The second in a series about the future of U.S. manufacturing.
Since the year 2000 manufacturing employment in the United States has dropped from 17.2 million workers to 12.3 million in 2015. That’s despite a gain of almost a million manufacturing jobs since the 2008-2009 recession.
As discussed in the first post on this subject, this long term decline in manufacturing jobs is a major economic issue, impacting the nation’s competitive profile as well as cutting off a path to middle-income security for millions of Americans.
Some of the reasons given for this decline have been the role of unions, excessive (“job-killing”) regulations, and the shifting of jobs overseas. The first post in this series skewered the notion that unions had a leading role in this job loss. This post will look at the role of government regulations.
The Job-Killing Regulations Universe
“Job-killing regulations”. The phrase is a signature example of how smart sloganeering can shape perceptions and influence national policy. And if you believe some people, regulations are a major reason why US manufacturing is in so much trouble.
One of the biggest players in job-killing regulations universe is the National Association of Manufacturers, or NAM, which has promoted some staggering numbers about the cost of federal regulatory compliance. This recent NAM infographic suggests that compliance with federal regulations cost the economy $ 2 trillion a year, and that the share paid by small manufacturers – those with fewer than 50 employees – is over $ 34,000 per employee. (Larger manufacturers, which enjoy economies of scale, spend less per employee.) If these numbers are anywhere near accurate, who in their right mind would start or expand a manufacturing business in the United States?
The problem is that NAM’s numbers are porn for the job-killing regulations crowd. In a word, they’re absurd.
My questions about NAM’s numbers stem from a personal perspective. From 2001 to 2011 and from 2012 to 2014 I was the president of two small, high tech equipment manufacturers. One handled hazardous chemicals on a regular basis. The other company counted among its customers several of the nation’s top military contractors. For these two companies – with thirty to fifty employees each – compliance costs might have totaled $ 2,000 per employee, and that includes third party expenses like accountants, lawyers, safety consultants, even chemical waste disposal. These two companies are typical of thousands of other small manufacturers across the country that comply with federal environmental, safety and labor regulations. How could my experience be reconciled with NAM’s assertions?
Who Makes this Stuff Up?
Turn to Mark and Nicole Crain. W. Mark Crain is at Lafayette University in Easton, PA and one-time member of the Reagan Administration. Professor Nicole Crain is also at Lafayette. The NAM infographic is based on the Crains’ “The Cost of Federal Regulation to the U.S. Economy Manufacturing and Small Business”, a NAM-commissioned study published in 2014.
The Crains have a mixed reputation in public policy circles, and to be charitable, their study’s methodologies are weak and deceptive.
The NAM study starts with a bottom-up survey of manufacturers that estimates regulatory costs paid by manufacturers. The survey – which wouldn’t pass muster in a Statistics 101 course – seemed designed to allow the self-selected NAM members participating in the survey to fantasize about how they would spend all the money they’d save if there were no federal regulations. That’s okay, because the numbers being hustled by NAM come the second part of the Crain study.
Big Numbers – Really Big Numbers
Here are the Crains’ key findings:
In summary, the $ 214 billion they apportion to the manufacturing sector works out to an average of about $ 20,000 per employee for all manufacturers. Their math suggests that small manufacturers pay much more – over $ 34,000 per employee.
When in Doubt, Invent the Biggest Numbers You Can
The Crains’ excellent adventure in really big numbers start with their invention of an “indirect cost” of regulation which they label as “Economic”. This is defined to be the loss in gross domestic product due to “over-regulation”. Their mind-boggling $ 1.448 trillion estimate was calculated by (1) cherry-picking the results of a global “executive opinion survey” on regulation, (2) using this fuzzy data to calculate a “regulation index”, and (3) creating a half-baked statistical model that suggests what the US GDP would be if the economy was as regulated as several other, “less regulated” nations. This is arm-waving economics at its worst. The Crains’ regulatory indexes are based on anecdotal data. The notion that such comparisons can even be made is invalid – nations profoundly differ, as do their regulatory needs. But worse, the Crains then assign this made-up GDP deficit as a “cost” that is somehow paid for by manufacturers and others.
