How Public Policy Crippled Manufacturing

Manufacturing executive Andrew Smith explains why health care and worker’s compensation are responsible for the industry’s decline.

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In its glory days, the manufacturing sector made up about one-third of the American economy. Today, just 10 percent of American workers work in manufacturing. In "Sand in the Gears: How Public Policy Has Crippled American Manufacturing," Andrew Smith, a manufacturing executive, argues that health care and worker’s compensation are responsible for the industry’s decline. Smith recently spoke with U.S. News about the manufacturing sector, how public policy has failed, and what he says should be done to keep America competitive. Excerpts:

Who is to blame for the downfall of American manufacturing?

So the conventional wisdom about what happened to U.S. manufacturing is that companies in the U.S. went offshore to chase cheaper labor, lower operating costs and forces of globalization, which are emerging markets and supply chains developing in other parts of the world. These three factors contributed to the job loss, and that’s certainly true, but they don’t explain the entire story. The rest of the story is that we did this to ourselves. "Sand in the Gears" examines the tax system, the health care system, the legal system, the worker’s compensation programs, government regulations, and labor policy that together have created a hostile environment for manufacturers.

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How do health care policies affect manufacturers?

Eighty percent of manufacturers offer health insurance to their employees, versus 50 percent for the rest of the economy. And 80 percent of those employees will take it up from their manufacturer employers, versus about 60 percent for the service sector. [American health care is] almost three times more costly than the OECD [Organisation for Economic Co-operation and Development] average. That creates a tremendous headwind for the cost structures of manufacturers. And under Obamacare it’s going to be worse. Spending is going to be worse; it’s going to get more expensive, not less costly, I predict.

What does this mean for U.S. competitiveness globally?

We’ve got the most expensive health care system in the world. We’ve allowed unions to exert destructive power over the workplace. We have excessive regulations at all levels of government, which are both costly and inefficient. Our tax system is dysfunctional and complex, and our disabilities systems are featherbedded, and they really have been used for purposes that do not relate to taking care of people who are truly disabled. Now the rest of the world is looking at the United States as not that fierce a competitor. They’ve been very successful in taking market share from us, and it’s because we allow these policies to develop.

[See a collection of political cartoons on health care.]

Why is manufacturing important to the American economy?

National security is a key factor. Manufacturing has also been a driver of innovation and research and development, historically. Manufacturing has a very large multiplier effect. It has more linkages to other parts of the economy than any other sector that we can identify. Wherever you have strong manufacturers, you have prosperity. For many people, you can have a very good living without a college education by working in manufacturing.

What is the "new social compact"?

The new social compact is my [proposed] package of reforms. When I look across these policy areas, what joins them together is the fact that it’s all about taking care of people who are injured or sick. [The compact’s] central feature is to promote individually-owned, all-risk insurance products for every citizen that would cover all injuries, all illnesses, even death from whatever cause, wherever it occurs. This insurance would be funded by the government by means of a fixed subsidy or fixed credit, which allows market forces to work. And as a result you wouldn’t need numerous existing programs.

[See a collection of political cartoons on the economy.]

How would the social compact be funded?

I propose eliminating the current income tax system and replacing it in its entirety with the value-added tax. Economists have studied this, and they estimate that we would have approximately $1 trillion a year more in economic output if we used a consumption tax like the VAT instead of the income tax system, which is what we have.