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American Manufacturing Competitiveness Act Would Develop National Manufacturing Strategy

Tuesday, June 25th, 2013

On June 20, 2013, U.S. Rep. Dan Lipinski (D-IL-) introduced H.R. 2447, “The American Manufacturing Competitiveness Act of 2013,”a bill that would bring together the private and public sectors to develop recommendations to revitalize American manufacturing and create good-paying, middle-class jobs here at home.” U.S. Rep. Adam Kinzinger (IL-16) is the lead Republican cosponsor.

This bill is a pillar of the “Make It in America” jobs plan in the House and would require the National Science and Technology Council’s Committee on Technology to develop a national manufacturing competitiveness strategic plan that would be updated every four years. The goals of the strategic plan would be to promote growth of the manufacturing sector, support the development of a skilled manufacturing workforce, enable innovation and investment in domestic manufacturing, and support national security.

In order to develop a manufacturing strategy, the bill would also require the Committee to conduct an analysis of factors that impact the competitiveness and growth of the United States manufacturing sector, such as “the adequacy of the industrial base for maintaining national security,” “Trade, trade enforcement, and intellectual property policies, and financing, investment, and taxation policies and practices…”

The Secretary of Commerce, or a designee of the Secretary shall serve as the chairperson of the Committee, and the Committee would be required to transmit the strategic plan developed to the Committee on Commerce, Science, and Transportation of the Senate and the Committee on Science, Space, and Technology of the House of Representatives not later than one year after the date of enactment of the Act.

I laud Rep. Lipinski for being so persistent in attempting to get a bill passed that would develop a national manufacturing strategy. Last year, he and Rep. Kinzinger introduced “The American Manufacturing Competitiveness Act of 2012” (HR-5865). The bill passed the House on September 12, 2012, by a roll call vote of 339-77. However, the Senate did not act on the bill.

H. R. 5865 was actually a renaming of H.R. 1366, “The National Manufacturing Strategy Act of 2011,” that Rep Lipinski also introduced, which died in the Energy and Commerce Committee. Senators Brown and Kirk had introduced the Senate version of this bill in 2011, but it was never voted on by the Senate. Rep Lipinski had previously introduced H.R. 4692, “The National Manufacturing Strategy Act of 2010,” which passed the House in July 2010 with overwhelming bi-partisan support. Sen. Debbie Stabenow (D-MI) introduced the same bill in the Senate, but it was not voted on by the Senate.

Let us hope this new bill not only passes the House this year, but actually gets voted on and passed by the Senate. This new bill is far superior to last year’s bill in that it would utilize an existing committee rather than set up a new committee with a complex appointment structure for the proposed 15-member committee. It builds on the successful development of the 2012 National Strategic Plan for Advanced Manufacturing and utilizes the expertise and knowledge that was developed in that plan. It would be accomplished with less cost and be consistent with prior Administration work and legal authority. By using the existing committee of the NSTC, the strategy will bring together the many agencies and their expertise that interact with American manufacturing.

“American companies and their workers are operating at a severe disadvantage as they face foreign competitors who benefit from coordinated, strategic government policies that benefit manufacturing,” Rep. Lipinski said. “We need to recognize this reality and bring the public and private sectors together to develop a national manufacturing strategy that specifies recommendations for the optimal tax, trade, research, regulatory, and innovation policies that will enable American manufacturing to thrive. Manufacturing is critical for national security, an essential source of good-paying jobs for the middle class, and drives high-tech innovation.”

“Manufacturing is vital to our economic and national security, and it is critical that we do all we can to promote American competitiveness in the global economy,” Rep. Kinzinger said. “I’m proud to work with Congressman Lipinski to put forward bipartisan legislation that focuses our attention on the challenges facing American manufacturers.”

America has a long and proud manufacturing history. Manufacturing is the foundation of our economy and fostered the development and growth of the middle class in the 19th and 20th centuries. Since the 1970s, however, the number of manufacturing jobs has shrunk, from 20 million in 1979 to fewer than 12 million today. We lost 5.8 million manufacturing jobs just since 2000. The recent recession hit workers in manufacturing especially hard. The hemorrhaging of manufacturing jobs has contributed to the stagnation of middle-class wages – since 2000, the median household income, after it’s been adjusted for inflation, has fallen by $4,787.

In a press release dated June 21st, Scott Paul, President of the Alliance for American Manufacturing, said, “We commend Congressmen Lipinski and Kinzinger for their authorship of the American Manufacturing Competitiveness Act of 2013. Our nation’s manufacturers and their workers stand poised for a manufacturing resurgence, but Washington must do its part by implementing a strategy that actively responds to the challenges of the 21st Century.”

The Alliance for American Manufacturing recommends that “a national manufacturing strategy support private business by focusing government programs on increasing national competitiveness, reducing programmatic inefficiencies and redundancy, and coordinating policies across various agencies and departments.” This type of strategy would require the American government to act smarter in its efforts to promote growth, entrepreneurship, and innovation. AAM recommends that a national manufacturing strategy should:

  • Keep our Trade Laws Strong and Strictly Enforced
  • Combat Currency Manipulation
  • Reduce the Trade Deficit
  • Support Buy America
  • Defend America with American Made Product
  • Prepare for the Next Super Storm
  • Invest in American Infrastructure
  • Create New Ways to Invest in America.
  • Use the Tax Code to Incentivize Domestic Manufacturing
  • Educate Americans for Quality Jobs
  • Invest in Energy Efficiency

The Alliance for American Manufacturing is just one of many organizations that have made recommendations on a national manufacturing strategy. In my book, Can American Manufacturing Be Saved? Why we should and how we can, the chapter on “How Can We Save American Manufacturing?” contains a summary of the recommendations of such organizations as the American Jobs Alliance, Coalition for a Prosperous America, Economy in Crisis, National Association of Manufacturers, Small Business and Entrepreneurship Council, and the U. S. Business and Industry Council, along with my own recommendations.

In April 2011, The Information Technology& Innovation Foundation (ITIF) released a report, “The Case for a National Manufacturing Strategy,” that makes a strong case for such a strategy. Authors Stephen Ezell and Robert Atkinson recognize that “most U.S. manufacturers, small or large, cannot thrive solely on their own; they need to operate in an environment grounded in smart economic and innovation-supporting policies with regard to taxes, talent, trade, technological development, and physical and digital infrastructures.”

Ezell and Atkinson recommend adoption of the following actions as part of the national strategy:

  • Increase public investment in R&D in general and industrially relevant in particular
  • Support public-private partnerships that facilitate the transition of emerging technologies from universities and federal laboratories into commercial products
  • Coordinate state, local, and federal programs in technology-based economic development to maximize their combined impact
  • Provide export assistance to build upon the National Export Initiative, which seeks to double U. S. exports by 2015.
  • Increase export support for U. S. manufacturers through the Export-Import Bank loans

In the past eight years since the National Summit on Competitiveness in 2005, there has been a summit or conference held every year on the topic of revitalizing American manufacturing. A first Conference for the Renaissance of American Manufacturing was held in September 2010, and a second Conference on the Renaissance of American Manufacturing: Jobs and Trade was held on March 27, 2012. This conference focused on solutions to the decline of manufacturing in America and highlighted manufacturing and trade issues.

The President’s Council of Advisors on Science and Technology (PCAST) released a report, “Capturing Domestic Competitive Advantage in Advanced Manufacturing,” in July 2012, prepared by the Advance Manufacturing Partnership Working Group, which makes 16 specific recommendations for policies to enable the United States to resume its leadership in the manufacturing industry and strengthen our position in advanced manufacturing technologies.

We need a committee that will review the many recommendations on a national manufacturing strategy we already have and select the ones that will have the most impact in enabling the United States to have a real renaissance in the manufacturing industry. Since a similar bill has passed the House two out of three times since 2010, it is time for the Senate to pass this legislation and “stop fiddling while Rome burns.” We need real leadership in action, not just words. Contact your Congressional representative to ask them to cosponsor the bill and urge your Senator to bring it to a vote in the Senate after it passes the House.

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Posted in Jobs, Manufacturing, Taxes/Regulations, Trade Policy | 1 Comment »

How we could Create Jobs while Reducing the Trade Deficit and National Debt

Tuesday, March 26th, 2013

There are numerous ideas and recommendations on how we could create jobs but most job creation programs proposed involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue. Other recommendations would require legislation to change policies on taxation, regulation, or trade that may be difficult to accomplish. The recommendations in this article focus on what could be done the fastest and most economically to create the most jobs while reducing our trade deficit and national debt.

Manufacturing is the foundation of the U. S. economy and the engine of economic growth. It has a higher multiplier effect than service jobs. Each manufacturing job creates an average of three to four other supporting jobs. So, if we focus on creating manufacturing jobs, we would be able to reduce the trade deficit and national debt at the same time.

The combined effects of an increasing trade deficit with China and other countries, as well as American manufacturers choosing to “offshore” manufacturing, has resulted in the loss of 5.7 million manufacturing jobs since the year 2000. If we calculate the multiplier effect, we have actually lost upwards of 17 to 22 million jobs, meaning that we have fewer taxpayers and more consumers of tax revenue in the form of unemployment benefits, food stamps, and Medicaid.

In 2012, the U.S. trade deficit with China reached a new record of $315 billion. According to a recent study by the Economic Policy Institute (EPI), the trade deficit with China cost 2.7 million U.S. jobs from 2001-2011. The Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 lost jobs, so the $738 billion trade deficit in goods for 2012 cost upwards of 9,599,200 jobs.

