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January 1, 2009

THE NEW, NEW DEAL FOR U.S. INDUSTRIAL POLICY

Truth be told, the United States has several manufacturing policies, most of them ad hoc, formulated and designed with little or no coordination.

With the economy falling apart on several fronts, and with the hurdle of government intervention in private businesses resolved on a monumental basis, it is now permissible in polite society to speak openly of forging a national manufacturing policy.

“We certainly need one, with manufacturing at a 26-year low,” says Thomas Gibson, president of the American Iron and Steel Institute (AISI).

But let’s look for a second at what Gibson and others consider to be a “manufacturing policy.” Gibson thinks there should be three focuses of policy: free and fair trade, an approach to greenhouse gas regulation that doesn’t disadvantage the steel industry and a more coherent energy policy.

The National Association of Manufacturers (NAM), in a lengthy, self-important “Dear President-elect Obama” letter, suggests the organization should “help you lead the country” through difficult economic times and outlines a series of individual issues—energy, taxes, health care, education, R&D—that it wants to see addressed. The American Manufacturing Trade Action Coalition, stating the obvious, says fixing the economy is the top priority for the incoming president, then links it to its own individual issues. These include “creating incentives for corporations to keep jobs here and to bring others home,” and reducing reliance on imports of energy, investment capital and food.

But the question is not whether AISI, NAM or other groups have their own policy agendas. The question is whether, and how best, to integrate and coordinate them in an overarching national policy to support domestic manufacturing, something this nation usually does only in wartime.

“We have plenty of industrial policies,” says F.M. Scherer, professor at Harvard University’s John F. Kennedy School of Government, “but they are largely ad hoc. There just hasn’t ever been a consensus in this country that we should have [a single] one.”

Even discussion of a single manufacturing policy “has bad connotations, of socialism, for instance,” says Fred Block, professor of sociology at the University of California, Davis, whose research involves industrial policy and the economy. “But we will talk about innovation policy and jobs creation. We will, after all, need a fairly big stimulus package bill to put a bottom under the economy.”

Still, major intervention in what was previously regarded as the “private sector” has been the federal government rule since late last year. Faced with a major recession, big companies have put out big hands, seeking government support in return for equity stakes, new managements and other forms of control previously thought inappropriate for the government to seek.

A patchwork of emergency responses to a recession and handouts isn’t the same thing as an actual, thoroughly considered policy. Even so, trade associations focused on different aspects of the industrial landscape have reached common ground on a number of policy proposals that parallel one another in trade and taxes. Many trade groups want action to ensure that China meets its World Trade Organization (WTO) commitments. Energy issues, including the use of nuclear power and clean coal technologies, are frequent items on manufacturing legislative wish lists.

Many associations favor workforce policies that will help train a new generation of production-oriented employees and managers. Few ideas are more apple pie than intensive investment in R&D. Everyone seems to want tax stability or declines, and greenhouse gas controls that don’t automatically kill industrial competitiveness.

These days, however, when industry leaders call for a “comprehensive” industrial policy, they are not looking for a single pronouncement that describes how, when and where government will intervene, own and even manage businesses. Clearly they are calling for a government commitment. But they are looking for a commitment to several different important policies at once. Comprehensive, then, even in this new era of government activism, really means a group of policies or a multi-part agenda that manufacturers and their suppliers find agreeable.

In the 1980s, the political apex of modern industrial policy debate, Walter Mondale ran for president arguing for a central policy to restore America’s industrial base. His idea, promoted by people such as Harvard University’s Robert Reich, included a single cabinet-level department with a broad, aggressive and intrusive mandate. It would run everything, from national and regional development banks and protective trade policies to support for government-picked winners that would include product guidance, production quotas and even plant-closing restrictions to preserve jobs.

Ronald Reagan crushed Mondale in the 1984 election, insisting that none of this was necessary. And he was right. With individual policy targets, tax credits here, trade regulations there and R&D support all over the place, American manufacturing pushed its output, productivity, revenue and profitability to record highs, until recession rode in last year. Convincing advocacy for more central control died with this performance.

