It's Not the Wages, Stupid!

A Rational Environmentalist

America’s Dirty War Against Manufacturing

By Carl Pope, former chairman of the Sierra Club, January 18, 2012 (Bloomberg) 

 “I’d love to make this product in America. But I’m afraid I won’t be able to.”

     My host, a NASA engineer turned Silicon Valley entrepreneur, has just conducted a fascinating tour of his new clean-energy bench-scale test facility. It’s one of the Valley’s hottest clean-technology startups. And he’s already thinking of going abroad.

     “Wages?” I ask.

     His dark eyebrows arch as if I were clueless, then he explains the reality of running a fab -- an electronics fabrication factory. “Wages have nothing to do with it. The total wage burden in a fab is 10 percent. When I move a fab to Asia, I might lose 10 percent of my product just in theft.”

     I’m startled. “So what is it?”

     “Everything else. Taxes, infrastructure, workforce training, permits, health care. The last company that proposed a fab on Long Island went to Taiwan because they were told that in a drought their water supply would be in the queue after the golf courses.”

     So begins my education on the hollowing-out of the American economy, which might be titled: “It’s not the wages, stupid.”

     Manufacturing’s share of U.S. employment peaked in 1979 and has since fallen by almost half. Although manufacturing has been a relative bright spot in the dismal economy of the past couple of years, in the last decade, the U.S. lost a third of its manufacturing jobs, with the damage rippling far beyond that base to erode millions of jobs that are dependent on it.

                        Tomorrow’s Losses

     The loss of textile, shoe and toy production to low-wage competitors such as China, and now Cambodia, has devastated a few regions, particularly South Carolina. But the loss of yesterday’s manufacturing isn’t the really painful part: It’s losing tomorrow’s manufacturing: automobiles, electronics, metal fabrication, specialty chemicals, appliances and consumer electronics.

     Those industries left the U.S. in search not of cheaper workers, but of more supportive governments. If the U.S. lost manufacturing due to high wages (or unions, labor laws, regulation -- the other commonly cited villains), how do you explain the manufacturing success of Germany and Japan? Germany, the world’s pre-eminent high-end manufacturing economy, has higher wages, stronger unions and stricter labor laws than the U.S. Japan, too, is a high-wage competitor, yet Toyota Motor Corp. still makes 60 percent of its vehicles there. General Motors Co. makes only about 30 percent in North America.

     So if wages aren’t to blame, what is?

     Policy. But is U.S. government policy really hostile to manufacturing?

     Sadly, yes. Take tax policy. Historically, manufacturing was the high-wage sector of the economy -- manufacturing jobs still pay about 30 percent more than service jobs in education and health care -- so tax policy milked it. Manufacturing companies, in the old days, actually paid the corporate income taxes that many others avoided. Commodity producers (oil, timber, agribusiness) lobbied for, and received, federal subsidies, with investors in oil and gas wells simply voiding corporate income taxes on the profits they earned. Banking, retail and services found their own ways around taxes, often by offshoring intellectual property or shifting profit to tax havens. Eventually, manufacturers figured out how to duck taxes as well -- by going overseas.

                      Varying Regulations

     Yet it isn’t just taxes. Wind turbines, for example, are enormous, heavy and expensive to transport -- so there is a big advantage to fabricating them close to the installation point.

But consider the predicament of the Spanish wind manufacturer Gamesa Corporacion Tecnologica SA after it began operations in Pennsylvania. Because the George W. Bush administration’s Department of Transportation wouldn’t establish uniform standards for transporting the enormous turbine blades, each state followed its own rules. Whenever a blade crossed a state line it had to be unloaded by a construction crane and then reloaded to conform to the next state’s specifications.

     Similar policy failures explain why Minnesota’s Port of Duluth exports iron ore to China and imports wind turbines from Europe. On the way to China, the ore freighters pass Chicago; Gary, Indiana; Cleveland; and Buffalo, New York -- cities where steel could be made and turned into turbine towers. But the U.S.

wind market is too small, and the government too focused elsewhere, to make it profitable.

     And that Long Island golf-course story? Not unique to New York. During the 1991 California drought, Silicon Valley’s electronics manufacturers were warned by Governor Pete Wilson that the state might have to shut off their water supply.

Agriculture, Wilson said, came first. When I asked a Silicon Valley lobbyist in Sacramento if he had quietly received assurances that California would prioritize 21st-century computer chips over 19th-century alfalfa, he said he hadn’t. In fact, he said, some plant expansions initially planned for Silicon Valley were being diverted to Oregon to secure access to water.

     In 1991, it was Oregon. Today, it’s Asia. Conventional wisdom blames globalization for the exodus of factories and jobs. Because other countries pay lower wages, the thinking goes, there is nothing we can, or even should, do about it. But the evidence of Germany and Japan -- and the experience of manufacturers in the U.S. -- tells a very different story.

     We are not victims of an impersonal Leviathan called “globalization.” We’re the suckers who allowed our government to sacrifice the manufacturing sector while protecting the real

winners: commodities, intellectual property, finance and agribusiness. The U.S. didn’t lose its manufacturing leadership; it threw it away.

     In the next two parts of this series, I’ll discuss how that happened and what we can do about it.

     (Carl Pope is a former chairman of the Sierra Club. The opinions expressed are his own.)