What Congress Could Do

First, Congress should enact legislation that addresses China’s currency manipulation. Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone. To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 in 2011, but GOP leadership prevented the corresponding bill in the House, H. R. 639, from being brought up for a vote, even though it had bi-partisan support with 231 co-sponsors. On March 20, 2013, Sander Levin (D-MI), Tim Murphy (R-PA), Tim Ryan (D-OH), and Mo Brooks (R-AL) introduced the Currency Reform for Fair Trade Act in the House and a corresponding bill will be introduced in the Senate.

Second, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense. All federal spending should have “buy America” provisions giving American workers and businesses the first opportunity at procurement contracts. New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction. No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries. The following proposed legislation would also prevent corporations from avoiding paying corporate income taxes:

  • Reduce corporate taxes to 25 percent
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country

It is also critical that we not approve any new Free Trade Agreements, such as the Trans-Pacific Partnership and Trans-Atlantic Partnership that are currently proposed. The U.S. has a trade deficit with every one of its trading partners from NAFTA forward, so Free Trade Agreements have hurt more than helped the U.S. economy.

What States and Regions Could Do

State and local government can work in partnership with economic development agencies, universities, trade associations, and non-profit organizations to facilitate the growth and success of startup manufacturing companies in a variety of means:

Improve the Business Climate – Each state should take an honest look at the business climate they provide businesses, but especially manufacturers since they provide more jobs than any other economic sector. The goal should be to facilitate the startup and success of manufacturers to create more jobs. I recommend the following actions:

  • Reduce corporate and individual taxes to as low a rate as possible
  • Increase R&D tax credit generosity and make the R&D tax credit permanent
  • Institute an investment tax credit on purchases of new capital equipment and software
  • Eliminate burdensome or onerous statutory and environmental regulations

Establish or Support Existing Business Incubation Programs, such as those provided by the members of the National Business Incubation Alliance. Business incubators provide a positive sharing-type environment for creative entrepreneurship, often offering counseling and peer review services, as well as shared office or laboratory facilities, and a generally strong bias toward growth and innovation.

Facilitate Returning Manufacturing to America – The Reshoring Initiative,  founded by Harry Moser in 2010, has a  mission to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from “offshoring is cheaper” to “local reduces the total cost of ownership.” The top reasons for U. S. to reshore are:

  • Brings jobs back to the U.S.
  • Helps balance U.S., state and local budgets
  • Motivates recruits to enter the skilled manufacturing workforce
  • Strengthens the defense industrial base

According to Mr. Moser, the Initiative has documented case studies of companies reshoring showing that “about 220 to 250 organizations have brought manufacturing back to the U.S….with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010.”

State and/or local government could facilitate “reshoring” for manufacturers in their region by conducting Reshoring Initiative conferences to teach participants the concept of Total Cost of Ownership, how to use Mr. Moser’s free Total Cost of Ownership Estimator™, and help them connect with local suppliers.

Establish Enterprise Zones and/or Free Trade Zones: Enterprise Zones provide special advantages or benefits to companies in these zones, such as:

  • Hiring Credits – Firms can earn state tax credits for each qualified employee hired (California’s is $37,440)
  • Up to 100% Net Operating Loss (NOL) carry-forward for up to 15 years under most circumstances.
  • Sales tax credits on purchases of up to $20 million per year of qualified machinery and machinery parts;
  • Up-front expensing of certain depreciable property
  • Apply unused tax credits to future tax years
  • Companies can earn preference points on state contracts.

States located on international borders could also establish Foreign Trade Zones (FTZs), which are sites in or near a U.S. Customs port of entry where foreign and domestic goods are considered to be in international trade. Goods can be brought into the zones without formal Customs entry or without incurring Customs duties/excise taxes until they are imported into the U. S. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs associated with U.S. trade laws

What Individuals Could Do

There are many things we could do as individuals to create jobs and reduce our trade deficits and national debt. You may feel that there is nothing you can do as an individual, but it’s not true! American activist and author, Sonia Johnson said, “We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.”

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible. There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies. There are many hidden costs to doing business offshore, so in the long run, you may not save as much money as you expect by sourcing your product offshore. The cost savings is not worth the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copycat or counterfeit product sold at a lower price.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product. Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price. Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then conduct a Total Cost of Ownership analysis for your bill of materials to see if you could “reshore” some or all of the items to be made in the United States. You can use the free TCO worksheet estimator to conduct your analysis available from the Reshoring Initiative at www.reshorenow.org. Also, you could choose to keep R&D in the United States or bring it back to the United States if you have sourced it offshore.

If enough manufacturing is “reshored” from China, we would drastically reduce our over $700 billion trade deficit in goods. We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

You may not realize it, but you have tremendous power as a consumer. Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products. As a result, on January 15, 2013, Walmart and Sam’s Club announced they will buy an additional $50 billion in U.S. products over the next 10 years.

U.S. voters supported Buy America policies by a 12-to-1 margin according to a survey of 1,200 likely general election voters conducted between June 28 and July 2, 2012 by the Mellman Group and North Star Opinion Research. The overwhelming support has grown since prior iterations of the same poll – Buy America received an 11-to-1 margin of support in 2011 and a 5-to-1 margin in 2010. A survey by Perception Services International of 1400 consumers in July 2012, found that 76% were more likely to buy a U.S. product and 57% were less likely to buy a Chinese product.

As a consumer, you should pay attention to the country of origin labels when they shop and buy “Made in USA” products whenever possible. Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products. If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products. Each time you choose to buy an American-made product, you help save or create an American job.

In his book, Buying America Back:  A Real-Deal Blueprint for Restoring American Prosperity, Alan Uke, recommends Country of Origin labeling for all manufactured products that “puts control in the hands of American consumers to make powerful buying choices to boost our economy and create jobs,” as well as reduce our trade deficit. The labels would be similar to the labels on autos, listing the percent of content by country of all of the major components of the product. This Country of Origin labeling would enable American consumers to make the decision to buy products that have most of their content “made in USA.”

If every American would make the decision to buy American products and avoid imports as much as possible, we could make a real difference in our nation’s economy. For example, if 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars. During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

In conclusion, if we want to create more jobs, reduce our trade deficit and national debt, we must support our manufacturing industry so that it could once again be the economic engine for economic growth. Following the suggestions in this article could make the “Great American Job Engine” roar once again.

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Posted in Economy, General, Manufacturing, Reshoring, Taxes/Regulations, Trade Policy | No Comments »

How do Obama and Romney Stand on Issues Affecting Manufacturing?

Tuesday, October 23rd, 2012

Both President Obama and Governor Romney have put the manufacturing industry as the cornerstone of their plans to strengthen the U.S. economy and revitalize business activity. How would their differing plans affect manufacturers, and which would provide the most benefits to the manufacturing industry?

Government has the most impact on the manufacturing industry with regard to its tax, regulation, energy, and trade policies, but budget priorities of an administration also have a powerful effect for the good or the bad. We will use these policies and priorities to compare the plans of President Obama and Governor Mitt Romney. Governor Romney’s plan is extracted from his “Believe in America – Mitt Romney’s Plan for Jobs and Economic Growth” available on his website. President Obama’s plan is derived from his record and his “Blueprint for an America Built to Last,” released by the White House on January 24, 2012.

Taxes:  The more taxes a business pays, the less money a business has to grow the company, buy equipment, conduct R&D, expand into new markets, and hire more workers.

President Obama’s plans include:

  • Reduce overall corporate rate to 28 percent with an even deeper cut to an effective tax rate of 25 percent for corporations manufacturing in the U. S.
  • End tax breaks for outsourcing and provide a 20 percent tax credit for expenses of moving manufacturing operations back to America
  • Expand, simplify, and make permanent the R&D tax credit
  • Extend the 30 percent-Advanced Energy Manufacturing Tax Credit for clean energy manufacturing projects
  • Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss
  • Reauthorize 100% expensing of investment in plants and equipment

Governor Romney’s proposal includes:

  • Reduce the overall corporate tax rate to 25 percent
  • Make permanent the R&D tax credit
  • Reduce the top individual tax rate from 35 percent to 28 percent since most small businesses pay taxes at the individual level, not corporate taxes
  • Eliminate the Death Tax
  • Pursue a Fairer, Flatter, Simpler Tax Structure

Taxes on corporations and individuals will increase January 1, 2013 when the current tax rates that have been in effect for 11 years expire (referred to as the Bush tax cuts) and return to the higher rates in effect under President Clinton. There are additional taxes that will go into effect at the same time as a result of the Patient Protection and Affordable Care Act, commonly called Obamacare.

As Governor of Massachusetts from 2003-2007, Mitt Romney closed a $1.3 billion state budget deficit in 2004 without raising taxes by using a combination of funding cuts, fee increases, collection of more business taxes from eliminating tax loopholes, and drawing from the state’s “rainy day fund.”

Regulations:  Regulations function as a hidden tax on manufacturers. A multitude of rules, restrictions, mandates, and directives impose stealth expenses on businesses and acts like a brake on the economy at large. The federal Office of Management and Budget own study places the annual cost of regulation on the economy at $1.75 trillion, which is nearly double the total of all individual and corporate income taxes.

