Protecting US Manufacturing Exports = Protecting US Manufacturing Jobs

Manufacturing exports make up $1.45 trillion or 7.8% of US GDP.  Today more than 20% of all US manufacturing jobs depend on exports.  The United States is currently renegotiating trade agreements with a number of its trading partners, potentially threatening billions of dollars of US exports and millions of jobs across the country.  The top 10 states with the most jobs are California, Texas, Ohio, Michigan, Pennsylvania, Illinois, Indiana, Wisconsin, New York, and North Carolina.  Protecting US exports protects US manufacturing jobs.

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3 Reasons 2015 Will Be A Big Year For Global Trade

2015 is shaping up to be a big year for the global economy. The U.S.-led free trade agreements have new life. The U.S. and China reached a monumental agreement on information and communications technology tariffs. And India and the U.S. came to consensus on food stockpiles that helps bring the World Trade Organization’s Trade Facilitation Agreement (TFA) one step closer to reality. The U.S. cannot squander this opportunity.

Photo courtesy of Reuters.
  1. On the U.S. FTAs: The Trans-Pacific Partnership (TTIP) and Trans-Atlantic Trade and Investment Partnership (TTIP) have returned to the conversation among policymakers as something the President and Congress can accomplish during the lame-duck session. The success of these agreements hinges on the President and Congress re-enacting the Trade Promotion Authority to allow negotiated trade deals to be voted on in Congress without having them picked apart. And, as we noted in our previous report, there are substantial benefits to TPP countries due to intellectual property-intensive industries that are vital to prosperity, innovation, and competitiveness of all countries in the TPP. 
  2. On U.S./China ITA: The U.S. and China finally agreed to adopt an updated Information Technology Agreement (ITA) that eliminates tariffs on trade for hundreds of information and communications technology (ITC) products. These tariff eliminations, which stood at a range from 8 percent for medical devices to 30 percent for video game consoles, are massively important for the U.S. economy and consumers. The ITA expansion is estimated to increase U.S. exports by $2.8 billion, advance revenues of U.S. companies by $10 billion, and create 60,000 new jobs. Overall, the agreement stands to increase global GDP $190 billion annually. 
  3. On the WTO’s TFA: The U.S. and India reached an agreement over food stockpiles that pulls the Group of 20 major economies closer to consensus on the Bali Agreement. The agreement would be the biggest trade deal in the WTO since its inception. The TFA will remove delays at border crossing and ports by bringing uniform standards at customs and ports. The WTO estimates TFA will stimulate the global economy by $1 trillion. 

The opening of global markets beyond the incremental steps taken over the past few years is a great thing for a sputtering global economy. Businesses benefit by having access to many more customers. Consumers gain access to goods and products are lower prices and a greater variety. Washington has a grand opportunity to lead on global trade. It better not spoil it.

New Report: The Essential Role of the USPS in American Daily Life

Everyone loves getting mail. Birthday cards from your grandparents, packages from favorite online retailers, life updates from dear friends, and birthday gifts from your family. Email, mobile phones, and social media have altered the way we communicate, but they are still no substitute for a handwritten thank you note sent through the mail. Despite the opinions of a few people in Congress and the White House, the Postal Service is still an extremely valuable service and an integral part of American daily life. 

Our latest report evaluates the valuable role of the United States Postal Service (USPS) to the U.S. economy, consumers, and the mail services industry. The USPS, established by the U.S. Constitution, has served the American public and its businesses for more than 200 years. The USPS is the foundation of the U.S. mailing industry and many other industries that rely on the existing USPS infrastructure to deliver their products to final destinations. 

In the last decade, the mailing services industry has entered a new era. The applications of the Internet through e-commerce businesses produce both positive and negative impacts on the mail services industry. While networked solutions have reduced the need to mail bill payments, checks, and tax payments, online shopping and auctions create an exponential demand for cheap and fast delivery. In fact, e-commerce businesses are working with the USPS, UPS, and FedEx to deliver mail and packages at lower costs and even on Sundays.

