Is The Obama Administration Really This Clueless About US Companies' Global Competitiveness? (UDATED)

In Sunday's Chicago Tribune, Caterpillar CEO Doug Oberhelman explained why his manufacturing powerhouse has no plans to expand business operations in its home state of Illinois.  The whole op-ed is worth reading, but here are the money grafs:

Despite the fact that we announced plans for dozens of new factories in the last few years and our United States workforce increased by more than 14,500 in the past 10 years, we haven't opened a new factory in Illinois in decades. Our Illinois workforce is at the same level it was 10 years ago. Caterpillar recently informed several Illinois communities that they are not in the running for a new factory we will build in the U.S., ultimately adding 1,400 jobs — work that's now done in Japan. In that case, logistics was a key factor, but even if it were not the case, when Caterpillar and most other companies look to locate a new factory in the U.S., Illinois is not in the running.

It doesn't have to be that way.

About 10 months ago I wrote a letter to Illinois political leaders expressing my hope that the state would undertake long-term, fundamental reforms so Illinois could compete for jobs and long-term business investment that drives growth.

To date, we haven't seen much change.

The governor's recent three-year projection of state revenue and spending proves that even with the income tax increase, Illinois has not done what is necessary to balance its budget. Major credit agencies have downgraded the state's bond rating. The state passed some changes to workers' compensation last spring, but it wasn't enough. Illinois will still be among the most expensive states in the nation for workers' compensation insurance. Our own comparison of workers' compensation costs showed Illinois was far more costly than neighboring Indiana, which is consistent with a comparative study by Oregon, which also shows Illinois is much more expensive than Indiana, Iowa and Kansas in workers' compensation insurance rates.

What's the solution? For starters, Illinois needs to adopt a long-term sustainable state budget that relieves pressures on taxpayers. Unlike some, I do not favor an early rollback of the temporary tax increases in Illinois; but they should expire as planned. Keeping the temporary tax increases in place for now gives the state time to develop a multiyear plan that balances the state budget. In addition, the state needs to dramatically lower workers' compensation costs. Some say these changes are not politically possible in Illinois. But if Illinoisans put pressure on both parties to make these types of improvements, I think the state can become a place that can successfully compete for business growth and new jobs.

Let me be clear. Caterpillar is not threatening to leave Illinois. Rather, we want to grow our presence here. For Illinois to really compete for new business investment and growth, the state must address these matters.

In short, high taxes, fiscal profligacy and bad regulation - not the absence of state subsidies or other taxpayer-funded "incentives" - prohibit Caterpillar from both locating new business operations in Illinois and remaining globally competitive (a critical issue for the export-dependent company).  Mr. Oberhelman was speaking about state-level policies, but the principles he describes apply equally to national policy.

Unfortunately, the Obama administration does not appear to understand these principles and is instead cluelessly pursuing the exact opposite course.  I've already explained repeatedly how existing US regulations - and new ones like ObamaCare - are doing a number on American businesses' ability to compete on the global stage, so I won't get into that again tonight. [UPDATE: Brand new - and totally depressing - stuff from The Economist on how the United States "is being suffocated by excessive and badly written regulation."]  Instead, I'd like to review the administration's brand new budget plans and their impact on American corporate competitiveness.

In short, it ain't pretty.

On tax policy, the budget keeps the United States' corporate tax rate at one of the highest levels in the world, even though pretty much every other industrialized economy has lowered their rates (charts courtesy of AEI's Jim Pethokoukis):

Pethokoukis cites to studies showing how high corporate tax rates lead to lower growth, and then explains that President Obama's budget not only retains our sky-high 35% stautory rate but also "raise the corporate tax burden by some $350 billion over ten years."  This insanity includes $30 billion in new taxes on oil & gas companies, even though they are fueling (pun intended) the current economic recovery and already pay a much higher effective tax rate than other US manufacturers:

Smart.  Meanwhile, our northern neighbor (and a major global competitor) Canada lowered its corporate tax rate again to a jealousy-inducing 15% on January 1, 2012, making Canada the #1 country in the world to do business, according to Forbes Magazine.  Congrats, Canada.  You big jerks.  (As I said, I'm jealous.)

Ok, well, sure, that's just tax policy.  I'm sure that those taxes are being well spent in the Obama budget and making sure that the United States house is totally in order, right?  Wrong (again via Pethokoukis, who's clearly been on a roll this week):

Pethokoukis concludes that the President's Budget "makes no effort to deal with Medicare, Medicaid, and Social Security — the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House(!) chart shows. It just goes up and up and up — until the heat death of the universe or the economy is struck by a Greek-style debt crisis."  Holy souvlaki, Jim!