Fundamentally Different

So, until recently, the U.S. government did not use policy to establish clear winners and losers among domestic industries or companies, or to provide so much support that they have huge advantages on international markets.

Other nations, at various times, have made that a cornerstone of domestic policy. Japan’s Ministry of Economy, Trade and Industry (formerly the Ministry of International Trade and Industry) all but created the country’s semiconductor, electronics and computer industries with subsidies, tax breaks, research-and-development money, and favorable trade and foreign exchange policies.

The European Union’s European Commission sets out specific support policies for its member nations, most recently developing policies focused on pharmaceuticals, aerospace, shipbuilding, business services and textiles. India is about to issue what it says will be a comprehensive manufacturing policy that will target specific industries for assistance.

The United States does not take such actions, at least not publicly, and likely will not until an industry or corporation deemed “too big to fail” gets in serious trouble.

“Our position on industrial policy is fundamentally different than in other countries,” says AISI’s Gibson, who served as chief of staff to U.S. Environmental Protection Agency administrators Christine Todd Whitman and Michael Leavitt. Rather than a government- directed, top-down policy, “ours is more of a partnership, but an adversarial one where all interests get to have input.”

Plenty of Policies

The truth is that, even without economic crises, the United States always has had in place elements of industrial policies. It always has supported industry and research that it felt was necessary for national security and the public good, and to satisfy the more powerful economic interests in the country.

Existing U.S. industrial policy—from trade regulation and aid for R&D and capital investment to outright subsidies—supports a broad range of manufacturing and industry. It is now primarily focused on defenserelated industries of all kinds, including aerospace and the semi-conductor and electronics industries.

“The Defense Production Act [DPA] is probably our main and only expressed industrial policy,” says Paul Freedenberg, vice president for government relations for the Association of Manufacturing Technology, which represents the machine tool industry. “It was created to ensure national security and allows the president, for example, to order the auto industry to stop making cars and start making tanks, if necessary.”

Under DPA, “industries like steel are monitored to make sure that supplies are sufficient in the event of mobilization.” The Bush administration, however, always believed that the United States could buy enough from other countries. “Bush has had no industrial policy and has not thought we need it for defense,” Freedenberg says.

“The International Trade Administration, out of the Department of Commerce, is the next closest thing we have now to an industrial policy,” Harvard’s Scherer says. “It makes a lot of industrial policy in the context of trade actions. Steel has been before it many times asking for protection of various kinds.”

Troubling Duplication

Various programs also exist at the federal and state level to support workforce training and R&D, so many of them, in fact, that they are more like ineffective, light-gauge shotgun blasts than they are focused policy rifle shots.

“The system carries decentralization to unproductive extremes,” Block says of R&D and its commercial development. “Under current arrangements, it is entirely possible that five different government agencies could be supporting 30 different teams of technologists working on an identical problem without full knowledge of the duplication of effort.” He cites the pursuit of advanced battery technologies as a current example of different initiatives going after the same goal with little sharing of information.

The government in fiscal year 2006 spent $76.7 billion across 17 different federal agencies, departments and other groups on 250 separate programs that influence regional economic development, says a study published in April 2008 for the Brookings Institution’s Metropolitan Policy Program, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” by Karen Mills, Elisabeth Reynolds and Andrew Reamer.

With so many programs in play, coordination is impossible. Further, these programs fail to augment each other because they operate in their own agency silos, the report notes. Current programs have evolved “in a wildly ad hoc, idiosyncratic and uncoordinated fashion,” the report concludes.

The federal government needs to better organize its efforts to promote innovation and coordinate with state programs, and one step toward doing this could be through a system of industry clusters, as proposed in the Brookings report.

The suggestion: establish geographic concentrations of companies that could benefit from federal support in planning grants or grants that could provide direct support. There are some state-driven cluster initiatives under way—in Oregon, Maine, Kentucky and California—but they are thin and uneven in geographic and industry coverage and in organizational capacity. For example, steel and metals distributors or metal fabricators and machine shops could form one or more regional clusters and hook their wagons to a proposed bill that would stimulate the economy by rebuilding infrastructure, study co-author Mills says. The cluster would apply for a grant to member companies for designated purposes such as training, upgrading technology or adding certain types of equipment.