President Obama’s record:

  • The Federal Register’s compendium of new rules and regulations hit a record in 2010 of 81,405 pages with a projected annual cost of compliance of $26 billion.
  • In one month alone, July 2011, the Obama administration issued 229 proposed rules, 379 final rules, and 10 economically significant rules—totaling more than $9 billion in regulatory costs.
  • The over 2,000-page Dodd-Frank Act mandates 259 rules and suggests another 188.
  • The Patient Protection and Affordable Care Act (PPACA) may generate up to 10,000 pages of regulations to implement.
  • The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 produced federal restrictions on credit card companies that have led to higher interest rates, higher annual fees, and lower credit limits.

Governor Romney’s proposal:

  • Issue an executive order paving the way for Obamacare waivers for all 50 states and work with Congress to accomplish full repeal
  • Seek to repeal Dodd-Frank and replace it with a streamlined regulatory framework
  • Eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda
  • Press Congress to reform our environmental laws and to ensure that they allow for a proper assessment of their costs
  • Order all federal agencies to initiate repeal of any regulations issued by the Obama administration that unduly burden the economy or job creation
  • Impose a regulatory cap that forces agencies to recognize and limit these costs
  • Restore a greater degree of congressional control over the agency rulemaking process

Trade: The U. S. had an overall trade deficit of $558 billion in 2011, but our deficit with China was $295.5 billion, and the combined deficit with Canada and Mexico rose to a combined $185 billion of the total. In fact, we have a trade deficit with 66 countries. Both President Obama and Governor Romney support current trade agreements and propose additional agreements.

President Obama – As a candidate in 2007 and 2008, he said, “there’s no doubt that NAFTA needs to be amended,” in December 2007 at the Des Moines Register debate, and at a June 2008 speech in Flint, MI, he said,” If we continue to let our trade policy be dictated by special interests, then American workers will continue to be undermined, and public support for robust trade will continue to erode.”

But as president, he pushed hard for passage of the trade agreements with Korea, Colombia and Panama, which were passed and signed in October 2011, all drafted on the NAFTA template. He has instructed his team at the U.S. Trade Representative’s office to spearhead the proposed Trans-Pacific Partnership, a trade agreement involving nine Pacific region nations, including Vietnam and Brunei, two undemocratic countries with serious and well-documented human and labor rights problems.

Unlike his predecessors, he has imposed tariffs on imported Chinese products that have been determined to be “dumping, such as the 2009 tariff on imported Chinese tires, and the recent Commerce Department final determination of anti-dumping duties from just over 31 percent up to 250 percent on photovoltaic solar cells, and anti-subsidy duties of up to more than 15 percent were also recommended.

His Blueprint states that he will:

  • Create a new trade enforcement unit that will bring together resources and investigators from across the Federal Government to go after unfair trade practices in countries around the world, including China
  • Enhance trade inspections to stop counterfeit, pirated, or unsafe goods before they enter the United States
  • Put American companies on an even footing by providing financing to put our companies on an even footing.

Governor Romney – As a candidate, he supported the free trade agreements with Korea, Colombia and Panama and also calls for passage of the Trans-Pacific Partnership, in addition to new FTAs with nations such as Brazil and India.

Romney would pursue the “formation of a ‘Reagan Economic Zone.’ This zone would codify the principles of free trade at the international level and place the issues now hindering trade in services and intellectual property, crucial to American prosperity and that of other developed nations, at the center of the discussion.”

Romney proposes to get tough with China in the following ways:

  • Impose “targeted tariffs” or economic sanctions for unfair trade practices or misappropriated American technology
  • Designate China as a currency manipulator and instruct the Commerce Department to impose countervailing duties
  • Improve enforcement at the border by allocating the necessary resources to investigate the actual point of origin for suspect products arriving on our shores
  • Impose harsher penalties on those who would circumvent our laws

Energy:  The manufacturing industry both produces and uses energy; therefore, government policies affecting energy have a major impact on the growth, development, and financial position of manufacturers. Energy policy is critical to our country’s economic future, and we have the natural resources we need to be more energy independent.

President Obama’s plan:

  • Promote safe, responsible development of the near 100-year supply of natural gas, supporting more than 600,000 jobs while ensuring public health and safety
  • Incentivize manufacturers to make energy upgrades, saving $100 billion over the next decade
  • Create clean energy jobs in the United States

President Obama’s Track Record:

  • Imposed a moratorium in 2010 on underwater drilling that eliminated more than 10,000 jobs and cost $1 billion in lost wages.
  • Delayed the construction of the Keystone XL Pipeline, which would bring enormous supplies of Canadian tar sands oil from Alberta to the U. S and create an estimated 25,000 to 100,000 American jobs.
  • Proposed a cap-and-trade system that was a complex plan for allowing industries to trade the right to emit greenhouses gases, which failed to pass Congress.
  • Under Obama, the EPA has issued a 946-page “hazardous air pollutants” rule mandating “maximum achievable control technology” under the Clean Air Act, which could put 250,000 jobs in jeopardy.
  • New regulations for industrial boilers—the so-called “Boiler MACT”—may put another 800,000 jobs at risk.

Governor Romney’s proposed energy policy focuses on significant regulatory reform, support for increased production, and funding basic research instead of specific technologies, including the following:

  • Streamline and fast-track the permitting process for exploration and development of oil and gas
  • Consolidate procedures for issuing permits so that businesses have a one-stop shop for approval of common activities
  • Overhaul outdated legislation such as the Clean Air Act, Clean Water Act, and other environmental laws
  • Reform the regulatory structure of the nuclear industry
  • Inventory our nation’s carbon-based energy resources
  • Explore and develop our oil reserves wherever it can be done safely, taking into account local concerns, including the Gulf of Mexico, both the Atlantic and Pacific Outer Continental Shelves, Western lands, the Arctic National Wildlife Refuge, off the Alaska coast, and the more recently discovered shale oil deposits
  • Partner with  our neighbors Canada and Mexico to develop their oil reserves
  • Pave the way for the construction of additional pipelines that can accommodate the expected growth in Canadian supply of oil and natural gas
  • Extract natural gas by means of “fracking” (hydraulic fracturing, coupled for these purposes with horizontal drilling)
  • Redirect government funding of clean energy spending towards basic research and development of new energy technologies and on initial demonstration projects that establish the feasibility of discoveries

Manufacturing has been a key driver of what limited economic recovery we have had since 2009 and will play a major role in U.S. economic success in the future if it gets the right support. On the surface, Obama and Romney seem to have roughly the same economic goals – stimulate job creation, boost American competitiveness in the global market and drive down the deficit, but as we have seen, their plans for reaching these objectives differ greatly. I urge everyone to carefully compare their plans and what they have said and done before choosing for whom to vote. Don’t waste the precious freedom to vote that our ancestors risked or gave their lives to gain.

 

 

Posted in Economy, Energy, Manufacturing, Taxes/Regulations, Trade Policy | No Comments »

ITIF Report Details 50 Policies to Improve U.S. Manufacturing Competitiveness

Tuesday, September 25th, 2012

Last week, the Information Technology and Innovation Foundation (ITIF) released a report titled, “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” by Stephen Ezell and Robert Atkinson in which they stated, “A comprehensive strategy aimed at strengthening U.S. establishments competing in global markets is needed for the United States to boost short-term recovery and long-term prosperity…”

“The United States is increasingly isolated in its belief that countries don’t compete with one another and that only firms compete” said ITIF Senior Analyst Stephen Ezell, co-author of the report. “Our traded sector establishments are up against competitors that are aided in countless ways by their governments. It’s time to level the playing field.”

The report, presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness, along with 13 state-level recommendations. The recommendations are organized around federal policies regarding the “4Ts” of technology, tax, trade, and talent, as well as policies to increase access to capital, reform regulations, and better assess U.S. traded sector competitiveness.

A nation’s traded sector includes industries such as manufacturing, software, engineering and design services, music, movies, video games, farming, and mining, which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. They are the core engine of U.S. economic growth and face unique challenges.

Because these industries face competition in the global market that non-traded, local-serving industries (retail trade or personal services) do not, their success is riskier. “The health of U.S. traded sector enterprises in industries such as semiconductors, software, machine tools, or automobiles—all far more exposed to global competition than local-serving firms and industries—cannot be taken for granted.”

If a company like Boeing loses market share to Airbus, thousands of domestic jobs at Boeing, its suppliers, and the companies at which their employees spend money will be lost. In contrast, a local grocery store may compete for business with other supermarkets, but it is not threatened by international competition. If Safeway loses market share to Wal-Mart, the jobs remain in the United States.

Ezell and Atkinson state, “The fact that the U.S. traded sector has not created a single net new job in 20 years is a core reason for the current U.S. economic malaise.” They cite the research of Nobel Prize-winning economist Michael Spence, who has demonstrated that “from 1990 until the Great Recession started in 2007, the U.S. achieved virtually no growth in traded sector jobs. The malaise has been a downright decline in manufacturing, as the United States lost nearly one-third of its manufacturing workforce in the previous decade, saw on net over 66,000 manufacturing establishments close, accrued a trade deficit in manufactured products of over $4 trillion, and experienced a decline in manufacturing output of 11 percent at a time when U.S. GDP increased by 11 percent (when measured properly).”