If the goal of this exercise is to understand how regulatory compliance is affecting manufacturing decision makers and jobs, clarity is critical. No manufacturer in the US ever wrote a check to pay for an imagined deficiency in GDP.
Workplace Safety Regulation – Real Costs and Direct Benefits
Manufacturers do write checks for OSHA compliance, and here’s where the Crains begin to show their ignorance about how factories really work. Their safety compliance cost estimates – based on OMB (Office of Management and Budget) studies – explicitly ignore any of the compliance benefits that are also in those OMB studies. This despite the fact that manufacturers directly benefit from the regulations.
It’s simple – in an alternate libertarian universe where there are no workplace safety regulations, most companies would still have comprehensive safety programs. Why? Because those companies with unsafe workplaces would find themselves with high rates of injuries and deaths that in turn would disrupt operations, hurt sales and profits, create lawsuits and even bring on criminal legal action.
Back in the real world, companies with good safety programs typically experience few, if any injuries, never see safety problems impact sales and profits, and pay lower insurance premiums. The OMB has consistently found that the benefits of worker safety regulations exceed their cost, so if one accepts the OMB’s compliance cost estimates, the net cost to manufacturers is much closer to zero than $ 9 billion.
What’s a reality-based estimate of occupational health and safety costs? On the low end, it can be argued the actual cost to manufacturers is zero. On the high end, if one gives any credence to the Crains’ notions of “over-regulation”, a reasonable estimate is about one-half of their $ 9 billion estimate, or around $ 5 billion.
Environmental Compliance Costs – Direct and Real
Environmental compliance costs are different. Manufacturers spend real money for environmental compliance, but except for the immediate employee safety benefits, the enormous societal benefits from clear air and water never show up on their profit and loss statements. If US environmental compliance is hammering US manufacturers, it might be suppressing manufacturing employment.
The Crains’ environmental compliance estimates are largely based on the 2001 OMB Report to Congress. (In turn, this document is partially based on estimates from a much older study released in 1988.) In that 2001 OMB report, it was estimated that the cost of environmental compliance for all rules then in place to be between $ 96 and $ 170 billion as measured in 1996 dollars. Take the high estimate (which was what the Crains used), and crank it through the Minneapolis Fed’s inflation calculator, and the result is $ 256 billion in 2014 dollars, or 77% of the $ 330 billion estimate shown above. In other words, more than three-quarters of the Crains numbers are based on estimates somewhere between thirteen and twenty-six years old.
Adding to the out-of-date figures, the Crains acknowledge and then ignore a widely recognized problem. The compliance cost estimates presented by the EPA and OMB often far exceed the actual costs. One reason for this is that initial cost estimates are based on existing product, compliance and manufacturing technologies. Regulation frequently spurs innovation that results in lower cost compliance solutions. Another reason for overestimation is that higher demand for compliance-related products and services can increase competition and reduce long term compliance costs. A final factor is that industry groups opposing regulatory changes may present “worst case” estimates of compliance costs that are later given weight in government estimates. The Crains pass over all this over and use the very high end of the range of the OMB’s estimated environmental compliance costs. Their compliance cost estimate for the entire economy is 21% higher than the mid-point estimate.
So instead of a $ 115 billion annual cost to manufacturers, what is it? A reality-based estimate could be constructed as follows:
For the high end of the cost range, take the Crains’ $ 115 billion, which they observe is 21% higher than the mid-point.
This implies the mid-point of the estimate is $ 95 billion
For the low end of the estimate, if one takes the difference between the high end and mid-point estimates and subtracts it from the mid-point the result is $ 75 billion.
