After General Electric announced this year that it would close its aviation facility in Albuquerque and terminate 400 long-time employees, the union representing them, along with New Mexico’s governor, the state’s congressional delegation, and the city of Albuquerque, proposed a solution. Why not consider alternative uses for the facility, such as the development of clean energy machinery like wind turbines? After all, a priority of the American Recovery and Reinvestment Act (ARRA) is investment in domestic renewable energy production, and millions in stimulus dollars are available.
GE demurred. “This is a challenging time for these businesses,” GE Aviation President and CEO David Joyce wrote to the Congressional delegation, citing the “difficult economic climate and lack of policy initiatives such as a national RES (renewable energy standard).” In other words, we need more specific energy policies. He might have added that GE is already in the game: Among other things, it is involved in a program that would use wind turbines manufactured in China.
The Recovery Act passed by Congress and signed by President Obama in February 2009 was intended to jump-start demand in the U.S. economy and create American jobs. An innovative feature of the act was its attention to investment in renewable energy projects, such as a joint venture in Texas to develop a giant wind farm. The fact that the turbines from the project will be supplied by A-Power Energy Generation Systems of China, and that A-Power has partnered with GE Drivetrain Technologies to produce wind turbine gearboxes in Shenyang, does not, apparently, violate domestic sourcing requirements provided for in various sections of the act. The Treasury Department, explained, “There are no restrictions on the use of the funds.”
The Texas joint venture is only one of many projects directed toward clean energy that could potentially use U.S. taxpayer money to create manufacturing jobs overseas. Recently, the Investigative Reporting Workshop (IRW) at American University reviewed 11 wind farm projects funded with stimulus money and found that they are dominated by foreign manufacturers, most of whose production capacity is outside the U.S.
That stimulus money could support manufacturing jobs in other countries, at a time when manufacturing job losses in the U.S. are accelerating and the unemployment rate has surged to 10.2 percent, is not surprising. The stimulus grants in question are not directly tied to U.S. manufacturing employment. As reported by IRW, Dan Tangherlini, an assistant secretary for management at the Treasury Department, explained, “There are no restrictions on the use of the funds.”
The absence of a strong domestic sourcing requirement for all clean energy programs in the stimulus is indicative of how government procurement in general and stimulus money in particular fails to fully utilize taxpayer funds to create manufacturing jobs in the U.S. For example, the provisions in the ARRA adopting Buy American requirements have been significantly diluted. The Recovery Act does contain domestic sourcing requirements (with some exceptions): “None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States. While these domestic sourcing provisions are clear in the statute, their implementation was greatly weakened by the Office of Management and Budget (OMB). It issued interim regulations that narrow the definition of “manufactured goods used in the project” to those related to “construction materials incorporated into the ‘building or work.” The result is that one of the largest opportunities to support U.S. manufacturing workers – the domestic production of equipment, including tools, used in conjunction with the Recovery Act – has been lost.
The practical result of the OMB interim regulation is that, although the cement being used in construction under the Recovery Act may have to be domestically produced, the cement mixer and trowel do not. This narrow interpretation eliminates incentives for the domestic manufacture of goods and equipment used under the act. If you are a manufacturer who has outsourced your production overseas, why produce at home when you can maintain your offshore production and still obtain stimulus funding? With the lack of incentives for domestic sourcing go the much-needed opportunities to create manufacturing jobs.
Even the Buy American program that serves as a model for a portion of the Recovery Act contains so many loopholes that it fails to fully realize its potential to support manufacturing jobs. The purpose of the Buy American Act, passed in 1933 during the Great Depression, is to create demand for domestically produced goods and, in doing so, utilize government procurement to foster employment. It has been maligned by those on the right who argue that Buy American provisions limit government from procuring the cheapest goods available. But with millions of manufacturing workers unemployed, the real question is not whether Buy American costs the government too much money, as they argue; It is whether Buy American is effectively being implemented to support U.S. jobs.
To begin, the general domestic content requirements of the Buy American Act are satisfied if just 51% of content is attributed to the U.S. Many U.S. taxpayers would probably be startled to learn that a product that has only 51% U.S. content is considered to be made domestically. This begs the question, how is U.S. content defined and how is it calculated? Surprisingly, there is no easy answer. Are intangible items such as patent rights and research and development included in the calculation? How are materials valued? Is the origin of components and subcomponents considered, and if so how? Are executive salaries and benefits included? Is there a uniform policy on implementing domestic content requirements throughout the federal government? If not, why?
