Manufacturing, the State of the Union, and Iowa
Jan 28, 2012
By Dave Swenson
By Dave Swenson
Early in President Obama’s State of the Union message he highlighted a key component of his economic recovery strategy. He believes that re-invigorated U.S. manufacturing is a keystone to future U.S. prosperity, and he offered strategies and initiatives to underscore that notion. For many who might have written off U.S. manufacturing as an engine of future growth, this might strike them as an odd focus given the fact U.S. economic development policy has primarily focused on non-manufacturing sectors in the past two decades. Others may view Mr. Obama’s emphasis cynically as merely a mechanism to shore up Rust Belt union support in the next election.
First off, the President proposed tax breaks to companies that repatriate production back to the U.S. When U.S. firms, like Maytag in Galesburg, Illinois, or Whirlpool in Evansdale, Indiana, moved their plants to Mexico, our tax laws allowed them to deduct the costs of that re-location. Mr. Obama would eliminate that inducement and use the savings to reward U.S. firms moving in the opposite direction. The message that is sent is clear: the public will no longer subside your leaving, but write-offs for returning jobs will be guaranteed.
Second, he offered up doubled tax deduction incentives for advanced manufacturing job creation. This is an important component of the President’s development initiative, and it is my take that Mr. Obama’s economic development advisors have looked to Germany as a model for remanufacturing our manufacturing sector.
A decade ago, German had high unemployment and a stagnant economy. It realized it could not compete with the rest of the world in making low value products using low wage and low skilled labor. But it knew full well that it could compete at the higher ends of manufacturing: in automobiles, machined goods, specialty metals, and a wide range of durable goods. They wouldn’t produce the most, but they would produce the best. This is the direction that President Obama wants to take the U.S. He envisions a German-style manufacturing emphasis that rewards the creation of high-value, high-quality manufactured goods.
The problem that Germany had and solved and what the U.S. has and has yet to solve, however, is that an advanced manufacturing sector needs an advanced manufacturing workforce. And part of the speech focused on the need to take our labor force and redirect those that are able and interested into training and retraining programs that allow them to staff the next generation of manufacturing firms.
It’s a daunting process, though, because persistent declines in manufacturing jobs in the U.S. have sent a very clear signal to labor, especially youth entering the labor force: go look elsewhere, we’re not hiring. While manufacturers are currently bemoaning the absence of specifically-skilled talent, the President proposes to offer focused skill-building assistance. It is important to note, though, that the re-introduction of the American workforce to manufacturing might be a difficult prospect. First, pay will have to beat the next best alternative, whatever that is. And second, the biggest drawback to entering manufacturing employment is the business cycle. All pay, benefits, and assurances combined have to offer the kind of job security and stability that makes workers dedicate themselves to a career in manufacturing. Wooing workers back to manufacturing may take some time.
There were other provisions that would juice up incentives for firms staring up in distressed areas, those engaged in clean energy development, 100 percent deductions of new plant and equipment from tax bills, and closing loopholes that allow firms to shift their profits overseas to avoid U.S. taxation. They’re all fine and good, but the big question for the Midwest and Iowa is: will this make a difference?
Iowa has a range of advanced and very high quality manufacturers. There is a sub-culture here of the kind of new American manufacturer as envisioned by the Obama economic development team. But the vast majority of Iowa manufacturing is not advanced manufacturing. Very large components produce basic foodstuffs and staples. We have a comparative advantage to the nation in production workers, but we have a decidedly alarming comparative disadvantage in engineers, mathematicians, and physical scientists. That means that we have a pronounced deficit in the innovation human capital needed to lead to rapid growth in advanced manufacturing activities.
In short, while we rank 5th or 6th nationally in the amount of manufacturing GDP we produce, the kind of manufacturing that we do in Iowa puts in a poor position to rapidly transform our manufacturing culture to one that emulates the President’s vision or the German experience.
If the President get’s his initiatives through Congress, they will benefit Iowa manufacturers and the Iowa economy. But the prospects that they will transform Iowa manufacturing are, alas, low.
Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and a community and regional economics analyst and educator. He also teaches planners (those nefarious agents of totalitarian control) how to do economic things in their profession at both Iowa State University and The University of Iowa.