Ezell and Atkinson corroborate what I have written previously ? “every lost manufacturing job has meant the loss of an additional two to three jobs throughout the rest of the economy. The 32 percent loss of manufacturing jobs was a central cause of the country’s anemic overall job performance during the previous decade, when the U.S. economy produced, on net, no new jobs….at the rate of growth in manufacturing jobs that occurred in 2011, it would take until at least 2020 for employment to return to where the economy was in terms of manufacturing jobs at the end of 2007.”

The reasons why the authors emphasize the importance of manufacturing as a “traded sector” are:

  • It will be difficult for the U. S. to balance its foreign trade without a robust manufacturing sector because manufacturing accounts for 86 percent of U.S. goods exports and 60 percent of total U.S. exports.
  • Manufacturing remains a key source of jobs that both pay well.
  • Each manufacturing job supports as an average of 2.9 other jobs in the economy.
  • The average wages in U.S. high technology are 86 percent higher than the average of other private sector wages.
  • Manufacturing, R&D, and innovation go hand-in-hand.
  • The manufacturing sector accounts for 72 percent of all private sector R&D spending.
  • Manufacturing employs 63 percent of domestic scientists and engineers.
  • U.S. manufacturing firms demonstrate almost three times the rate of innovation as U.S. services firms.
  • Manufacturing is vital to U.S. national security and defense.

They contend that “the engines of a nation’s competitiveness are in fact not mom and pop small businesses, but rather firms in traded sectors, high-growth entrepreneurial companies, and U.S.-headquartered multinational corporations. Although such firms comprise far less than 1 percent of U.S. companies, they account for about 19 percent of private-sector jobs, 25 percent of private-sector wages, 48 percent of goods exports, and 74 percent of nonpublic R&D investment. And, since 1990, they have been responsible for 41 percent of the nation’s increase in private labor productivity.”

The report notes that “traded sector businesses improve the local economy in three ways:

  1. Traded sector businesses bring money into a region by selling to people and businesses outside the region.
  2. They help keep local money at home through import substitution, which occurs when local residents and businesses purchase locally produced products instead of importing goods and services.
  3. They improve economic equity since “their productivity and market size tends to lead them to offer higher wage levels” and “jobs at traded sector companies help anchor a region’s middle class employment base by providing stable, living wage jobs for residents.”

While the authors believe all 50 recommendations are needed, they believe the 10 most critical recommendations are:

  1. Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.
  2. Support the designation of at least 20 U.S. “manufacturing universities.”
  3. Increase funding for the Manufacturing Extension Partnership (MEP).
  4. Increase R&D tax credit generosity and make the R&D tax credit permanent.
  5. Institute an investment tax credit on purchases of new capital equipment and software.
  6. Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.
  7. Fully fund a nationwide manufacturing skills standards initiative.
  8. Expand high-skill immigration, particularly which focuses on the traded sector.
  9. Transform Fannie Mae into an industrial bank.
  10. Require the Office of Information and Regulatory Affairs (OIRA) to incorporate a “competitiveness screen” in its review of federal regulations.

Only two of their top 10 recommendations made the list of the most critical recommendations in the second edition of my book:  # 4 and # 10. However, I support all of their other top 10 recommendations, as well as many of their other 40 recommendations, especially the following:

  • Lower the effective U. S. corporate tax rate – As of April 1, 2012 (when Japan lowered its corporate tax rate), the United States took the mantle of having the highest statutory corporate tax rate at almost 39 percent (when state and federal rates are combined) of any OECD nation.
  • Combat foreign currency manipulation
  • Better support and align trade promotion programs to boost U. S. exports.
  • Better promote reshoring.

I also support their recommendation that Congress should broaden the R&D tax credit’s scope to make it clear that process R&D (R&D to develop better ways of making things) qualifies for the tax incentive and that Congress should expand the R&D credit to allow expenditures on employee training to count as qualified expenditures.

With regard to trade enforcement, they recommend that the U. S. “exclude mercantilist countries from the Generalized System of Preferences (GSP)” because “the top 20 GSP-beneficiary countries — Argentina, Brazil, Bolivia, Colombia, India, Indonesia, Pakistan, the Philippines, Russia, Thailand, Turkey, and Venezuela—are on the U.S. Trade Representative’s Special 301 Watch List (which documents countries that fail to adequately protect U.S. companies’ or individuals’ intellectual property rights).”

I believe that enacting legislation to address foreign currency manipulation by China in particular should be in their top 10 recommendations. I also recommend that we enact legislation to establish either a Natural Strategic Tariff as recommended by economist Ian Fletcher in his book Free Trade Doesn’t Work:  What Should Replace It and Why, or a Balanced Trade Restoration Act to authorize sale of Import Certificates using either the Warren Buffet plan or the Richmans plan (as explained in their book Trading Away our Future).

I completely disagree with their recommendation to “Forge new trade agreements, including a high-standard Trans-Pacific Partnership and Trans-Atlantic Partnership.” As documented by Alan Uke in his book, Buying Back America, the U. S. has a trade deficit with nearly every single one of the countries with which it has a trade agreement. In fact, the U. S. has a trade deficit with 66 countries, the most egregious being the $278 billion deficit with China. Remember the touted benefits of NAFTA with Canada and Mexico? Well, in 2010, we had a trade deficit with Canada of $28 billion and $66 billion with Mexico. Do we want to increase our current trade deficit by adding more trading partners?

Additionally, the report articulates four key themes that the authors believe should be viewed as essential components of a U.S. traded sector competitiveness strategy. They recommend that the following key themes must be embraced by U.S. policymakers if the United States is to restore its traded sector competitiveness (summarized):

  1. The federal government must place strategic focus on its traded sectors, because it simply can’t rely entirely on its non-traded sectors to sustainably power the U.S. economy.
  2. The United States needs become much more of an engineering economy because gains from engineering-based innovation are capturable and appropriable within nations.
  3. The United States must move toward an economic system more focused on production than consumption, giving short-term consumption less priority in our politics.
  4. The structure of the global trading system must be seriously restructured to ensure that it is a trading system based on market-oriented principles and not the “innovation mercantilism” that has risen in the last decade, which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.

Beyond federal policies to support traded sector competitiveness as a nation, the report also includes a section on recommended policies that states should implement to bolster their competitiveness, and in turn, the competitiveness of the broader U.S. economy. The state policy recommendations utilize the same “4Ts” framework as the federal recommendations.

Ezell and Atkinson state, “Implementing the policies recommended in this report will make the United States a more attractive investment environment for traded sector enterprises and their establishments. The technology policies will help spur innovation in advanced manufacturing, upgrade the technology capacity of manufacturing and other traded sector firms, help restore America’s industrial commons, and support the productivity, innovation, and competitiveness of traded sector SMEs. The tax policies will stimulate a favorable climate for private sector investment by making the overall U.S. corporate tax code more competitive with that of other nations and also by leveraging tax policy to incent private sector R&D and investment.”

In conclusion, they urge that U.S. policymakers understand that “manufacturing is not some low-value-added industry to be cavalierly abandoned.” Manufacturing is vital to U.S. competitiveness. I highly recommend reading all of this comprehensive, well-researched, well-documented report to be able to evaluate all of their recommendations and benefit from the details that are the basis for each recommendation.

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Will President Obama’s Blueprint Save American Manufacturing?

Tuesday, February 7th, 2012

In his State of the Union address, President Obama laid out a blueprint for an economy that’s built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.

I share the President’s believe that “this is a make or break moment for the middle class and those trying to reach it.  Manufacturing is the foundation of the middle class, and we are losing the middle class because of the loss of manufacturing jobs.  I’ve seen the middle class eroding for decades because manufacturing and the good jobs the industry provides began leaving our shores long before the recession.  Too many manufacturers have sourced all of most of their manufacturing offshore, especially in China.  It’s the loss of manufacturing jobs that is keeping unemployment so high and creating budget deficits at the local, state and federal level.  People who are working pay taxes that generate revenue for our government whereas the unemployed create expenses to government for their “safety net.”

The President’s blueprint has one section covering manufacturing titled, “Manufacturing: Create New Jobs Here In America, Discourage Outsourcing, And Encourage Insourcing,” so let’s examine the points one by one to see if they will make enough difference to “save American manufacturing.”

1.        Remove tax deductions for shipping jobs oversees and providing new incentives for bringing them back home:  It’s been outrageous that we’ve been giving tax incentives to companies to outsource manufacturing offshore by allowing companies moving operations overseas to deduct their moving expenses and reduce their taxes in the United States.  This proposal would eliminate deductions for moving their operations offshore and give a 20 percent income tax credit for the expenses of moving operations back to the U. S. to create jobs for Americans.  Eliminating this tax incentive for outsourcing offshore is one of the recommendations mentioned in my book.

2.        Target the domestic production incentive on manufacturers who create jobs here at home and double the deduction for advanced manufacturing:  This proposal would reform the current deduction for domestic production by more narrowly focusing it on manufacturing activities, expanding the deduction for manufacturers, and doubling the deduction for advanced manufacturing technologies from its current level of 9 percent to 18 percent.  This proposal would benefit manufacturers utilizing advanced manufacturing technologies, but I see no reason why it shouldn’t apply to all domestic manufacturing and why oil production should be eliminated from this deduction.

3.       Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss:  “The President is proposing a new credit for qualified investments that help finance projects in communities that have suffered a major job loss event … would provide $2 billion per year in incentives for three years.”  For example, if a major employer closes a plant or substantially reduces the workforce with a mass layoff, the tax credit would support qualified investments in the affected community that would improve local economic growth.   This proposal would help communities that lose manufacturing companies or suffer mass layoffs, but would have no effect in preventing manufacturers from leaving or closing plants.

