies and open financial markets. Policy leaders must become adept at determining the actual causes, how they are transmitted through national income identities and how they result in imbalances. Effective policy responses can then be designed to rebalance trade and capital flows, increase US employment and restore our economic growth.”

The paper shows why America’s economy grew when the majority of manufactured goods were Made in America and consumed by US consumers. The wages paid to the manufacturing workers who produced these products allowed them to save more because they earned more. When the U. S. lost 5.8 million higher paying manufacturing jobs from the 2000 – 2010 because American production was offshored to China and other Asian countries, American workers no longer had any money to save. The overproduction of trade surplus countries resulted in a glut of cheap imported products that further depressed or destroyed some American manufacturing industry sectors. The cheap imported goods that consumers bought became a curse rather than a blessing.

Therefore, the preposterous premise of many macroeconomists that low savings create trade deficits was proven false. It is incomprehensible to me why macroeconomists don’t understand that you can’t save if you don’t have a job or your non-manufacturing job is paying way less than your manufacturing job did. This is why I strongly support the recommended policies of the Coalition for a Prosperous America and urge you to do so also.

Posted in Economic Development, Economy | No Comments »

Coalition for a Prosperous America Summit Discusses How to Grow Economy

Thursday, December 8th, 2016

On October 13, 2016, the “Southern California Manufacturing Summit” was held at the Wedgewood Center in Aliso Viejo. The summit was hosted by the Coalition for a Prosperous America (CPA), with SDG&E/Sempra Utilities as the major sponsor, along with a long list of non-profit organizations, regional businesses and associations as sponsors and partners. The purpose of the summit was to learn and discuss how we can use Southern California’s advantages to re-grow manufacturing and create good paying jobs through smarter policies on trade, taxes, and the economy.

CPA is a unique alliance of manufacturing, agriculture, and labor working for smart trade policies and represents over three million households through our member associations and companies.
Since nearly all of our sponsors provide services that benefit manufacturers, we modified our format from previous summits to provide opportunities for our sponsors to tell about their services to promote networking among attendees.

Our first speaker was Greg Autry, Adjunct Professor of Entrepreneurship, Marshall School of Business, University of Southern California, who discussed “National Security Concerns with the Current U.S. Trade Regime.” Among the highlights of his presentation was his statement, “There are national security concerns with trade agreements. 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, machinists, and more.”

He recently prepared a report analyzing the competition and found that we are now outsourcing most of our space-related technology. He said, “NASA awards contracts for launch vehicles to Boeing and Space X, but chose to buy Russian lower stage engines. We have to choose if we are going to have a supply chain for the space industry. We cannot rely on China to produce what we need for our military and defense systems.

He added, “The International Space station was funded by the U. S. to the tune of $100 Billion of the $120 Billion that it cost. 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.”

Autry stated, “If you own stock in Alibaba, you actually own stock in a holding company in the set up in an offshore tax haven of the Cayman Islands, and the real owner behind Alibaba is the Chinese government. In contrast, he said, “It was the wealth he created at Amazon that enabled founder Jeff Bezos to now lead Blue Origin, which was selected by the United Launch Alliance to finish development of a new engine to replace the Russian made RD-180 rocket engine used by ULA’s Atlas 5 rocket.”

He pointed out that the Germans had the best technology in WWII, but didn’t win because we out produced them. Productive capacity is what wins wars. We wouldn’t be able to do the same for a future war as China has become the shop floor for too many American manufacturers. Take the U.S. F-22 airplane vs. the Chinese J20 airplane. We have 187 F-22s, and we stopped producing them because they were too expensive. China has several hundred J-20s, and they are still producing them.

He warned, “China has been an aggressive nation for thousands of years – it’s how the country grew from a small nation state. China has expanded their claim to territorial waters to include territory claimed by all of its immediate neighbors — Taiwan, South Korea, Vietnam, Japan, the Philippines, Japan and even New Zealand and Australia. China’s threat to these countries could eliminate getting supplies from Vietnam, Taiwan, and Korea, where companies are located that are now part of our supply chain for the military and space industry. We are going to lose our supply chain for the military and defense industry because the people in the State and Commerce Departments don’t talk to the Defense Department.”

After his presentation, July Lawton, President of The Lawton Group/TLC Staffing, explained that her company provides temporary to permanent staffing solutions for engineering, manufacturing, information technology, as well as the more traditional human resources, accounting, administrative, marketing, and healthcare positions.

Nicholas Testa, Jr., CFPIM, CSCP, CIRM, is founder and CEO of Acuity Consulting, Inc. a firm specializing in supply chain and operations management and systems consulting and training. He is president-elect of the APICS Orange County and described the types of supply chain education and training that APICS provides to its manufacturing industry members.

Economist Ian Fletcher, author of Free Trade Doesn’t Work” was the next speaker. A few highlights of his presentation were: “Free trade is trade without restrictions. Economic rivalry is taking place every day. There is rivalry for wealth and power. We live in America, and it does matter where you live. America’s trade deficit is averaging $500 B/year. Free trade is part of the cause of poverty, as well as family breakdowns. Free trade mostly destroys jobs. We are looking in a decline of quality rather than quantity of jobs. De-industrialization is occurring. Many major American companies are not American any longer; they are owned by foreign corporations. Boeing is losing manufacture of airplane wings to Mitsubishi. There is not a single airplane that doesn’t rely on parts from other countries.”

He stated, “Free trade simplified means there must be something good for both parties. Free trade is only one sided by the United States because many countries practice mercantilism. Trade is being manipulated to benefit our trading partners. The Euro currency has been manipulated to reduce the value of the currency of Germany to be lower by balancing it out with the economies of France, Italy, Spain, and Greece. The U.S. is being forced to compete with the state capitalism of Europe and Asia.”
He added, “Free traders say that trade deficit doesn’t a matter, but trade deficits mean that we consume more than we produce. David Ricardo’s theory of comparative advantage did not work when it was created and doesn’t work now. A nation needs some protection. Protectionism is really the American way. Alexander Hamilton was the founder of American protectionism. The U.S. had a protectionist policy until after WWII. Every country has done protectionism to succeed. He showed a chart showing the history of tariffs in the U. S.

