Manufacturing Monday: Tax bill to spur jobs, and a costs eat into Dow

It seems Congress is looking into getting the tax code to work in bringing jobs here. Also, on the inflation front, Dow Chemical is reporting that material costs have become a financial tumor. Folks, welcome to another edition of Manufacturing Monday!

You bring the jobs, and we'll lower your taxes!

Back in 2004, then-presidential candidate, John Kerry, proposed a tax plan to promote manufacturing jobs. Essentially if you hired a certain number of American workers, that you as an employer, would receive a tax credit. There was a graduated system, depending on how many you employed.

• New Jobs Tax Credit. As president, John Kerry would jumpstart manufacturing job creation with a New Jobs Tax Credit that would pay the employer share of the payroll taxes for any net new jobs created by manufacturers, other businesses affected by outsourcing, and
small businesses in 2005 and 2006.
o For example, a medium-sized manufacturing company employs 1,000 workers. If this company hires an additional 100 employees at $40,000 – bringing the total to 1,100 workers – they would get a tax cut of $3,060 per worker $306,000 in total. Note, the New Jobs Tax Credit would roughly offset the additional cost of health premiums which have risen $2,630
under President Bush.

- excerpt from "THE KERRY-EDWARDS PLAN TO REVITALIZE MANUFACTURING AND INVEST IN THE JOBS OF THE FUTURE",
JohnKerry.com, 2004

With the fraud-filled defeat of Kerry/Edwards, it seemed as if such a plan was dead. Bush had promised some sort of tax relief for jobs, but we all know that like everything else his kind has proposed, it was a scam. Indeed, since 2004, we've lost a ton of manufacturing jobs!

Yet, in spite of all this, it seems as if a portion of the Kerry plan has come back from the dead! Pennsylvania 10th district Congressman, Chris Carney has introduced a similar plan; also co-sponsored by Republican Congresman Jim Gerlach. Under the The Made in America Act, it proposes to cut corporate income tax rates from 35% to 30% for companies both big and small that hire American workers versus expansion overseas. And it covers other related expenses that is inspired to promote growth.

Among tax breaks provided, The Made in America Act reinstates the research and development tax credit that expired in December 2007, and makes it permanent to prevent other countries from enticing manufacturers overseas through their own tax incentives. This raises the amount of refundable expenses that can be claimed under the tax credit from 12 percent to 20 percent, while also eliminating the complicated calculation that previously made claiming the credit difficult, said Carney.

- excerpt from "Retaining U.S. manufacturing", Morning-Times, 2008

I think the idea is a good one. During the Cold War, corporations took advantage of our fear of those "evil commies," but pushing legislation that opened the gateways of jobs flooding to these "potential targets of Moscow." Of course this was all bullshit. The Cold War has been over for a long time and the game has changed. We should have gone back to promoting our own industrial economic good versus our allies who have long since recovered from WW2. We are now in a game of competition with the latter, and we've been losing so far!

One thing that bothers me, is that the bill doesn't seem to go far enough. If we are going to apply tax cuts, that means a loss in revenue for the government. Now I know, many of you libertarians may think that's a good thing, but really it isn't. Why not do the opposite for those who offshore our jobs? You want to open up a shoe factory in China? Go ahead, but you will be an exceedingly higher income tax that would eliminate any benefit of such a move. It seems to me, that we always offer the carrot to these corporations but never the stick!

Inflation's shadow is growing

Last week everyone, well mainly the Kudlow-living-in-a-cloud group, was jubilant that the price of crude oil had dropped from $145 to $125. I remember watching Kudlow & Company and hearing from folks like Don Luskin that the economy was recovering. They even regarded inflation on the wane, which would only go to support Larry Kudlow's "Goldilocks economy" theory. Larry may think it's all grand, but Dow Chemical may say otherwise.

Today the chemical giant announced that earnings would be down, and that future prospects are looking dim. Why make such a pronouncement, what was the source? According to the 100-year old Midland, Michigan corporation, it all stems to rising material costs, which they are claiming are the highest in their company's history. That's really saying something, my friends. And they have good reason to say so, take a gander to the charts below.

