'Compliance': The Word That Sunk a Million U.S. Jobs
President Obama may be perhaps the most openly anti-business president ever, but government at all levels has been creating an adverse business environment for decades. In the last forty years those policies have caused great damage to the U.S. economy, with particularly negative effects on manufacturers employing the medium- and low-skill workers so important to our economy. The dreaded “outsourcing of jobs,” so demonized by politicians, may be driven as much by the need to escape a high-cost domestic environment created in significant part by government as it is by the search for increasing profits. We are simply losing players to more welcoming countries.
Generally speaking, when discussing the state of international competition the conversation focuses on issues of taxation, fair/unfair trading partners, labor costs, and corporate CEO greed. However, as competitive as Americans are it is surprising that so little attention is given to the ways in which we make ourselves uncompetitive by putting one-sided burdens on our own companies. Whether as a source of revenue or a means of promoting social policies, we have watched federal and state governments do just that.
How might this happen? In reality, when we think of competition in business we usually focus on product pricing, unless there is a unique product that commands its own price. (Think anything named Apple.) In reality, competition among businesses is not based as much on price as it is on cost to produce. The market sets the price among like or similar products, and only those companies that can produce that product at a cost low enough to make a sustainable profit will survive. Those whose costs are higher must either lower costs or exit the market. It really is that simple. The companies that produce an acceptable product or service at the lowest cost usually determine the market price, and competitors must be able to match that price and be viable or lose out.
This is tough enough in a market gone fully global, but it gets immeasurably worse when the U.S. burdens its companies with layers of additional costs the competition does not have. While we focus on the relative labor rates between countries and demagogue about “slave labor,” we would do well to consider the added costs accumulated by federal and state government actions; extraneous costs that add nothing to enhance the end product.
Politicians have treated business as a painless source of social and monetary benefits for nearly forty years. In the end, regardless of their origin or intent, all costs of doing business must be able to fit into the competition model. A business that can’t recover all its costs must find a way to reduce them -- possibly by relocating to where they don’t have those costs.
We can break manufacturing costs into two broad categories. The first covers those costs directly related to producing the product and operating the business. In the most comprehensive sense this would include not only the labor, materials, and facilities needed to make the physical product, but also the managerial, sales, administrative, and distribution costs necessary to operate in a given market. The second category, the one we are focusing on here, are non-product related costs. Simply put, they are those that if removed in total, would have no discernible immediate impact on the product itself or market position of the producing company. Let’s call these two categories product and non-product related costs.
American manufacturers have become quite adept at reducing product-related costs by managing productivity at all levels of their organization. Many can hold their own in the global market when competition is based on product cost alone, because higher labor costs are offset by significantly higher productivity. Non-product costs -- better recognized as government facilitated monetary and social costs -- tilt the playing field heavily against domestic manufacturing by adding a layer of cost not related to the value of the product:
- Companies used to have personnel clerks whose primary function was to make sure employees were paid accurately, vacation time was accounted for, and payroll tax deductions were made. They have been replaced by multitudes of advanced-degreed and six-figure paid HR professionals. We have diversity audits, sensitivity training, gender awareness programs, and all manner of support and grievance processes. As a result, every employee must be treated as a potential minefield of liability -- an artificially generated risk managed at great expense to meet the mandates dictated by government at state and federal levels, and all with reams of accompanying reporting.
- Health insurance that used to focus primarily on illness and injury now, by state and federal mandate, covers all manner of other costs such as smoking cessation, obesity counseling, gender counseling, drug abuse treatment, depression, mental health, etc. These costs are added on top of the already ballooning cost of basic care by politicians who run to a microphone to announce that they have provided help for your smoking habit -- and without raising taxes!
- Environmental regulations that are so extreme that spilling a can of paint thinner becomes an “end of life as we know it” event. Common sense good stewardship long ago lost out to very, very expensive measures frequently unrelated to a real threat. Try breaking a CFL in the middle of an environmentally compliant facility or getting all the permits needed to build a facility that will in any way use chemicals.
- Corporate legal departments used to be primarily involved in contracts and tax preparation. Now add to that whole staffs to either manage litigation or stifle any activity that could lead to liability in the fertile imagination of a tort lawyer. If a stock drops, a label falls off, a risky abuse of the product can conceived of, or any of a thousand other real or imagined risks, a company lawyer is called in to advise. Tort lawyers increasingly attempt to construe personal liability of corporate management in order to pressure them to settle claims, all without constraint from the government or the courts. Protection is expensive, and non-productive.
These are but a few examples as government related costs have permeated every corner of business operations. If we were to attempt to summarize these factors into a single descriptive term, a driver that just makes the cost wheels spin in all non-productive areas, that term would be “compliance.”
What I call compliance costs add significantly to the cost of a product without adding any value at all to the product itself -- it does not improve the product nor increase its value so that a higher price can be obtained. One can argue the social value (except in the case of tort exposure which is mostly predatory), but the simple fact is these costs put U.S. manufacturers at a disadvantage against global competitors that have significantly lower levels of compliance cost. It is a matter of degree.
Businesses must spend vast sums in an attempt to be compliant and to minimize the potential devastation that comes from even minor non-compliance. These non-productive costs were small nuisance items at the outset but have since grown to be major components of business costs. They have contributed to U.S. companies finding it harder and harder, in some cases impossible, to compete domestically against global producers of basic manufactured products. Whole industries are simply gone from American soil because of them. Worse, when contemplating investments that stretch years into the future, a business planner sees no signs of this trend abating anytime soon.
Are Americans as a whole better off for all this effort? Certainly we are to the extent real issues such as health, safety, and non-discrimination are concerned. We have gone well past the point of practicality however, and now the lack of opportunity for basic manufacturing workers to earn the living their fathers and mothers had has damaged us all.
The world has changed and there are now alternatives that didn’t exist before. There are developing countries with modern roads, ports, reliable electrical supplies, and legal systems to secure property and contract rights. There are also educated and motivated workers and governments that are welcoming instead of threatening. These governments promote growth and development of manufacturing as a means to raise the standard of living in their country, just as it did for prior generations here. They are not promoting abuse or exploitation of their own people; rather they are inclined to promote economic growth to better their condition. They offer prospective businesses the opportunity to operate in a responsible manner by their standards while avoiding the extremes imposed at times on American producers.
China, India, and Brazil join a host of smaller countries to vie for productive investment on a global scale. American businesses don’t move or expand offshore without reason. Unfortunately, there is ample reason to avoid the U.S. manufacturing environment -- it's called survival.