He concluded, “After WWII, free trade became a policy because of the politics to win the Cold War. It is crumbling now because of politics. There are dangers in protectionism, but there are dangers in doing nothing. Treaties or trade agreements are basically about protecting property rights. The World Trade Organization has failed to enforce terms of current trade agreements and will not do any better with the proposed Trans Pacific Partnership Agreement.”

After the morning break, I provided a brief overview of California manufacturing prior to moderating our panel of manufacturers. California is the 8th largest economy in the world, and if it were a country, it would be equal to France. California lost 33.3% of manufacturing jobs between 2000 and 2009 compared to 29.8% nationwide, and lost 25% of its manufacturing firms.

I pointed out that even with its unfavorable overall business climate, California still ranks first in manufacturing for both jobs and output. However, since the Great Recession, California lags in manufacturing job growth at a 3.6% rate compared to the national 7.2% rate and a GDP growth rate in manufacturing of 11.2% in California compared to a 22.6% GDP growth in the U. S. as a whole.

On the positive side, California leads the nation in R&D and number of patents issued, and
California companies received $78.4 billion of VC dollars in 2015 (57% of U.S. total – up from 51% in 2010).

Mexico, Canada, China, and Japan are the top four export markets for California, and California represents 11% of total U. S. exports. California ranks second behind Texas in all exports, but
California ranks first among all 50 states in agricultural exports estimated at $13.6 billion per year. California is the biggest U. S. producer of nuts, dairy, ice cream, and wine. The top high tech export is computers and electronic products, which equals 26.1 % of all the state’s exports. Transportation goods are the second top export, consisting of airplanes, ships, unmanned vehicles, and underwater vehicles.

Besides the good weather, Southern California’s advantages are:

• Gateway to Pacific – two major ports – Long Beach and San Diego
• Major hub in western U.S. for air, rail roads & waterway transportation
• Skilled, educated workforce for ALL occupations
• Research Institutions and Universities
• Large inventor/entrepreneur pool
• Hundreds of business Incubators and Accelerators
• Angel investor networks
• Venture capital networks
• 18 Foreign Trade Zones
• Employment Training Panel funds for employee training
• Workforce Investment Boards

There is also an abundance of business resources in Southern California, such as the California Manufacturing Technology Consulting (designated California MEP), two Centers for Applied Competitive Technologies, several Small Business Development Centers and Economic Development Agencies, as well as many Chambers of Commerce and Business Councils.

I concluded with mentioning the opportunities we have to improve the California business climate, change our national tax and trade policies, return manufacturing to U.S. through reshoring, connect regional manufacturers with other U. S. suppliers, increase collaboration between manufacturers and community college to address workforce and skills gaps, and educate community/youth about career opportunities in manufacturing.

After my presentation, the following three panelists shared their stories:

James Hedgecock, Founder and President of Bounce Composites, which designs, engineers, and manufactures high-quality, durable composite goods for multiple industries, including wind energy, automotive, aerospace, and sporting goods. He shared that the company started out producing their own patented design of stand up paddleboards, but it has been tough to compete with offshore companies because of unfair trade practice. He said it was especially difficult to export to Mexico and Europe because Value Added Taxes (VATs) are added to the price of their products, making their product more expensive.

Robert Lane and Dave Mock, principals of Lane OPX, shared how they help companies optimize excellence through blending Lean Six Sigma principles, strategic business initiatives and participative management philosophies to grow organizations, and inspire high performing, motivated teams. By leveraging their deep experience in manufactur9ing, team dynamics, leadership development and organizational design, they have been able to power the turnaround of small to large companies. More recently, they have been able to help manufacturers return manufacturing to America from overseas.

Mr. Wei-Yung Lee, CEO of Carlsbad Technology Inc. was our final panelist. Based in Carlsbad, California, Mr. Lee said that Carlsbad Tech was founded 1990 and is a subsidiary of Taiwan’s leading YungShin Pharmaceutical Co. The company began as a contract manufacturer of generic pharmaceuticals and has become an industry leader in manufacturing and distribution of generics, supplements, and medical devices. He said, “We have 150 employees and 15 are well-trained chemists. We have the capacity to produce 60 million capsules and 400 million tablets per year. Last year, we Launched our Comfort Vision™ contact lenses in the USA and have sold over 1 billion units in Asia. We are striving to become a global health bridge, bringing a world of innovative health products to the markets that need them. ”

After the panel, Jill Berg, President of Advanced Test Equipment Rentals, told about the products and services of her company. They rent, lease, and sell a large selection of test and measurement equipment and other types of lab equipment to companies all over the world. She announced that her company was hosting a San Diego Test Equipment Showcase on October 18th.

Then, Chris Marocchi, Field Operations Manager of California Manufacturing Technology Consulting (CMTC), explained that his organization is a non-profit consulting organization that just won the competition to provide Manufacturing Extension Program services for all of California. These services provide innovation and growth strategies along with operational enhancements to foster profitable growth for California companies. MEP services include: innovate new products, open new markets, improve workforce skills, increase product quality and reduce costs through Lean training, increase energy efficiency and green production, and optimize supply chain performance.

After our lunch break, I presented information on Lean Six Sigma Institute (LSSI) as neither of the principals was able to attend and I had obtained my Yellow Belt Certificate in Lean Six Sigma from LSSI in 2014. LSSI is boutique-style training and consulting company that uses training and coaching model to guide companies to manage Lean Six Sigma change, develop internal leaders, and sustain the results. LSSI’s is headquartered in Chula Vista California, but has satellite offices located in nine countries and employs over 60 expert consultants worldwide. Lean and six sigma principles and tools apply to virtually any process, and LSSI has successfully helped clients implement Lean Six Sigma in a variety of industries, such as manufacturing, retail, and healthcare.

Our key note speaker for the summit was Michael Stumo, CEO of the Coalition for a Prosperous America, speaking on “Growing SoCal Manufacturing.” Mr. Stumo stated, “CPA is a true coalition
of manufacturing, agriculture, labor, Republicans, Democrats, Progressives, Conservatives, and Independents. Our members are: Trade Associations, companies, farm organizations, Labor Unions, and individuals from all walks of life. Our non-Agriculture industries are: manufacturers, steel, tooling and machining, electronics, textiles, copper, aluminum, etc. Our mission is to balance trade and produce more in America to reclaim American prosperity.”