The first chart, the Producer Price Index (PPI) is essentially the inflation rate that those who make goods or services must endure. Of course, readers of this blog have known for a while that this number has been understated. The PPI represent a basket of of goods for companies, but it is an essential reading. As you can see since 2006, the indicator has been rising.

Now the second chart, is a weekly chart of the benchmark crude oil futures contract traded on the New York Mercantile Exchange. This chart is key to Dow Chemical, as petroleum is used extensively throughout their product range. A rise in petroleum is an increase in cost for Dow. Of course, oil isn't the only basic material that the company uses.

The last chart is the Bureau of Labor Statistic's crude goods products. Crude goods are the basic of basic materials, iron ore, oil, grains, essentially stuff that hasn't been unprocessed. What's striking here, on this chart going back to the 1070s, shows a better picture on inflation than even PPI! Looking at the chart, we see that crude products costs have increased over 300%!

Dow Chemical has always been a key company I always looked at. There is a set of companies, that if you follow them, could give you a heads up on what's really happening to the economy (note, this does not mean you invest in them!). Now they are eating these costs, and depending on the market for their goods, may pass on such costs eventually to their customers. A rise in price from them would cascade across everything from cookware to food to electronics to medicine. In a way, Dow Chemical is a canary in the inflation coalmine!

Meta: 

Comments

Dow Chemical

Is frankly moving offshore in so many words. While they will tout poor quarters to justify their slash and burn in the United States, they will turn around and pour millions into investments, infrastructure, support and our favorite, jobs overseas.

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This is why we need to do the opposite of the Act

mentioned in this article. Punitive taxes, that's the key, and why not make 'em retroactive? Robert, I'd love to hear from you on this.

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retroactive

I don't think would get past two cosponsors. That would really mess up their balance sheet. Plus, these days, frankly a US corporation can easily move it's headquarters elsewhere, say the Cayman Islands or Dubai and many have.

They are simply little sociopathic entities scouring the globe for profits. I mean seriously, they have no national loyalty. How to get national loyalty out of one is a very good question!

It seems that nation-states out jockey each other on who can bribe MNCs (multinational corporations) more with incentives, tax breaks and so on to move or not offshore outsource jobs or create jobs. Then, in other cases to make the sale, nations demand company x put x billion in offsets, i.e. jobs, investments, 3rd party contract to make the sale.

So, looking at this globally, you cannot just run businesses out of town and into the ground in so many words, at the same time, the United States should at least play the game to the level of the EU, China and Japan. As far as I know the United States has zero policy, plan for economic development in the national interest, i.e. for the good of the nation.

I mean other nations have all sorts of policies to keep jobs in their countries, to invest in their countries.

I really like the idea of a VAT/BAT because other nations already have this so it's legal under the WTO. Now abolish the WTO or no, this at least should be done, at least we should be on par with other nations in policy!

Why I like the Horizon project is how they analyze the motivations, financial incentives of multinational corporations and tweak policy accordingly.

If there is no financial incentive, well that corporation will not do it.

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There is an easy way to stop that movement overseas

200% taxes on wire transfers.

Personally, I think we should have done it long ago

There should be *NO* reason why our money should be fleeing this country for foreign parts- not because of corporations moving headquarters overseas, not because of illegal immigrants sending money home, nothing.

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-------------------------------------
Maximum jobs, not maximum profits.

but seebert

How will Mom send me the bail money to get out of the Peruvian jail on vacation?

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How about this?

Allow me to propose a radical solution. Many won't go for what I'm about to propose. It isn't the full answer, simply a hammer in an economic toolbox. Ok, well here goes, please hold the rotten tomatoes until I've said it. Why not form a department or some sort of government body that targets offshore parasites who've really abused the system, and simply put out an economic bounty in the sense of funding a rival. Say for example, a company that has for years gotten tax assistance and other such financial goodies from taxpayers suddenly decides to take it all offshore. Plant, office, the whole works is now beyond US borders. Ok, fine, they can have that, but we need a domestic answer to this now-foreign competitor. We should then offer an enterprise startup subsidy to have a US-based version of a company that left. Help it with grants, what have you in its early years, even a lucrative government contract. In return, all funds come with the stipulation that the work is to be done here in the US. At anytime the given business concern decides to move production overseas, it will be forced to return the money at a very high interest rate. Also, all government contracts will be made null and void, and if they are moving within their corporate calendar in which they are doing a project for the government, then any monies recieved shall be reimbursed back to the tax payer.

