Creating a manufacturing strategy – JEC hearing

Earlier this week, the Congressional Joint Economic Committee held a hearing on “Manufacturing in the USA: Why We Need a National Manufacturing Strategy?“. Some of the testimony was the standard laissez-faire rhetoric on don’t worry about manufacturing (i.e. “it’s all part of economic evolution”) or the problem is all taxes and regulations. But the testimony by Scott Paul of the Alliance for American Manufacturing and by Mark Zandi, Chief Economist for Moody’s Analytics are worth noting.
Zandi was surprisingly optimistic about manufacturing’s future prospects:

While it will take many years for the U.S. trade deficit in manufactured goods to disappear, the process is under way in earnest. U.S. manufacturers who have long seen the dark side of global trade are moving toward the bright side, where they will be long into the future.

In part, he felt the worst is over, stating that, “any U.S. manufacturer that survived the Great Recession must be doing something right, staying very cost effective and/or holding a global market niche.” Companies that can build on those strengths can expand as the global economy recovers.
While issuing the standard warning about protectionism and “industrial policies” of subsidizing specific companies, he did offer a number of systemic policy proposals. These including confronting the Chinese currency issue, addressing the skills problem, reforming the tax code, lowering the cost of capital through increased SBA lending (including SBA equity financing) and improving infrastructure to lower the cost of transportation, telecommunications and energy.
Zandi also advocated work-share programs:

Manufacturers would also benefit from reform of the unemployment insurance system, including the expansion of work-share programs. Work-share allows manufacturers to avoid some layoffs by cutting workers’ hours, with government making up some of the employees’ lost compensation. This allows businesses to avoid severance costs and keep valuable employees whose skills are difficult to replace. Workers are increasingly willing to give up some hours to avoid being laid off. The unemployment insurance program should also provide incentives to unemployed workers to invest in their own retraining. Federal efforts to facilitate the retraining and education of displaced workers have been inadequate, and there has been little research into the design and implementation of effective retraining programs. This is especially important for unemployed workers in distressed regions of the country.

As I have noted before, work-share programs could effectively be combined with training programs so that workers spend those hours away from the job in training activities. But I would go beyond Zandi’s call to reform worker training programs for dislocated workers. We need to revisit the entire unemployment insurance system and revamp the worker “retraining” system into a worker training system.
Paul outlined his own set of policies for fostering a vibrant and economically prosperous manufacturing sector. These too included enhanced skill training and expanding infrastructure investment. He also called for confronting the Chinese currency issue as well as dealing with other Chinese unfair trade practices. But Paul also warned about any strong dollar policy that would but US manufacturers at a competitiveness disadvantage.
In addition, he called for a reorientation of the Administration’s trade goal of doubling exports to one of eliminating the manufacturing trade deficit. As he noted, “That’s a far more accurate metric for success or failure in the manufacturing sector than increases in exports that may be offset by a flood of imports.”
On regulation, Paul warned about cutting regulations:

while duplicative and unnecessary regulations should be reformed or eliminated, pursuing a race to the bottom with countries like China is foolhardy and ineffective as a means to boost our global competitiveness. A high-road strategy is the only feasible one for our nation. Advances in technology are making industries more sustainable, and ultimately, more competitive. The idea of rolling back decades of protections for workers and the environment is an exercise in futility, and time and resources would be better spent elsewhere. The goal should be for other nations to aspire to the quality of life that Americans enjoy, not to discard our efforts through a downward competitive spiral.

On taxes, Paul took issue with the especially the notion that manufacturing specific tax incentives should be eliminated in exchange for lower rates (see earlier posting):

The idea that a revenue-neutral corporate tax cut would be good for manufacturing is tenuous, at best. There appears to be little or no correlation between marginal tax rates and global competitiveness. A more significant factor is the presence of value added tax (VAT) systems with rebates for exports in virtually every industrialized and industrializing country except ours.

I agree with much of what Paul and Zandi said. I would add that we need to make sure these policies are crafted in a way to also foster the transition that manufacturing is undergoing. As I discussed in previous postings, manufacturing is becoming a more knowledge based activity and the distinction between manufacturing and services is disappearing. Our Policy Brief Intellectual Capital and Revitalizing Manufacturing outlines some of the steps that could be taken. These include work sharing and expanded worker training programs as mentioned above. But they also include recommendations to directly help companies and entrepreneur better utilized their intellectual capital. One step would be to expand the Manufacturing Extension Partnership (MEP), SBA assistance programs and EDA business incubator programs to include intellectual resource management that covers a broad array of assets, beyond help with intellectual property. Another would be to help companies use their intellectual capital to gain access to more financial capital. For example, SBA underwriting rules should be changed to allow companies to use their IP as collateral on loans and SBA could create a specific IP-backed loan fund. The paper also outlines other steps that could be taken in the financial system to encourage better recognition and utilization of intangible assets.
It is clear we need an overall manufacturing strategy. That strategy should build upon the current transformation of the economy — neither fight it nor assume that a laissez-faire direction will be in the best interest of the nation. Let us hope the policymakers were listening to the good suggestions coming out of the JEC hearing.

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