Manufacturing Makes a Comeback, Obama Oddly Takes Credit

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In his State of the Union speech last week President Obama tipped his hat to the resurgence in American manufacturing jobs, then pledged to assist the process by expanding the government's network of so-called ‘innovation hubs' around the country. In these centers the federal government will concentrate its investments and those of private partners in research, development, training and start-up funding, all aiming to help turn around areas of the country "left behind by globalization,'' the president said.

In his speech the president didn't pause to explain even briefly why manufacturing is suddenly reviving, and where in America it's starting to thrive again. That's because the industrial resurgence has so little to do with federal government intervention, and it isn't occurring in public sponsored ‘hubs' of innovation. Much of the momentum behind the revival comes from the rise of America as a global energy powerhouse, producing record amounts of oil and natural gas and in the process driving down one of the chief costs of manufacturing production, namely power. That decline has occurred at precisely the moment that the cost of manufacturing is rising in some of our global competitors, especially China.

The winners in this new industrial sorting aren't government-directed hubs or clusters. In a piece last autumn in City Journal, Joel Kotkin noted the rise of manufacturing production in America's Third Coast, the area stretching from Brownsville, Texas, to greater Tampa along the Gulf Coast, which has been adding jobs at three times the national rate for a decade. Some of that industrial job growth is directly related to energy production, as firms that supply power companies with equipment, for instance, rise and grow rapidly. Other types of manufacturing are spreading rapidly there, too, ranging from steel to food production.

The rise of the region isn't just an accident of natural resource location. Three of the top 10 rated states for doing business, according to a recent survey by Area Development, a site selection magazine, are Gulf States: Texas, Louisiana and Alabama. They win high marks for their moderate taxes, speedy permit processes for new ventures, and increasingly skilled workforces, all of which have helped those states unlock their resources. By contrast, California, with the nation's third highest unemployment rate, is sitting on significant untapped reserves of energy but blocking their development.

Our unique federalist system, which offers companies a rich array of choices when they ponder whether to invest in new jobs here, is far more likely to generate jobs than any Washington industrial policy. For instance, the president cited as an example of manufacturing's revival Caterpillar's decision to move jobs back from Japan to the United States. The president didn't point out, however, that Caterpillar, headquartered in Illinois, is relocating 1,400 jobs from Japan to Georgia, ranked the third most business friendly state in the nation by Area Development thanks to its below-average tax rates, its moderate regulatory environment and success in attracting talented workers. Illinois made a pitch for the Japanese plant but Caterpillar turned the state down, citing concerns in a letter about Illinois' "business climate and overall fiscal health," both of which are among the nation's worst.

Similarly, nine of the 10 states leading the economic recovery in the Area Development survey are right-to-work states, including two which joined the movement last year, Indiana and Michigan. Although the president spoke out against right-to-work in Michigan last December, many of those industrial jobs from overseas that the president touted in the State of the Union are going to the 24 states that now give workers the right to opt out of a union.

Tax policy is another point of divergence among the states. The United States has among the densest, most complex corporate tax codes in the world. While the president makes perfunctory mention occasionally of reforming it to stimulate investment, some states have already reshaped their business taxes to be more competitive for jobs.

Michigan's Gov. Rick Snyder, a former business executive, did the heavy lifting in his state, eliminating the regressive Michigan Business Tax, one of the nation's worst business taxes, and replacing it with a flat corporate tax. Michigan has been feeling the heat from nearby Indiana, which spent eight years under former Gov. Mitch Daniels cleaning up its tax code, passing right to work legislation, and stabilizing its budget. Louisiana, Florida, and Pennsylvania are just some of the other states that have been hacking away at bad business taxes to improve their competitiveness.

In his brief remarks on job creation in the State of the Union, the president sketched out a role for the federal government as a guiding hand of the economy, selecting areas of the country for job creation, the so-called hubs, then mustering government resources to lead investment in those places. By contrast, the most successful states are pursuing jobs by reforming and refining policies to minimize their impact on the marketplace, from taxes to regulation.

The beauty of our system of federalism is that when the states succeed in this mission, as some of them are right now in attracting industrial jobs, the president can claim credit for it.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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