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",
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!