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Can Obama save manufacturing?

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Reposted from The Washington Post

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Can Obama save manufacturing?

Zachary Goldfarb  |  July 13, 2012  |  The Washington Post

As he campaigns for reelection, President Obama has embraced soaring political rhetoric, pledging to harness the ingenuity of America “to bring manufacturing back.” In beat-up factory towns across the land, he has promoted a vision to rebuild manufacturing after decades of shuttered plants and vanishing middle class jobs.

But he wasn’t always so sure. Three years ago, confronting the issue in an Oval Office debate, Obama was less of the chest-thumping politician he is today. Vice President Biden led a group of advisers who were making the case for an ambitious plan to reverse the industry’s long decline.

Obama had witnessed the devastation of lost factory jobs from his earliest days as a community activist in Chicago and felt in his gut that there must be some way to help, but the president, a policy wonk and onetime professor, also wanted to know what the research showed.

“There’s a narrative that countries have to make things to be successful,” Obama said to his economic advisers. “What’s the evidence?”

His economists, top academics from schools like Harvard and MIT, replied that there wasn’t much evidence. In fact, they argued, manufacturing represented relatively few jobs in the nation’s economy. And governments had terrible records of investing in specific industries, anyway.

The advisers, on both sides of the debate, looked to the president for resolution.

“It’s a draw,” Obama said, failing to resolve the split within his team — or even within his own mind.

Today, Obama has settled that conflict in favor of manufacturing, a decision explained by politics, economics and the president’s trust in his own instincts, according to interviews with more than 30 current and former Obama advisers and others who’ve worked with the White House on manufacturing.

As he mulled whether to adopt policies to try to reverse manufacturing’s long decline, critics said, Obama risked allowing even more jobs to go overseas. The vast majority of manufacturing jobs lost in the recession have not come back — and today there are still fewer jobs in the sector than when Obama took office.

But now Obama is a man on a mission, pursuing major tax breaks for manufacturers, loans to help sell manufactured goods overseas, tougher trade enforcement to protect U.S. industries from foreign competition, investments in clean energy, high-tech manufacturing clusters and a range of other policies.

Obama has rallied in part because of pressure from his own party to find good-paying jobs for millions of factory workers, who sense that their economic future is slipping, or has slipped, away. He has followed recent economic evidence that has led him to believe that it is important — and feasible — for the government to take steps to revive manufacturing.

But he has also listened more closely to his political instincts, rejecting the view of many economists, including several on his team, that manufacturing doesn’t have an especially dynamic role to play in the nation’s economy. People who work closely with him say Obama has followed an impulse that the government must try to protect manufacturing workers — people who make things.

“As the issue has been surfaced,” said Ron Bloom, Obama’s former top manufacturing adviser, “the president’s core values have had a chance to come out and I think you see them now.”

Even so, as happens in any election year, the president’s rhetoric is a step ahead of his policy. He hasn’t declared specific national goals for restoring manufacturing to the place it once was or launched a race-to-the-moon-like government program.

Not that it would be easy. Global, decades-long forces haven take a massive toll on American manufacturing, and there are few signs they will abate. And the nation’s strained finances – and paralyzed politics — limit what government can do to help.

The president’s embrace of manufacturing comes during a campaign in which his rival, former Massachusetts governor Mitt Romney, has also pledged to rebuild the sector. Obama’s strategists see political gain in the relentless focus on manufacturing, drawing a contrast with Romney’s background as someone who financially invested in industrial companies but never ran one, and his criticism of the auto bailout.

But Obama has his own vulnerabilities. Romney and Republicans say there is already an example of Obama’s manufacturing policy at work — the “green jobs” program that benefited political donors and lobbyists, such as the backers of the failed solar energy company Solyndra.

A long slide

Manufacturing, long a source of high wage jobs, has been shrinking as a portion of the economy for 45 years, from representing more than a quarter of economic activity to just 12 percent today, a decline that helps explain the nation’s anxiety about the future of the middle class.

The slide is the result of many factors, including dwindling union membership and automated factory technology, but largely reflects the rise of low-wage jobs overseas. In the past decade, fueled in large part by open trade with China, factories have shed millions of jobs.

