Manufacturing job creation IS a state issue

Cross-posted at Fox and Hounds

A few days ago, Governor Jerry Brown made the surprising statement that our state’s massive loss of manufacturing jobs is not a unique California problem because we have “lost manufacturing at about the same rate as the rest of America.”

While it is true that both the US and California have suffered manufacturing job losses, California’s industrial job loss rate was nearly ten percent higher than the U.S. loss rate.  In real numbers, we’ve lost a staggering 626,000 manufacturing jobs in the past decade.  If California had tracked with the national manufacturing job loss percentage, we would have 55,000 more Californians receiving paychecks than we do today.

More significantly, economists are proclaiming manufacturing growth is leading the national recovery. Bloomberg notes, ”Manufacturing accounts for about 12 percent of the economy and was at the forefront of the recovery that began in June 2009.” Contrary to this national trend, California manufacturing is moving in reverse. During 2011, the U.S. created 227,000 new manufacturing jobs, while California lost an additional 4,000 manufacturing jobs.  These are the middle class jobs that our elected leaders say they covet, but do very little to encourage and protect.

State policy has a tremendous impact on manufacturing job growth. States with a positive business climate (competitive operating costs, a trained workforce and a predictable regulatory climate) outpace states with negative business indicators.  California’s 34 percent manufacturing job loss compares with Texas at 21 percent, Indiana at 29 percent and Louisiana at 19 percent.

Business climate issues also have a direct impact on new investment. From 1977 to 2000, California received 5.6 percent of the nation’s new and expanded industrial facilities.  Since 2001, California’s share of those facilities has plummeted to 1.9 percent.  Industrial investors plan on a 10 to 15 year time horizon when making large investments in land, buildings and equipment.  States with long-term budget deficits, excessive infrastructure needs and aggressive regulatory agendas seldom make the short list of corporate planners.

It’s true that California continues to be the innovation state – we receive a large share of investment capital. But in the past decade, we have lost our ability to both innovate and manufacture new products here.   From 2005 to 2009, California received 48 percent of U.S. venture capital investment, but only 1.3 percent of U.S. industrial investment.

The current model is to innovate in California, manufacture in a more cost-competitive state or country, and market back to California consumers.  Under this scenario, California gets the jobs advantage of small, start-up research and development firms, but loses the enormous jobs benefit when those new products move to the production stage.

California’s modern government grew up of an era of rapid industrial expansion.  During the 1950s, 60s and 70s, California led the nation in industrial growth, becoming the top manufacturing state in 1977.  With that growth came a flood of new tax revenues allowing California to invest in infrastructure, education and new social programs.  California became dependent on the largess of a robust industrial economy.

During the ensuing 40 years, California found pride in implementing “first in the nation” environmental regulations.  Clean air, land and water are laudable goals, but the associated regulatory costs have had an impact.  Four decades of accelerating environmental activism have taken a toll on our ability to attract new investment and jobs.

We’re told by financial analysts that American corporations have $3 to $5 trillion available for investment when the current recession ends and that more and more U.S. manufacturers are re-shoring their overseas operations.  The question is: will California attract a fair share of manufacturing investment, or will investors look for states with a more favorable business climate? Our efforts should be to prove that California is serious about rebuilding a manufacturing economy by acknowledging where we must make improvements, not resting on an assumption that this is simply a national problem.

AB 32 was not intended to be a revenue raiser

This weekend, Gov. Jerry Brown proclaimed that revenue from the cap-and-trade system under AB 32 will go toward the construction of California's High Speed Rail project.

AB 32 was not intended to be a revenue raiser for the state of California. We dug up then-Assembly Speaker Fabian Nunez' 2006 letter of legislative intent before the bill was passed, which made it unequivocally clear that revenues raised under the regulations were not to go beyond the administration of the AB 32 program. Have a look:

Click image for full pdf

While more than 500 facilities struggle to pay for a costly cap-and-trade system in just the first year of the program, the State of California is already finding other ways to spend the money they weren't supposed to collect in the first place.

California Budget Surprise

In Governor Jerry Brown's proposed 2012-13 State Budget, there is a line item that anticipates $1 billion from the still-developing cap-and-trade carbon emission program in California. Though that money is not identified with any particular programs yet, the Governor intends for it to be spent on environmental programs that are outside the scope of the cap and trade program.