4.       Provide temporary tax credits to drive nearly $20 billion in domestic clean energy manufacturing: The President is proposing to extend the Advanced Energy Manufacturing Tax Credit tax credit for investment in domestic clean energy manufacturing to ensure new windmills and solar panels will incorporate parts that are produced and assembled by American workers.  However, the U.S. solar industry filed a trade case at the Department of Commerce late last year alleging dumping and unlawful subsidies by China.  Until we address China’s currency manipulation and dumping of products including solar panels and windmill parts, America’s clean energy industry will remain at a competitive disadvantage to China.  Senate bill 1619 that passed the Senate last fall, and H. R. 639 waiting for a vote in the House would be a good start in addressing China’s currency manipulation.  Unfortunately, President Obama has indicated he would veto the bill if passed.

5.      Reauthorizing 100% expensing of investment in plants and equipment: The President is proposing to extend for all of 2012 a provision that allows businesses to expense the full cost of their investments in equipment, spurring investment in the United States.   This provision was part of the Bush administrations tax cuts and will sunset at the end of this year unless it is extended.  It needs to be extended well beyond the end of this year for it to have any real impact in benefitting manufacturers.

6.      Closing a loophole that allows companies to shift profits overseas: Corporations right now can abuse the tax system by inappropriately shifting profits overseas from intangible property created in the United States.  The President is proposing to close this loophole.  This is one of the several steps we need to take to incentivize companies to maintain manufacturing in the U. S. or bring manufacturing back from overseas.

At the same time the President is calling for immediate enactment of this plan, he is pushing forward on a framework for corporate tax reform that would encourage even greater investment in the United States, while eliminating tax advantages for outsourcing.  This framework would include:

Making companies pay a minimum tax for profits and jobs overseas and investing the savings in cutting taxes here at home, especially for manufacturing: The President is proposing to eliminate tax incentives to ship jobs offshore by ensuring that all American companies pay a minimum tax on their overseas profits, preventing other countries from attracting American business through unusually low tax rates.  The savings would be invested in cutting taxes here at home, especially for manufacturing.

This would only encourage more companies to reincorporate in tax haven countries to avoid paying any corporate taxes in the U. S., which has the second highest rates in the world.  A better plan would be to reduce corporate taxes down to the globally competitive 25 percent so that corporations will have less incentive to avoid paying U. S. taxes by building facilities in foreign countries.

Making permanent an expanded Research and Experimentation Tax Credit: The President is proposing to make the Research and Experimentation Tax Credit permanent, while enhancing and simplifying the credit.  Again, this is one of the recommendations in my book and would encourage manufacturers to keep R&D in the United States as only research and experimentation performed in the United States is eligible.
Simplify the tax code and close loopholes:  The Fact Sheet states that over the last 30 years since the last comprehensive reform, the tax system has been loaded up with special deductions, credits, and other tax expenditures that help well-connected special interests, but do little for our country’s economic growth.  The President’s framework will close these loopholes and simplify the tax code so businesses can focus on investing and creating jobs rather than filling out tax forms.  As I mentioned in a recent article, the Department of Treasury issued a report in 2007 that made many recommendations of how to simplify the tax code and close loopholes.  We don’t need to “reinvent the wheel” to study how to simplify the tax code.  Let’s just implement some of the previous recommendations immediately.

Cracking down on overseas tax avoidance and loopholes:  The Fact Sheet states that the President has taken strong steps to crack down on overseas tax evasion and loopholes, including signing into law the Foreign Account Tax Compliance Act, which targets tax evasion by U.S. citizens holding investments in foreign accounts, as well as measures to crack down on abuse of foreign tax credits  that have allowed multinational companies to inappropriately reduce the amount of taxes they paid in the U. S.
The Fact Sheet touts the tax incentives that President Obama signed into law in the last three years that have helped manufacturers, but he actually only signed legislation extending the tax cuts and tax incentives through 2012 that were originally passed by Congress under the Bush administration.  These tax cuts and incentives will end in 2013, if not extended again, and far higher taxes will be imposed under certain provisions of the Affordable Health Care Reform Act of 2010.

One of the big reasons manufacturers and other types of businesses are sitting on millions of dollars in corporate profits without expanding plants, buying new equipment, and hiring more workers is the fear of the higher taxes and health care costs they are facing in 2013 as a result of the Health Care Reform Act.

Therefore, a careful review of the President’s blueprint shows that it doesn’t do enough to save American manufacturing.  The few beneficial policies will be more than undone by the tax increases and regulations that will take effect in 2013 and thereafter.  What we need is an all encompassing national manufacturing strategy if we truly want to provide enough incentives to retain or bring back manufacturing to the U. S. and discourage corporations from outsourcing their R&D and manufacturing overseas.

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Why is it Important to Lower Corporate Tax Rates?

Tuesday, January 24th, 2012

Last fall the Manufacturers Alliance/MAPI and the National Associations of Manufacturers Manufacturing Institute released a report on their analysis of production costs in the United States relative to its top nine trading partners ? Canada, Mexico, Japan, China, Germany, United Kingdom, Korea, Taiwan, and France.  The report revealed that on a trade-weighted basis, the U. S. tax rate is 8.6 percentage points higher than its trading partners in the 2011 cost study, considerably higher than the 5.6 percentage points of the first cost study in 2003.

While the U. S. federal and state combined tax rate has remained the same, every other country in the study has lowered corporate tax rates at least once since 1997, and most countries have done so several times.  The result is that the U.S. rate is now second-highest to Japan in the Organization for Economic Co-operation and Development (OECD).  The increase in the foreign advantage since the 2008 tax study is due to rate reductions in Canada (36 percent to 31 percent), Germany (38.4 percent to 29.4 percent) and Taiwan (25 percent to 17 percent).

If you think that a reduction in corporate tax rates would only benefit the large, multinational corporations doing business globally, think again.  According to last MAPI/MI report, “Facts About Modern Manufacturing,” produced in 2009, 95 percent of the 286,039 manufacturers were companies of under 100 employees.

It isn’t just manufacturing corporations and their trade associations that recommend a reduction in corporate taxes.  On July 26, 2007, the Treasury Department hosted a conference on Global Competitiveness and Business Tax Reform that brought together distinguished leaders and experts to discuss how the U.S. business tax system could be improved to make U.S. businesses more competitive. As a follow-up to this conference, on December 20, 2007, the U.S. Department of the Treasury released a 121-page report titled “Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.”

The report acknowledges that, “Globalization … has resulted in increased cross-border trade and the establishment of production facilities and distribution networks around the globe. Businesses now operate more freely across borders and business location and investment decisions are more sensitive to tax considerations than in the past.” Further, as globalization has increased, “nations’ tax systems have become a greater factor in the success of global companies.” The report notes, “Many of our major trading partners have lowered their corporate tax rates, some dramatically.”

In the 1980s, the United States had a low corporate tax rate compared to other countries, but now has the second highest. Japan has the highest corporate tax rate at 39.54 percent. According to the OECD, Ireland’s tax is lowest at 12.5 percent, while most of the other major industrial nations have corporate tax rates ranging from 19 to 30 percent.

The Treasury Department says, “As other nations modernize their business tax systems to recognize the realities of the global economy, U.S. companies increasingly suffer a competitive disadvantage. The U.S. business tax system imposes a burden on U.S. companies and U.S. workers by raising the cost of investment in the United States and burdening U.S. firms as they compete with other firms in foreign markets.”

The report states that the U. S., tax system “discourages investment in the United States” and “may also slow the pace of technological innovation.  The pace of innovation is a key determinant of economic growth, and innovation tends to take place where the investment climate is best…Given this interplay between innovation and capital accumulation, allowing     U. S. corporate taxes to become more burdensome relative to the rest of the world could result in a cumulative effect in which U. S. firms fall increasingly behind those in other nations.”

The study concludes that the current system of business taxation in the United States is making the country uncompetitive globally and needs to be overhauled. A new tax system aimed at improving the global competitiveness of U.S. companies could raise GDP by 2 to 2.5 percent.  Rather than present particular recommendations, the report examines the strengths and weaknesses of the three major approaches presented:

Replacing the business income tax system with a Business Activity Tax (BAT)

  • The BAT tax base would be gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses.
  • Wages and other forms of employee compensation (such as fringe benefits) would not be deductible.
  • Interest would be removed from the tax base – it would neither be included as income nor deductible.
  • Individual taxes on dividends and capital gains would be retained.  Interest income received by individuals would be taxed at the current 15 percent dividends and capital gains rates.

Broadening the business tax base and lowering the statutory tax rate/providing expensing

  • The top federal business tax rate would be lowered to 28 percent.
  • If accelerated depreciation were retained, the rate would drop only to 31 percent.
  • Acquisitions of new investment could be partially expensed (35% could be written off immediately)

Specific areas of our current business tax system that could be addressed

  • Multiple taxation of corporations (corporate capital gains and dividends receive deduction)
  • Tax bias favoring debt finance
  • Taxation of international income
  • Treatment of losses
  • Book-tax conformity

If the business tax rate were lowered to 31 percent, it would mean that the United States would have the third highest tax rate, while a 28 percent corporate tax rate, would mean the United States would have the fifth-highest tax rate.  The report acknowledges that these lower rates might not be enough as other countries are continually changing their tax systems to gain competitive advantage.  The Treasury Department study says, “Thus, it remains unclear whether a revenue neutral reform would provide a reduction in business taxes sufficient to enhance the competitiveness of U.S. businesses.”