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Sic 'em, Sic 'em!

That's kind of fun but one thing I want to see is some sort of government based VC (venture capital) that doesn't have miles of bureaucracy which they are notorious to do, invests in new ventures in the US. this of course would be a pig fest, but ya know if they model it off of many of the private VCs, well, something good should come out of a few of the ventures. Or there is the DARPA like models. The US has been very successful with organizations like DARPA, NASA and so on and we need some sort of more funding system like this. Now maybe you're chasing good money after bad in some of these corporations and you might be able to innovate them to oblivion, which would be a nice payback!

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Horizon Project Tax Recommendations

I don't think Kerry's plan went far enough either.

I wrote earlier about the Horizon Project policy recommendations.

Going through their corporate tax code policy recommendations:

  1. Tax rate reduction for high value added
    jobs
  2. Eliminate tax deferrals on foreign
    profits
  3. Reform the foreign subsidiary tax
    allocation rules

On 1, This is basically a VAT and a BAT tax, which I believe is farther than Kerry. Then on bullet 2, that is huge! Corporations do not pay taxes on foreign profits unless they bring that money back into the United States. On 3., see below. I think this needs more details and understanding. There appears to be abuses going on where corporations hide taxable income through R&D credits and other avenues.

They also recommend extensive R&D tax credits.

  1. Increase and transform the R&D tax
    credit by allowing companies to take a
    40% (rather than a 20%) tax credit on
    incremental increases in R&D as well as
    workforce training expenses
  2. Create a flat, non-incremental 40%
    tax credit for company expenditures for
    collaborative research at universities and
    research consortia
  3. Boost the alternative minimum tax
    credit to 10% of qualified research expenses
    in excess of 60% of a taxpayer’s qualified
    research expenses

I would add to that making sure those R&D credits are going to American workers and not being funneled somehow out of the United States. That's a real issue going on here, when dealing with advanced research, intellectual property, frankly it's in the head of the worker and thus can be easily transferred out of the United States through global migration methods.

Link(pdf) to the full Horizon Project policy recommendations.

These guys think things through and really analyze what is going on globally through statistical carrot and stick economic incentives.

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Some damn good points made today in comments!

Sorry for the delay, kinda hectic here on the home front. I am really going to have to investigate this Horizon Project group. From what you've mentioned, has really piqued my interest. Regarding current policy, I suspect that despite what McCain may proclaim for our workforce, what one would see is basically a 2.0 of the current agenda. Now the Democrats, should Obama win, may do something. I say may, because as many on EP have basically said, the problem is so big it really is going to take much longer than a single presidential term. No, what is needed is a much more concentrated effort on Congress along with the Executive Branch to basically re-write from scratch our banking, labor and trade rules. The system now is simply too far gone. The United States will be the global economy's "sick man" for a long time to come.

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power and influence

I believe the group this think tank has influence on are the Populist Dems, whatever that means. So, Byron Dorgan, Jim Webb, Peter DeFazio, McCaskill, Sherrod Brown and so on and I believe you could potentially include Populist Republicans (yes they exist!) (Chuck Grassley, I'd claim is in this category). But, overall the Populists or call them the true Progressives (toss in Bernie Sanders), are not in power. As you are probably aware the Hamilton Project aka Rubinomics, and Rubin clone, Jason Furman is the head of Obama's economic policy advisers.

So, in a nutshell and hopefully that's what makes this site cool, we have to push for policy that is the good stuff and really ignore the man in terms of personality. I mean McCain is a joke frankly on economics and seems hell bent on representing corporations at all costs but well, let's just say Obama hasn't been really touting policy like the above.

I'm not sure yet but in terms of elections, it seems highly probable that candidate Jeff Merkeley (Sen., D-OR) might be a Populist Dem.

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