Can Regional Policy Help Manufacturing? A Midwest Overview

1. Can Regional Policy Help Manufacturing? A Midwest Overview Richard Mattoon Senior Economist Federal Reserve Bank of Chicago Issues in Manufacturing Policy April 27, 2004

2. What do manufacturing studies tell us about the role of policy? • No shortage of studies • Midwestern governors are particularly active--studies in Ohio, Pennsylvania, Michigan and Wisconsin • National studies by U.S. Department of Commerce, Congressional Research Service • Trade association studies by National Association of Manufacturers and Manufacturers Alliance

3. Making sense of the policy options? • Broad policy categories: • Federal strategies (tend to focus on trade, healthcare and pension reform) • cost-reduction strategies (focus on regulation and taxes) • value-added strategies (focus on technology and education, infrastructure) • workforce strategies (workforce training, labor flexibility) • structural strategies (new institutional arrangements)

4. Federal Strategies • Premise: Feds have the major policy levers for trade issues and reform of healthcare and pensions, these are the major issues for manufacturers • Improve international trade conditions including preventing currency manipulation, enforcement of WTO, protecting intellectual property rights, eliminating non-tariff barriers, improving market access (Michigan, U.S. Commerce) • enhance Federal support for Manufacturing Extension Program (Michigan, Wisconsin) • improve U.S.-Canada border infrastructure (Michigan) • Feds should do something about healthcare cost containment and pension reform (just about all of the studies) • energy policy--diversify energy supply, enhance reliability (Michigan, U.S. Commerce, NAM/MAPI)

5. Cost reduction strategies • Premise: Basic cost structure imposed by government is too high for manufacturers to compete • Examine state business tax structure • use of special credits (Michigan) • encourage capital formation and deepening by replacing property and franchise tax with a flat tax on wages and salaries (Ohio) • Make Federal tax changes permanent • reduce uncertainty by making recent corp tax changes permanent (U.S. Commerce, NAM/MAPI) • study changes to depreciation, the effect of the alternative minimum tax, research credits, incentives to increase U.S. savings rate (U.S. Commerce, NAM/MAPI)

6. Cost reduction strategies continued • Taxes • reduce statutory corporate tax rates in line with trading partners (NAM/MAPI) • eliminate dividend tax • Regulation • cost-benefit review on new regulation (state and federal) (U.S. Commerce, NAM/MAPI) • streamline permitting (Michigan) • Legal reform • includes limiting medical liability, class action reform, asbestos liability (U.S. Commerce, NAM/MAPI)

7. Value-added strategies • Premise: globalization means that the market for inputs as well as outputs is global, not national. Firms have new choices in how to optimize the supply chain. Need to create location specific advantage with success measured by capturing new investment • Number 1--Workforce training and education (all studies) more to come • technical assistance programs aimed at increased productivity (Wisconsin, U.S. EDA, Congressional Research Service, U.S. Department of Commerce, Illinois)

8. Value-added strategies continued • Develop supportive infrastructure (Ohio, Illinois, Michigan) • Develop early warning system for intervention (Illinois) • venture capital formation (U.S. EDA, Congressional Research Service) • business climate (NAM/MAPI, U.S. EDA, U.S. Commerce, Ohio) • corporate transparency (U.S. EDA)

9. Work force/education strategies • Premise: manufacturing is becoming more knowledge intensive. Manufacturing jobs can be retained if worker skills are upgraded (the number 1 value-added strategy) • increase federal funding for flexible job training (Wisconsin, Michigan) • establish a high school and technical education partnership initiative (U.S. Department of Commerce) • establish personal re-employment accounts (U.S. Commerce) • improve delivery of assistance for displaced workers (U.S. Commerce)

10. Work force/education strategies continued • Develop a training and education curriculum in the context of industry standards and employer requirements (Illinois) • encourage training that leads to certification (Illinois) • group jobs and skill clusters in the context of career ladders. Training should reflect this structure (Illinois)

11. Institutional Strategies • Premise: manufacturing industries are poorly represented or served by existing institutions • create an Assistant Secretary of Commerce for Manufacturing. Functions would include benchmarking studies, industry analysis and regulatory analysis • create a President’s Manufacturing Council • create a federal inter-agency work group on manufacturing • improve coordination of federal, state and local policy toward manufacturing (all U.S. Department of Commerce) • improve basic science and research infrastructure to reflect strengths of universities and national science policy

12. Institutional strategies continued • State government, multi-stakeholder strategies. Coordinate competitiveness and training efforts between manufacturers, labor and education. (Illinois)

13. Questions for the panel • Has the recent decline in manufacturing been a cyclical or structural? • Can regional or state policy do something about it? If regional and state policy can help, what specific policies make a difference? • What will manufacturing look like in 20 years? What are the implications of that future?