So the Obama budget kills US companies on regulations, taxes and debt, but how does the administration propose to help them?  Targeted subsidies for US manufacturing, of course.  The administration's "Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing" pays lip service to broader tax reform, but never once actually provides even a hint as to what such reform would look like. Instead, it just provides a laundry list of new tax subsidies for US manufacturers - including expanding "domestic production incentives," a new "Manufacturing Communities Tax Credit," and temporary tax credits for "domestic clean energy manufacturing."  (The plan also proposes - in tellingly vague fashion - to eliminate tax breaks for "shipping jobs overseas," but we all know what a political joke that is.)

Unfortunately, the administration's manufacturing blueprint - which continues the President's long-held preference for manufacturing - is just as misguided as their broader tax and fiscal plans.  As I've repeatedly noted, the prioritization and subsidization of US manufacturing over other sectors of the domestic economy (like our expanding and globally dominant services sector) is completely misguided, especially as some sort of "plan" to solve the country's high unemployment.

But, hey, don't take my word for it.  The former Chair of President Obama’s Council of Economic Advisers (Christina Romer) thinks the same thing, recently arguing in the New York Times that Obama's "singling out of manufacturing for special tax breaks and support" was wrongheaded because none of the primary rationales for subsidizing the American manufacturing sector - market failures, jobs or income distribution - actually holds any water.  She concludes:

AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

As I noted when Romer's op-ed first came out, smart people on the right and left might disagree about the solutions to our current mess, but at least we they all can agree that the solutions do not involve targeted subsidies for the US manufacturing sector.  If only Dr. Romer had explained this obvious fact to President Obama when his office was a just few doors down the hall.

When Caterpillar realizes that Illinois' tax, spending and regulatory policies prevent it from competing in the global economy, it can - and often does - choose to simply move its operations to a state with a better business environment.  Indeed, the migration of American companies from poorly-managed, debt-ridden states like Illinois and California to leaner, meaner states like Texas is well-established.  Unfortunately, those migrating businesses won't escape bad federal policies so easily.  And if President Obama and his team don't soon get their fiscal and regulatory acts together quickly, Caterpillar and others might not be moving South to Texas but instead heading North to Canada and thus out of the country altogether.

Pining Away for an America of Protectionism, Socks, Ironing Boards and Poverty

When I first read this recent Yahoo Finance article on "10 American Industries Still Hanging On" by Donn Fresard, Matthew Mallon, and Justin Rohrlich, I really thought it was a parody.  On further review, however, I'm pretty sure that the piece, which laments the demise of American manufacturing and praises a few plucky upstarts clinging to survival against a pernicious onslaught of foreign competition, is real.  And you'll never guess how many of the highlighted companies manage to "survive."   Yep, good ol' fashioned protectionism:

For most of the last century, the United States dominated global manufacturing -- no country could compete with America's output.

In recent years, however, the news about domestic manufacturing has been discouraging, if not devastating. Industry surveys have shown a decline in most sectors as the US continues to lose its factories to cheaper labor markets overseas, and especially to China.

In 2010, the last remaining American flatware factory shut its doors. So did the nation's last sardine cannery. Recent years have seen the shuttering of America's last coat hanger factory, last button down shirt factory, and the entire sheetrock-producing town of Empire, Nevada -- which fell victim to the desiccated US housing market.

Surprisingly, however, there remains a handful of heroic holdouts. Bloodied, battered, but not yet down for the count, there are still pockets of US manufacturing scrappy enough to keep the lights on in the face of overseas competition. Here's a look at 10 survivors worth celebrating....

SPARKLERS: Few products say summer in America like the sparkler. But without Diamond Sparkler of Youngstown, Ohio, it would be a cold winter for domestic sparkler production. Diamond has been in Youngstown since 1985, when Phantom Fireworks operator B.J. Alan bought Chicago's Acme sparkler manufacturer and brought its operations to Ohio. At that point, cheaper Chinese sparklers had snuffed out all but three US producers. By 1999, Diamond would be the lone holdout that hadn't shifted to imports. Not because it found a way to profits, however. Besides a brief tariff-related windfall, Diamond Sparkler never been a moneymaker for its parent firm, whose owner said he bought the division because he couldn't "envision something as American as sparklers, with its association with the (Fourth) of July, not being made in this country."...