Others have longed for more coherence in federal policy. “I have always wanted a single government agency that could study industries and focus on trends, technology, barriers to success and technical innovation and devise policy to encourage strengths,” Harvard’s Scherer says. Neither industry nor the federal government has “the breadth of vision or the objectivity to do this. And academia doesn’t, either. It used to. There used to be lots of doctoral theses looking at industries, but no more.”

The 2003 creation of an International Trade Administration agency, the Office of Manufacturing and Services (MAS), seemed to many domestic manufacturers a start down the path toward a coordinated, systematic policy. Here, in one place, federal officials could gather information about manufacturing trends, identify areas of weakness and recommend action focused on the well-being of the nation’s industrial base, rather than on narrower policy questions of energy, taxes or research.

But the actual agency is far from effective. It has no oversight or policymaking authority. The two men who have headed the office as assistant secretary, California carpet maker Al Frink until 2007 and William Sutton, former president of the Air Conditioning, Heating and Refrigeration Institute, were charged with a broad, nonregulatory mission.

“We conduct regulatory analysis, coordinate strategies to remove non-tariff barriers to U.S. exports and provide practicable and actionable data to local and national policymakers,” Sutton says. “We ensure that the long-range economic impact of policies on U.S. firms is taken into consideration, whether in discussions with foreign governments or within the U.S. government.”

Christian Ketels, principal associate of Harvard Business School’s Institute for Strategy and Competitiveness, also laments the United States’s “disorganized” industrial policies.

“There is no dialogue,” he says, “no rational for public investment, for example, which limits federal economic policy either to broad-based schemes like tax credits, or company- or region-related schemes like pork barrel investments.”

All true, certainly. But as modern economies develop, other countries, even those known for more central control such as Japan, China and even some in the European Union, seem to be gravitating more toward the U.S. model.

Japan, for instance, which was so successful with MITI and the post-World War II effort to rebuild the industrial base and establish world-class automotive and electronics industries, also made mistakes in picking its winners. It tried to keep Honda out of the car business, for example. And it has discovered that a multi-disciplinary approach to R&D is more productive when the government loosens its stranglehold.

China is discovering that in its efforts to create jobs, full-employment-in-the-provinces programs are keeping its losers from closing inefficient plants and improving productivity. The European Union’s latest declaration of industrial policy speaks of streamlining regulations and “avoiding overregulation” of industry, although European nations have been as activist as the United States when it comes to recession-related interventions.

Whatever the economic environment of the United States, neither Scherer’s research-and-policy agency nor an end to broad-based schemes and pork barrel investments seem likely. One need look no further than the battle over the auto bailout to see how a sharp fragmentation of policy initiatives, abruptly shifting political pressures and strong regional interests blocked a comprehensive approach to even this single important industry.

Mitt Romney, son of George Romney, the man who ran American Motors (remember that one?) before becoming governor of Michigan, almost single-handedly embodies the political schizophrenia that surrounded Detroit. When he was running for the Republican presidential nomination, Romney kicked off his campaign in Dearborn, Michigan (not in Massachusetts, where he was governor), and called for broad aid to the auto industry. Having failed at that, in November he wrote a much commented upon op-ed in The New York Times that said, basically, “Let them eat bankruptcy.”

“We shouldn’t reward bad business practices made by competitors to the company that is about to employ 2,500 workers coming to my district,” Rep. Lynn Westmoreland (R-Georgia) told The Wall Street Journal. Kia Motors Corp. of South Korea is building a $1 billion plant, set to open next year, in Westmoreland’s district.

To be blunt, there is no sign that the intense regionalism and political self-interest that informs much of Congressional and statehouse industrial policy debates will diminish. It is simply how our system works. Call it a “partnership” as AISI’s Tom Gibson does, or “pork barrel” politics as Ketels does, it is still the same uncoordinated animal.