The USPS is the foundation of the U.S. mail services industry and many other industries that rely on the infrastructure to deliver their products to final destinations. In fact, the U.S. mail services industry has become highly interdependent. Both FedEx and UPS rely heavily on the USPS infrastructure for final delivery of small packages in urban and rural areas. The USPS infrastructure has been created, maintained, and expanded over the past decades to a level that no other business entity can provide. The USPS raised the cost of mailing and is proposing to cut back services. While the industry and consumers need solutions for cheaper and faster deliveries, raising prices and cutting services are counter-productive and are against the market demand. 

The USPS relies on its economies of scale and scope to create different mail segments. The current proposal of eliminating Saturday delivery would be counter-productive and ineffective. Since these mail segments share the infrastructure such as vehicles and postal carriers, the cost savings would be insignificant. The volume of mail and packages would still need to be delivered on the following days. As a result, the associated costs would still be spent and the USPS may need to hire and train additional part-time workers to handle the bottlenecks and delays in the following days. The adverse effects would be more significant when the USPS fails to satisfy their customers’ expectations and the demand for services.

Sorry, China Is Not The World’s Largest Economy

Mainstream media has the American public aghast at a recent report from the World Bank claiming China is poised to take over the United States as the world’s largest economy. Of course, this is not exactly true. Measuring economic performance goes beyond simple measures of GDP, PPP, and per capita income—something that is obviously missing from the World Bank report. China still has a ways to go to give the United States serious contention as the world’s greatest economic power.

There are considerable issues with trying to use Purchasing Power Parity (PPP) to compare the sizes of world economies. The concept of PPP is useful for domestic policymakers to evaluate the relative prices of non-tradable goods and services within their country. But, it’s not exactly a true barometer of economic prosperity. For example, as the Wall Street Journal points out, China cannot buy missiles, ships, iPhones, German cars, or any other imported goods, at PPP exchange rates. When standard GDP exchange rates are used rather than PPP, China’s economy is only half of the size of the U.S. economy. When population is taken into account and factoring PPP measures of GDP, China’s economy is only ranked 99th in the world. Most of the Chinese population is still relatively poor.

Beyond these technical problems, the future of the Chinese economy is less bright when China’s major long-term economic weaknesses are taken into account. There are many essential factors China lacks that will prevent the country from experiencing the sustained, broadly-based economic growth that developed countries such as the U.S. experience. It is well-established among economists that institutions are the fundamental determinants of long-term economic growth.

The United States and other advanced economies have well-developed, transparent, and accountable political institutions that have implemented laws and policies which favor trade, innovation, and competitiveness. For that reason, developed economies are the most connected to the global economy. While Chinese policy leaders have attempted to foster innovation to spur domestic sources of economic growth, they lack these institutions, which allow Chinese citizens to become entrepreneurs. It is this top-down approach that will ultimately limit the innovativeness of the Chinese economy, and why the U.S. economy continues to be driven by bottom-up sources of innovation

MyRA Is Laudable, But Won't Produce Grand Returns

One of the more interesting policy proposals from President Obama’s sixth State of the Union address was the announcement of an executive order directing the Treasury Department to create MyRA—a government backed savings account. The details of MyRA are pretty straight forward: the plan offers American workers a savings account with low interest rates for whose employers do not offer traditional retirement savings plans.

Here’s the skinny via Nick Summers at Bloomberg Businessweek: "The accounts are intended for workers whose employers don’t offer 401(k) accounts, and they can be started with as little as $25; contributions after that can be as low as $5, withdrawn automatically from their paychecks; and earnings on the investments—U.S. government bonds—would be tax-free, like a Roth IRA."

And Lydia DePillis in the Washington Post notes, "The MyRA option would create an cheaper way for smaller employers to enroll their workers in some sort of plan, by taking an automatic payroll deduction that goes into a Roth IRA-style, government-backed account with the employee's name on it."

The plan has its advantages in encouraging meaningful long-term savings for retirement. The proposal is indeed ambitious and well-intentioned, but unlikely to significantly boost overall retirement savings of American workers. As a financial product targeted at lower- to moderate-income individuals, the incentives—other than retirement savings and protection of the principal balance—are weak. Since MyRA is a Roth plan, the contributions are not tax-deductible, which eliminates some incentives for savings.