Mr. Stumo explained that there is a difference between service jobs and manufacturing jobs. According to Investopedia, “Examples of service sector jobs include housekeeping, psychotherapy, tax preparation, legal services, guided tours, nursing and teaching. There are very few “tradable” service jobs. By contrast, individuals employed in the industrial/manufacturing sector might produce goods such as cars, clothing and toys.”

He said, “There is also a difference in income and purchasing power between manufacturing and service jobs. When considering what industry sectors to prioritize for workforce and economic development efforts, it is important to look beyond basic employment numbers. This is because, while a sector might have a lot of jobs, it might not actually be producing a lot of income for the region, which is also very important for overall economic health and vitality.”

Mr. Stumo stated, “The problem is that as more manufacturing jobs leave, more productivity leaves as well. Unlike manufacturing, service-sector jobs have strict limits in terms of productivity. For example, a live performance of Beethoven’s 5th requires the same amount of performers/employees as when it was performed early in the 19th century. Compare that with the production of almost anything manufactured — the number of workers now required to produce a bolt of fabric, for example.”

He added, “There is a regional ripple effect of service vs. manufacturing jobs. At $4.4 trillion in total sales, manufacturing is by far the biggest income generator in our nation, despite a fairly rapid decline in employment. Yet, manufacturing still manages to far outperform all other industries in terms of pure income creation. Manufacturing generates more income per worker and has much bigger ripple effects, creating much more impact in a region while helping to raise wages in lower-productivity service sectors.”

He asked the rhetorical question, “What’s wrong with a service economy? He answered, “It shrinks manufacturing employment as well as the manufacturing sector’s ability to prop up wages. A labor market that loses wage pressures of high-productivity manufacturing industries will settle at wage rates lower than markets where this wage-boosting effect is present. Economic development policy makers should be careful about shunning manufacturing or other production sectors in favor of service sectors. This is a problem because 66% of U. S. workforce is without a four-year college degree.”

He concluded stating, “America is at a crossroads. We are losing an economic competition against other nations whose mercantilist strategies are destroying our manufacturing jobs, critical industries, and our standard of living, our national security, the security of our food supply, and our children’s futures. For the U. S. to become prosperous again, our future strategy must include the following:

• National Priority of Balanced Trade
• Strong enforcement
• Stop new trade agreements to force a re-think.
• Neutralize currency manipulation
• Tax reform with VAT/consumption taxes
• Consider tariffs to neutralize imbalances

We have a choice. We can continue our current trade and tax policies or we can develop and implement a comprehensive strategy that retains and reinforces our leadership in innovation, locates investment and production in the U. S. and raises employment by creating good paying jobs.”

As chair of the California chapter of CPA, I hope you will join our efforts to make America prosperous again.

Tags:manuacturing jobs, manufacturing, mercantilism, tax polcies, trade policy
Posted in Economy, Jobs, Manufacturing, National security, Taxes/Regulations, Trade Policy | No Comments »

Why Should the U. S. Have a Specific Productivity Policy?

Wednesday, July 27th, 2016

This question is answered by Robert D. Atkinson, President of the Information Technology & Innovation Foundation (ITIF) in Part II of the report, “Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies.” He states, “Rather than think of an economy as a large market with self-interested actors transacting on the basis of price and seeking to maximize productivity, it is more accurate to conceive of an economy as a large, integrated enterprise that requires coordination of activities that individual enterprises will not effectively undertake on their own.”

His opinion is contradictory to that of most Anglo-Saxon nation economists, whose policies are based on two major competing doctrines vying for influence: “neoclassical and neo-Keynesian economics, neither of which supports a national productivity policy.” In a nutshell, he states, “the neoclassical economic doctrine is focused on limiting government’s role in the economy, even as neo-Keynesians see the government’s main role as managing the business cycle and supporting a fairer distribution of income.” His definitions were so simple that even non-economists like me could understand them:

Neoclassical ? focuses on the “managing scarce resources in such a way that maximizes the net benefit from their use, and that produces the quantity and mix of goods and services most beneficial to society.”

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

Atkinson particularly criticizes neoclassical economists because they “do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged.”

He criticizes neo-Keynesian economic policy prescriptions because they “revolve around increasing government spending to keep the economy at full employment and ensuring economic fairness and redistribution, because…their goal is not productivity growth, it is full employment.”

Atkinson states. “Thus, the first step for any policymaker seeking to maximize the economy’s productivity is to reject the conventional neoclassical and neo-Keynesian economic advice and embrace an alternative economic doctrine grounded in an understanding of the economy as an integrated, complex enterprise.”

He adds, “This approach is grounded in understanding that productivity is less about markets and more about organizations and systems, in particular about how technology is developed and deployed to drive productivity.”

Atkinson concludes, “Few conventional economists bother to “look inside the black box” of actual organizations or industries and crossindustry systems. Yet it is there that the keys to raising productivity and the keys to the right productivity policy will be found.” He comments that “conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.”

The rest of Part II discusses how “public goods, externalities and other enterprise failures, and system interdependencies for development and adoption of productivity-enhancing tools all mean that markets alone will not maximize productivity.”

Public goods are “a good or service provided without profit to all members of a society—to increase their productivity.” Some examples are transportation infrastructure such as roads, highways, bridges, airports, seaports or the education infrastructure for K–12 and higher education. Atkinson comments,”… though public goods are necessary, they are not sufficient.”

Atkinson comments that rather than maximizing productivity companies “can maximize profits from increasing revenues or reducing costs. Many companies focus less on boosting productivity and more on increasing revenues, either by getting more customers or increasing revenue per customer by selling products or services with higher margins.”

What he does not cover is that the best way for companies to boost productivity is to transform themselves into lean companies through the adoption and implementation of lean principles, tools, and strategies.

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of Production’ and therefore productivity is a direct threat to their jobs.”

I found his brief discussion on the effect of system interdependencies on productivity interesting in how he shows that there is a relationship between product innovation and “interdependencies that are only observable and actionable at the industry or economy level.” For example, “when Apple developed the iPod, it needed customers with broadband Internet access and it needed music to be available for purchase online. Without either, the iPod would have gone the way of the Newton (an earlier, failed Apple attempt at creating a PDA).”

Market failure can stem “from markets tending to be poor at coordinating action when multiple parties need to act together synergistically and simultaneously. These chicken-or egg challenges must be overcome for productivity-enhancing innovation to occur in many technology platforms…Unless government plays a facilitating role, relying on markets alone can mean significantly delayed implementation.”