SOCKS: To get an idea of what's happened to the American sock industry, take a look at Fort Payne, Alabama. Until a few years ago, the town of about 14,000 billed itself as the "Sock Capital of the World." They weren't spinning a yarn, either: As late as 2007, according to the Hosiery Association, if an American put on a pair of socks, the odds were about 1 in 8 they'd be rolling a product of Fort Payne/DeKalb County onto their hooves. Most of the area's workforce was employed in its sock mills, which then numbered 125 to 150. Today only 20 remain, providing roughly 600 jobs, down from 8,000 just a decade ago....

What started pulling out the thread was -- you guessed it -- globalization. An influx of cheaper hosiery, imported from the likes of China, Pakistan, and Honduras, started around the turn of the 2000s. It flipped the American sock industry on its head faster than argyle came back and again went out of style. Domestically made socks went from three-quarters of US sales to one-quarter between 1999 and 2006.

Thanks to a quirk of national politics, Fort Payne caught a break in 2005, when then-President Bush needed to swing a single vote in Congress to get his Central American Free Trade Agreement out of deadlock. The city's congressman, Robert Aderholt, was a holdout against the deal, and he took the opportunity to hold the bill hostage with a single demand: Restore the tariffs, which had been lifted in 1984, against socks seamed in Honduras. The White House complied, and the duty returned at the end of 2007. The move had little effect in the long run, and sock factories are still fleeing Fort Payne for Honduras.

IRONING BOARDS: The fact that there's only one ironing board manufacturing plant left in the Unites States has nothing to do with changing tastes in laundry after-care, or the viral spread of track-suits and t-shirts, and everything to do with retail consolidation and globalization.

Located in Seymour Indiana, HPI Seymour, owned by Chicago-based Home Products International, has been around since 1942, when it started as a tool-and-engineering shop. In the 1950s it switched to ironing-board only mode, successfully marketing a range of high-end ironing boards around the world.

But today the plant, which employs 200 people (down from 400 in 2000) and pumps out 720 boards an hour, is fighting the same stiff winds that have wiped out so much of U.S. manufacturing, despite a market that sees some 7 million ironing boards sold every year. Big chains like Wal-Mart (WMT) and Target (TGT) are still customers and anti-dumping tariffs as high as 157% against its rapacious Chinese competitors have kept the lines rolling at the plant so far. But with the chains increasingly sourcing cheaper and cheaper products from Asia, and with the tariffs coming under pressure from observers who wonder if artificially high ironing board costs for 7 million consumers are worth 200 jobs in Indiana, HPI Seymour's 69-year-old history is probably nearing its end.

PENCILS: Without tariffs against Chinese imports, you might as well erase pencil manufacturing from the ledger of American industry. And even since the US government took anti-dumping action against Chinese exporters in 1993, China's dominance of the industry here has barely slowed: American companies in 2008 produced only 14% of pencils sold stateside, whittled down by half from just four years prior.

Newell Rubbermaid's Sanford, have closed plants that employed hundreds in the past few years as they shifted production to Mexico and elsewhere. Other companies largely retreated into specialty graphite utensils, like colored and drawing pencils. "The yellow pencil basically became a Chinese commodity," Jim Weissenborn, whose family has owned General Pencil for 150 years, explained to Bloomberg news in June. "We've had to become a very boutique type of business in order to survive."

SNEAKERS: New Balance is the only major player in athletic footwear that still operates American factories, and it's hanging on by a shoestring as free-trade negotiations with Vietnam loom. The privately held Boston company has 1,000 US workers in its five New England plants, whose $10-and-up hourly wages are a quaint holdover in an industry that imports 99 percent of its product. "The company already could make more money by going overseas, and they know it," 35-year-old floor leader Scott Boulette told the Washington Post. "So we hustle."

But all the elbow grease in Norridgewock, Maine, won't keep New Balance competitive if an expected agreement with Vietnam eliminates the tariff on imported shoes, typically around 20%. The region's legislators are trying to carve out an exemption to keep New Balance's factories open. The firm's competitors like Nike and Reebok, though, seeing an opportunity for higher profits on imports and, displaying little sympathy for the scrappy northeastern holdouts, have banded together to fight the duty – or "shoe tax," as they call it. "For products that are no longer produced here and haven't been produced here for decades, there's no sense for consumers to be paying it." said Nate Herman, of the industry's lobbying group....

Sigh.  Where to begin?  Well, first let's start with the little fact that the American manufacturing sector as a whole is actually doing quite well, as these two charts (recently mentioned here) make perfectly clear:

Source: BEA

Second, let's recall that lots of American manufacturers, particularly those like Caterpillar who use low-cost imported inputs and depend on foreign demand, remain very successful.   Indeed, IndustryWeek's recently-released "2011 IW 50 Best Manufacturing Companies" lists plenty of American manufacturers who are dominating, even in this tough economy.  And although some of these companies utilize foreign facilities, many of them, like #1 ranked hard-drive manufacturer Western Digital out of California, have significant US production facilities and are hiring.  And considering that most high-tech goods are duty free because of the Information Technology Agreement, we can be pretty darn sure that Western Digital didn't make it to the top of the IW list by lobbying for government protection from foreign competition.

