KY Policy Blog

The Real Threat to Kentucky Manufacturing Jobs

By Jason Bailey
May 30, 2014

Expect to hear loud concerns next week that new rules to reduce the carbon emissions that cause climate change will harm Kentucky’s economy, including the state’s electricity-intensive manufacturing jobs.

Kentucky has reasons to be concerned about those jobs. Although manufacturing provides only about 12 percent of the state’s employment today, it’s been a critical source of decent-paying jobs for Kentuckians with less than a college degree. Maintaining and even growing a manufacturing sector remains vital to a diverse and innovative state economy.

But the overall jobs impact of the new rules is uncertain. And it’s a wonder why we haven’t been hearing a similar outcry over a threat to those jobs that’s not speculative but real—the broader economic and trade policies that have been shedding thousands of Kentucky manufacturing jobs and put more jobs at risk in the immediate future unless policy changes are made.

Kentucky’s energy use and policies

Concerns about the new carbon emission standards stem from the fact that Kentucky has the most electricity-intensive economy in the United States, including big users like aluminum smelting, iron and steel mills, paper mills, chemical production and glass manufacturing. Forty-nine percent of Kentucky’s electricity is used by industrial customers compared to 26 percent for the U.S. as a whole.

A report by the Kentucky Department of Energy Development and Independence (DEDI) identified a set of scenarios for new greenhouse gas constraints, and projected higher electricity prices and some job losses in most (but not all) of them.

Kentucky is vulnerable in part because it has been unwilling to adjust its energy approach despite rising real electricity prices—which began increasing in the state in 2002—and health and environmental regulations that have been phased in for decades. Even as other states were moving to diversify their energy portfolios and aggressively promoting energy efficiency, Kentucky only took small steps to improve efficiency and has maintained its heavy reliance on coal even as production in the eastern portion of the state began declining in the mid-1990s.

But it’s wrong to conclude anything yet about economic harm from the new rules. The specifics aren’t out yet, and the flexibility the EPA is rumored to be giving states to meet the standards would be a plus. Untapped energy efficiency opportunities are often the cheapest alternative available while the cost of renewable energy technologies is declining rapidly. A study by Synapse Energy Economics for MACED estimated that a state law requiring increases in renewable energy and energy efficiency in Kentucky could result in lower average bills in 10 years than would otherwise be the case and significant net job creation.

While it’s critically important that Kentucky develop a plan to adapt to the new emission rules in ways that protect and grow jobs, other economic policies threaten to wipe out more of Kentucky’s manufacturing economy before potentially higher prices from new emission standards can even begin to play a role.

Trade deficit causing loss of manufacturing jobs

Over the last 15 years, Kentucky has lost 80,000 actual manufacturing jobs—more than one-fourth of the state’s factory employment.

The primary culprit in those losses is not regulations or electricity prices but the rising trade deficit along with the impact of two deep recessions. There are clear actions the federal government can take to shrink that deficit and create and protect jobs, if it were willing to do so.

The major cause of the trade deficit is currency manipulation by other countries and the resulting overvaluing of the U. S. dollar. A group of about 20 countries have been engaging in intentional efforts to artificially lower the value of their currencies relative to the dollar, primarily through government purchase of foreign assets. That makes their exports cheaper and U. S. exports more expensive, leading to the loss of jobs here.

Powerful corporate interests have much at stake in this arrangement, including big manufacturers and retailers who stand to profit from lower production costs overseas. The solutions to the problem are available: Congress could pass pending legislation (here and here) allowing the Commerce Department to treat currency manipulation as an illegal subsidy in trade deals, and make protections against these actions a part of future trade agreements. The administration could also implement strategies to tax or offset purchases of foreign assets by these governments.

Such efforts could create between 31,800 and 82,500 jobs in Kentucky, according to a recent report by the Economic Policy Institute (EPI).

Kentucky’s steel industry is also at specific risk due to a recent surge in imports caused by unfair trade practices. That surge is due to excess capacity in countries like China, South Korea and India that have heavily subsidized their steel industries, resulting in falling prices. That’s put the U.S. steel industry in the red the last two years and at risk of bankruptcy and job loss. Unless the U.S. enforces trade remedy laws—which have been vital to the industry’s survival in the past—Kentucky is at risk of losing up to 10,800 jobs according to another EPI report.

Kentucky’s strategy to protect and create manufacturing jobs shouldn’t be simply to resist measures that address global climate change. While those rules present challenges given Kentucky’s history, they also present opportunities to create jobs in labor-intensive energy efficiency efforts and in growing industries associated with new energy sources. Regardless, the job future for manufacturing will be bleak unless Kentucky also advocates for economic and trade policies that keep that sector from slipping away.

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