By Jillian Kay Melchior – National Review Online -
I would like to black those days out — does that tell you how bad they were?” says Carl Schanstra, owner of a small Illinois parts-assembly firm. During the recession, his sales dropped by around 50 percent, and Schanstra was forced to take a calculated risk: He downsized considerably, reworked his business strategy, and invested his life savings to tide the manufacturing company through the hard times.
“We laid off 20 people in one day,” Schanstra tells National Review Online. “That day sucked. We got rid of some of the high-level management that was not functioning correctly, as well as our low-level people. We cut and cut and cut. And as the owner of the company, I went without a paycheck for over three months, several times throughout that period. You get to compound on that company’s traumatic experiences, and then add that you don’t have any personal income as well.”
At first glance, it looks like Schanstra’s sacrifices paid off. Automation Systems Inc. is once again stable, and sales continue to rise. During the recession, the firm was housed in a leaky old building with a gravel loading dock and tarps aplenty to protect equipment when it rained. Three months ago, Schanstra was able to move into a much bigger, light-industrial new building.
But the company now faces a new problem because of the Obama health law. Automation Systems Inc. has expanded to include 37 employees today, and Schanstra says he wants to hire more — maybe as many as 200 or 300 in the next 10 to 15 years. But once the business crosses the 50-employee threshold, it will have to pay $40,000 in penalties, plus $2,000 for each additional employee. That’s because of the so-called employer mandate, a fee imposed on businesses that get too big without providing health care the federal government deems acceptable.
“The government has made it clear with the health-care law that the incentive is to have companies under 25 people, where we can get tax breaks,” Schanstra says. “The mid-range companies with the labor of 25 to 60 people — those companies are going to be impacted by this dramatically.”
Between 2007 and 2010, the U.S. lost 27,409 manufacturing firms, according to data from the Census Bureau, most of the losses presumably occurring during the recession. At its low point in June 2009, American manufacturing production was down about 21 percent from what it had been in December 2007. The manufacturing sector became a symbol for everything that had gone wrong: Why can’t the U.S. make things like it used to? Is the U.S. losing its global edge? Factory jobs were America’s hottest export, as the story went, and furrowed faces personified the trend.
President Obama took up the cause, setting a goal to double U.S. exports by 2015 and to create a million new American manufacturing jobs in the process. Early in the stimulus, politicians on the left pushed for federal aid and Buy America clauses. Most neglected to mention, of course, the regulatory burden and union wrangling that have made these companies less competitive than their global counterparts.
Taxpayer money has since flowed copiously toward the manufacturing sector. Just last July, the president was pushing for a 2013 budget with $11.245 billion in funding for various manufacturing initiatives, and that’s on top of existing programs and the stimulus money.
At first, it seemed to work. Manufacturing has boomed in the past three years, a rare occasion for optimism in the midst of a lukewarm recovery. Though the manufacturing sector faces a skill-set mismatch, it’s one of the few sectors with plentiful jobs available. Deloitte and the Manufacturing Institute reported last year that as many as 600,000 manufacturing positions remained unfilled.
Yet that growth is fragile, as recent news has demonstrated. For the first eleven months of 2012, inflation-adjusted manufacturing essentially plateaued, leading to speculation that the sector was re-entering a recession. The most recent data, collected in November, show that manufacturing remains short of what it was before the hard times hit.
And it’s hard to say which direction manufacturing is headed next, says Alan Tonelson, a research fellow at the U.S. Business and Industry Council, which represents some 2,000 small and medium-size manufacturers.
“We have come back a lot of the way, but we’re not back all the way,” Tonelson tells National Review Online. “And what I find discouraging about this is, we’re still behind the manufacturing eight-ball despite the trillions of dollars that have been poured into the economy by the stimulus and the Obama administration. It seems like that spending should have created much more growth for the buck.”
Even so, a recent survey by ThomasNet found that 48 percent of American manufacturing companies want to hire. But many of these companies will be affected by the new employer-mandate fees, which would certainly give them reason for pause.
