The Escalating Cost Crisis
Economist Jeremy A. Leonard has completed an update on his 2003 analysis of the structural cost pressures facing U.S. manufacturers. The report, The Escalating Cost Crisis, was released today by the National Association of Manufacturers which commissioned the study.
Structural costs for domestic manufacturers have increased from 22.4 to 31.7% since 2003 compared to nine major trading partners. The new study uses the same methodology as three years ago and analyzed five structural, non-production costs: corporate tax rates, employee benefits, legal costs, natural gas prices, and pollution abatement. “This is an astonishing increase from just three years ago,” Leonard said. “Because of these escalating costs, fewer new manufacturing jobs have been created and less is available to invest in research and development and worker training.”
The corporate tax rate was both the highest burden in absolute terms and the largest contributor to the increase in structural costs, responsible for more than one third of the increase in the cost burden. While the corporate tax rate has remained the same since then, some trading partners have lowered their statutory tax rates, thus widening the gap and undercutting U.S. manufacturers.
Historically, natural gas prices have been a competitive advantage for U.S. manufacturers, costing on average 30% less than the nine major trading partners in the mid-1990s. This advantage has turned into a competitive disadvantage, as the average cost of natural gas for those nine major trading partners was 0.7% below the price paid by U.S. manufacturers in 2005. Energy legislation pending in the Senate, NAM explained, would expand use of domestic sources, leading to lower energy costs. New domestic sources will improve competitiveness by cutting the 31.7% cost disadvantage. Likewise, pollution abatement costs have increased by 11.5% since 2000, to an estimated $77 billion in 2004, according to the study, increasing the U.S. excess cost burden by 1.7 percentage points relative to its major trading partners.