Banishing businesses: the burden of socialist regulations here at home, not corporate greed or even low foreign wages, is the single most important factor driving U.S. manufacturing jobs abroad.

In December, as the Dow crested 10,000 for the first time in over a year and major retailers came under siege by Christmas shoppers, recovery seemed to be at hand. But looming behind these glad tidings was the specter of "outsourcing" as U.S. companies, seeking to cut costs, send well paying jobs in manufacturing and technology abroad.

While it's true that the economy has created many new jobs, for the most part they pay much less than the jobs being lost. Notes former Treasury Department official Paul Craig Roberts: "In November the U.S. economy was able to create only 50,000 private sector jobs--almost all in low-paying services [such as] temporary help, accommodations and food services (hotels, restaurants and bars), and hospitals and ambulatory health care services. This pattern has held through the second year of the 'economic recovery' that began in November 2001. Such jobs cannot support families and most might be filled by recent legal and illegal immigrants."

In the two-year period ending in November 2003, the economy created roughly 500,000 jobs capable of sustaining a middle-class lifestyle. However, continues Roberts, "all of the income from these 500,000 jobs is offset by the loss of 549,000 manufacturing jobs in the last 12 months. During its second year of 'recovery,' the overall economy experienced a net loss of 183,000 private jobs...."

Many critics of outsourcing insist that the trend is a reflection of incorrigible corporate greed and abysmal foreign wage rates. However, a new report from the National Association of Manufacturers (NAM) documents that the federal regulatory burden is the single most important factor behind the exodus of jobs from the U.S.

"U.S. manufacturing has demonstrated the ability to overcome pure wage differentials with trading partners through innovation, capital investment and productivity," comments James Berges, president of Emerson, a St. Louis-based manufacturer of industrial equipment. "But when the additional external costs [of government regulation] are piled on, the task becomes unmanageable, even in the best companies."

Simply put: Many, if not most, American businessmen who relocate abroad aren't abandoning our nation's free enterprise system. They're fleeing socialism.

The Big Five

Using a standardized measurement called unit labor costs, the NAM report compares U.S. industrial competitiveness with that of our nine biggest trading partners: Canada, Mexico, Japan, China, Germany, Britain, South Korea, Taiwan and France. This approach allowed researchers to calculate government-imposed "structural costs" on manufacturing in each country. As NAM President Jerry Jasinowski summarized, the findings demonstrate that "We are essentially shooting ourselves in the foot competitively by making it too expensive to make products in America."

As our trade deficit grows, and high-paying jobs depart our shores, many American employers and workers have come to believe that we must enact protective tariff barriers to block foreign imports. But imposing high tariffs on foreign goods would do nothing to repair the damage being done to the economy at home. The NAM study illustrates that American businesses could compete successfully in the international marketplace--if they were relieved of the onerous burdens placed on them by Washington.

According to the NAM report, "domestically imposed costs--by omission or commission of federal, state, and local governments--are damaging manufacturing more than any foreign competitor and adding at least 22.4 percent to the cost of doing business from the United States.... Once these underlying cost pressures are understood, it becomes clearer why much of U.S. production is moving offshore." In fact, the report asserts, "the absolute value of the excess cost burden on U.S. manufacturers (nearly $5 per hour) is almost as large" as the basic production cost in China.

NAM highlights five critical obstacles to an economic recovery in the manufacturing sector:

* Excessive corporate taxation.

* Escalating costs of health and pension benefits.

* Escalating compliance costs for regulatory mandates, particularly those related to workplace safety, pollution abatement and corporate governance.

* Rising energy costs, particularly natural gas.

* Sluggish capital investment (outside of information technology).

Of these factors, the cost of regulatory compliance is the most lethal. "Compliance costs for regulations can be regarded as the 'silent killer' of manufacturing competitiveness," observes NAM. "Often developed without an objective cost-benefit analysis, regulations have steadily increased in quantity and complexity, regardless of which political party controls the executive branch." A reasonable estimate of the costs inflicted by economic, environmental, workplace and tax-compliance regulations "is in the order of $850 billion--with $160 billion on manufacturers alone, equivalent to a 12 percent excise tax on manufacturing production."

NAM's estimate of total compliance costs is nearly identical to the findings reported in "'The Ten Thousand Commandments," a recent paper produced by economist Clyde Wayne Crews Jr. of the CATO Institute. Crews' basement-floor estimate of regulatory costs was $860 billion a year. To put that figure in perspective, it's useful to note that in 2002 the federal government collected $949 billion in individual income taxes and $201 billion in corporate income taxes. Thus the hidden tax imposed by regulations is at least comparable in size to fedgov's total take from individual income taxes, and more than four times as large as total receipts from corporate income taxes.

According to Crews, "U.S. regulatory costs of $860 billion exceed the output of many entire national economies.... U.S. regulatory costs exceed the entire 2000 GDP of Canada, which stood at $701 billion. The regulatory burden also exceeded Mexico's GDP of $574 billion." Estimated federal regulatory costs also exceeded the total of pre-tax corporate profits in 2001 ($699 billion). With U.S. regulatory costs exceeding the GDP of our "NAFTA partners" and dwarfing total corporate profits, it stands to reason that overburdened American businessmen would be driven abroad in search of more business-friendly environments.