Atkinson identifies another challenge: “Many technology solutions require mutual adoption and coordination for them to be effectively deployed… For example, when automobiles were first developed few paved roads had been built. Only after a certain number of autos were sold was demand strong enough that the government needed to build roads. But initially cars could be driven on dirt roads that horses used, so adoption could grow gradually in the absence of government construction

In Part III, Atkins lays out a comprehensive and actionable agenda for spurring productivity growth, which can be used as a guide to tailor national productivity policy policies. This agenda includes policy recommendations…and the ways in which governments need to organize themselves to advance effective productivity policies.”

He states, “The conventional theory holds that the only thing government can do is to remove barriers and fix policy failures so that firms reacting to price signals can do whatever they may choose to drive productivity. This overly passive framework ignores the complexity and enterprise-like nature of economies, which actually require more strategic productivity policies.” He recommends that an “effective productivity policy needs to go beyond the standard limits to embrace four other key components:”

Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment
.Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.
A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.
Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

Roll back policies favoring small business – “special benefits to small business and discriminatory policies that place tax and regulatory burdens only on large businesses. He recommends, “To boost productivity, governments should embrace firm-size agnosticism in all policies.” (pages 70-73)

Replace the term informal with the accurate term the illegal economy – “individuals are breaking the law by not registering their businesses and paying taxes. Informality is a drag on productivity growth, not a progressive force.” (pages 73-74)

Set a reasonable set minimum wage indexed to inflation – this helps make it more economical for organizations to substitute capital for labor” and “in some sectors may expedite the adoption of automated equipment and new technology to increase labor productivity.” (page 81)

Atkinson warns, “Countries that protect entrenched, incumbent, or politically favored industries from market-based competition only damage their own country’s productivity and economic growth potential… This limits the ability of firms at the productivity frontier to take market share away from firms with lower productivity.”

Atkinson acknowledges that “The challenge is that few governments have designed their scientific research programs explicitly around advancing technologies to drive productivity. Instead, they follow the advice of neoclassical economists that governments should not pick particular technology areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

In fact, Atkinson recommends that “Governments need to focus on identifying and funding many more research and engineering projects that are specifically targeted to developing Technology that can replace human labor.”

He explains, “Productivity policy cannot be fully effective unless it is grounded in a sophisticated understanding that industries differ significantly with regard to their productivity dynamics… Three key factors differentiate industries when it comes to considering productivity policy.” They are

Scale ? Industries differ in terms of average firm size.
Competition ? Industries differ in the extent to which they face competition.
Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

In his conclusion, Atkinson recommends, “The single most important step governments can take to boost productivity is to make higher productivity the principal goal of economic policy, more important than managing the business cycle, defending liberty, or promoting equality.”

He adds, “National governments should also identify or establish one agency or laboratory whose main mission is to support development and adoption of productivity technology as well as of platform and sectoral productivity strategies. In the United States, this might be the National Institute of Standards and Technology.”

Finally, Atkinson states: “Productivity is the key to improving living standards—so policymakers should ignore conventional economists who say there is little government can do about it and instead make it the principal goal of economic policy.”

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of

Production’ and therefore productivity is a direct threat to their jobs.”

Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment.

Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.

A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.

Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

Scale ? Industries differ in terms of average firm size.
Competition ? Industries differ in the extent to which they face competition.
Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

Tags:jobs, manuacturing, productivity
Posted in Economic Development, Economy, Innovation, Jobs, Manufacturing | No Comments »

Is Bi-partisan Tax Reform Possible?

Wednesday, April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

“First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

“The percentage of a corporation’s nationwide property that is located in a state.
The percentage of a corporation’s nationwide sales made to residents of a state.
The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

One of our members of the Coalition for a Prosperous America, Bill Parks, is a passionate advocate of corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserts that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explains that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

“Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
It would encourage exports because all exports are fully excluded from corporate income tax.
It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
Ends the disguised income taxes which are actually royalty payments.
Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

“Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

Tags:Bi-partisan tax reform, corporate inversion, offshoring, Sales Factor Apportionment, tax havens
Posted in Economy, Jobs, Manufacturing, Taxes/Regulations | No Comments »

CPA’s Balanced Trade Message has Impact on Congress

Wednesday, April 27th, 2016

I just returned last Friday night from the Coalition for a Prosperous America‘s 9th annual Fly-In to Washington, D. C. It was my 4^th time to participate with CPA members from across the country to meet with Congressional Representatives and/or their staff. I noticed a big difference in the reception we got during our visits compared to my first trip. The Coalition for a Prosperous America is a nonprofit organization representing the interests of 2.7 million households through our agricultural, manufacturing and labor members, and I’ve been a member since 2011.

In his report, CEO Michael Stumo wrote, “It was an amazing experience to finally have the wind at our backs instead of facing headwinds…CPA is taken very seriously by congressional offices. They trust what we say. One-fourth of our meetings included the congressman/woman themselves, which is significant and a new high for us. Senior staffers attended our meetings rather than junior staffers as was the case only a few years ago.”

However, we have not just been doing an annual visit to D. C. once a year since 2008. Teams of CPA members led by Michael Stumo have made visits to D. C. once or twice a month since January 2015. Here in California, teams of members led by me have visited the offices of 37 of the 53 Representatives from one to six times since 2013. In addition, CPA has co-hosted four manufacturing summits in California starting in 2013 ? two in San Diego, one in Orange County, and our recent one in Sacramento in February. The same kinds of activities have taken place in other states where CPA has a state chapter, such as Ohio, New York, and Pennsylvania.

In all of our visits, either in district or in D. C., we have constantly focused part of our message on simply establishing why our huge trade deficit not only matters, but is core to our national economic malaise. As I have written in past articles, our annual trade deficit over the past 20 years has a relationship to our national debt and is a major cause of the loss of 5.8 million manufacturing jobs and the nearly 95 million people that are no longer part of the workforce.

For years, we have been emphasizing the following:

Trade deficits matter, they kill jobs and growth: This may sound obvious to you and me, but many Representatives and their staffer did not believe trade deficits mattered in the past. They were unwilling to admit the serious consequences in having a huge deficit in goods. So, if trade deficits were not a problem, there was no need to pursue a solution. Michael Stumo wrote, “This past week showed we have largely won that argument. We can only grow jobs and our economy if we focus upon a national strategy to balance trade by identifying the biggest trade cheating problems and aggressively fixing them.”

