It’s the Economy, Stupid: Manufacturing

All is not well for the “Made in the USA” label. Manufacturing output, one half of the equation, has achieved a high level of production, yet manufacturing jobs have gone the way of the woolly mammoth.  Consider the graph below, comparing jobs vs. output in the manufacturing sector since 1975:

This trend illustrates the net loss of manufacturing jobs but it is the percentage employed in manufacturing, 9%, which is of more grave concern. It wasn’t always this way. In 1950, the advent of the “Golden Age of Capitalism” saw manufacturing account for 31% of all non-farm employment. The Marshall Plan not only helped rebuild Europe but also ensured a market for American manufactured goods. When coupled with the military-industrial complex Cold War spending, these conditions provided the impetus for manufacturing supremacy. What happened?

Economists view movement away from manufacturing as a natural step in economic development. First, subsistence farming is able to satisfy people’s needs. After large-scale agriculture is able to produce a surplus and bring down costs, manufacturing develops. After manufacturing becomes more efficient through specialization, technological improvements and trade, tertiary service industries experience growth.

Manufacturing isn’t necessarily a story of national failure, but rather a lack of adaptation. Technological improvements contributed considerably to the loss of employment in the name of productivity. I assume no one will be shocked by the notion that automated robots are more productive than humans in the manufacturing sector. A better culprit for the industry’s demise is the rise in imports, which demonstrates that manufacturing is a zero-sum game America has been losing. Before the 1980s, imports scarcely rivaled domestic production, but rose to 25% of manufacturing output during this decade.

Products are less expensive to import or manufacture abroad because of a strong US dollar and lower labor costs. To illustrate this trend, Morgan Stanley provides perhaps the most informative manufacturing graph you’ll ever see:

Looking above, you get a sense of how important the Industrial Revolution was to the United States – about as important as the American Revolution. Unfortunately, this graph doesn’t reach 2010. That’s the year in which Chinese manufacturing output exceeded the US, ending our 110-year stretch of primacy in the industry. The Chinese were put over the top by manufacturing growth tied to Chinese subsidiaries of US companies, in a word, outsourcing.

US manufacturers have a simple choice: competing based on cost or quality. The common sense solution is not a race to the bottom in terms of cost, but rather through quality – manufacturing innovative, high-tech products with substantial added value. With that in mind, let’s examine the records and plans of the 2012 Presidential candidates.

Obama

When surveyed by the Associated Press on three things that would improve manufacturing, Obama didn’t mince words, offering a comprehensive plan. Far from a race to the bottom, the President espouses that we shoot for the stars. His approach can best be characterized as a holistic carrot-and-stick plan to spur domestic manufacturing. He seeks to lower the marginal corporate rate to 28% and reduce it to 25% by way of a domestic production deduction for companies whose products are made in the USA. Recognizing the need to compete on quality, Obama pledges to double the credit for advanced manufacturing technologies from 9% to 18%. In an effort to in-source (more accurately, re-source) jobs to the United States, he endorses a 20% income tax credit for relocation expenses incurred while returning jobs to America. Finally, Obama would make the R&D credit permanent, allowing manufacturers to embrace innovation.

Those are the carrots. Here are the sticks.

The President recognizes that cheaper costs incentivize foreign production, and that making it more expensive to produce goods abroad helps domestic manufacturing. As such, he would close loopholes that allow costs related to outsourcing to be tax-deductible. A measure with more bite: Obama would institute a minimum tax on foreign earnings for US-based companies, which are failing to repatriate their profits to avoid taxation. I’ve read complaints that such an action would cause companies to fail to accurately report profits earned abroad. Fine, let them commit fraud. I’m sure Obama has an inside line to the Department of Justice.

The President has received praise for his commitment to manufacturing training programs which served over 2 million Americans. Chester Chambers, assistant professor of manufacturing strategy at Johns Hopkins, claims that these programs are “more in keeping with what small producers routinely complain about – the lack of skilled labor.”

Obama’s record on manufacturing is similar to that of the economy in general, as seen in the chart below. He inherited a manufacturing sector leaking jobs on the scale of the Titanic, and managed to turn it around, albeit with a meager rebound.

Romney

In contrast, Romney bemoans the federal jobs training effort. A ‘Day 1’ Retraining Reform Act by President Romney would consolidate “the sprawl of federal retraining programs and return funding and responsibility for these programs to the states.” This act would have a negative effect on manufacturing employment – rather than consolidating programs, it decreases the efficiency of training programs by creating multiple administrations (each of the 50 states, not one federal agency). On the aggregate, this would increase overhead costs.

Romney holds an anti-union view of the manufacturing workforce. In Believe in America, he implies that labor unions hurt the manufacturing industry (102-103). Mitt also uses another popular conservative talking point as a cause of the decline in manufacturing: regulations.

With foreign companies operating in a less-regulated environment than ours, is it any wonder that our country’s share of the global marketplace in manufacturing is on the decline and that American jobs have been lost to lower-cost competitors abroad? Believe in America, p. 54

This statement is indicative of the Romney approach: a race to the bottom. The quest for a deregulated business environment is merely another manifestation of this plan.

Romney’s three ways to improve manufacturing were unsurprisingly curt. Like President Obama, he would make the R&D credit permanent. His primary proposal to burgeon manufacturing is a straight cut to the corporate tax rate, down to 25%. This tax cut is not peculiar to manufacturing – and when you count Obama’s corporate tax cut and domestic production deduction, domestic manufacturers would enjoy the same tax rate under either candidate. The difference is that Romney does nothing to prevent outsourcing. As well, this corporate tax cut would not affect a majority of the small manufacturers who file individual income rather than corporate taxes.

Romney promises toughness on China as another core component of his plan to revitalize manufacturing. He denounces China for its currency manipulation, unfair trade practices and intellectual property theft, often with venomous rhetoric to boot.  China Daily has condemned Romney’s China policy as “an outdated manifestation of a Cold War mentality.” Historically, Presidents have difficulty translating words into deeds vis-à-vis China, as this Business Week excerpt shows:

“Whenever someone goes from campaigning to governing, the realities of engaging China forces moderation,” said Charles Kupchan, a professor of international affairs at Georgetown University in Washington and a senior fellow at the Council on Foreign Relations. “Despite the economic difficulties here and the deindustrialization in important swing states, neither party has really gone to the mat once they’re in office.” Business Week

Will Mitt Romney really be the President who goes “to the mat” on China? Reality check. Without a pair of functioning kneecaps, he’d have trouble standing for anything. This stance on China is as misguided as it is unrealistic, as the country owns 8%, or $1.2 trillion, of US public debt.

Romney’s record in manufacturing betrays him. Mitt’s tenure at Bain is marred by proof that the company was a pioneer in outsourcing. The 2008 op-ed “Let Detroit Go Bankrupt” underscores his fealty to free-market capitalism even at the expense of national security. GM ranks 24th on this list of defense contractors – who would build our Hummer tanks if it were allowed to go bankrupt? As the Governor of Massachusetts he fared poorly, losing approximately 40,000 manufacturing jobs at a rate nearly twice the national average.

The Ruling

Mitt Romney’s manufacturing policy would reduce products “Made in the USA” to a quality level of “Made in China.”

With four more years, Barack Obama will build on his success, protecting the quality – and quantity – of manufacturing jobs and products in the United States.

Manufacturing? He’ll build that!

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  • Carol Slezak

    You wrote: “Without a pair of functioning kneecaps, [Romney would] have trouble standing for anything.” This reminds me of a joke that is making the rounds:
    A liberal, a conservative, and an independent walked into a bar. The bartender said, “Hello, Mitt.”