Our nation's out-of-control system of tort litigation also plays a critical role in driving business abroad. In 2001, the costs of the U.S. tort system climbed to $205 billion, "or just over 2 percent of GDP," comments NAM. "A least one-third of this increase has been due to an upward reassessment of liabilities associated with asbestos claims." Asbestos litigation was an outgrowth of the 1986 Hazard Emergency Response Act, which required "abatement" of asbestos in public school buildings. Three years later the Environmental Protection Agency issued regulations effectively banning most uses of asbestos in both public and private buildings by 1997.

More than a decade ago (see our article "Independent Businessmen, an Endangered Species?" in our November 19, 1990 issue), THE NEW AMERICAN warned that the federally abetted asbestos scare--propelled by now-discredited claims linking the substance to cancer--would decimate our economy. Unfortunately, the NAM report validates those earlier warnings.

The economic damage inflicted by the eco-leviathan is hardly limited to asbestos abatement. NAM points out that "pollution abatement falls disproportionately on the shoulders of manufacturers," who accounted for 83 percent of pollution abatement expenditures in 1999. "On a trade-weighted basis," observes the report, "the burden of pollution abatement expenditures alone reduces U.S. cost competitiveness by at least 3.5 percentage points." Of our nine largest economic competitors, only South Korea spends more on pollution abatement as a percentage of GDP; this is true even of the so-called green economies of the European Union.

Congressional Abdication 

Congressman Ron Paul (R-Texas) recently recounted an interview in which several American businessmen were asked why they opened production facilities in Communist China. Their reply: "It is so much easier to start a business in China than in the United States, especially in places like Massachusetts and California." Given that the external costs of government regulation are nearly the same as basic production costs in China, that answer makes tragic sense.

It should also be remembered that the hidden tax imposed by regulations are passed on to consumers. As cheaper foreign goods become more available, an increasing number of Americans simply forgoes paying that hidden tax by choosing the less expensive imports. This contributes to the outsourcing of jobs abroad, which in turn contributes to the accelerating erosion of our manufacturing base--the foundation of our middle class economy and an indispensable element of our national security.

The dire implications of NAM's findings were cleat" even to the editorial staff of the liberal Christian Science Monitor. Although it maintained that "some costs--those for pollution abatement is one example--are the price for a civilized society," the Monitor admitted that the study "underscores the importance of weighing the burden of government policies on the nation's ability to retain well-paid manufacturing jobs.... [I]f the U.S. wants to retain manufacturing jobs, it needs to review how each tax and regulation reduces industrial competitiveness, and then decide on the tradeoff."

The federal regulatory apparatus is often described as the "fourth branch of government." Unelected and unaccountable regulators not only devise their own "laws," but are also empowered to enforce their own roles, acting as the accusers against violators and functioning as both judge and jury.

The fourth branch also imposes taxes, albeit of the hidden variety. CATO Institute economist Clyde Crews refers to regulation as "off-budget taxation": "[R]ather than pay[ing] directly and book[ing] the expense of a new initiative, [government] can require that the private sector and lower-level governments pay," comments Crews. "That process sometimes allows Congress to escape accountability and to blame agencies for costs."

Each year, literally thousands of new regulations are emitted by the Environmental Protection Agency, the Departments of Transportation, Treasury, Agriculture, Housing and Urban Development, and Interior, the Occupational Safety and Health Administration, and so on. And as the regulatory leviathan grows, it increasingly sucks up revenue, resources and manpower that otherwise would be invested in productive pursuits--thereby driving an increasing number of businessmen and investors offshore.

Ending what Crews calls "regulation without representation" would greatly aid our economy. "Whatever measures Congress uses to address the regulatory state, dealing with the root of the problem requires ending excessive delegation, or 'regulation without representation'" be observes. "Congress should not have bureaucrats to blame for regulatory excess that is Congress' fault."

During the late 1990s proposals were made to require Congress "to OK significant agency rules via an expedited process before they are binding," Crews continues. "Article 1 of the Constitution grants legislative power solely to Congress. In that vein, major agency regulations should be turned into bills requiring congressional passage and a presidential signature--no more or less than ordinary legislation. Sensible regulatory policy, as well as constitutional government, demands that every elected representative be on record for significantly costly regulations. Some might complain that voting on regulations would bog down Congress. But do we want Washington making so many laws that lawmakers can't even pass them all during their waking hours?"

Actually, having Congress get bogged down in the process of enacting new regulations would be a very desirable outcome: The longer Congress takes to pass such bills, the likelier that they will wither and die before becoming laws; fewer laws would mean a reduction in the hidden tax that is suffocating our business economy and steadily undermining our standard of living.

And as Congress actually assumes the burden it has unconstitutionally delegated to unaccountable bureaucrats, politicians will start absorbing the political costs of regulating productive citizens. This should radically reduce the size and expense of the regulatory state--which is the only real hope for reviving our battered manufacturing economy.