The Executive Summary also comments on the importance of individual income tax rates. Roughly 30 percent of all business taxes are paid through the individual income tax on business income earned by owners of flow-through entities (sole proprietorships, partnerships, and S corporations). These businesses and their owners benefited from the 2001 and 2003 income tax rate reductions. This sector has more than doubled its share of all business receipts since the early 1980s and plays a more important role in the U.S. economy, accounting for one-third of salaries and wages. Moreover, flow-through income is concentrated in the top two tax brackets, with this group receiving more than 70 percent of flow-through income and paying more than 80 percent of the taxes on this income.

The Executive Summary concludes that “now is the time for the United States to re-evaluate its business tax system to ensure that U.S. businesses and U.S. workers are as competitive as possible and Americans continue to enjoy rising living standards.”

Unfortunately, the recommendations of the Treasury Department haven’t been addressed by Congress in legislation in the more than four years since the report was released.

At the same time that we address the corporate tax rate, we need to close a huge tax loophole that multinational corporations are enjoying at the expense of American workers and which is a big incentive for U. S. firms to invest abroad in countries with low tax rates.

In June 2006, James Kvaal, who had been a policy adviser in the Clinton White House and was then a third-year student at Harvard Law School, published a paper “Shipping Jobs Overseas: How the Tax Code Subsidized Foreign Investment and How to Fix It.”  In this well-researched paper, Kvaal points out that “American multinationals can defer U.S. taxes indefinitely as long as profits are held in a foreign subsidiary.  Taxes are only due when the money is returned to the U.S. parent corporation.  The result is like an IRA for multinationals’ foreign investments: foreign profits accumulate tax-free.  U.S. taxes are effectively voluntary on foreign investments.”

There’s no rule saying American companies ever have to bring that money home.  As long as they reinvest earnings overseas, they pay only the host country’s (usually lower) tax rate.  Many companies just put the money they make overseas back into their foreign operations, which means more economic growth for other countries, and less here at home.  Kvaal wrote that “when multinationals choose to return profits to the U.S. they can offset any foreign taxes against their U.S. tax. … As a result, the effective tax rate on foreign non-financial income is below 5 percent, well below the statutory rate of 35 percent.”

He recommends changing the tax code to a “partial exemption system” that “would tax foreign income only if a foreign government failed to tax it under a comparable tax system. As a result, all corporate income would be taxed at a reasonable rate once and only once.” He opines that this system would reduce incentives to invest in low-tax countries, simplify the taxation of corporate profits, and reduce tax competition by removing the benefit of tax havens. He urged immediate action “to ensure that our tax code no longer exacerbates incentives to move offshore.”

The importance of low tax rates to the success of start-up companies is emphasized by Henry Northhaft, CEO of Tessera Corporation, in his book Great Again, co-authored by David Kline. They wrote, “… lower tax rates on the last dollar earned encourage individuals and businesses to work harder, take more entrepreneurial risks, and expand their operations because they can keep more of the fruits of that added labor or activity … a reduction in the marginal tax rate of 1 percentage point increases the rate of start-up formation by 1.5 percent and reduces the change of start-up failure by more than 8 percent. … Tax rates don’t just influence how much investment and growth a firm will choose to undertake.  In an increasingly globalized economy, they also profoundly affect where a business will chose to invest or expand … the relative tax and regulatory burdens on U.S. start-ups have grown exponentially, whereas those on European and other foreign ventures have declined sharply.”

Nothhaft “As a result, America now has the highest corporate rate in the world (with the lone exception of Japan). At 39.2 percent, it’s more than 50 percent higher than the OECD average of 25.5 percent. … A number of empirical studies by OECD economists and others have discovered that the best “revenue-maximizing” tax rate – the rate that brings in more total revenues than either a lower or a higher tax rate – is around 25 percent.”

Comprehensive tax reform is needed because under the current system multinational corporations are favored over domestic companies.  Taxes can foster economic growth or hinder it.  Our domestic economic growth is being hindered by the current tax system and must be addressed by Congress in the near future if we want to help American compete successfully in the global economy and create more jobs.

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What Could We Do Right Now to Create Jobs?

Tuesday, January 17th, 2012

There are numerous ideas and recommendations on how we could create jobs that range from the cautious to the extreme.  Most job creation programs proposed by commentators, politicians, and economists involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue.  Other recommendations would require legislation to change policies on taxation, regulation, or trade that would be difficult to accomplish. Many of these solutions involve borrowing money or taking money from one group of citizens or a future generation to give to another.  Let’s start with what we as individuals can do from the viewpoint of entrepreneurs, business owners, employees, and consumers.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product.   Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price.  Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then you could do a Total Cost of Ownership analysis for component parts that you are having made offshore to see if you could “reshore” some of all of them to be made in the United States.  Check out www.reshorenow.org for a TCO worksheet estimator to conduct your analysis.  Also, you could choose to keep R&D in the United States or bring it back to the United States if you have “offshored” it.    Every manufacturing job you keep or bring back to the United States will create an average of three to four support jobs for other Americans.  If you are a service company, you could choose to keep your customer service department in the United States or bring it back if it is “offshored.”  If enough manufacturing is “reshored” from China, we would drastically reduce our trade  $600 billion trade deficit .  We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible.  There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies.  As I’ve written previously, there are many hidden costs to doing business offshore so that in the long run you may not save as much money as you expect by sourcing your product offshore.  Don’t forget about the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copy-cat or counterfeit product sold at a lower price than your product.

If you are fortunate enough to have a regular, stable job, do everything in your power to contribute to the success of your company.  Do your job to the best of your ability.  Be willing to learn new job skills to increase your value to your employer.  No matter what your job, adopt the marketing mindset where you realize that everyone in a company is part of the marketing team regardless of their job function.  Every interaction that a customer or potential customer has with anyone in a company influences his or her opinion about doing business with that company.  Even though you are being paid by your employer, it’s actually your company’s customers that provide you with a job.

You may not realize it, but you have tremendous power as a consumer.  Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products.  Pay attention to the country of origin labels when you shop and buy “Made in USA” products whenever possible.  Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products.   If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products.   Each time you choose to buy an American-made product, you help save or create an American job.  There is a ripple effect in that every manufacturing job creates three to ten other manufacturing jobs, depending on the industry.  If 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars.  During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

Now, let’s consider what Congress could do to create jobs.  First, Congress must enact legislation that addresses China’s currency manipulation.  Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone.  To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 last fall.  Even though the corresponding bill in the House, H. R. 639, had bi-partisan support with 231 co-sponsors, GOP leadership bottled up the bill in committee and prevented it from being brought up for a vote, so the session ended without action to address this serious issue.  The 112th Congress lasts two years, starting in Jan 2011 and ending December 2012, so there is the opportunity for the bill to be voted on this year.

We  voters need to pressure our elected representatives in the House to pass this bill this year so that American products can compete against Chinese imports.  It’s an obvious fact that if American companies can increase sales of their products, then they will be able to hire more workers.

Second, Congress should pass legislation allowing American corporations to “repatriate” income earned by plants in foreign countries at a reduced tax rate of 5-5.5% if the income is permanently reinvested in the United States.  This would bring nearly 1.2 billion dollars of monies back to the U. S. to be invested in R&D, plants, equipment, and hiring workers.

Third, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense.   All federal spending should have “buy America provisions giving American workers and businesses the first opportunity at procurement contracts.  New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction.  No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries.  The proposed legislation would also close tax loopholes and prevent corporations from avoiding paying corporate income taxes.  They are:

  • Reduce corporate taxes to 25 percent
  • No negotiation or ratification by Congress of any new Free Trade Agreements
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country
  • Change the tax code to a “partial exemption system” to eliminate incentives for companies to move offshore by taxing all corporate income at a reasonable rate once

In this election year, it is unlikely that legislation proposing any of these recommendations would have a chance of being passed by Congress.  The problem is that no Democrat would want to allow any credit to go to a Republican, which might help them win re-election, and no Republican would want to allow any credit to go to a Democrat, which might help them win re-election.   We will need to wait until after the 2012 election before we have any hope of such legislation being considered.

Finally, the Obama administration is considering a high-level task force to manage China trade enforcement issues. Such a task force is desperately needed and long overdue.  The challenge will be to ensure that the task force has the authority to take bold steps to lower our trade deficit with China.  Holding China accountable for their compliance with terms of their membership in the World Trade Organization would be a major step in helping American manufacturers compete in the global marketplace to be able to succeed, grow and create jobs in America instead of China.

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What are the Republican Candidates’ Economic Plans to Create Jobs?

Monday, January 9th, 2012

Every Republican candidate has an economic plan they say will create jobs.  The truth is that the ability of any president to directly create private sector jobs is very limited, but he can set the focus and present a plan that his/her administration can follow and solicit the support of Congress and the American people to approve and implement his plan through legislation and funding.  The legislation that Congress passes and the President signs can either help or hinder the private sector to create jobs.  The funding that Congress allocates provides the fuel to accomplish the plan.