A New Direction

Nevertheless, there is a new, more interventionist shape to U.S economic policy. With an Obama presidency, that likely would have been true regardless of economic conditions.

There is generally a large gap between what a presidential candidate on the stump says he wants to do and what he is able to do once in office. Even as the financial crisis reshapes national priorities, there are issues that will almost inevitably set our national industrial policy, chaotic and fragmented though it may be.

Fixing the economy, of course, will be first priority. It also appears we can expect bipartisan and industry support for a tougher stance with China on trade and currency manipulation. There will be energy policies aimed at increasing efficiency, encouraging alternatives to fossil fuels and creating green jobs. We can look for ramped-up spending on job training and education, R&D and infrastructure to create jobs and repair our decrepit system of highways, bridges, tunnels, ports and air traffic controls. These are all professed presidential and Democratic Party priorities.

“I would think we will get a different attitude toward all this from an Obama administration,” says Freedenberg at the Association of Manufacturing Technology. “To make the U.S. industry winners, there will probably be some invervention from the Obama administration because Obama believes in industrial policy, while the Bush administration did not.”

“The first test will be to see how Congress deals with climate change,” AISI’s Gibson says. “There will be a lot of attention early on climatechange policy, and it needs to take account of ensuring energy supply and global competition. Climate-change policy is trade policy.”

The new administration almost certainly will put a price tag on carbon emissions with a cap-and-trade system for emission permits, as Obama and leading Democrats have declared their support, and even industry lobbyists contend it’s inevitable.

To be sure, there will be broad industrial policy areas in which manufacturers particularly are more likely to strike out. There is all but universal business opposition to Big Labor’s so-called Employee Free Choice Act, which would make it easier for workers to organize by eliminating the need for secret voting in union-certification elections.

The bill, advocated by the AFL-CIO and unions, passed the House of Representatives in 2007 but stalled in the Senate. The unions are optimistic because Democrats, the beneficiaries of huge campaign contributions from organized labor in 2008, now will have a stronger hand in Congress, and Obama was a sponsor of the 2007 legislation.

More than 500 associations back an initiative, called Coalition for a Democratic Workplace, or My Private Ballot, to defeat the bill, and the demands of an uncertain economy may allow Congress to put it off.

Corporate America also faces stiff headwinds on its desire for lower tax rates and less regulation. Corporate income tax rates will not decline, although there is murmuring in Congress that capital gains rates might as part of a bailout package.

With new leadership in Washington, depreciation rates might get shorter, as members of the Association for Manufacturing Technology and other capital-intensive industries would like, and investment and R&D credits could well become more generous.

Stiffer regulation of many business sectors is inevitable. (The Small Business Adminstration’s Office of Advocacy puts manufacturing’s cost of federal environmental, economic, workplace and tax-compliance regulation at $162 billion in 2004.) Beefed-up enforcement for pharmaceuticals, food and product safety, not to mention the environment and energy efficiency, are all but given.

But with all this, it is a safe bet that industrial and manufacturing policy in the United States will remain a hodgepodge of fragmented and mostly uncoordinated, issue- and corporate- focused decisions. It is a system and policy framework that has produced an economy that remains, even in recession, the envy and aspiration of the world.

MANUFACTURING ISSUES THAT MATTER—A QUICK REVIEW

With pressing problems such as wars, global economic collapse and much more, the Obama administration’s priorities will be set as much in a “crisis du jour” mode as in any planned sense. But with the interests of manufacturing in mind, here is a closer look at a few of the issues that matter to the manufacturing economy.

Taxes: Problems and Opportunities

With a combined federal-state corporate tax rate of 39.3%, the United States has the second-highest tax rate among the 30-member countries of the Organisation for Economic Cooperation and Development (OECD), just behind Japan’s 39.5%. To remain competitive in the international marketplace, many countries have reduced their corporate tax rate—the average corporate tax rate among OECD countries has dropped a full percentage point in the past year, from 27.6% to 26.6%, says Scott Hodge, president of the Tax Foundation in Washington, D.C. In Asia, China moved to a 25% corporate tax rate, down from 33%, in January 2008, and South Korea, Taiwan and Hong Kong have announced reductions.