Last year, we released a report detailing the contributions of the financial services industry to the U.S. retirement savings system. Overall, the current U.S. retirement savings system has proven to be successful, with participation and retirement assets both rising steadily over time. While the overall savings rate has dropped, more than two-thirds of American households have accumulated $19.2 trillion in retirement assets. Presently, the U.S. currently lags many OECD countries in terms of level of savings in private retirement savings plans (adjusted by country GDP):

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President Obama’s plan may achieve success by helping ordinary Americans start a meaningful savings account, but it’s not going to produce a sea change of in the way that Americans plan for retirement. It may work in the short-run to prop up participation in general retirement savings, but over the long-term there must be meaningful policy changes to induce increases in general retirement savings rates. The U.S. retirement savings system has proven to work. Policymakers, plan sponsors, and service providers should work together to implement additional measures to strengthen this system beyond the small steps of myRA. These successes should be built upon with policies that further incentivize retirement savings for all economic and demographic groups. Ensuring America's small businesses are able to offer plans that are cost-effective is of great importance.

More Research About Cities and Economic Growth

The influential economist Alfred Marshall described urban economies and entrepreneurship as working in unison through parallel movements between localization and growth of the capitalist “undertakers”, or entrepreneurs.  Community is a form of currency in the global marketplace and cities matter more than ever. The most recent report from the Kauffman Foundation—authored by Yasuyuki Motoyama, Ph.D. and Jordan Bell-Masterson—measures the rate of business creation in 356 metropolitan areas across the United States. Using three sets of data for metro areas including the startup rate for all industries, high-tech sectors, and high-growth firms, the report assesses the regional factors are associated or unassociated with entrepreneurship. Specifically, the authors seek to understand what drives entrepreneurship at the regional level in high-growth sectors. 

The authors find that population size and the rate of population growth within a metro area are the two most important factors in determining start-up rates. Simply put, cities have a more diverse set of sectors and bringing in a greater number of businesses and startup opportunities. Of course, this is firmly supported in the literature on urban economies through studies on agglomeration in cities (i.e., firms benefit when locating near one another). For example, an important study comparing New York City and Pittsburgh, Benjamin Chinitz (1961) found the measure of inputs, such as independent suppliers and capital, have linked to a stronger “suppler schedule of entrepreneurship.” In short, New York City was a better place for starting and operating a business due to its size, diversity, and network of suppliers.

The most interesting finding from the report, and contrary to multiple previous studies, the authors find few significant factors for the public sector to influence entrepreneurship. The presence of government- and university-funded research and patents has no correlation to startup rates, even within high-tech sectors. The one public sector factor that is associated with higher startup rates is education, namely high school and college completion. However, the authors note that their previous findings have shown 52.6 percent of entrepreneurs having less higher education than a college degree, and thus an exclusive focus on college education and completion suggests a linear relationship between education and entrepreneurship is not likely to be true.

The authors conclude by noting the presence of high-tech sectors leads to higher rates of high-tech startups, but not for all kinds of new firm. While the authors’ research shows that higher start-up rates for high-tech sectors does not necessarily induce greater overall rates of entrepreneurship, their conclusion comes with the recommendation that policymakers shouldn’t promote high-tech companies. This is an odd recommendation, especially when comparing the results of this research to the Milken Institute's annual Best Performing Cities report. The most recent iteration finds that cities known for their technology hubs take more than half of the top-25 best performing cities. In addition, technology growth propelled a number of other metros to improve their rankings compared to the previous year. Talk to the mayor of a major U.S. city and ask what they want: it’s high-growth companies and job creation.

Larger cities are able to support a more diverse set of start-ups across all sectors. However, drawing upon the authors’ conclusions about high-tech start-ups, further study should examine what factors lead to greater start-ups in different sectors and industries. These findings go against research that shows government- and university-funded research and patents are correlated with greater innovation more generally in industries such as pharmaceuticals.

Start-up companies and small businesses look to cities to start their businesses because access to the market is more immediate and demand is greater. Cities are best suited in attracting the diverse skills, abilities, materials, and processes that are required for the birth and growth of entrepreneurial small firms. Growth, new business formation, and free enterprise will do more for a city’s economy than any economic development policy can induce on its own.