Our teams distributed a flyer titled, “Balanced Trade: Fighting the New Mercantilism” recommending that Congress establish a national goal to balance trade over a reasonable period of time by means of:

Direct trade negotiators to pursue trade deficit reduction as a primary negotiating objective.
Review past agreements for compliance with this objective. Renegotiate those that fail the test.
Utilize tax, fiscal and monetary policies to achieve the goal.
Aggressively and systematically attack and neutralize foreign mercantilism.

Past trade agreements have not improved our trade performance: For years, we have heard this line from the establishment and Congressional Representatives: “Trade agreements establish American leadership, grow exports and create jobs.” The refrain was: “Trade is beneficial. We are increasing exports, and we have a surplus in services.” The only time I heard this refrain this year was by a legislative assistant in Senator Dianne Feinstein’s office.

We were able to trounce this argument this year by distributing a flyer that clearly showed the poor trade performance of our past agreements through visual aids CPA spent a lot of time developing (see below). We clearly showed that modern foreign mercantilism has moved beyond the tariff and non-tariff barrier provisions in trade deals. Indeed, those deals often made our trade problems worse. For example, our trade deficit with Korea has nearly doubled since it went into effect in 2012 (from $14.7 billion to $28.4 billion in 2015.)

The TPP will likely make America worse off: CPA read and digested the pro-TPP studies by Petri and Plummer, Peterson Institute for International Economics, Working Paper 16-2, Jan 2016 and the “Global Economic Prospects: Potential Macroeconomic Implications of the Trans-Pacific Partnership,” by the World Bank, Jan 2016. These reports tried to hide the problems and exaggerate gains. Our CPA teams distributed a flyer that “displayed the results through insightful infographics showing that any projected gains were embarrassingly meager and fundamentally implausible”[because] “The studies assume, without analysis, (a) no currency misalignment, (b) no foreign border taxes that replace tariffs, (c) no industrial subsidies and state-influenced enterprises, and (d) no mercantilism.” As Michael Stumo wrote, “These assumptions are untrue. Therefore, we cannot achieve the meager growth projected. We showed how those studies were built upon a series of demonstrably false assumptions to produce those meager gains. Then we showed why losses to American workers, industry and the economy were nearly certain when you eliminated the false assumptions.”

This year we also proposed tax reform that can fix some major foreign trade cheating on a large scale. As Michael Stumo, wrote, “Tax reform is a challenge because K Street lobbyists rig the game for special interests and no connection is made with our success in producing here and winning the international trade competition. However, we made significant gains in showing how we can fight foreign consumption taxes that act as tariffs by smartly adding a US consumption tax and funding the reduction of other regressive taxes and costs to fix the problem. We also showed how we can fix the corporate income tax system with sales factor apportionment to halt tax haven abuse by transnationals, incentivize US domestic production, and make foreign companies pay their fair share of income tax when selling into the lucrative American market.”

The good news is that everyone we saw seemed to agree that the TPP does not have the votes to pass before the election. The danger will be in the “Lame Duck” session. We seem to be in a far better position to prevent future passage than we were last year at this time with regard to passage of the “Fast Track” Trade Promotion Authority. Michael Stumo, wrote, “We almost beat Fast Track last June. Indeed we won the first votes in regulation time but lost in overtime when the Empire Struck Back. Now, it seems that the anti-Fast Track block is holding strong and quite a lot of pro-Fast Track congressional members have either declared opposition to TPP or are leaning against it.”

Michael added, “GOP House leadership pushed Fast Track through last year but they seem to view TPP as toxic now. The GOP rank and file are letting House leadership know they do not want to vote on TPP at any time in the foreseeable future. The Senate side is less solid and has always posed the bigger challenge. Senate majority leadership wants changes to TPP but still wants get to ‘yes.’ However, the changes being demanded are difficult (but perhaps not impossible) to deliver.”

We are being helped by the stand against trade agreements by two of the major presidential candidates, Trump and Sanders, who bring up our broken trade policy in almost every speech. “Trade has become one of the few, rare ‘voting issues’… an issue that actually moves voters to support or oppose a candidate.”

While this has been a several year battle, we haven’t won yet and still have a lot to do. The establishment will continue say that the voters simply don’t understand the “greater good.” Pundits will continue to write many “reasoned” articles about why the voters should support trade agreements such as the TPP. But the success of Trump and Sanders shows that the establishment has not only lost its clout, it is actively disbelieved by many now.

Help us to grow this movement and increase our effectiveness. Encourage your friends and colleagues to participate. Let’s keep up the good fight!

Tags:job loss, national debt, tax reform, trade policy, Trans-Pacific Partnership
Posted in Economy, Jobs, Manufacturing, Taxes/Regulations, Trade Policy | No Comments »

Mixed Messages at San Diego’s Economic Outlook Events

Tuesday, February 9th, 2016

Economists and industry experts presented conflicting outlooks at the three of the Economic Outlook events held in San Diego this month. I attended two of the three ? the 32^nd Annual San Diego County Economic Roundtable and the San Diego 2016 Economic Outlook by the National University Institute for Policy Research ? and read about the third, the San Diego Business Journal (SDBJ) Economic Trends event.

The SDBJ event focused on the areas of expertise of industry panelists in banking, health care, insurance, commercial real estate, tax, and employment, which is why I did not attend this event. If you are involved in these industries, then you were happy to hear that these experts forecast a healthy year for San Diego with the U. S. economy growing about 2.5%. Home prices have increased, consumer spending is growing, wages are increasing, and commercial real estate vacancy rates are below the 10-year average.

The other two events paid more attention to the manufacturing sector in which I am involved. Marney Cox, Chief Economist for the San Diego Association of Governments (SANDAG) participated in both events, and he and Kelly Cunningham, Chief Economist at the National University Institute of Policy Research (NUPR) were more cautious, forecasting a more modest 1.9% growth in the region, 2.1% in California as a whole and only 1.8% growth in the U. S.

Kelly Cunningham stated that it took us 74 months after the last recession to get back to the job level we had in 2007, which was two to three times as long as the recessions of 1980-81, 1990-91, and 2000-2001. The average GDP growth after these three previous recessions was 4-5% annual growth, but the U. S. GDP has grown an average of only 2% since the Great Recession. At the SDWP event, Marney Cox opined that the regional GDP growth should be >3%.