Dorothy Coleman, vice president of tax, technology and domestic economic policy at NAM, contends that to join the majority of the OECD and reduce the U.S. corporate tax rate would produce positive changes such as higher economic growth rates, higher wages, a productivity increase, more business investment and lower inflation.

Another alternative that’s been discussed is to establish a value-added tax, which is assessed on the incremental value added to goods and services at each phase of production. They are applied to products and services that are bought and sold for use or consumption in some 150 countries, including Canada and Mexico—but not in the United States.

“Practically every country in the world now has a value-added tax system,” says Augustine Tantillo, executive director of the Washington, D.C.-based American Manufacturing Trade Action Coalition. “Countries operate it differently, but they apply a tax at every point in the production process. If someone takes a component and further processes it, when they go to sell that item, they pay the government a tax on the value added that they imparted to that particular item.”

Whatever shape corporate tax reform takes, the Tax Foundation’s Hodge advises against making a few corrective measures while leaving the existing tax system intact. “What is happening is that we are essentially trying to consign American business to a poor tax system, then trying to make up for it by offering all sorts of incentives on the back end,” he says. “It’s crazy.”

Part of that craziness is the variation between the statutory tax rate—what the laws call for—and the effective tax rate—what companies actually pay. An August 2008 report by the U.S. Government Accountability Office, titled “Effective Tax Rates Are Correlated With Where Income Is Reported,” said that while the average effective corporate tax rate in 2004 was 25.2%, a considerable variance existed among corporate taxpayers. About one-third of them had effective individual tax rates of 10% or lower, but a quarter were at more than 50%.

The difference in effective tax rates narrows the tax base, creating the need for a higher statutory corporate tax rate. That needs to change if the United States wants to remain competitive in the international market.

“The fact of the matter is that the rest of the world understands the concept of tax competition, and we do not,” Hodge says. “We impose very high tax rates on a very narrow tax base. The rest of the world is moving toward having much lower tax rates on a broader base.”

Trade: Free and Fair

The major focus of trade policy has been a struggle between multinational corporations with their allied free traders, who see open borders and free trade as always good—largely because it is good for them—and “free and fair” traders, including domestic manufacturers, who believe the federal government should fully and aggressively enforce its own trade laws, even when it hurts, politically. Free and fair traders also want the government to reduce the flow of business to less-expensive overseas manufacturing centers, often by enacting new laws that compel controlled, exportoriented economies such as China’s to abandon their mercantilist tendencies.

Framing the debate has been the Bush administration’s all-but-complete refusal until his last year in office to enforce existing remedies against injurious, unfair trade practices from China. The public rationale for the administration’s refusal to act was that anything done to force China to change currency and trade policies ultimately would hurt the U.S. consumer. Just as or more important has been the fact that China is a major buyer of U.S. government debt, and that China’s cooperation on such sticky issues as North Korea’s nuclear aspirations and global terrorism was considered more important than its adherence to WTO rules.

Shanker Singham, a partner who specializes in international trade and competition in the Washington, D.C., office of law firm Squire, Sanders and Dempsey, contends current U.S. trade policy fails to distinguish between efficient market competition, which rewards companies that make better goods at lower prices, and foreign businesses that benefit from market distortions and government subsidies. “We need a trade policy that incentivizes one and not the other,” Singham says.

At home, input costs, such as those for raw materials, and taxes on those inputs should be kept to a minimum, says Lewis Leibowitz of the international trade group of the Washington, D.C.-based law firm of Hogan and Hartson. The United States also should ensure that taxes on production aren’t higher here than they are in other countries, he says. When they are, “then our production will become other countries’ production.”

A number of organizations, including the China Currency Coalition, have pushed to identify and stop currency manipulation by such trading partners as Japan, Taiwan, South Korea and China. The Currency Reform for Fair Trade Act of 2007, sponsored by U.S. Rep. Timothy Ryan (D-Ohio) in the House and Sen. Jim Bunning (R-Kentucky) in the last Senate, would impose countervailing duties on countries that benefit from currency manipulation. It also would require the secretary of the treasury to designate misaligned currencies and involve the International Monetary Fund and WTO in the process. The measure, which has been proposed in some form for the last five years, has never emerged from committee.

