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4 Ways to Improve the State of American Manufacturing

As the race to the Whitehouse marches on, the field of potential candidates continues to narrow, and the related coffee house discussions vary according to the most recent debate outcomes, one topic remains consistent in its need for more detailed attention; U.S. jobs.  Last month's article,The Data Behind the State of American High-Tech Manufacturing, highlighted the statistical decline and current state of U.S. manufacturing.  Here's a look at four primary reasons for the long-term decline in U.S. manufacturing jobs, and potential solutions for each.  These reasons can be best explained as deficits that need to be remedied in order to stabilize U.S. manufacturing jobs and begin creating meaningful numbers of new US manufacturing jobs.

The Skills Deficit

Manufacturing industry experts estimate that there are roughly two million unfilled jobs in U.S. manufacturing today, largely owing to the lack of skilled workers to fill these jobs.  With as many as 30% of our workers under the age of 25 being “underemployed”, a reasonable first solution would be to systematically address basic training for manufacturing.

Today's U.S. high school graduates are generally not adequately prepared for most jobs on the factory floor, lacking sufficient math skills and specialized skills in everything from quality control to materials handling.  A simple six month program targeting enhanced math skills and the basics of manufacturing could be implemented at the high school level as a first level remedy for this deficit. A similar post high school short program curriculum could be offered via vocational training at Junior Colleges or Trade Schools. Both would go a long way towards filling some of the two million openings in manufacturing, and would help establish on ongoing sources of entry level manufacturing workers. 

The following chart shows a statistical comparison of the G20's ranking in high tech exports as compared to two decades ago. The first statistic is the rate of growth and placement in rank of each country now as compared to 1994.  The second series of statistics is the actual US dollar value and ranking of that value of the high technology exports for each member country.

The Financial Incentives Deficit

Capital equipment depreciation schedules, jobs and training credits, manufacturing R&D credits, and corporate tax rates are all potential tools for increasing manufacturing jobs. Reduction of corporate tax rates is the financial incentive most often discussed, perhaps because it has the appearance of low hanging fruit; but it is not sufficient as a stand-alone remedy. Corporate tax rates for high tech manufacturing in the U.S. should indeed be reduced from 35% to 10%.  U.S. high tech manufacturers would benefit further on their tax burden if Modified Accelerated Cost Recovery System (MACRS) depreciation schedules for U.S.-based manufacturing equipment in targeted industry segments were cut in half, allowing high tech manufacturers to take more expense against their high cost equipment purchases in a shorter timeframe.  Likewise the minimum threshold on manufacturing capital acquisition costs should be raised from $1,500 to $7,500 so more costs can be expensed at the beginning of the equipment lifecycle, in order to help offset the cash outlay for the equipment acquisitions. 

Companies putting their employees through an approved manufacturing skills training program each year should be given a $2,000 tax credit per existing employee they maintain on the job, and a $6,000 tax credit for new manufacturing hires – or alternatively could opt for a $1,000 and $3,000 cash reimbursement grant from the Department of Labor's newly formed (at least in my mind) Department of High Tech Worker Preparedness.  Existing R & D tax credits, which tend to be thought of as focused on product and materials, should be clarified and expanded to include a broader range of manufacturing process development and process improvement activities in key manufacturing technologies.  The U..S. needs to leverage its lead in R & D to build and maintain a lead in high tech manufacturing.

Manufacturing Technology Development Deficit

Let's face it, the development of some new technologies often yield their own rewards, (think social media). Yet, while critical, the development of manufacturing technology tends to happen behind the scenes and is often a cumbersome process, with very little fanfare, and even less sex appeal.  To help correct this deficit, the USPTO should create an expedited approval channel where US based manufacturers can apply for materials and process technology patents for high tech manufacturing processes.

The White House should create a special awards program (something like the old Malcolm Baldridge Award, which honors Performance Excellence) but one that specifically focuses on innovation in US manufacturing.  The program would have a defined judging criteria and would award 10, $5M awards, (think X-Prize), to the most innovative small manufacturers in the US every year.

The department of education, working with the nation's top engineering colleges, could define (or redefine) an engineering discipline and specific degree requirements for Manufacturing Engineering as a unique discipline – the Manufacturing Engineer with specialized training in statistics, material science, industrial technology, operations research, efficiency, supply chain management, etc.  A new student loan program could be developed and underwritten by the government to incentivize new student enrollment in such a program if creating high tech manufacturing jobs is really a national priority.

Trade Agreements Enforcement Deficit

Most U.S. trade agreements to date, from North American Free Trade Agreement (NAFTA) to the Trans-Pacific Partnership (TPP) all focus primarily on eliminating barriers to trade with very little emphasis on creating or protecting jobs.  That is the very nature of free trade, but for it to benefit all, the world must have a level playing field.

All U.S. trade agreements should be reviewed and some renegotiated with an eye towards leveling the playing field for all workers globally.  Common overtime laws, leave laws, and minimum legal standards for social benefits should be added as part of the trade pack framework with better surveillance and enforcement clauses built in.

Trade agreement compliance should also be tied directly to a rule set for central bankers in the signatory countries.  Direct currency manipulation should have a pre-described, automatic penalty associated with it.  For example, if the Chinese Central bank acts over night to devalue its currency by 3%, the next day all Chinese imports should automatically be subjected to a 3% import tariff.  This does not disallow central banks from making such moves, but it adds a new dimension of consideration for those in charge – and it blunts the power of currency manipulation as a trade tool.

A similar type of penalty structure should be put in place for cases of extreme Quantitative Easing (QE) manifested in the form of negative interests rates put in place by Central banks.  When one of our trade agreement partners embarks upon a negative interest policy, their trade in goods with the U.S. should be immediately subjected to import duties equal to -5 times the set interest rate.  So if the EU embarks on a negative 50 bps interest rate policy, their goods would be immediately subject to a (-.50 x 5) = 2.5% import tariff. The chart below highlights some of the current worst negative rate offenders as compared to the US.

There is a lot more that the U.S. can do to facilitate manufacturing job creation – but we need to think and act more broadly than just corporate tax rates.  If the Federal government, and all its various agencies and departments really wanted to create manufacturing jobs – the resources are there.  We just need to focus these resources with policies and incentives that accomplish the object; more manufacturing jobs and specifically more jobs in high tech manufacturing.

Let us know what you think in the comments section below.

2 comments on “4 Ways to Improve the State of American Manufacturing

  1. tsmiley
    April 5, 2016

    Ron Keith's ideas are solid. Perhaps if our leaders and wantabe leaders can embrace some of the ideas in this article, we can begin to close the gap and some of us can actually bring it home.

    The cost disparity, however, is so great that simply filling jobs and reducing tax burdens cannot move the needle all that much. The average small manufacturer of electronics has less of a tax problem than a fundamental cost problem and therefore, if to compete, has no choice but to find a reliable Asia manufacturing partner. I know, we tried for 8 years to make it work.

    My experience tells me that while we need the ideas put forth, the only thing that will make fundamental change is some disruptive shift in technology, process capability, or geo-politics.  Until then the containers will roll in.

     

  2. vamsikrish123
    April 28, 2016

    awsome post , excellent points thanks  for sharing

     

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