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Mike Richman

Management

Manufacturing and the Federal Budget

What should taxpayers support?

Published: Thursday, February 23, 2017 - 13:03

The U.S. national debt currently stands at approximately $20 trillion. In the time it will take you to read this article, the debt will increase by a couple of million dollars more. Regardless of where one stands on the political spectrum, these facts are stark and shocking.

Thus, it’s no surprise that the new, deeply conservative administration in Washington is seeking to take a cleaver to the federal budget. According to a recent article from The Hill, fiscal hawks in the capitol are taking a long look at “A Blueprint for Balance,” a suggested budget from The Heritage Foundation. The 2017 blueprint, published last year, targeted federal programs like the National Endowment for the Arts (NEA) and the National Endowment for the Humanities (NEH) for elimination. In addition, the blueprint suggested the privatization of the Corporation for Public Broadcasting (CPB).

It’s long been a matter of conservative orthodoxy that taxpayer funds should not be used to support organizations such as these. We could argue the pros and cons of that position, but it is at least a recognizable principle endorsed by a large proportion of voters, and an even heavier percentage of political officeholders on the right.

What is surprising, however, is to see that the blueprint also suggests eliminating funding to the Hollings Manufacturing Extension Partnership (MEP), a program run by the National Institute of Standards and Technology (NIST), a nonregulatory agency within the Commerce Department.

A little history

The MEP program was founded in 1988 as part of the Omnibus Trade and Competitiveness Act. As with the Malcolm Baldrige National Quality Award program, begun a year earlier, this act of Congress was intended to help U.S. manufacturing, particularly small companies, remain on the cutting edge of technological innovation. The Baldrige and MEP programs would do this by providing resources not only to develop new manufacturing ideas, but also to share that knowledge among peers. The hope was that the manufacturing sector here in the United States would thus be better able to fend off challenges from Asian and European competitors, thereby increasing market share and profitability. As a natural consequence, these companies would then be able to hire more workers and pay them better wages.

Of course, during the late 1980s concepts like outsourcing, global supply chains, automation, big data, and the internet of things were still in their infancy, or perhaps not yet even born. The importance of innovation and benchmarking, however, were all too familiar to U.S. manufacturing executives, and they keenly felt that in this they were at a disadvantage, particularly in comparison to Japanese firms such as Toyota, Sony, and others.

For these reasons, there were powerful political motivations to provide federal funding in support of the manufacturing sector. Democratic Senator Fritz Hollings of South Carolina was chairman at that time of the Commerce, Science, and Transportation Committee, and he was a strong supporter of issues relating to technological innovation and how it could contribute to the overall competitiveness of U.S. industry. Senator Hollings was the driving force behind the Technology Competitiveness Act of 1988, which was rolled into the Omnibus Trade and Competitiveness Act that cleared the way for the launch of the MEP program.

Making sense of the dollars

According to the Heritage Foundation’s blueprint, and as confirmed by NIST, for fiscal year 2016 the MEP program was federally funded at approximately $130 million. On the surface, that appears to be a lot of money, but within the context of the overall federal budget, it’s a proverbial drop in the bucket. It’s also not much when you consider that the individual MEP centers (which are located in every state in the union, plus Puerto Rico) interacted with more than 25,000 manufacturers this past year. Do the math, and you’ll see that the federal funding averages just a bit more than $5,000 per manufacturer.

The MEP program is a public-private enterprise. To cover their operational costs, the centers are directly responsible for raising another $1 to match every $1 of federal funds. The local MEPs raise their share of operating expenses through state and/or local government funding, private donors, or client fees for services.

According to an infographic on the MEP website, those dollars are intended to yield significant returns for those manufacturers with access to them. Every federal dollar routed to manufacturers in the MEP network generates nearly $18 in new sales growth, and $27 in new investments. Add it up, and it comes to $2.3 billion in new sales for that $130 million investment. Furthermore, the MEP creates or retains one manufacturing job for every $1,501 of federal monies allocated to the program.

So how do they do it?

“Each year, manufacturers work with their local MEP center to solve problems, increase productivity, improve their economic competitiveness, and enhance their technological capabilities,” says Jennifer Huergo, director of media relations in NIST’s Public Affairs Office. “As a result, MEP clients increase their sales, save time and money, invest in physical and human capital, and create and retain thousands of jobs. Services offered through local MEP centers include innovation and business strategies, commercialization, lean and process improvements, workforce development, supply chain development, exporting, and technology scouting and transfer.”

Huergo offered some specific examples of manufacturing companies that have benefited directly from this program. CARDSource, of Eagan, Minnesota, for example, increased revenue by 30 percent and its overall workforce by 10 percent after working with its local MEP center. Meanwhile, Springfield, Illinois-based Nudo Products saw $3.5 million in new sales, retained five jobs, and added 15 after working with its center. Other case studies demonstrating the value of the MEP can be found on this landing page on the organization’s website.

Things to come?