San Diego is adding jobs faster than the rest of California, and he forecast that the San Diego unemployment rate would remain at the low of 4.8% reached in December 2015 compared to 5.8% for California. He emphasized that this is the commonly used U3 rate of employment, not the U6 rate that includes part-time and discouraged workers. The U6 rate is about double the U3 rate, and was 9.8% in December 2015. However, the U3 rate doesn’t include people who have dropped out of the labor force. At the SDWP event, Marney Cox stated that 698,000 people had dropped out of the labor force in San Diego since 2005.

What concerns me is that manufacturing is only 9.5% of the regional GDP (based on 2014 data), up from the low of 7.6% of GDP in 2008. This is still considerably down from the high of 30.1% in 1980. It had slipped to 24.8% by the end of 1999, but that is less than a 6% loss in 19 years, whereas we have now dropped another 15.3% in 15 years. Also, San Diego’s GDP dropped from 7^th in 1999 to 17^th in ranking of the top 35 metropolitan areas in the U. S.

According to NUPR report, San Diego has “added 7,000 manufacturing jobs back as 2015 ended. Half of the new manufacturing jobs are in non-durable goods, one-quarter in aerospace, and the rest among other durable goods production, including shipbuilding and recreational goods…” However, this is about 5% or 6,000 fewer jobs than we had in 2007 (102,400) and more than 26,000 fewer jobs in manufacturing than we had in 1999 (128,300).

Since you have to make it, grow it, or mine it to generate tangible wealth, it is questionable whether or not San Diego can even maintain its level of prosperity in the future. Agriculture did not even show up on the pie chart of GDP for San Diego, and natural resources only represented .5% of the GDP. Thus, it is critical that San Diego maintain a strong manufacturing base. Manufacturing jobs create 3-4 other support jobs, while service jobs only create 1-2 other jobs.

Construction dropped from 3.8% of the region GDP in 2008 to only 3.3% at the end of 2014, but there has been very little recovery in the number of construction jobs as the number of jobs is still down by 12% from what the number was in December 2007. The NUPR report stated, “In 2016 we do not foresee a significant increase of this part of the economy, in part because of the

relatively small number of housing permits approved in the County. Absent a fundamental change of that figure, this part of the economy will continue to struggle.”

Since manufacturing and construction represent good paying jobs for the middle class, this explains why middle wage jobs are decreasing. The NUPR report released at their event defines “middle wage jobs as those paying between $35,000 and $77,000 per year in 2014 dollars” and states that “in 2001 middle wage jobs accounted for 56.6 percent of all payroll wage jobs…the ratio continued to shrink, standing at 49.5 percent as of 2014.”

Essentially in San Diego, we are creating six times more low paying jobs than high paying jobs and double the number of low paying jobs than middle wage jobs. Higher wage jobs “increased from 21.2 percent in 2001 to 26.2 percent by 2014,” and lower wage jobs “increased from 22.3 percent in 2001 to 24.3 percent as of 2014.”

This trend is nothing new. I remember Marney Cox expressing concern over the shrinking number of middle wage jobs at economic roundtables I attended in the mid 1990s.

Another trend Marney Cox mentioned is that the percentage of workers age 55+ has increased from 25% of the workforce to 35.1%, and there has not been a recovery in employment for those ages 25-54. Since these years are supposed to be the “golden years” of making money in a career, this does not bode well for the future for this age bracket. My own son and daughter are in this age bracket, and my son has had to work as an independent contractor since early 2010 without being able to find a permanent, full-time job in an occupation related to construction. Neither of my children has been able to afford to buy a house because with rents as high as they are, they can never save enough money for a down payment. Their dad and I were able to buy our first house in our mid 20s when houses cost about 3-4 times a median annual salary, but now they cost 9-10 times an annual median salary.

As I have mentioned in past articles, San Diego has been an innovation hub of advanced technology for the past 30 years, and we now have many startup companies at various stages of development in the more than 45 different accelerator/incubator programs in the region. This is why I was very concerned when Marney Cox stated that venture funding being invested in San Diego companies has greatly diminished. Last year, venture fund investment was <$One Billion and represented only 2% of national investment compared to 4-5% previously.

If this trend continues, it would have far-reaching effects. San Diego’s diverse industry clusters derived from technology-focused R & D have always helped the region perform slightly better than the rest of the country. However, if early stage companies cannot get venture funding beyond the Angel investor stage, it will be more difficult for them to ramp up into the full production stage where the majority of job expansion occurs. As a mentor for startup technology-based companies for the San Diego Inventors Forum and the CONNECT Springboard program, I am witnessing the increasing difficulty entrepreneurs are experiencing in getting investment funds. Crowdfunding is helping more companies get off the ground, but they will not be able to succeed in the long run and scale up to full production without significant Angel and venture funding.

San Diego’s economy cannot depend on military/defense spending and tourism for growth in regional GDP. Tightening defense/military budgets because of sequestration have been a drag on the San Diego regional GDP growth for the past three years, and the slight increase in defense spending in the current fiscal year budget will not make much of a difference.

These considerations are why I think that the conclusion reached in the NUPR report is valid: “World and national headwinds suggest battening down the hatches with a prognosis for tightening economic conditions…San Diego will be fortunate to achieve a seventh year of continuous positive economic momentum in 2016. These indicators of economic activity, however, do not portend an acceleration, but rather uneasy movement going forward.”

Based on the economic indicators I am seeing for the national manufacturing industry, I would say that these words of caution should also be applied nationally.

Tags:Economic forecast, loss of manufacturing jobs, San Diego GDP
Posted in Economic Development, Economy, Innovation, Jobs, Manufacturing, Technology | No Comments »

CPA Releases Competitiveness Strategy for the United StatesCPA Releases Competitiveness Strategy for the United States

Friday, November 20th, 2015

For several years, organizations and elected representatives in Congress have proposed developing a national manufacturing strategy. For example, the Information Technology& Innovation Foundation (ITIF) released a report, “The Case for a National Manufacturing Strategy,” in April 2011 and the Alliance for American Manufacturing has repeatedly put forward a “Plan to Save Manufacturing,” calling for a national manufacturing strategy to reverse the decline in U.S. manufacturing and the good jobs that come with it. Bills sponsored by Illinois Rep. Dan Lipinski (D) have even passed the House of Representatives, but have died in the Senate.

