The Politics of Manufacturing

Unemployment is not going to improve in this country unless we have political leaders who actually address our overall decline in manufacturing. With a presidential election right around the corner, here are some thoughts to consider from Washington insiders about the relationship between our government and American manufacturing, and a tax proposal that could potentially boost U.S. manufacturing.

On a cool spring morning in Washington D.C. this past March, I had the privilege of gathering with many business and manufacturing leaders, policy experts, government officials, congressional staffers, trade association and union representatives, grassroots organizers and academics at the National Press Club for the Second Annual Conference on the Renaissance of American Manufacturing, where speakers discussed U.S. trade laws, economic strategy and American jobs, and the upcoming presidential election.

Lots of noise was raised about why we need manufacturing in this country, what solutions would work best in regards to U.S. trade laws, and the root causes behind what has gone wrong in regards to the loss of American jobs. Opinions got stronger on China, the decline in U.S. manufacturing and what the upcoming presidential candidates should be planning in regards to American manufacturing.

Other thoughts were shared on issues that continue to resonate throughout the economy: a response to China’s overvalued currency, lowering the high corporate tax rate, creating a Secretary of Manufacturing, correcting the lack of a comprehensive manufacturing policy, developing a more aggressive policy against unfair foreign trade practices, and dealing with intellectual property theft.

But the hottest topic by far was the evidence that the jobs picture is not going to improve in the United States in a meaningful and sustained way without a president/government that actually addresses the decline in manufacturing. Of everything said about this, I am particularly intrigued by (1) some beliefs about the relationship between our government and American manufacturing, and (2) a proposal that analyzes how value-added tax (VAT) trade zones could boost U.S. manufacturing.

I want to share these politics of manufacturing with you to see what you think and open a forum for thoughtful debate.

First up is an aggregation of insights into the relationship between our government and manufacturers that are gathered from the Foreign Policy column of Clyde Prestowitz, the founder and president of the Washington-based Economic Strategy Institute. Prestowitz, who served as counselor to the Secretary of Commerce in the Reagan Administration, states the following:

ANOTHER BITE OF THE APPLE
A corporation has obligations to the society and the government that gave it birth. As a U.S. government trade negotiator in the 1980s, I was requested by top Apple executives on several occasions to help them crack the Japanese market, to help the company prevent dumping of Japanese products into the U.S. market, and to enforce intellectual property laws in ways that would protect Apple from damage due to theft of its intellectual property.

As a representative of the U.S. government, I (along with other government officials) responded and provided significant assistance to Apple that certainly enhanced its sales and profitability. Earlier this year Apple received $21 million in tax incentives from the state of Texas as part of a plan to expand its production in Austin, so it seems very clear to me that this company has received a lot of help from the U.S. government over the years and has a fundamental human obligation to return the favor when the opportunity arises, which it now seems to be doing.

My questioning of the existence of a soul at Apple stirred up a lot of response, some in praise of me (thank you) and some questioning my sanity (a perfectly good question). What I found most interesting was two widely held false presumptions.

The first was well expressed by an Apple shareholder who said my notion that the company owed some obligation to help with the problems of the United States is ridiculous. Clearly the writer takes the shareholder sovereignty view that has become the dominant corporate management doctrine over the past 30 years.

According to this philosophy, the soul priority of chief executive officers and top corporate management is to maximize returns to shareholders. Management is said to have a fiduciary responsibility to shareholders. This thinking evolved out of an attempt to find an effective, readily available way to measure management performance. Returns to shareholders are quantifiable and readily available, so that became the measure.

But it was not always so. In the early 1980s, the Business Round Table published a list of the recommended priorities of CEOs that included such things as producing and providing the best products and services, taking excellent care of customers, maintaining good relationships with suppliers, providing an outstanding work environment and developing the skills of the work force, supporting the local community and the nation, and, oh yes, earning decent returns for shareholders. That stakeholder view of the role and obligations of the corporation and its management was not changed by the Business Round Table until the mid-1990s.

I can put the case for corporate responsibility to the nation in more personal and more organic terms. With regard to the personal, I suppose it to be an elementary aspect of human relations that, having been helped by someone, each of us feels an obligation to return the favor if the occasion to do so arises. A more fundamental point, however, is that Apple and other corporations owe their very existence to the society that gives birth to them.

Think about it. Neither corporations nor shareholders create corporations. They are all chartered by government. In the early days of the U.S., both the federal and state governments were cautious about creating corporations and typically only chartered a few of them, and those only for very narrow, well defined purposes and only for limited periods of time, such as 10 to 20 years. Corporations were seen as a potential threat to the freedom and well-being of both the individual citizen and the state.

Keep in mind that when it charters a corporation, a government (as the representative of a society) is granting important privileges (such as limited liability, alternative taxation, and the rights and privileges of a citizen) and powers not always granted to individual citizens. The reason a government does this is because it believes and desires that the corporation will bring certain benefits to the society – that, of course, includes the corporation’s own shareholders, but is not limited to them.

Rather, it means the whole society. Thus, by definition, a corporation has obligations to the society and government that gave it birth. It would seem that the stakeholder philosophy is inherent in the very act of a government chartering a corporation.

NO AMERICAN PLAN, NO AMERICAN CEO
In a recent lament to friends, William Holstein, author most recently of The Next American Economy: Blueprint for a Real Recovery, wondered why the United States now seems unable to imitate countries like Germany, China, South Korea, and Singapore in taking steps to control its own economic destiny.

He used the case of A123 Systems, Inc. (Waltham, MA) as the trigger for the broader question. The company is an entrepreneurial U.S.-based effort to develop the advanced lithium ion batteries that are expected to power much of our future. Over the years, the U.S. government has made loans to the company of about $200 million, but now it has approved the sale of the company and its leading-edge technology to Wangxiang Corporation, one of China’s largest auto parts makers.

I didn’t find this deal in the least surprising. Indeed, I predicted something like this three years ago at a White House meeting that was called to deliberate ways of revitalizing U.S. manufacturing as a means of improving the lot of the American middle class. Some administration officials were urging that loans and other incentives be given to the development of clean energy technologies like batteries, wind turbines, and solar cells. I pointed out that other countries like Germany, China, South Korea, and Japan were already doing this and, if we were serious, we’d have to at least match their incentives.