This yields an estimated compliance cost of between $ 75 billion and $ 115 billion, but to make the numbers a bit more credible, we’ll assume that cost-reductions in compliance over the past three decades have knocked costs down by another 10%. That leaves a compliance cost range of between $ 68 billion and $ 104 billion. This calculation wouldn’t get a passing grade in an advanced economics course, but for the purposes of rough estimates it’s more than adequate.
The Real Impact of Regulatory Compliance Costs on US Manufacturers
One more reason the Crain study is questionable is that manufacturers generally look at costs as a percent of sales. Cost per worker is meaningless, especially in highly automated industries.
In 2014 US manufacturers shipped about 6 trillion dollars worth of products. How does that compare to the reality-based estimates made here?
Reality-based estimates suggest regulatory compliance is costing US manufacturers between 1% and 2% of sales.
That’s an average number. Some businesses (like the small, light manufacturing companies I ran), pay less. Others (say a maker of hazardous chemicals or a semiconductor factory) pay more. Writing as a manufacturing professional, these costs are significant, but would not be the cause to drive a company out of business and kill manufacturing jobs.
Here’s another important point – for entrepreneurs starting a small manufacturing business from scratch, these costs present no real barrier to entry.
The Impact of Regulation on Manufacturing Job Loss
Is there any evidence that regulation has contributed to job losses in the 2000 to 2015 period? From 2007 to 2012 the Bureau of Labor Statistics asked companies who had engaged in major, extended layoffs why those layoffs were taking place. During that time, 0.25% of layoffs were attributed to government regulations and/or intervention.
This set of statistics is dangerously deceptive. It covers all sectors of the economy (not just manufacturing), and it only covers those large businesses reporting layoffs of 50 or more employees. (A small factory shutting its doors would not be in the numbers.) But if one were to assume that every one of those regulatory job losses was in manufacturing, they would still only amount to 1% of the extended manufacturing layoffs in that time frame.
Some of the other problems with these statistics is that they don’t cover people laid-off and later re-hired. And the single reason a company cites in these numbers may hide many other factors. But the point is clear – manufacturing jobs are not disappearing because jackbooted OSHA or the EPA thugs are breaking down the doors of factories and shutting them down for petty violations of arcane rules.
Why Job Killing Porn Matters
One reason I and many others a lot smarter than I have taken issue with the Crains’ work is that the US needs regulatory reform in many areas, but it also needs a reality-based debate. Their studies – presented as “fact” by interest groups of all kinds – adds to a highly politicized narrative that regulation is strangling the American manufacturing. That narrative ignores the direct benefits of safety regulations, the enormous societal benefits from environmental regulation, and steers the discussion away from the real issues surrounding regulatory reform. Some examples:
The nation’s overall tax code is a job killer – over complicated, noncompetitive with many other nations and encouraging major US manufacturing corporations to keep their overseas profits offshore.
The EPA’s rule making authority is under constant assault by special interests and state governments. What’s needed is something that by today’s standards seems quaint – a new, national political consensus (compromise) on environmental quality and climate change.
The creaky, rickety structure that is the Affordable Care Act (Obamacare), has had a real and negative impact on small manufacturers with more than 50 employees who in the past did not offer employee healthcare insurance. Those that you want to kill Obamacare and those that want to keep it agree on one thing – the nation’s health care system needs major reforms
There’s wide agreement that state regulations on occupational licensing are hurting the economy, although that will have to be addressed on a state level.
And what about OSHA? Like all rule-making federal agencies, it needs work, but in truth many complaints about the agency are from small business owners who are culturally and politically at odds with the entire notion of safety regulation. They believe that they alone should decide how to keep their workers safe. Maybe that made sense in a world lit only by fire, but in an age in which even the smallest manufacturer may be handling deadly chemicals and operating complex equipment, having a set of tough, comprehensive workplace safety laws is just common sense. Just look what happens when manufacturers are allowed to set their own rules.
Still Missing – What Killed 5 Million Manufacturing Jobs?
The suspect list is getting shorter. If unions and over-regulation didn’t consume 5 million American manufacturing jobs, what did? The next post on this topic will turn to the impact of overseas competition.