“If you can bust Chinese currency policy, you could get others to change,” says Peter Morici, professor of international business at the University of Maryland and former director of economics at the U.S. International Trade Commission. But without addressing such currency distortions, new trade agreements “don’t make any sense to me.”

As president, Obama may advocate giving a break to companies that keep jobs in the United States. While in the Senate, Obama, with Sens. Richard Durbin (D-Illinois) and Sherrod Brown (D-Ohio), in 2007 introduced the Patriot Employer Act, which would give a tax credit to businesses that maintain or increase their number of full-time workers in the United States, among other stipulations.

As to trade, in June he backed off earlier disparaging remarks about the North American Free Trade Agreement (NAFTA)—he had labeled it “an enormous problem”—and indicated to Fortune magazine he was open to talking with Canada and Mexico about incorporating enforceable environmental and labor standards. He also had decried China’s permanent trade relation status during the campaign, saying rules needed to be enforced to prevent China from “manipulating its currency to make our exports more expensive and their exports to us cheaper.”

R&D: Partnerships

A persistent belief is that the government should intensify its involvement in research spending, especially as it applies to alternative energy.

At UC Davis, Professor Block’s research indicates that since the 1970s, government-supported research has played an increasingly important role in collaborative research and innovation with non-defense, civilian businesses. Forty years ago, the idea was that all government had to do was create a healthy business environment, then get out of the way.

But “whereas the lion’s share of award-winning R&D 100 innovations in the 1970s came from corporations acting on their own,” Block says, in the last two decades most “have come from partnerships involving business and government, including federal labs and federally funded university research.”

One of the most famous of the single-company innovations, for instance, was discovered and developed in Dupont’s Jackson Laboratory in Deepwater Point, New Jersey, beginning in 1938. Roy J. Plunkett was working with a Dupont product, Freon, and after one experiment, he found an unexpected white slippery residue, which the company trademarked Teflon. Through the 1970s and beyond, the company continued to spin off fluoropolymers of the basic Teflon compound. The substance has graduated far beyond non-stick pans to textile coatings and even bulletproof vests.

Today, on the other hand, government agencies and money, from the Lawrence Livermore National Laboratory in Livermore, California, to the CIA’s In- Q-Tel arm in Arlington, Virginia, and the Department of Energy in Washington, D.C., are all in the productinnovation business with industry. This includes projects to squeeze more computing power into microchips, develop vaccines to fight bioterrorism and flu epidemics, and invent complex, digital manufacturing interfaces so computer-aided designs can speak directly to smart machine tools on the factory floor.

Each year, R&D Magazine tracks innovation that results in commercial products with a juried competition that picks the top 100 innovations in the country. In 1975, 41 of those top 100 were the result of some kind of federal funding, says a report by Block. By 2006, the number reached 77. This, he says, is because R&D has become both more complex and crucial to business, and often simply beyond the capacity of a single corporation.

In a March 2008 report, “Manufacturing the Future,” the Interagency Working Group on Manufacturing Research and Development, which coordinates R&D activities in selected sectors across 15 federal agencies, noted that in fiscal 2006, total federal funding for R&D was $135.5 billion. Industry, by comparison, invested an estimated $212 billion in R&D in 2006, with academia and not-for-profit organizations spending $20.4 billion.

While the U.S. government has played this role in the past, American companies now may be at a competitive disadvantage as other countries step up their R&D support, says William Hickey, president of Lapham-Hickey Steel Corp. in Chicago. “Many other countries have national manufacturing policies that have much greater incentives for research and development,” he says. (See “Too Little Innovation,” Forward, September/October 2005.)

Nearly 18,000 U.S. companies rely on the support to aid their R&D, NAM estimates.

Economic Development: More Focus

No one in Washington opposes economic development. But this area, with heavy involvement by the states, is poorly coordinated and focused.

