The Competitive Edge -- Bridging the Divide Between Wall Street and Main Street

Dec. 11, 2008
When it comes to helping U.S. manufacturers, President Obama's first rule should be: Do no further harm.

A new team arrives in Washington this month, energized by a solid electoral majority and a mission to solve the worst economic slowdown since World War II. The slump has spread with astonishing speed from Wall Street to Main Street, but the tools to fix the two parts of the economy are vastly different, as is, apparently, the motivation to do so. While the political establishment has reacted quickly and massively to the financial crisis, there is widespread reluctance or outright opposition to helping Main Street -- especially the manufacturing sector. Agriculture long ago linked its fate to the public trough.

Despite its central role in establishing the United States as the leading global superpower, manufacturing has enjoyed neither the pastoral allure of agriculture nor the fast-paced excitement of Wall Street. This long-standing image deficit can be overcome by elucidating the efficient, innovative, high-tech and highly responsive reality which is at the core of modern American manufacturing. Adding to this is the global emergence of billions of new consumers slowly becoming customers for American products in Asia and other emerging markets.

Fortunately, the help needed to reignite domestic industry does not come with a huge price tag. The fiscal resources of the United States are already depleted by the huge loans and investments for the financial sector, rendering it extremely difficult to extend financial aid directly to industry. What, then, can the new administration do to help?

The first rule is to do no further harm. Many of the problems faced by manufacturers in their constant struggle to remain competitive in a global economy are simply due to regulation and other "structural costs." A series of studies published jointly by the National Association of Manufacturers (NAM) and the Manufacturers Alliance/MAPI has shown that, while unit labor costs in the United States are increasingly competitive with those of their largest trading partners (in no small part due to higher productivity here), costs such as health care, pensions, environmental regulation, taxes, torts litigation and energy have led to a competitive disadvantage.

A huge boost to manufacturers would come from not adding to these costs through expansive new environmental or other workplace regulation, tilting the table in favor of the trial bar, giving new advantages to labor unions through the "card check" proposal, raising energy prices by restricting exploration and drilling, or raising health care outlays through new mandates or a universal coverage program. None of these preventive measures would require any new federal outlays.

The most important structural cost disadvantage is now the very high corporate tax rates in the United States. While lowering taxes would have a budgetary impact, empirical research strongly suggests that maximum revenues from this tax are achieved at rates closer to 25% than at the current 35% (or more when state taxes are added).

A final pitfall to avoid is the one that played such a seminal role in the Great Depression: protectionism. Given the severe economic challenges facing President Obama, and given the core constituencies which helped elect him, restrictions on trade will present an alluring siren call. It must be resisted.

The vast outlays deployed to address the financial crisis have an ad hoc quality, with no consistent organizing principle. Helping the manufacturing sector lends itself to a simpler and more coherent strategy: employ forbearance in regulation, allow creative forces (including those that displace the old) to work their will, and increase the incentives for success by lowering its price through reduced taxation.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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