Most of us are familiar with the old adage that small businesses create up to 80 percent of all jobs; however, the new Census Bureau database called Business Dynamics Statics shows that it’s not so much small businesses that create jobs as it is new businesses.  In his book, Great Again, CEO Henry Nothhaft wrote, “all the major innovations that powered the American economy to unrivaled prosperity over the last fifty years – from semiconductors and personal computers to software, biotech, and the Internet – were all created by small start-ups.  So were all of the 40 million new jobs created in this country since 1977…”

However, not every new business has the potential to grow and produce a significant number of jobs.  As Rodney Stark wrote in The Victory of Reason, the basis economic fact is “all wealth derives from production.  It must be grown, dug up, cut down, hunted, herded, fabricated or otherwise created.”   Because of the jobs multiplier effect, businesses that manufacture a product, whether it’s a hardware or software product, have the highest potential for creating jobs as they grow and succeed.  However, these companies will only create American jobs if they manufacture their products or perform their services in the United States.

Most of the plans of the Republican candidates’ plans involve cutting taxes, cutting government spending, reducing the size of government, eliminating burdensome regulations, and repealing what they consider onerous legislation.  Do their specific plans provide a platform to create jobs from production?  Do their plans provide incentives to manufacture products in America?  If they don’t, what should their plans include?

Since all of the Republican candidates recommend reducing corporate taxes, let’s examine why this would be beneficial for creating jobs.  Right now, American corporations are at a disadvantage compared to other countries:  our tax rates are the second highest in the world next to Japan’s, averaging 35 percent at the federal level.

The Organization for Economic Co-operation and Development (OECD) has conducted a number of empirical studies by OECD economists and others that discovered the best tax rate that maximizes revenue and compliance is 25 percent.  The studies found that high corporate income tax rates have the most harmful impact on long-term growth and lowering tax rates can lead to significant productivity gains in the very companies that have the most potential to contribute to economic growth.

Governor Mitt Romney and Ron Paul propose reducing corporate tax rates to 25 percent; Governor Perry proposes a reduction to 20 percent; Rick Santorum to 17.5 percent; while Newt Gingrich proposes a reduction to12.5 percent.  There were no specific recommendations on former Utah Governor Jon Huntsman’s campaign website on reducing corporate taxes.  He seems to base his American Jobs Plan predominantly on increasing free trade through additional free trade agreements.

Three candidates, Governor Romney, Governor Perry, and Rick Santorum propose to create immediate jobs by allowing corporations to “repatriate” profits being held offshore by foreign subsidiaries or divisions at a reduced rate of 5 to 5.5 percent.  Over 1.2 trillion dollars could be brought back to America in a matter of days that would provide capital for investment in plants and equipment in the U. S. and hiring more workers to run the equipment.

Currently, the U. S. operates under what is known as a “worldwide” tax system, meaning that business income is taxed at the U. S. rate regardless of whether the income is earned within American borders or overseas.  American companies pay the corporate tax in the host country, and when profits are repatriated back to the U. S., they pay the difference between what was paid to the host country and what would have been owed under the U. S. rate. Our higher corporate tax rate provides an incentive for companies to keep their profits offshore and not repatriate them.   The U. S. is now the only country in the OECD that adheres to the “worldwide” tax system while imposing a corporate tax rate above 30 percent.  A reduced rate for “repatriation” of corporate profits was provided by the Bush administration in 2004, and corporations have been hoping for the opportunity to do so again.  To prevent this problem in the future, Governor Romney and Governor Perry propose switching to a “territorial” tax system in which income is taxed only in the country where it is earned.

In order to succeed and grow, businesses, and especially manufacturers, need to make long-range plans on allocating funds for R&D and capital investment.  Thus, businesses would benefit by making the R&D tax credit permanent and either reducing or eliminating the capital gains tax.  Governor Romney, Governor Perry, and Newt Gingrich support eliminating the capital gains tax altogether; Ron Paul proposes cutting and simplifying the corporate capital gains tax and Rick Santorum proposes to reduce it to 12 percent.  They all support increasing and making permanent the R&D tax credit.  In addition,  all the Republican candidates support eliminating the  Estate Tax, aka the Death Tax, which especially hurts small, family owned businesses where the heirs frequently have to sell the business to pay the Estate taxes instead of maintaining the business for the next generation of their family.

All of the above proposals for changing tax policies are included in the ten immediate recommendations for saving American manufacturing in chapter 10 of my book, Can American Manufacturing be Saved?  Why we should and how we can.  Only one candidate, Governor Romney, has included my top recommendation in his campaign economic plan:  enact legislation to address China’s foreign currency manipulation.  He also proposes to “direct the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.”  Some criticize this proposal by saying it would start a trade war.  What they don’t understand is that we are already in a trade war, and China is winning.

We need a president who recognizes that currency manipulation is just one of the tactics China is using in their economic warfare with the United States.  Other tactics they use have been described in my previous blogs and are well documented in the writings of Ian Fletcher, Senior Economist for the Coalition for a Prosperous America in his book, Free Trade Doesn’t Work, What should replace it and Why, and CPA’s blog www.tradereform.org.

In his book Great Again, CEO Henry Nothhaft provides additional recommendations of what tax policies should be changed to dramatically help start-up companies:

  • Forgive or defer use taxes levied against start-ups for the purchase of new equipment
  • Reduce or defer the statutory and marginal income taxes paid by start-ups in their first three years of existence
  • Create special tax breaks, capital grants, and incentives for capital-intensive start-ups, especially manufacturing start-ups
  • Provide an innovation tax credit that would give small start-ups half of the money back that they spend on getting a patent

I heartily concur with these recommendations based on my own experience working with start-up companies in business and as a member of the steering committee of the San Diego Inventors Forum (SDIF),

Additional economic proposals of the Republican candidates that would help create jobs would be to repeal the Dodd-Frank act and Sarbanes-Oxley act.  At the very least, we need to exempt firms under $500 million in market value from the costly audit and report requirements of Sarbanes-Oxley.  These onerous requirements have hindered technology-based companies from securing growth funding through the IPO market according to Henry Nothhaft.

Of course, all of the Republican candidates have pledged to play a role as president in the goal of repealing Obama’ Health Care Act, which would add at least $500 billion in taxes to the burden already borne by American individual and corporate tax payers.

I urge every American voter to not just pay attention to the candidates’ sound bites from their ads, debates, and interviews.  Check out their websites and read for yourself what they propose to do as president.  Don’t just vote along party lines.  Make your own personal decision based on facts and gut feelings.  Support the candidate you choose by donating and volunteering.  Join your voice with others who want to create jobs and save American manufacturing.  Besides the Coalition for a Prosperous America already mentioned, check out the American Jobs Alliance, a new independent, non-profit, non-partisan organization.

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What Can I do to “save” American Manufacturing?

Tuesday, October 25th, 2011

You may feel that there is nothing you can do as an individual to stop the total destruction of American manufacturing and watch the United States go over the precipice. Don’t think this way!   American activist and author, Sonia Johnson said, “We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.” Eleanor Roosevelt echoed this sentiment saying, “Never doubt that a small group of thoughtful, committed citizens can change world; indeed, it’s the only thing that ever has.” Remember that our country was founded by a small group of people that did indeed change the world by forming the United States of America.

Here are suggestions of what each one of us can do:

As a Consumer:  It matters if we buy American-made products.  First, our addiction to imports has helped create our high trade deficit, especially with China, where most of the consumer goods we import are manufactured.  Second, American-made products create American jobs.  Each time you choose to buy an American-made product, you help save or create an American job.

Look at the country of origin labels of goods when you go shopping. Most imported goods are required to have these labels.  Buy the “Made in U.S.A.” even if it costs more than the imported product. It is a small sacrifice to make to insure the well being of your fellow Americans. The price difference you pay for “Made in USA” products keeps other Americans working.

If the product you are looking for is no longer made in America, then avoid countries such as China, who have nuclear warheads aimed at American cities. It would not be an exaggeration to say that American consumers have paid for the bulk of China’s military buildup. American service men and women could one day face weapons mostly paid for by American consumers. Instead, patronize impoverished countries such as Bangladesh or Nicaragua, which have no military ambitions against the United States.

In addition, you will be reducing your “carbon footprint” by buying a product made in America instead of a product that is made offshore that will use a great deal of fossil fuel just to ship it to the United States.

If you have a “Made in USA” appliance that needs repair and all the new ones are imported, have it repaired. If it can’t be fixed, and it is a small appliance that you can live without, then don’t buy a new one.

We Americans buy many things that we really don’t need just because they are so cheap. If a product that you are considering purchasing is an import, ask yourself, “Do I really need this?” If you don’t need it, then don’t buy it.

If you are willing to step out of your comfort zone, you could ask to speak to the department or store manager of your favorite store. You could tell the person that you have been a regular customer for x amount of time, but if they want to keep you as a customer, they need to start carrying some (or more) “Made in USA.” products.  If you buy products on line or from catalogs, you could contact these companies via email with a similar message. Your communicating with a company does have an effect because the rule of thumb in sales and marketing is that one reported customer complaint equals 100 unreported complaints.

If you think that Americans no longer care about where goods are made or have concerns about the safety of foreign products, you may be surprised to learn that poll after poll shows that the majority of Americans prefer to buy American.