Most direct business funding, aside from U.S. Small Business Administration (SBA) loans, comes today through state initiatives to promote economic development. Many states offer low-interest loans and grants to companies that meet certain criteria, such as job creation or environmental benefits. At least 30 states send money to private venture-capital funds, which in turn finance promising ideas or early-stage companies.

The ideal manufacturing policy would beef up existing economic development and R&D funding programs and develop new ones where market demands call for them.

One example is the Advanced Technology Program (ATP), under the National Institute of Science and Technology, which Obama pledged to support during the presidential campaign. “It was [created] to ramp up advanced research beyond complex weapons systems,” Block recalls. “They were improving metal parts, machining to closer tolerances to improve fuel and manufacturing efficiencies, and [doing] a lot of work with composites to make cars stronger and lighter weight, all energy saving.”

Obama also said he wanted to double funding for the Manufacturing Extension Program (MEP), a nearly 20-year-old program under the Commerce Department’s National Institute of Standards and Technology that helps manufacturers improve efficiency, use technology better and become more competitive. (See “Making It Work,” Forward, November/December 2008, for more on MEP.)

MEP has worked with thousands of companies and reports delivering $1.3 billion in annual cost savings and $6.25 billion in increased or retained sales, based on a survey of projects completed in fiscal 2006, MEP’s most recent data available. The MEP budget was $89 million in fiscal 2008, when it received only partial funding. Ned Hill, vice president for economic development at Cleveland State University and chairman of the MEP advisory board, says a fully funded MEP would be at $109 million.

Block also expects the America Competes Act, which created the Technology Innovation Program (TIP) in 2007, to be “bulked up” in the new administration. TIP offers financing to bridge the gap between pure research and commercial development. More support for the Small Business Innovation Research program, a 25-year-old and now $2 billion program, also would be on Block’s wish list. That program requires federal agencies with R&D budgets to allocate 2.5% to small business. It’s coordinated loosely by SBA but administered by 12 different agencies, half of it in the Department of Defense.

One new program could be an Advanced Manufacturing Fund to invest in compelling manufacturing strategies, which Obama proposed during his campaign. It would be modeled after Michigan’s 21st Century Jobs Fund, a $2 billion initiative that targets companies in advanced-automotive manufacturing, alternative energy, homeland security and life sciences.

Training: Back to School

Manufacturers, in their wish list for a solid manufacturing policy, also say better-coordinated training programs would help them compete.

The Workforce Investment Act, first authorized a decade ago, provides training and employment services through statewide and local career center systems. Programs include access to job banks and training initiatives administered by not-for-profit agencies and community colleges. Funding for the 2008 fiscal year is $3.6 billion, down from roughly $5 billion five years ago. Allocations have been cut amid criticism that the program wasn’t effective—it hasn’t been formally reauthorized since its inception in 1998.

What’s also needed in a revamped manufacturing policy may be more money for the Carl D. Perkins Career and Technical Education Act, which allocates funds to high school districts and colleges. Reauthorized in 2006, Congress appropriated $1.16 billion for 2008.

“Half the high school graduates we interview wash out because they don’t have math and reading at a ninth-grade level,” says Ron Bullock, chairman of the Illinois Manufacturers Association and owner of Bison Gear & Engineering Corp. in St. Charles, Illinois. His company interviews 20 applicants for every one it hires.

Newer workers are encouraged to attend a certification program that Bullock helped establish at the College of DuPage in nearby Glen Ellyn, Illinois. The program covers basics such as factory maintenance and safety. A worker receives $100 after completing each of four training modules and another $100 bonus after he or she finishes testing on all four, for a total of $500.

Environment and Energy: Betting on the Future

By far the No. 1 environmental issue confronting manufacturing in general and metals makers specifically is greenhouse gas (GHG) controls, and certainly the top alternative for achieving such controls is a capand- trade system.

