Reposted from Bloomberg Businessweek
Peter Coy | April 12,2012 | Bloomberg Business
Ideas matter in Washington, if only as the sharp points on the battering rams of power and money. One of the ideas of 2012 is the need for some sort of industrial policy. President Barack Obama called for more robust support of manufacturing in his State of the Union address and his “An America Built to Last” blueprint, which followed shortly afterward.
The debate over industrial policy has heated up since then, with criticism of Obama’s proposals coming from expected and unexpected quarters. Writing about the president’s effort in the Wall Street Journal, Michael Boskin, chairman of the Council of Economic Advisers under President George H.W. Bush, reminded readers of Obama’s “record of picking losers” such as Solyndra, the now-bankrupt solar panel manufacturer. More stinging was a shot by one of Obama’s own—Christina Romer, who headed the CEA until 2010. In a February op-ed in the New York Times titled “Do Manufacturers Need Special Treatment?” she wrote, “A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce ‘real things’ than services.”
Enter Gene Sperling, director of the president’s National Economic Council. On March 27 he spoke before the Conference on the Renaissance of American Manufacturing about the president’s plans. The speech was clearly the product of Obama’s entire economics team, not just the energetic “Gene the Machine.” “This is the strongest intellectual case any administration has made for manufacturing,” says Robert Atkinson, president of the Information Technology and Innovation Foundation, who participated in the conference.
Sperling was raised in Michigan and trained as a lawyer, not an economist. His speech, which was highlighted in a Financial Times column on April 8, breaks from free-market doctrine. He argues that manufacturing deserves special attention because it produces “positive spillovers” for the economy. New research shows that when a factory locates in a county, the productivity of other plants in the county rises.
Manufacturers also account for most innovation. And innovation tends to wither when it’s separated from production. “For example,” Sperling said in his prepared remarks, “when we lost consumer-electronics manufacturing, we gave up a claim on future innovation. We lost in follow-on products like advanced batteries, flat-panel display technology, and LED lighting. When we lost consumer-electronics manufacturing, we also lost the capability to make and design the batteries, including lithium-ion batteries, used in computers, cell phones, and other consumer devices.”
The U.S. lost 34 percent of its manufacturing jobs from 2000 through 2009, and employment in manufacturing has risen only about 4 percent since. Romer says manufacturing employment is in an unstoppable downtrend because fewer workers can produce more. Sperling argues that higher productivity, far from being a job killer, can lower prices, thus increasing demand for the products and saving jobs. The problem, he says, is that output is down. According to the Federal Reserve, the physical quantity of goods made in the U.S. declined 5 percent from 2000 to 2010.
To Sperling, the solution is to boost output—which will require faster productivity growth, not slower, along with enforcement of trade laws and adopting some of the measures on Obama’s “Built to Last” agenda. These include denying companies a deduction for moving costs when they shift jobs abroad; making the research and development tax credit permanent; funding manufacturing training programs in community colleges; and building regional hubs for manufacturing innovation that bring together industry, government, and academia.
Sperling is far from the first person to say manufacturing is important. Laura Tyson, a professor at the University of California at Berkeley’s Haas School of Business, recalls the issue coming up in 1992 with Bill Clinton. “The reason I made an impression on him is that I said manufacturing does matter,” she says. He named her to head his Council of Economic Advisers.
One speech, however well researched, won’t convert the opponents of manufacturing policy. It won’t even unite the proponents, who range from labor activists, who favor more aggressive trade sanctions, to chief executives of multinationals, who dislike being told where to locate their production. But it might just nudge the debate forward.
The bottom line: A speech by the head of the National Economic Council may change the conversation about the need for industrial policy.