It's appropriate to provide a timeline here. The most manufacturing intense -- but most energy efficient -- state in the Union passed the farthest reaching carbon reduction mandate in 2006 with the intention that the rest of the country and world would follow. Since then, no state has joined and California is going it alone. The state developed its cap-and-trade system to force California manufacturers and others to reduce their emissions and/or pay millions in carbon auction costs (taxes) and emission credits. This while competitors in other states already enjoy 50 percent lower electricity costs. Before the cap-and-trade system is even started, the State is chomping at the bit to spend precious resources extracted from struggling California companies in the first year of the program for purposes unrelated to companies efforts to reduce emissions at their facilities.

Misuse of the funds raised in the program will hurt AB 32 and the cap and trade program. It will drive critical new investment, jobs and innovation away from our great state.

The employer group that has been working so diligently to help implement AB 32 in a cost effective and technologically feasible manner put out this statement on Thursday. It sums it up much more eloquently than I did:

Dorothy Rothrock representing the AB 32 Implementation Group, a coalition of employers and taxpayer groups advocating for policies to achieve greenhouse gas emission reductions in a manner that will protect jobs and the economy issued the following statement regarding authority to expend $1 billion of AB 32’s cap-and-trade revenue:

“We are greatly concerned that the Governor’s budget would allow use of $1 billion raised in the AB 32 cap and trade program in a manner that is beyond the scope of authority under AB 32 and the California constitution.  The purpose of cap and trade is to reduce greenhouse gas emissions from regulated sources – including manufacturers, electric generators, universities, and public agencies. AB 32 and cap and trade is not intended to be a revenue source for the state of California.

At a time when the public is concerned about jobs and the economy, the budget proposes a new tax on California businesses for climate change activities. The anticipated $1 billion is not windfall revenue.  The funds will be paid by California employers suffering the worst recession since the Great Depression.  To avoid litigation and protect jobs, the revenues should be maintained within the cap-and-trade program and must be used in a manner that meets the requirements of a legal fee.”

California's environmental litigation is a job killer

For those who doubt that litigation risk in California is a job killer, I recommend that you read a November 14 piece in the Los Angeles Times, “Firms turning to environmental law to combat rivals.”

This blog will serve as my public letter to the editor.  The one I sent was not placed.

Here's a portion of the article:

Environmental advocates say the focus on why groups use CEQA is misplaced. "You shouldn't really be looking at motivations of petitioners," said Doug Carstens, an environmental lawyer in Santa Monica who often files CEQA complaints. "Even if it's a solely economically motivated actor, if they're promoting transparency, good government, why not?"

It’s shameful that a California lawyer endorses the idea that lawsuits to enforce environmental laws can be “solely economically motivated.”  The impact of this goes way beyond the sheer number of lawsuits and the size of awards and settlements - Companies spend uncounted millions to protect themselves against such litigation, with no environmental benefit. These are dollars that could be spent on expansions, modernization, and innovation to create new jobs.

The evidence is in – we are losing investment and employment to other states that are not hindering employers with costly litigation. Data from Site Selection Magazine shows that California is among the worst in the country in new manufacturing facilities and expansions, averaging only two percent of the country's new growth in the last decade.  

Further, a recent study, commissioned by City Journal, used the National Establishment Time Series database to reveal the scope of California's problems -- "snuffed-out start-ups, unproductive big cities, poorer jobs, and tinier, weaker, or fleeing companies."  One key statistic from the study: California had a net loss of 260,000 jobs from start-ups and closures in the last decade.  In the 90's, we had a net gain of 776,000.

Three decades of CA manufacturing investment

A look back at three decades of new and expanded manufacturing facilities in California leaves us scratching our head.  What's the state's next big game changer?  Our investment highs this decade equal our lows of the 80's and 90's.

The aerospace and information technology ramp-ups in the 80's and 90's were mostly based on innovation, a competitive state business climate, viable markets and a sufficient statewide talent pool, as well as some nice weather.  Those manufacturing upsurges created economic spillover effects in other manufacturing sectors and service industries, as well as massive footprints in the economy.  Many of those manufacturers still exist and helped sustain our economy through bad times.

This is specifically what we need now.  What will the game changer be? Who will be making the investments in California? (You'll see in CMTA's "Why not California" blogs that the climate is not conducive to growth). In previous decades, winners and losers weren't chosen by California government. Sectors and companies were built through hard work in a state where they could compete and supply products to realistic mass markets.

This chart is a look backward, but our future is much more critical.  Where will the new facilities and investment come from?  The state is uncompetitive with an increasing amount of California-only policies, and our skilled worker pool is shrinking fast.

The state should play a role in our growth, but that role must encourage all new investment opportunities, not hurt other investments for the gain of a few.  That's not how we grew in the 80's and 90's.