How to Revive U.S. Manufacturing
It’s debatable whether President Barack Obama can revive U.S. manufacturing, as he proposed in his State of the Union address. It isn’t debatable whether he should try.
The U.S. can already go toe-to-toe with (or beat) other countries on energy costs, workforce quality, supply networks and legal rights -- even if it can’t (and shouldn’t) compete over wages and environmental controls. If Congress cherry-picked just a handful of ideas from Obama’s long list of proposals, the U.S. could jump the competitiveness queue.
U.S. manufacturers have added roughly half a million jobs since 2010, when employment bottomed out. Today, about 12 million people hold factory jobs, down from 17 million at the peak in 2000. Getting back to the previous level will be tough, and it shouldn’t be the only measure of success.
A better yardstick is whether businesses think it’s smart to consider the U.S., alongside China and other low-cost manufacturing hubs, when deciding where to locate new plants. This is beginning to happen. Cheap energy has shifted the cost calculus for Caterpillar Inc., Intel Corp. and Ford Motor Co., which are moving production jobs to the U.S. from overseas. Later this year, as Obama said in his address, Apple Inc. will again make Mac computers in the U.S.
Obama hopes to accelerate the trend. The problem is that he offers an avalanche of ideas -- some innovative, others recycled -- without tying them together in a holistic way. The result is that Congress won’t adopt most of them.
Obama would bolster clean energy subsidies, hire hundreds of people to lobby foreign companies to open U.S. plants, and end tax breaks to companies that ship jobs overseas. He would expand free-trade pacts, crack down on unfair trade practices, enhance job retraining programs, establish supply-chain coordinators, and on and on.
The president could be more effective if he sharpened his focus on two areas: public-private partnerships and corporate tax reform.
Start with his request for $1 billion to open 15 manufacturing innovation institutes. It has gotten little notice, yet deserves consideration, as we have advocated. The institutes would be modeled on a German program that develops and showcases new manufacturing technologies. With a broader mandate, the U.S. versions could deliver a lot of bang for a billion bucks.
The institutes could, for example, make sure local colleges are equipped to offer the specialized training that workers need, notably in high-tech manufacturing. They could help foster a pro-business environment by pushing legislatures to trim red tape, such as licensing and permitting requirements. They could make sure basic services, including broadband communication and efficient transportation, are available. And they could help diversify their local economies to avoid overdependence on a single employer or industry.
The day after the State of the Union speech, Obama toured a plant owned by Linamar Corp. near Asheville, North Carolina, where a partnership of local colleges, economic development agencies and private-sector startups helped bring about an economic resurgence. Linamar, an Ontario company, began making heavy-duty engine parts in a closed Volvo factory in 2010. It now has 160 workers and plans to add 40 more this year. Other companies have followed and, in three years, the region has attracted 1,900 new manufacturing jobs and more than $500 million in investment.
The tax code is Obama’s other challenge. Again, he asks Congress for too much. He wants to lower income taxes on manufacturers to 25 percent from 35 percent, enact a new global minimum tax on manufacturing profits, make permanent the research and experimentation tax credit, deny companies deductions and credits when they move overseas, and create a new tax credit for companies that add factory jobs in hard-hit areas.
These are all worthy ideas, but it’s a complicated array. Why not just lower taxes on earnings for all manufacturers? Corporate income taxes, after all, aren’t actually paid by companies, but are passed on to workers in the form of lower wages, to consumers in higher prices and to shareholders in smaller investment returns.
The U.S.’s 35 percent corporate tax rate -- one of the highest in the world, even if most companies use loopholes and credits to pay far less -- makes it difficult to attract investment. A 15 percent tax on manufacturing profits would be reasonable. One happy byproduct might be the repatriation of overseas profits by U.S. manufacturing companies.
Reinvigorating manufacturing won’t cure the problem of high unemployment. Still, declining energy prices in the U.S. and rising labor costs in China have put the wind back in the U.S.’s sails. The key now is to chart a precise course.
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