When pondering what the MEP program might look like if federal funding were to be eliminated or significantly reduced, one need only look at a sister program within NIST—the Malcolm Baldrige National Quality Award.

The Baldrige program, which provides a framework for performance excellence and honors high-performing small businesses, manufacturers, healthcare facilities, municipal agencies, and more, was at least partially funded by the federal government from its inception. However, as of fiscal year 2012, the program federal funding, at that point less than $10 million, was completely eliminated, and the Baldrige had to go it alone.

“When federal funding was ended for the Baldrige program, a new business model was implemented that streamlined operations, decreased costs, and created new revenue streams,” says Baldrige director Robert Fangmeyer. “It has been very successful so far, reducing staffing by 60 percent, expenses by more than 65 percent, and nearly tripling operating revenues. The model also depends on financial support from the Baldrige Foundation, but the stretch goal is to reduce that amount to zero to rebuild the endowment. 

“In total, since 2011, the amount of funding support needed has been reduced to less than one-fifth of what it was previously, while significantly expanding the products and services offered, and continuing to accomplish the public benefit mission and purpose of the Baldrige program.”

From the Baldrige model, it’s apparent that there are viable alternative funding options for the MEP going forward, should the federal government decide to cut off the flow of dollars. But should it? Again, as opposed to the CPB or the NEA, this program can’t be accused of being a liberal giveaway with soft, amorphous benefits; the MEP has hard numbers demonstrating its value as a driver of U.S. manufacturing excellence, and as a job protector and creator to boot. Those benefits come at a relative pittance, but that may not be enough to save the program.

The Heritage Foundation and Republican Mick Mulvaney, the newly appointed Director of the federal Office of Management and Budget (OMB), have their eyes firmly fixed on that ever-running debt and have made its reduction their primary goal. For Mulvaney, a former representative from South Carolina (ironically, the same state that sent his political opposite, Fritz Hollings, to the Senate a generation ago) this mission is not a new one. He came to Congress as one of the biggest budget hawks in the Tea Party class of 2010, and has looked forward to this opportunity ever since.

The process to put into place a federal budget for an upcoming fiscal year is, as one might well imagine, long and arduous. In the coming months we will see and hear bits and pieces of negotiation on this front emanating from the White House and Capitol Hill. At this point it is an open question as to whether the MEP (or any specific programs, really) will survive or expire.

Neither the Heritage Foundation nor the office of OMB Director (at the time Representative) Mulvaney responded to multiple requests to comment on this story. Nevertheless, we’ll keep our eye on the forthcoming development and negotiations over the 2018 budget, and revisit this topic as we learn more about the federal government’s plans. Stay tuned.

In the meantime, I hope you will let us know your thoughts about whether taxpayers should support programs such as the MEP.

Discuss

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Mike Richman

Comments

Business is about ROI

Interesting article.  The work the MEP is doing sounds very helpful for manufacturing.

However, business is based on return on investment.  Correct me if I'm wrong, but the MEP web site states "For every one dollar of federal investment, the MEP national network generates $17.9 in new sales growth for manufacturers...".  For $1 of investment, the manufacturer's profit margin would have to be at least 5.6% to break even on $17.90.  That's probably reasonable in most cases.  But with taxpayers footing the investment, their return is much lower.  It would seem doing this privately would be the better option.

I agree that the cost is miniscule compared to the $3.5 trillion budget and there are many other programs that cost more and return less.  So maybe we address those programs first.  But in the long run, this too should be cut in favor of a private operation if we want to limit the federal government to only their constitutional responsibility.

But that's just my opinion - I could be wrong.

Fair comment

Thanks, Bill... interesting perspective. Yes, private investors are good options here, and the local MEP centers do reach out for this type of support already. If federal funding were to be removed, they would push for even higher levels of private investment. However, as I understand it, the idea is not necessarily to enrich investors as it is to transfer best practices, support innovation, and create jobs for these small manufacturers. That's a public benefit and, to my mind as a taxpayer, something worth paying for... at least as much as Indiana citizens should pay to keep Carrier jobs in state!

typical!

Here we go again, on a war path to cut spending everywhere but here.

Take it away from programs and projects but never from their own pockets. A large chunk can be cut from the representatives themselves and the “fringe benefits” they enjoy. I don’t want to turn this into a political tirade but come on!!  If I’m short on money each month the couch cushions only provide so much, maybe I should stop going to movies and restaurants every day?  They never look inward for improvement only outward and it’s aggravating. You want to cut spending? Ok, no move government cars you can use public transportation. Install a punch clock, you are paid like the rest of us only when you’re on the clock.

You want to cut spending start in your own pockets. 

Agreed

Thanks, Jason... no doubt, government can and should look inward as well to address the stunning national debt. But we have to face reality here: programs will be cut in the 2018 budget. Should the MEP be one of them? I believe the numbers show that it's worth the $130M~ annual investment, but there's a case to be made that programs like the MEP, as solid as the ROI might be, still edge into corporate welfare and should be resisted. I'm eager to hear arguments in support of that notion from our readers.