Economic Policy Recommendations

This paper describes the weak manufacturing sector as an incredibly crucial economic problem, proposes the strategies, which can be applied for its solution and future U.S. economy growth. Shah and Casselman (2012) point that the U.S. manufacturing experiences the negative impact of the global slowdown and undermines the possibility of the economic recovery whereas manufacturing is perceived as the main driving force of economic growth. They emphasise “the economy is heading for a stall for the third year in a row”.  

As it is stated in the fact sheet issued by the United States Department of Commerce (2012), manufacturing is a platform for innovation development because manufacturing displays 70 % America’s private sector Research and Development and uses about 90 percent of patents. Manufacturing is also a jobs creating sector. 500,000 jobs were created since January 2010 in manufacturing. In the first four months of 2012 alone, the U.S. manufacturing sector added 139,000 jobs. Comparing to total unemployment rate fluctuating near 8-8.3 % in 2012 (12.8 million unemployed persons in July 2012), this rate in manufacturing was approximately 7% (7.2% July). The number of employed people raised in July 2012 up to 25,000. Durable goods manufacturing was the main employer, in particular the motor vehicles and parts industry (Bureau of Labor Statistics, 2012). 

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Manufacturing is also a key contributor to U.S. exports and is vital for national defense system stability. “Real manufacturing value added - a measure of an industry’s contribution to GDP - rose 4.3 percent in 2011, after increasing 11.2 percent in 2010” (Bureau of Economic Analysis, 2012). Comparing to 17.0% increase in 2010 in durable-goods manufacturing and 5.1% in nondurable-goods manufacturing, the similar figure in 2011 was much lower 7.9% and 0.3% correspondingly (Bureau of Economic Analysis, 2012).

According to Atkinson, Stewart, Andes and Ezell (2012) in 2010, the level of production in 13 of the 19 U.S. manufacturing sectors that give the jobs for 55 % of all employed in manufacturing industry were lower than in 2000. The authors also are dissatisfied with the indicators measured and published by the Bureau of Economic Analysis data regarding the productivity growth rate in manufacturing industry. They argued that the pointed figure of 2000-2010 manufacturing labor productivity growth of 66% and consequently the decline in the number of employees does not correspond to reality. Total increase in U.S. manufacturing capital stock is approximately 2%, and the inability to create more jobs by the companies is associated with the ineffective politics of U.S. government especially in the tax system sphere. The politics of total borrowing and spending is not a successful way for the prosperity and economic recovery. U.S. manufacturing creates value, and is a huge taxpayer.   

State economic policy should shift the focus from the financial sector to support and improvement in manufacturing business process by means of:

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- creating tax climate conducive to foreign investment, thus reforming the corporate tax code. High taxes, increasing healthcare expenses, excessive regulations, increasing energy costs restrict the development of business. According to National Association of Manufacturers (2011) corporate tax rate the United States is one of the highest tax rates among the countries membered the Organization for Economic Cooperation and Development (OECD), with Japan as a leader in this indicator. In order to make the U.S. manufacturers competitive with these competitors, corporate tax rate should be reduced to 25 % or lower. Moreover, the focus of the tax reform concerning support and boosting of manufacturing records should be placed on changing the taxation level of foreign income of businesses based in the United States. The main task of switching from “worldwide tax system to a territorial system” is to encourage competitiveness rather than obtaining bigger revenues. Small businesses and individuals need the most fundamental support from the government. That is why permanent lower income tax rates for these categories should be instituted at the lower rates. Taking into consideration the fact, that near 70% of manufacturers are income tax applying individual rates payers, such state act will enhance rise in capital investments, proposing more jobs by expanding the business scale.

- increasing the amount of funding developments in the field of science and innovation. As it is pointed by the United States Department of Commerce (2012), it is proposed and is budgeted for 2013 to create a National Network for Manufacturing Innovation including “15 competitively-selected regional hubs of manufacturing excellence”. The funding for this program is approximately $1 billion, and this program will involve the best minds and the most talented students, employees, representatives of agencies for accelerating the efforts of advanced manufacturing technologies creation. One of the most substantial financial proposals is to “increase the current simplified R&D credit to 20 percent and make it a permanent part of the tax code” (National Association of manufacturers, 2011).

- developing programs to reduce costs using alternative energy resources in particular shale gas. This substitute to natural gas can be the essential driver for the manufacturing renaissance whereas it can save several million of expenses annually. According to the National Association of manufacturers (2011) U.S. government must “expedite the permitting process on the Outer Continental Shelf” to make gas and oil reserves more accessible, parallel enhancing the development of oil sands and shale gas. Reducing the number overlapping fierce regulations inherent in the industry will encourage implementing up-to-date, environmentally friendly and energy efficient technologies.

- boosting manufacturing exports figures. Concerning the support of export operations, a slogan “build in USA, sell anywhere”, U.S. manufacturers cannot compete with their foreign competitors such as China or Korea that have much lower regulatory costs and lower taxes. Moreover, as it is stated in the study of National Association of manufacturers (2011) it is a time to promote “Made in U.S.” products by enhancing trade policy that will open foreign markets for the United States by abolishing or simplifying tariff barriers and regulatory requirements and collaborating with new trade partners that will take part in numerous trade agreements. The protection of intellectual property rights should be at the center of authorities’ legislative initiatives. It is crucial to understand that U.S. manufacturers cannot compete with its foreign competitors in the form of low wages or low benefits for workers. American manufacturing must have a competitive advantage at higher productivity to produce higher quality goods with shorter manufacturing cycle. It can be achieved only through investments in modernization of existing equipment and technologies.

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- investing in and supporting science, technology, engineering, and mathematics (STEM) education. It will help to avoid a big imbalance in demand and supply of specific workforce, especially in high-tech manufacturing.

To summarize the above mentioned, it should be pointed that U.S. manufacturing as a major contributor of the nation’s wealth must be supported by the government, whereas U.S. manufacturing industry output is not competitive to the production of the major U.S. trading partners. The main reason for such a situation is the ineffective and demotivating tax system in particular high corporate tax, individual income tax. Moreover, uncountable number of federal and local agencies and regulations acts issued by them not only failed to stimulate the development of new technologies that are the basis for the industrial growth but also are the retrogressive factor that reduces the competitiveness U.S. manufacturing products.

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