Odd that the authors didn't think to mention these globally-dominant firms, eh?

Third, the authors fail to mention that many manufacturers are returning to the United States because cheap labor couldn't trump the myriad benefits of domestic production.  Meanwhile, many US companies depend on  exports and foreign demand, particularly in this anemic US economic recovery, to keep their domestic doors open.  In short, "American" manufacturers are coming back to the states, and the very "globalization" that the authors repeatedly deride is actually a boon to the US economy.

Finally, the article above makes clear that many of the companies that the authors praise only exist here in the United States because of ridiculously high tariffs.  Thus, their "success" is government-induced and comes at the expense of American families and businesses who have been forced by the US government to pay higher prices for shoes, socks and other basic goods.  And even with massive government protection, the companies still can't compete.  Thus, we've all been forced to subsidize (through higher prices) failing US companies that will never, ever be competitive again.

By contrast, many of the globally-dominant companies listed in the IW 50 (or the broader IW 500) don't require government tariffs or subsidies.  But these companies aren't manufacturing basic, labor-intensive things like socks and pencils; they're mainly in high-end, high-tech, capital-intensive industries like aerospace, IT, pharmaceuticals, chemicals, biotech and heavy machinery.  And they're doing it very, very well.

I don't mean to disparage America's sock/pencil-makers, but the basic and obvious reality is that US companies have an extremely difficult - if not impossible - time competing on the lower-end of the manufacturing spectrum (even with massive government assistance).  At the same time, they're succeeding at the industrial top-end where education, technology and productivity - things at which the United States still excels - are more important than things like cheap manual labor.  And, of course, they're also succeeding through globalization and, yes, even outsourcing (see, e.g., Apple).  So to glorify the uncompetitive industries and the government protectionism that keeps them (barely) alive, while ignoring the successful American firms that don't need state assistance is more than just misleading and nonsensical, it's also harmful - if the authors somehow convince Americans to embrace protectionism and uncompetitive, inefficient American industries, we'd all be worse off.

As Cafe Hayek's Russ Roberts eloquently put it today in response to a trite NYT op-ed on the same subject: "Making stuff the cheapest way is the road to prosperity. Trying to find expensive ways to make stuff (because it once was a good idea but no longer is) is the road to poverty."

Why do Fresard, Mallon, and Rohrlich want us to run down that road?

Caterpillar CEO on Trade and How to (Really) Win The Future

President Obama and his underlings just love to talk about improving American competitiveness in order to Win the Future.  But what does the US business community - well, those not on the milky-end of the government teet - think about the current state of American policy and its impact on our companies' future global competitiveness?  Courtesy of HotAir comes a fantastic CNBC interview with the CEO of Caterpillar - one the shining stars of America's thriving manufacturing sector - on just those issues.  It's well worth your 15 minutes:



In short, Mr. Oberhelman sees the global economy not as a threat, but as a great business opportunity.  He's smartly positioned Caterpillar to take full advantage of both foreign and domestic market conditions - through things like advocating robust trade liberalization, currency hedging and maintaining near-total control over business operations in interventionist foreign markets - and he sees competitiveness-killing US government policies, not free trade or low-cost competitors in China or Brazil, as the greatest threat to his company's viability and the future of the American economy.

And what kind of US government policies are undermining our global competitiveness and thus jepoardizing our companies and jobs?  I'll let Oberhelman explain:



My favorite quote:

We've announced three or four arguably brand-new facilities [in the United States] bringing work in from outside. And frankly we weigh all of these things in which state is the most business friendly. It's not a question of labor cost or who's cheaper. If you chase cheap labor around the world, you're never going to win. It's a lot more than that. The state's got to be competitive.  The country's got to be competitive....  You see states going the other way [from Illinois], where they're very pro-business and reducing taxes, and guess where we land our plants that are very competitive.... The latest and greatest is in Texas.  We brought a plant that in the past has assembled hydraulic excavators in Japan for shipment to the U.S.... we've moved that plant to south Texas... 5,000 to 6,000 units a year, 600 to 700 high-paying assembly jobs.

Nice.  And how exactly does Mr. Oberhelman think the current administration is doing to keep American companies strong and competitive?  Well, the answer to that is in the second video, but I'll let HotAir spell it out for you.

(Hint: it's not good.)