What will it take to lure back manufacturing?

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Milwaukee Journal Sentinel, Milwaukee, WI

By John Torinus

The long-term prospects for manufacturing in Wisconsin are very much in doubt and debate. The last year has seen an erosion of more than 120,000 jobs across the state, including more than 50,000 in manufacturing.

Since 2000, the manufacturing freefall has been nearly as drastic, down 140,000 jobs from a high point of 590,000. That collapse has a lot to do with why average wages in Wisconsin have dropped to 86% of the national average.

Political and business leaders have watched this trend with something approaching shock. It has more than offset impressive growth in other parts of the economy, such as biotechnology and academic research and development.

State and local leaders have put together heroic packages to try to save specific manufacturing operations in Kenosha, Janesville and other parts of the state. But we get outgunned by states with much larger budgets for economic development.

The incentive packages run more than $50,000 for each job retained, and it's a tough assessment as to whether subsidies at that level make economic sense. There are analysts on both sides of that debate. Some say let the economy gravitate toward a service economy; some say an economy without manufacturing is untenable.

Not-so-hot payback

One way to look at that equation is to look at the tax revenue flowing back to the state and localities from each manufacturing job. Sales, income and property taxes from each employee run about 10% combined, so a $35,000 job would yield $3,500 a year. That would mean a not-so-hot 14-year or so payback.

There is also the retention of the income, sales and property taxes paid by the business - not big numbers compared to revenue from individual taxation. And there is the tough-to-calculate multiplier effect, as the employee spends the $35,000 for goods and services.

Looked at from a national perspective, there is little gain when one state lures a plant from another. It's a zero sum game. That has been a union perspective on subsidies to manufacturing for a long time.

Still, it's better to be first in manufacturing than last. And that's where Wisconsin is, first at 15.6% of the working population. In the throes of the Great Recession, we have passed Indiana for manufacturing intensity.

Our long history of manufacturing has served the state well, and it's not that easy to flip an economic development switch and go in another strategic direction. For example, the biotechnology industry in Wisconsin is an emerging winner, a cluster into which the state has poured hundreds of millions of dollars. But it still counts for less than a tenth of the manufacturing employment.

Picking winners to stimulate with taxpayer dollars isn't easy. Some efforts have been made to propel battery technology in Wisconsin, but Michigan, with more political clout, is emerging as the winner. Our neighbor won $1.4 billion out of $2.4 billion in federal stimulus awards last week. Johnson Controls won a $299 million grant for battery development.

Chinese competition

Manufacturing employment has taken major blows from the nation's economic meltdown, but also from Chinese competition. There are flickering signs of slow recovery here in recent weeks. Strattec Security Corp. says it will be hiring back some workers, and other manufacturers report similar upticks of 10% to 20% from the bottom two months ago. Because of restructuring, not all of the lost jobs will return.

It is not a given that China will surpass the United States in manufacturing. Our actions and reactions will have something to do with manufacturing viability. China produces 12% of the world's goods, and the U.S. 20%. That hard-working nation is closing the gap, but there are plenty of ways to compete.

Lean manufacturing is one powerful tool. Charter Steel has less labor in a ton of steel than the transportation costs of a ton from China. Cheap labor is thus neutralized.

At the state level, if Wisconsin were to decide that manufacturing is all important to its economic strategy, then the state might be better off to forget huge subsides for individual companies and send a stronger general signal. For instance, it could eliminate the 7.9% income tax on manufacturers.

That would produce howls from anti-business crowd in the Capitol, but the state corporate income tax is not a huge revenue producer. The federal corporate tax of up to 35% is the big hit.

Manufacturers in and out of the state would take notice of such a positive signal from Wisconsin. It would greatly affect their location decisions.

At a minimum, politicians who value manufacturing contributions to the nation's prosperity should not pile on more burdens. They need to be careful about crafting health care and carbon-emissions reforms that could become nails in a coffin.

John Torinus is chairman of Serigraph Inc. of West Bend and a founder of BizStarts Milwaukee, a nonprofit organization dedicated to fostering entrepreneurship in southeastern Wisconsin. 

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