On November 11^th, the Coalition for a Prosperous America (CPA) released “A Competitiveness Strategy for the United States – America at a Crossroads,” which addresses other sectors of our economy in addition to manufacturing.

“America needs to start winning again,” said Michael Stumo, CEO of CPA. “That is why the mission of the Competitiveness Strategy is to:

‘Win the international competition for good jobs, sustained real economic growth and prosperity with a national strategy to counter foreign mercantilism, balance trade and grow strong domestic supply chains.’”

“Across the USA, localities and states employ plans to attract jobs,” said Brian O’Shaughnessy, CPA Chief Co-Chair and Chairman of Revere Copper Products. “Other countries have sophisticated national strategies to acquire industries and bring good paying jobs to their countries. The USA has no comprehensive national strategy for domestic production and good paying jobs to guide trade negotiators and administration officials.”

CPA’s Competitiveness Strategy argues that:

The United States is losing an economic competition against other nations whose mercantilist strategies are destroying our manufacturing jobs, critical industries, our standard of living, our national security, the security of our food supply, and our children’s futures.

The threat to the U. S. economy and national security is grave. Other trading nations are using comprehensive strategies to import jobs across all economic sectors, but are particularly focused on strategically significant technologies and industries. American companies in these sectors face not only wide-ranging mercantilist practices and non-tariff trade barriers such as currency manipulation, tariffs and subsidies, but also much more sophisticated and specific strategies aimed at identifying, acquiring, or otherwise controlling critical technologies.

CPA’s strategy holds out the promise that the U. S. is in control of its own destiny and can re-assert itself as a great manufacturing and producing nation with a rising standard of living for all. We can develop and implement a comprehensive strategy that retains and reinforces our leadership in innovation, locates investment and production in the United States, and raises employment by creating good paying jobs.

The ultimate mission of the strategy is to win the international competition for good jobs and sustained economic growth. The mission recognizes we are in competition with other countries. The Competitiveness Strategy includes nineteen action steps focused upon three interrelated goals:

Identifying and countering foreign mercantilist strategies that grow their economies at the expense of other countries through achieving a persistent trade surplus
Balancing the national trade deficit
Growing domestic supply chains

“All three goals are interrelated and must be pursued together,” continued Stumo. “The President rightfully created the National Network for Manufacturing Innovation to grow domestic supply chains, but the effort cannot succeed unless we combat powerful foreign tactics to take those industries away. Further, a new effort to counter foreign mercantilism and trade cheating is essential, but must have the goal of balancing trade to be fully effective.”
“Additionally, balancing trade is essential, but merely exporting raw materials is insufficient. American must grow and retain a diverse array of industries that add value to our products and create good jobs, with special attention paid to advanced and critical industry supply chains,” Stumo concluded.

CPA’s competitiveness strategy shown below is succinct, yet comprehensive:

“Identify and counter foreign mercantilist strategies that grow their economies at the expense of other countries through achieving a persistent trade surplus

End both currency exchange rate imbalances and the accumulation of excessive US dollar holdings by non-US public and private entities.
Impose offsetting tariffs to neutralize foreign government subsidies to industries and supply chains that compete with ours.
Counter foreign government policies that force offshoring by conditioning access to their markets on transfers of technology, research facilities and/or production to their countries, as well as compliance with export performance and domestic content requirements, while their exporters have access to US markets without these conditions.
Ensure that foreign greenfield investments in the US and acquisitions of existing US companies provide a clear “net benefit” to the US with special scrutiny in cases of state influenced foreign entities.
Protect US food security from foreign government tactics to seize markets.

Balance trade

Offset cumulative trade deficits of recent decades and excessive accumulations of dollar reserves through sustained trade surplus to ultimately achieve a long term overall trade balance.
Insure that the composition of trade includes a substantial trade surplus in high value added and advanced manufactured goods.
Make the US workforce more cost competitive by promoting fair pay, rising living standards and safe working conditions for workers everywhere.
Reduce US producers’ trade disadvantage through tax reform which finances the reduction of payroll taxes and health insurance costs with a border adjustable consumption tax in a revenue and distribution neutral manner.
Lower corporate tax rates and end corporate inversion and profit shifting tax avoidance by taxing the income of unitary business groups, whether domestic or foreign, based upon proportion of global sales in the US.

Grow Domestic Supply Chains

Preserve and develop domestic manufacturing and agricultural supply chains to maximize value added production in the US.
Develop, build and maintain a world-class land, water, air, communications and energy infrastructure.
Safeguard our military strength and national security by insuring that critical technologies, weapons & IT components are developed and manufactured in America by American controlled companies.
Develop, commercialize and retain strategic and economically significant advanced technology and grow their manufacturing supply chains in the US.
Increase public support for, and incentives for private investment in, basic and applied research, infra-technologies and new product and process technologies.
Continually raise the competitiveness of American workers by improving Science, Technology, Engineering and Math (STEM) education available at all levels, systematically enhance lifelong learning for existing workers, and fostering a national system of apprenticeship and paid internships through collaborative public-private endeavors that are connected to actual opportunities in the labor market.
Raise the competitiveness of small and medium sized domestic enterprises by increasing long-term private sector financing, the sharing of research on common issues and the diffusion of new technologies and production methods.
Preserve our right to adopt and enforce domestic policies that insure the quality of our food and goods, and protect the health, safety and general welfare of our citizens without restrictions from international trade agreements.
Ensure that domestic manufacturing and agriculture benefit fully from an expanded supply of low cost US produced energy”

Anyone involved in efforts to revitalize American manufacturing already has a bookshelf full of books, studies, and reports containing recommendations on a national manufacturing strategy. My book, Can American Manufacturing Be Saved? Why we should and how we can has a chapter on “How Can We Save American Manufacturing?” that contains a summary of the recommendations of many organizations as well as my own recommendations, which I incorporate into articles and presentations whenever possible. As chair of the California chapter of CPA, I plan to incorporate this competitiveness strategy into future articles and presentations whenever possible.

The brilliance of CPA’s strategy is that it is not limited to manufacturing and is not a “to do list” of actions to take. The Competitiveness Strategy will work best when pursued as a whole. The three objectives are interrelated because, for example, we cannot balance trade without growing domestic supply chains to produce more, and add more value in the U. S. We cannot grow domestic supply chains unless we neutralize foreign mercantilism (trade cheating) that offshores otherwise competitive industries that we started and developed in the U. S. We cannot address foreign mercantilism without the guidance of a balanced trade objective.