Automation Systems Inc. is the perfect example. The employer mandate has made it financially untenable for the business to expand in the U.S., so Schanstra is reluctantly looking south of the border.
“I’m going to do what’s best for the company no matter what, so what jobs we have here, we can keep here,” he says. “As a business owner, I will learn the restrictions that the government imposes. But based on those restrictions, much of my business may no longer be within the country.”
Schanstra has already broken down the numbers: Even before the penalties, each employee costs nearly $11 per hour, once he factors in wages, worker’s comp, Social Security, and other expenses. In Mexico, a semi-skilled operator costs $3.50 an hour — “complete package.” Looking at the situation differently, Schanstra says, hiring a 50th employee would trigger $40,000 in added yearly costs. That’s the equivalent of almost two years’ salary for a low-skill Illinois worker.
Any way Schanstra does the math, he concludes that the Obama health law is going to cost American jobs.
Of course, moving abroad isn’t an option for every American manufacturing firm. But the employer mandate puts manufacturing companies stuck in the U.S. at an even greater disadvantage in the global marketplace.
Dick Murphy of Elk Grove Village, Ill., founded his small manufacturing business 29 years ago. He tells National Review Online that he put every asset he had into the company, then leveraged that money to borrow more and expand the business. Now, Murphy finds himself across the 50-employee threshold.
Murphy already provides health insurance for his workers, who earn between $10 and $12 per hour, and that benefit is a major expense. Last year, the company’s insurance provider raised costs to $707 per employee per month — a change that cost him around $28,000 per month in total. Even so, the coverage may not meet federally mandated standards, so Murphy might be forced to pay the employer mandate, too.
And the business can’t be exported, he says. DLP Coatings provides decorative and functional paint for fabricated metal. Murphy beats out the foreign competition because of his proximity to clients; when they ship him an order, he can have it processed and returned in a matter of days.
Yet other companies are relocating abroad, and that hurts Murphy, too.
“At one time, we did a great deal of work for General Electric,” he says. “A lot of that material moved out of the country down to Mexico. It’s frustrating and irritating. You’re losing your customer base. We just continuously see that manufacturing base dwindle. We’re geared entirely to manufacturing, and it gets so competitive for those who remain here — very difficult to make money.”
American manufacturers are already struggling to recover, never mind expand. In that context, the Obama health law’s employer mandate proves especially counterproductive.
The Census Bureau doesn’t calculate how many manufacturing firms are near the 50-employee threshold. But its numbers do show that the majority of them are small enough that the employer mandate may be a significant problem. Of America’s total 258,662 manufacturing companies, 197,701 had fewer than 20 employees in 2010, around the time when hiring growth picked up. Another 46,005 had between 20 and 99 employees.
And it doesn’t matter that most manufacturers already provide health care: The National Association of Manufacturers (NAM) estimates that 97 percent of its members already do so. Employers’ plans must cover at least 60 percent of employees’ average health expenses, and workers can’t contribute more than 9.5 percent of their family income, or the fees kick in anyway. That $2,000-per-employee penalty falls on top of the stiff taxes, trade barriers, and environmental limitations that manufacturers already have to contend with.
“The employer mandate is part of the overall negative business climate that manufacturers have been facing,” NAM spokesman Matt Lavoie observes. “It’s 20 percent more expensive to manufacture something in the United States than in our major trading partners, and that’s before you add in labor costs.”
As the Obama administration has argued, the employer mandate is one of the critical components of the health-care law. But too little consideration has been given to its consequences. The employer mandate is already having an adverse effect on the growth of U.S. companies and U.S. employment. Many existing businesses will scale down or avoid expansion. Meanwhile, would-be entrepreneurs may observe Schanstra, Murphy, and other business owners as a cautionary tale, realizing the risks they incur may not yield the payoffs they expect.
— Jillian Kay Melchior is a Thomas L. Rhodes Fellow for the Franklin Center for Government and Public Integrity.