Under cap-and-trade schemes, which are widely used globally, industries and companies are assigned specific limits, or a cap, on permitted GHG emissions. Companies that require additional emission permission can buy them from companies that don’t need their allotment. A cap-and-trade bill, the Lieberman-Warner Climate Security Act, was defeated in the Senate in June 2008. Some version of cap and trade will likely be introduced in the new Congress. (See “Cool It,” Forward, September/October 2008, for more on cap and trade.)

Such approaches have been met with mixed reactions. In Europe, for example, it was unclear whether there was a reduction of GHG in the European Union’s pilot system. Three years into that program, it first reported a 2% increase, but after later-audited emissions numbers were counted, they indicated a drop of 5% in some industry sectors. The European Confederation of Iron and Steel Industries says ongoing “auctioning [of permits] for steel would be extremely damaging and counter-productive.” Meanwhile, in Australia, which will launch its program in mid-2010, the Australian Industry Group favors cap and trade and has demanded the government drop a “risky and ill-conceived” 20% renewable energy target set for 2020, contending the capand- trade emissions policies will make the renewable energy targets redundant.

In the United States, there’s a natural concern about the cost of these programs and whether the additional cost will make domestic manufacturers uncompetitive on world markets. This is a particular worry of steelmakers, who have compiled a strong anti-pollution record during the last two decades.

“Greenhouse gas emission levels for the U.S. iron and steel sector are now lower by more than 40% from where they were in 1990,” says Steven Rowlan, director of environmental affairs at Nucor Corp. in Charlotte, North Carolina. “This is especially impressive since the industry is also producing more steel than they did in 1990. There are many industries in the U.S. that can also claim that they are emitting less GHG than they were in 1990, but very few have increased or even maintained their production levels.”

Aluminum producers don’t have the same concern because emissions of the No. 1 GHG, carbon dioxide, are sparse from smelters, and much of the industry supported the Lieberman-Warner Act, though there were some dissenters. For example, Michael Petersen, president of Petersen Aluminum Corp. in Elk Grove, Illinois, believes cap and trade as presented in that legislation would have hurt the aluminum sector, given the amount of energy their facilities burn, and is cautious about future variations of that proposal. Michael Wallis, president of North American Milled Products for Alcoa North American Rolled Products in Bettendorf, Iowa, says any cap-and-trade system would need “some recompense and understanding” of any competitive disadvantage it might create.

What aluminum really would like, says Lee Califf, Alcoa’s government affairs director in Washington, D.C., would be for the government to set aside a certain amount of power for manufacturing, at cost. “You can’t make aluminum using market-priced power,” he says.

The challenge for aluminum is twofold. First, aluminum companies have to convince public-power agencies such as the Bonneville Power Administration in Portland, Oregon, and the Tennessee Valley Authority in Knoxville, Tennessee, to sell their cost-based energy to them rather than, say, to residential communities— and sometimes they don’t, says Califf. “It’s not a subsidy. We pay taxes, we hire people.”

Second, when the agencies do sell, the deal comes with strings attached. Manufacturers need to guarantee a certain number of jobs will be created, money might need to be given to an economic development fund— all adding to the cost of the purchase, Califf says.

Incentives to encourage recycling programs run by municipalities also would appear on any wish list from aluminum producers, says Robert Strieter, vice president for environment, health and safety for the Aluminum Association in Arlington, Virginia. Those government units or recycling centers then could sell credits they generate.

With any initiatives, however, there’s also a fear industry- wide of counting too much on as-yet-undeveloped technology in any national policy plan. Nucor’s Rowlan cites former Vice President Al Gore’s call for 100% of U.S. electricity to come from renewable power within 10 years. Rowlan calls that “betting on the come,” and says Gore likely will lose the bet.

If technologies such as capture and sequestration (pumping carbon dioxide into a salt dome) and hydrogenbased economy (using hydrogen for fuel instead of methane) aren’t available by the time new regulations come into force, then industry will be pushed offshore, Rowlan says.

If and when that happens, “we will be standing around looking for another round of bailouts, if that is even possible.”

Contributors to this story included Sam Barrett, Ashleigh Braggs, John Buchanan, Philip Burgert, Michael Chevy Castranova, Judith Crown, Darrell Delamaide and Susan Ladika.