I think there's an easy solution to the problem of bringing back American manufacturing jobs, but before we get into the solution, it pays to understand the problem. Why have manufacturing jobs left the country? The brief answer is to survive. Let's say you own the Acme Widget Manufacturing Company. You have two rival firms also making widgets, but all three of you make comparable widgets in the States and sell them for comparable prices. Let's say a dollar per widget. You're happy with your profit. Your stockholders are happy. The workers are happy.Your competing firms are more or less happy.
One of your rival firms then moves their manufacturing to Mexico where their labor costs fall dramatically allowing them to undercut the selling price of your widgets. They now price their widgets at $.95. Their sales now increase and the two domestic widget manufacturers lose market share. The Mexican made company sees their stock prices increase. Their shareholders are happy. The CEO is praised by the board and gets a raise and a new contract. They're selling widgets like they're going out of style and your company is losing sales.
Your other rival, upset at losing market share and struggling to survive, finds a Chinese maker who will make their widgets for even less than the Mexican made widgets and shifts their manufacturing there. They're now able to undercut the Mexican made widgets while increasing their profits and market share. Their widgets now sell for $.94. Their stockholders are thrilled and the stock price increases.
Now, your sales have fallen dramatically as your rivals have been able to undercut your prices. You've looked at every option and you just can't sell your widgets for $.94 and keep your manufacturing in the States. The math just doesn't work. There's no increase in efficiency, reduction in benefits, or option left for you other than to see continually decreasing sales that will ultimately force you out of business. So, what do you do? You try to find a cheaper way yet to make widgets and what do you know? There's an Indian firm that's willing to make your widgets and undercut the Chinese maker's price.
You apologize to your workers and move your manufacturing to India and now your widgets sell for $.93 and you're suddenly back on top of the widget market and your stockholders are happy and you keep your position and get a raise. You feel sorry for your workers, but in order for your company to survive, you had to make the move. You really had no choice. Your workers would have been out of a job either way, but this way the company lives.
Labor costs overseas are so radically different that there are parts of the world where you can hire a worker for a week for what you'd pay for an hour here. With modern shipping, using shipping containers and ships that carry hundreds/thousands of containers, the cost per smaller item to ship these days is minimal, so that makes international shipping very cost effective for smaller items. Things like major appliances and cars take up a lot of space on a ship however which is why many of them are still made domestically. On larger, heavier items the savings in labor gets eaten up by the increased shipping cost per item so manufacturers stay here. There's no cost savings by making them overseas, so they make them here.
In general in business if you want to survive you have to be comparable in price to your competing products. If your product and a rival product are comparable in quality/features but your competitor's product is cheaper, it will likely sell more than your product.
So that's a general outline of what the problem is. Companies generally leave the US to survive or gain a competitive edge. In order to keep companies here, we have to find a way to let domestic manufacturers survive and/or have a competitive edge. Politicians talk about decreasing regulation, lowering the corporate tax rate, and other stuff, but I suspect none of those would have a major impact because they have minimal effect on the consumer cost of the product and that's largely why manufacturers leave, to stay price competitive with those manufacturing outside the US.
I have this quirky belief that refunding the sales tax to the manufacturers on domestic made items is the ideal solution. The national average sales tax is around seven percent these days.
But, you ask, is a seven percent difference enough to offset the increased labor costs?
You have to remember that the widget sold for a dollar has markups added on all along the way. The cost to the widget manufacturer might be $.25 to manufacture it. The wholesaler then marks it up to $.50 to make up the cost of warehousing/shipping/distributing the item. The retailer then marks it up to $1.00 to cover their operating costs. Now if the manufacturer somehow gets back that $.07 in sales tax and applies that to the manufacturing cost, the real world cost to them to manufacture each widget now drops to $.18. That's a big difference.
If you assume the same 100% markup at the wholesale/retail levels that domestically made widget could then sell for $.72 ($.18 to manufacture, $.32 wholesale and $.72 retail.) With your rival, foreign made widgets selling at $.94 and $.95 your market share will jump. Even if the wholesaler and retailer kept their profits at $.25 and $.50 the price would only be $.93 still below the foreign made widgets. What will your rivals do to compete? They'll have to move back here and bring their manufacturing back here to compete. With all of them back here competing on even ground there's no advantage to move manufacturing overseas and everyone wins.
But if your widgets are now selling for $.72 you won't be getting back that $.07 in sales tax refund and will be getting just $.05 back due to the lower price. That will increase your manufacturing costs to $.20 instead of $.18 and the retail cost will increase to around $.80 from the $.72. But this will increase your refund to $.055 and you can then lower your price a tick again to make up for the increased income and things will level out at around that point as the fluctuations become smaller and smaller.
Now, states will say, wait a minute! What about that lost sales tax revenue? We need that income! Well the reality is relatively few items are currently made completely in the US so the initial impact would be pretty minimal. Also sales tax in many/most states has a number of items that are sales tax exempt. Taking away those exemptions and applying sales tax to everything should offset any loss and encourage every manufacturer to bring jobs back here. It should be pointed out that much of the money states spend is in supporting those with low incomes. If we bring back enough jobs, we put everyone in the country back to work which would lower the costs to states (and the Federal government) dramatically.
Manufacturers will be competing for workers which will lead to increased wages/benefits. Even the disabled will be needed to fill job roles. There will be no shortage of jobs for workers. Instead of a hundred people scrambling for an entry level job, there will be dozens/hundreds of jobs available for every graduate. Things like Medicaid and Welfare will be looked at as quaint anomalies from the old days.
As manufacturing costs (salaries/benefits) increase so will the retail price, but there's a cushion built into this model that should allow things to progress along this path for some time before it becomes more cost effective to manufacture overseas again. As manufacturers increase prices to cover their increased costs, they get back 7% of the consumer price which helps to stabilize manufacturing costs. (We'd likely see a significant drop in the price of domestically made cars and major appliances under this plan. The reported average price for a new car is $33,560 which at 7% sales tax would find the manufacturer getting back $2,349.20 in sales tax. Apply that to the cost to manufacture the cars and the price should drop pretty significantly while having no or minimal on the manufacturer's profit.)
Now there are obstacles to a plan like this. One is the Commerce Clause which would I believe prohibit this as the clause is currently interpreted. Foreign trade agreements would likely have to be voided or modified. Politicians at both the state and federal level would have to get off their butts and actually do something.
The more liberal sorts who envision a single world government where everyone is equal would be appalled and decry this as corporate welfare. Manufacturers would have to believe in the system. The way inflation is calculated would likely have to be adjusted as the price fluctuation from a move like this could wildly swing the inflation/deflation numbers.
However, of the options out there, I feel this is the one that makes the most sense. Is it corporate welfare? Sure. But I think it would work and I'm not sure anything else would. It might even lower consumer costs while helping domestic manufacturers.
Manufacturers could maintain overseas manufacturing facilities to provide the rest of the world their products, but domestic sales could all come from domestic factories under this model. There are around three hundred and twenty million Americans, so we're a pretty big market.
It's a quirky idea to give manufacturers back the sales tax on the items they manufacture and many would object, but it makes sense to me and is the only real option I can see that seems like it would work. The radical difference in labor costs combined with cheaper shipping is nearly impossible to battle in any other way. Giving domestic manufacturers back the sales tax revenue to help offset their increased domestic manufacturing costs makes sense to me. The math seems to work. The concept seems sound. I think this is the best option available to bring back domestic manufacturing jobs. Feel free to leave comments if you agree or disagree.
No comments:
Post a Comment