Businesses must have a strategic plan to start and grow. This strategic plan guides the business with regard to product development, finance, marketing, production, procurement, etc. Many other countries have an economic strategy to grow their economy. A country’s strategy guides their economic, fiscal, trade, innovation, finance and monetary policy, so that they all work together to enhance their competitiveness as a nation.

The United States has no comprehensive strategy ? just a hodgepodge of laws and rules. Trade negotiators have had no strategic plan to guide them, and neither do the administrative agencies relevant to manufacturing, agricultural, and use of natural resources. The United States needs a comprehensive competitiveness strategy that clearly expresses exactly what we want to achieve for our country… not for an industry or special interest… but our country as a whole.

We do not have to “keep reinventing the wheel.” It is time for our leaders to “stop fiddling while Rome burns” and show some real leadership. Action, not lip service is what we need now!

Tags:currency manipulation, manufacturing strategy, mercantilist practices, supply chains, Trade agreements, trade deficit
Posted in Economic Development, Economy, Jobs, Manufacturing, National security, Reshoring, Trade, Trade Policy | No Comments »

New Technologies Featured at DMEDS 2015

Thursday, April 30th, 2015

In these busy times when face to face appointments have nearly become a thing of the past, don’t miss the opportunity for face to face interaction at the Del Mar Electronics and Design Show on May 6^th and 7^th at the Del Mar Fairgrounds.

This show is our only local trade show and convention for people who design, manufacture, and test products. The two-day event is free for industry professionals and will be held at the Del Mar Fair Grounds with plentiful free parking and easy highway access. Show hours are 10:00 AM – 5:00 PM Wednesday, May 6^th and 10:00 AM – 3:00 PM, Thursday May 7^th. Stay to network at the free reception at the Mexican Plaza and enjoy the free food and music after the show ends on the first day. Visit here for more information or to register.

Over the last 19 years, the show has evolved from a sales rep/distributor show to become a major exhibition of local, regional, and national manufacturing companies and organizations.

Since San Diego is a hotbed of innovation and start-up companies, there will be a special program on May 6^th starting at 3:00 PM, “Starting Block to Success – Utilizing San Diego’s Resources to Start and Grow Your Business.” First, CONNECT CEO Greg McKee will share some of his experience as an entrepreneur and executive at innovation companies, as well as discuss the ways in which CONNECT supports tech and life science companies at every stage of the business lifecycle. CONNECT provides resources for start-ups, mid-market, and multi-national enterprise companies.

From 3:30 – 4:00 PM, Jeff Draa, President & Board Member of Tech Coast Angels will discuss available sources of capital for startup companies, how to access these sources, which are the right ones at the right times. He will answer the questions about what early stage investors want to see from startups to help guide entrepreneurs through successful funding events which can determine success or failure in early stage businesses.

From 4:00 – 4:30 PM, Rory Moore, CEO and Founder of the EvoNexus incubator will share real life examples of companies at that have been “incubated” at EvoNexus.

Finally, from 4:30 – 5:00 PM, Lou Kelly, Director & Chairman of the San Diego Regional Innovation Cluster at San Diego State University will describe how their federally funded organization brings together 23 organizations in the San Diego area to create a customized package of support for high tech small businesses to help them grow, commercialize their product, and bring it to the market.

Program Manager Douglas Bodenstab stated “This year we are focusing on San Diego’s entrepreneurial spirit with a special program consisting of San Diego’s premier incubators, funding, and entrepreneurial organizations. The Del Mar Fair Grounds presents a relaxed atmosphere that is representative of San Diego’s entrepreneurial business personality, and the show is seen by the local community as the annual event to catch up with old friends, and also see what is new.”

New technologies will be displayed on the show floor with over 500 exhibitors. Dozens of free seminars will be provided on both show days. A few of the technical topics to be presented are:

How to Reduce Costs Using Rapid Prototyping Techniques

3D Printing Processes and Materials

3D Functional Inkjet Printing of Solder Mask & Legend on PCBs

Batteries: Yesterday, Today, and Tomorrow

What’s New in Wire and Cable

Integrate Mobile and Cloud Technology in our Next Electronic Product

Non-technical topics include:

Growth Strategy: How to use Market Intelligence to Shorten the Sales Cycle

How to use LinkedIn to Advance your Career

Using Digital Marketing to Accelerate your Sales Cycle

I will be one of the first speakers at the show on the topic of “How to Return Manufacturing to America” at 10:00 AM on Wednesday, May 6^th, in Room A of the Mission Tower building, (adjacent to Mexican Plaza across from the show buildings). Workshops on this topic at other venues can cost hundreds of dollars, so save money by attending my free seminar.

It has become common knowledge that cost savings of outsourcing in China have eroded due to higher labor rates and shipping costs. Quality problems, IP theft, and counterfeit parts are causing companies to rethink where to source. I will discuss how to select the right parts and products to reshore, how to calculate the Total Cost of Ownership using the Reshoring Initiative’s worksheet, what are the latest trends of reshoring, and share some new case stories of companies that have reshored.

My company, ElectroFab Sales, will be exhibiting at Booth 223 in the Bing Crosby Hall at the show. We will have sample parts on display for Century Rubber Company and some of the companies we represent.
One of the other companies we represent will have their own booth in the Exhibit Hall: A Squared Technologies (booth # 437). Please drop our booths.

Posted in Economy, Manufacturing, Reshoring | No Comments »

savingusmanufacturing.com

Archive for the ‘Economy’ Category

How Tax Reform Could Grow our Economy and Create Jobs

How to Fix the Dollar’s Overvaluation & Exchange Rate Misalignment

Do Low American Savings Rate Cause Trade Deficits?

Coalition for a Prosperous America Summit Discusses How to Grow Economy

Why Should the U. S. Have a Specific Productivity Policy?

Is Bi-partisan Tax Reform Possible?

CPA’s Balanced Trade Message has Impact on Congress

Mixed Messages at San Diego’s Economic Outlook Events

CPA Releases Competitiveness Strategy for the United StatesCPA Releases Competitiveness Strategy for the United States

New Technologies Featured at DMEDS 2015

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