Can Anyone Get Factories Humming?

Neither Bush nor the Democratic contenders have produced a viable plan. The core problems are structural -- and could take years to fix

By Richard S. Dunham

The latest Labor Dept. statistics showing a slight drop in the unemployment rate -- from 6.2% to 6.1% -- brought a sigh of relief at the White House on Sept. 5. Presidential spokesman Scott McClellan said more needs to be done to get the jobless rate down, but "the economy is continuing to pick up some steam and move in the right direction."

At the National Association of Manufacturers (NAM), however, the new jobless numbers set off alarm bells. The modest decline "cannot mask the loss of 93,000 more jobs -- 44,000 of them in manufacturing -- and should serve as a wakeup call to policymakers," said NAM President Jerry Jasinowski. "This is a lousy employment report as manufacturing has now lost jobs for 37 consecutive months."

Indeed, even amid growing signs of a robust recovery in some sectors, it's also becoming clear that manufacturing faces long-term structural problems. It's also clear that the Bush Administration's economic policies aren't turning things around for this hard-hit sector. While the President has maintained the strong support of most manufacturing execs, he can't afford the defection of the rank-and-file workers -- and the growing number of laid-off blue-collar voters -- from his 2004 reelection campaign (see BW, 9/15/03, "The Administration's Blue-Collar Blues").

MORE THAN CYCLICAL?

  If Bush is getting any good news, it's that the Democratic Presidential aspirants don't seem to have any sound solutions yet, either. This morass -- the loss of 16% of American manufacturing jobs since George W. Bush became President -- is a tough issue for both parties, with no easy answer.

The problem is obvious. American manufacturing jobs are being exported overseas. Everyone understands the reason: Companies are want lower labor costs, less red tape, fewer environmental restrictions, and even more trade subsidies offered by other nations.

A strong dollar in most recent years has made American-made products more expensive abroad and foreign-built wares less costly in the U.S. As Jasinowski says, "The armchair experts who say this is just another cyclical downturn are in a dream world, completely out of touch with today's competitive realities. This unprecedented loss of manufacturing jobs is due to structural changes in international trade, rising costs of production in the U.S., and the resulting cash-flow squeeze that forces job cuts."

Such structural changes are so troublesome because you can't put a big wall around the U.S. and keep foreign products out. You can't force cost-cutting American-based multinationals to spend substantially more money to make their products in more expensive U.S. factories. World Trade Organization rules prevent the U.S. and other nations from adopting protective tariffs on foreign-made goods. And rising productivity makes it possible for American manufacturers to produce their goods with fewer humans on the payroll (see BW, 9/15/03, "Productivity: Still Getting Stronger").

DEEP FROZEN.

  So what's the Bush solution? On Labor Day, the President announced he would soon name a manufacturing czar in the Commerce Dept. That's symbolism. The meat and potatoes of the Bush manufacturing strategy is tax cuts. The President is banking that his old tax cuts will free more capital for corporate investment. He also wants Congress to make permanent the temporary tax breaks for equipment expensing. And he wants to end the corporate alternative minimum tax.

Bush has also asked Congress to authorize his "reemployment accounts" for unemployed workers. The jobless could apply for a government grant of up to $5,000 to help them search for a job or seek retraining. If they find a job, they can pocket any money they haven't already spent. Sounds good. But GOP lawmakers have put Bush's plan in deep freeze, another victim of the budget squeeze caused by the ballooning costs of homeland security and Iraq.

While the President's proposals might help speed up a general economic recovery, few will help the hard-hit manufacturing sector bounce back more quickly. He recently dispatched Treasury Secretary John W. Snow to China to try to convince Beijing to end its policy of pegging the yuan to the dollar in a way that makes Chinese products bargains in the U.S. But the trip yielded no concessions. By Richard S. Dunham

FEW OPTIONS.

  At his core, Bush is a free-trader, and he won't back down on trade liberalization. But he will press the WTO to crack down on unfair practices from Asia to Europe. Trouble is, other countries have a slew of complaints about U.S. protectionism, too. So an excessively get-tough policy could exacerbate already raw trade frictions, especially with Europe, and hurt the global economy.

If Bush doesn't have many good options, neither do his Democratic foes. Representative Dennis Kucinich (D-Ohio) wants to cancel the North American Free Trade Agreement and pull out of the WTO the day he becomes President. Ain't gonna happen.

On the more viable left flank, former Vermont Governor Howard Dean says he would reopen trade pacts to force new concessions from allies on labor and environmental issues. But rival Joseph I. Lieberman says Dean's policy would transform the Bush recession into "the Dean depression."

"STOP THE BLEEDING."

  Tough-talking Missouri Representative Richard A. Gephardt says he would push the WTO to enact an international minimum wage. Each nation would be required to pay workers a living wage based on the economic strength of the country.

In theory, such a wage would help workers in developing nations. It also, theoretically, would help U.S. manufacturers by raising the price of foreign-made goods. But it's pure fantasy. No country will allow an unelected world trade body to tell its companies what to pay their workers. Can you imagine what the U.S. Congress and the Chamber of Commerce would say if the WTO told them that the U.S. had to pay all workers at least $20 an hour because America is the most advanced country in the world? Forget it.

Lieberman's approach is more Clintonesque: Targeted tax breaks to reward companies that keep a high percentage of their manufacturing jobs in the U.S. And he would eliminate capital gains taxes for some small- and midsize manufacturers that expanded in the U.S. "Stopping the bleeding of American manufacturing jobs demands a tough stand, not more lip service," says Lieberman, the first 2004 White House wannabe to come up with a comprehensive manufacturing strategy.

TALK IS CHEAP.

  Dems are more likely than Republicans to enlist the federal government in the attempted revival. Senator John F. Kerry (D-Mass.) would spend more federal money on retraining and reeducation. These plans may have some merit, but it's uncertain whether they would reverse the decline or simply slow it down.

The 2004 campaign is now coming into full flower, however, and on the stump, something that sounds good is often more important than something that's workable. Candidates know that the manufacturing decline is a big issue in many regions. After all, key swing states such as Pennsylvania, Michigan, Ohio, Illinois, Missouri, and Wisconsin are all heavily dependent on manufacturing economies.

Magnified by this Electoral College dynamic, the manufacturing crash could become "a much more important issue in the 2004 campaign than we had imagined," says Terry Madonna, a political scientist at Millersville University in Pennsylvania. So get ready for the candidates to talk the talk. Trouble is, they really aren't walking the walk.

Dunham is a White House correspondent for BusinessWeek's Washington bureau. Follow his views in Washington Watch, only on BusinessWeek Online

Edited by Douglas Harbrecht

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