A nationwide poll conducted by Sacred Heart University in September 2007 found the following:

  • 68.6 percent of Americans check labels for information like manufacturer, nation of origin and ingredients
  • 86.3 percent of Americans would like to block Chinese imports until they raise their product and food safety standards to meet U.S. levels.3

Buying American has been made even easier by a book by Roger Simmermaker – “How Americans Can Buy American: The Power of Consumer Patriotism” released in March 2008 and updated in 2010.  According to Simmermaker, “buying American” is not just about buying “Made in USA.”  “Buying American, in the purest sense of the term, means we would buy an American-made product, made by an American-owned company, with as high a domestic parts content within that product as possible . . . ‘American-made’ is good. ‘Buying American’ is much better!”

One of our greatest statesmen, Thomas Jefferson, stated, “I have come to a resolution myself, as I hope every good citizen will, never again to purchase any article of foreign manufacture which can be had of American make, be the difference of price what it may.”

Simmermaker has made it easy by listing companies and their nation of ownership. You can see his list of American-owned companies at his website: www.howtobuyamerican.com However, Simmermaker’s website isn’t the only one available. You can also check many other websites, found simply by “Googling” “buy American.” These include:

www.buyamericanmart.com

www.ionlybuyamerican.com

www.madeinusa.org

www.americansworking.com

www.shopunionmade.org

www.MadeInUSAForever.com

www.stillmadeinUSA.com

There are also brick and mortar stores springing up around the country that are either stocking only “made in America” products, such as the American Apparel stores or primarily “made in America” products, such as the Urban Outfitters stores.

As American consumers, you have many choices to live safely and enjoy more peace of mind with American products. It’s high time to stop sending our American dollars to China while they send us all of their tainted, hazardous, and disposable products. If 200 million Americans refuse to buy just $20 each of Chinese goods, that’s a four billion dollar trade imbalance resolved in our favor – fast!

As a Voter:  There’s only one way for manufacturers to find relief from high taxes, burdensome regulations, and unfair trade laws and that’s through Washington, D.C.  Voter apathy is partially responsible for the state of our affairs as a country. Too many people have decided that there is nothing we can do on an individual basis and have even stopped voting.

Americans have been “sold down the river” by politicians on both sides of the aisle – Democrats and Republicans. Democrats profess to support “blue collar workers” and unions, yet NAFTA and the WTO treaties were approved and went into effect under the presidency of Democrat Bill Clinton. Republicans profess to support business, yet they primarily support large, multinational corporations, rather than the small businesses that are the engine of economic growth in the U.S. and the foundation of the middle class.

In his 2008 book, “Where Have all the Leaders Gone” Lee Iacocca said, “Am I the only guy in this country who’s fed up with what’s happening? Where is our outrage? We should be screaming bloody murder. We’ve got corporate gangsters stealing us blind. The most famous business leaders aren’t the innovators, but the guys in handcuffs. And, don’t tell me it’s all the fault of right wing Republicans or liberal Democrats. That’s an intellectually lazy argument and it’s part of the reason that we’re in this stew. We’re not just a nation of factions. We’re a people and we rise and fall together.  We didn’t elect you to sit on your butts and do nothing and remain silent while our country is being hijacked and our greatness is being replaced with mediocrity.  What is everybody so afraid of?  Why don’t you guys in Congress show some spine for a change?”

In a poll asking Americans if they’ve ever contacted their elected representatives, eight out of ten said that they never had. It’s never been easier to contact members of Congress. All you have to do is click on www.house.gov or www.senate.gov and type in your zip code, and you’re automatically directed to your representative. A window automatically pops up where you can type a message to that representative.  It takes less than two minutes, on average.  Well, we now need to let our elected representatives know how we feel about the bad trade laws, bad tax laws, and over burdensome regulations on manufacturers. It’s time to shed apathy, become involved, and vote.

If people whose lives are affected by manufacturing would contact their legislators and tell them they want trade reform and tax reform and would follow up to watch to see how they voted, the results would be amazingly effective.

We cannot afford to export our wealth and be able to remain a first-world country. We cannot lose our manufacturing base and be able to remain a “superpower.” In fact, we may not be able to maintain our freedom as a country because it takes considerable wealth to protect our freedom. You can play a role as an individual in saving our country ? the company you save or the job you save by your actions may be your own.

Posted in General, Taxes/Regulations, Trade Policy | No Comments »

Government Regulations Create Huge Costs for Manufacturers

Tuesday, August 23rd, 2011

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

The Federal Register contains 81,405 pages of the federal rules and regulations that businesses are required to comply with.  Federal regulations strain the economy by creating huge costs that business are obligated to meet and serve as a hidden tax on the economy.

James Hamilton of Freedom Works wrote, “The cost of complying with federal regulation increases businesses’ expenses by billions of dollars every year.  Some of the compliance cost associated with federal regulation comes out of businesses’ profits, but much of the costs are passed down to consumers in form of higher prices.  Compliance costs associated with regulations cut into businesses’ profits, while higher prices increase the day to day expenses of all consumers.  Because regulations create artificial costs that must be paid by both producers and consumers, they cost the economy money and act as a drag on economic growth.”

Between 2001 and 2011, 38,700 new regulations were added to the Federal Register. Of the over 4,000 new regulations that are currently being developed by various departments and agencies, 224 are estimated to cost the economy more than $100 million each.  The Obama administration is greatly expanding regulation, with massive new regulations in the works at the Environmental Protection Agency and a host of yet to be written regulations covering financial services to comply with Dodd-Frank Financial Reform Bill.

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

  • Complying with workplace regulations cost an average of $2.2 million per manufacturing firm or about $1,700 per employee
  • Smaller firms (less than 100 employees) faced higher costs than large firms (500 or more) with costs of $2,573 per employee and $1,530 per employee respectively

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

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

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

Economists Nicole V. Crain and W. Mark Crain study of the net cost of regulations determined  that in 2009 federal regulation cost businesses and consumers $1.75 trillion, or nearly 12% of America’s 2009 GDP.  As a comparison, in the same year, corporate pre-tax profits for all businesses totaled about $ 1.46 trillion.

The Health Care Reform Act that passed at the very end of 2009 vastly expanded the requirement for businesses to file IRS Form 1099s for all payments over $600 annually.  The previous law required a business to provide a completed 1099 form to any independent contractors, subcontractors, freelancers, etc. that are not employees and not corporations to whom they made more than $600 in payments over the course of a year.  The Health Care Reform Act law extends this requirement to corporations as well.

This means that a business would have to provide a 1099 to their utility company and every other vendor to which they pay more than $600 a year for services.  For metal manufacturers, such as machine shops, sheet metal fabricators, stampers, and casting companies, this could mean they would have to provide a 1099 for their vendors of metals, as well as companies that provide surface finishing services such as painting, plating, anodizing, or powder coating.

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

On August 4, 2011, National Association of Manufacturers (NAM) Vice President for Energy and Resources Policy Chip Yost released the following statement after the NAM filed comments on the Environmental Protection Agency’s (EPA) proposed Utility MACT rule:

“Affordable energy and jobs are top priorities for manufacturers, and the EPA’s proposed Utility MACT rule threatens to deal a lethal blow to both. The EPA’s Utility MACT proposal is yet another example of excessive overreach that will dampen economic growth and result in job losses.

If implemented, the finalized Cross-State Air Pollution Rule and the proposed Utility MACT rule will cost an estimated 1.44 million jobs by 2020. These two rules will increase retail electricity prices nationwide by 11.5 percent and cost the electric sector a staggering $18 billion per year to comply. This will stifle investment and severely damage our competitiveness at a time when our economic recovery has stalled and the unemployment rate hovers at 9.2 percent.”

In addition, in the past three weeks, the Obama administration has announced back-to-back new fuel economy standards for passenger vehicles and trucks.  New regulations will require a corporate average fuel economy (CAFE) of 54.5 miles per gallon for passenger vehicles by 2025, and new standards for trucks will require a 10 to 20 percent increase in fuel efficiency before 2018.

The Center for Automotive Research released its latest study focused on the impact of anticipated fuel economy and safety mandates on the U.S. automotive market and industry in 2025

A few of the report’s conclusions are:

  • The average increase in vehicle cost necessary to achieve the higher CAFE mandates range from $3,700 to over $9,000.
  • The higher mandates will increase vehicle prices that exceed the savings in fuel costs (over five years), even if gasoline costs $6.00 per gallon (in 2009 prices).
  • Consumers will shun these technology costs by holding onto their used vehicles longer, especially if fuel prices are low (e.g., $3.50 per gallon), resulting in lower sales and a loss of automotive employment. Over 260,000 jobs may be lost if the highest mandate is passed and fuel prices stay low at $3.50 (2009 prices).

The authors recommended moderation in raising fuel economy mandates and conducting a periodic review to assess the rate of technology development and cost reduction of advanced technologies leading up to 2025.  The full report is available at www.cargroup.org.

During a meeting with hundreds of manufacturing executives in town to press lawmakers for looser regulations, White House Chief of Staff William Daley listened to one executive after another air their grievances on environmental regulations.   “At one point, the room erupted in applause when Massachusetts manufacturing executive Doug Starrett, his voice shaking with emotion, accused the administration of blocking construction on one of his facilities to protect fish, saying government ‘throws sand into the gears of progress’…Daley said, “Sometimes you can’t defend the indefensible.”

The regulations mentioned here are examples of the unintended consequences of lawmakers voting on bills they haven’t read.  If Federal lawmakers want to “save American manufacturing,” they need to wake up to the fact that adding burdensome government laws and regulations will actually reduce the tax revenue the federal government receives by driving manufacturers to export jobs overseas.

 

 

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