In addition to questions regarding content, Buy American provisions also contain waivers that are available when the use of foreign-sourced goods is in the “public interest,” when domestic end products are not reasonably available in sufficient commercial quantities, or when the cost of the domestic end product is unreasonable. At no time in the waiver process is consideration given to the number of domestic jobs that could be impacted if the waiver is granted.
Given the nation’s startling manufacturing job losses and its historic high unemployment, the administration is rightfully searching for a manufacturing policy that will restore good and sustainable jobs at home, since restoring these jobs is critical for economic recovery. Here are four proposals that can advance that policy:
1) Require employment impact statements
The Administration should adopt a simple, common-sense policy that directly links domestic employment with certain government activities. One way to accomplish this is to require detailed employment impact statements (EIS) as part of the decision-making process for government procurement contracts, assistance grants, and awards. The results reflected by the EIS should be a significant factor in the final determination concerning the project or transaction under consideration.
The EIS would contain information pertaining to employment that would be maintained, created, or lost if the program in question were approved; as much as possible it would detail the duration, wage, location, and category (e.g., production, maintenance, etc.) of the jobs. Verificat
ion could be conducted through payroll records, furnished, on a proprietary basis, to the government agency responsible for approval of the proposed program. Since many of the companies receiving federal money are already required to keep and maintain payroll records under federal wage and hours laws, this requirement would not force them to duplicate their efforts.
To assure that employment impact statements and reliance upon them are fully and effectively implemented, federal agencies would need to submit annual reports to Congress summarizing the procedures used and the results. The reports would furnish Congress and the administration with valuable information about how government programs are assisting with the creation and maintenance of jobs.
2) Review current domestic content requirements
Domestic content requirements currently in effect are a mess, and the administration should move quickly to make them simple, effective, and transparent. Domestic sourcing requirements for stimulus programs should be adopted, and government programs that do require some degree of domestic sourcing (e.g., Buy American, the Recovery Act, and the U.S. Export-Impact Bank) should be reviewed to ensure that the requirements are being taken seriously by contracting agencies and are effectively implemented. Troubling questions concerning how domestic content is measured and applied must be addressed. What factors do agencies include in determining content? Is the calculation limited to raw materials, production, assembly, and maintenance, or are intangible items like the value of research and development and intellectual property rights, which can be used to inflate domestic content, included? How is the origin of components and subcomponents considered?
Further, the OMB should reconsider its interim regulations that artificially narrow the definition of manufactured goods. And waiver applications to Buy American requirements should be reviewed with domestic employment in mind.
3) Establish new opportunities for fostering domestic production
Many small manufacturers are facing difficulty because they cannot obtain credit from commercial banks. A U.S. Jobs Development Bank could target assistance to key manufacturing industries. The bank would operate much like the U.S. Export-Import Bank but, instead of supporting businesses that export goods, it would support a broader array of companies that cannot obtain commercial credit. The credit would be tied to the creation or maintenance of manufacturing jobs in the U.S. Credit would also be available to support the renovation, modernization, and retooling of facilities to expand manufacturing capacity.
4) Create a President’s Council on Manufacturing Policy
Other countries have well-developed manufacturing policies aimed at employment, growth in exports, and enhancements to strengthen their economy. An example is offsets, that mandate the transfer of technology and production to a country in return for defense purchases.
In contrast, the U.S. has no national manufacturing policy and no mechanism for developing one. Even if U.S. manufacturing weren’t in free fall, the president should create a permanent Council on Manufacturing. It would consist of senior government officials as well as private sector representatives who would advise the administration and Congress on manufacturing policies aimed at restoring domestic manufacturing and high-quality domestic manufacturing jobs. One of its responsibilities would be to assist the administration and Congress in ensuring that policies throughout the government contribute to domestic manufacturing. The council would also advise the administration on manufacturing industries that are essential to national security and make recommendations for creating a positive environment for spurring start-up companies.
We can no longer be complacent with the hope that manufacturing is cyclical and will recover given a little patience. The changes we are witnessing in the sector are structural, and retaining a robust manufacturing industry and good jobs that strengthen communities and the nation requires a direct and structural response, not the least of which is spending U.S. government stimulus money here when the products and workers are right here waiting.
Until we restore the respect due manufacturing and the thousands of domestic jobs it creates, the industry will continue to fade, and along with it our hope for a healthy, sustainable economy. The actions proposed here might be too late to help the 400 workers at the GE facility in Albuquerque, but they can close the book on future sad stories by reviving a robust domestic manufacturing industry.
Owen E. Herrnstadt is Director of Trade and Globalization for the International Association of Machinists and Aerospace Workers.