The policies of presidents of both parties have over the years been shaped by the widely held view among economists that manufacturing’s decline — like agriculture before it — was inevitable and even beneficial for American consumers, who snapped up inexpensive products made overseas.

As someone who began his career organizing jobless factory workers, Obama came to office with a view that more should be done to protect these communities, but he wasn’t sure exactly what was possible. “I cannot wish away the sometimes competing demands of economic security and competitiveness,” he wrote as a senator.

Faced with an economic crisis, he deployed federal stimulus money to jolt a domestic clean energy industry to life. And months later, Obama pumped tens of billions of dollars into General Motors and Chrysler to save them.

His economic advisers were not always fully comfortable with these actions, which involved a profound government intervention in the private market, but agreed that clean energy had broad benefits to society and the collapse of America’s auto industry in the midst of a deep recession would have been catastrophic.

The view of Lawrence Summers, a Harvard economist and one of Obama’s top economic advisers, was best captured in an e-mail he wrote to an outside investor about the administration’s loan to Solyndra.

“I relate well to your view that gov is a crappy vc,” Summers wrote, referring to venture capitalist. “But suppose we think there are all kinds of externalities to renewable investments. What should we do?”

Beyond responding to crises, the question was whether Obama would try to do something more transformational: rebuild manufacturing in America. To many inside and outside the White House, the answer during the first half of Obama’s term was no.

Sense of urgency

In spring 2010, before a series of meetings with China’s leadership, Obama gathered with his topic economic advisers in the Roosevelt Room of the White House for a private briefing with outside experts.

One of the first speakers was Clyde Prestowitz, an old Washington hand and policy adviser to the semiconductor giant Intel. He had long advocated government investment in manufacturing and a hard line with China, which essentially makes it cheaper for companies to operate there through subsidies.

“As a fellow Kama’aina,” Prestowitz recalled telling Obama, using the Hawaiian word for “child of the land,” “one of the problems is we’re losing jobs we’re good at.”

That caught Obama’s attention. Prestowitz described how Intel was on the verge of opening its first high-tech semiconductor fabrication plant in China. Intel wasn’t looking for cheap labor, he said, but was pressured by Chinese leaders, who tended to offer free land, low taxes and other incentives.

“What do you think we should do?” Obama asked.

“We need to match the incentives and the urgency,” Prestowitz said.

After the meeting drifted to other speakers and topics, Obama brought it back with a staccato of questions: “Why can’t we make batteries in America? Why can’t we make fast trains? Why we can’t make windmills?”

Prestowitz recalled being struck by the fierceness of the president’s questions but also wondering why more was not being done to answer them. As an outsider, his guess was that Obama’s economic advisers hadn’t made it a priority.

“My impression was, hey, this is the real president and he’s got red-blooded American instincts,” Prestowitz said. “But it’s not his area of expertise and he’s got all his advisers here — and they are smothering his instincts.”

A policy split

Prestowitz’s assessment hinted at a divide within the White House that was getting in the way of a more ambitious manufacturing plan.

One camp, led by Biden and Bloom, represented Obama’s political instincts, his sense that something had to be done to help manufacturing workers. Biden “has a very tangible, gut understanding of the importance of manufacturing to the communities across the nation,” said Jared Bernstein, Biden’s former chief economic adviser. These advisers channeled the views of labor unions and Democratic politicians who saw in manufacturing a way to show workers how government was protecting their jobs.

They wanted more subsidies, to refurbish old factories and turn them into production facilities for electric car batteries and wind power turbines, and more aggressive trade sanctions against China.

But then there were Obama’s economic advisers — famous academics such as Summers and Christine Romer and financial policymakers such as Timothy F. Geithner — and their faith was in conventional economic theory.

And that meant a preference for unfettered trade. One adviser had written a study defending the importance of offshoring.

And if the government was handing out subsidies to manufacturers, the aides worried that those with the best lobbyists would get them — rather than firms with the best business prospects. More than that, the economists viewed manufacturing as a bit of a distraction, with unemployment still high and fewer than 1 in 10 of the nation’s jobs in the industry.

‘We can do it’

Obama had tapped Bloom, who had spent his career working with displaced steelworkers and other factory hands, to sketch out a manufacturing plan. But in an office outside the White House gates and lacking any real authority, Bloom had struggled to gain traction.

“I just found that I wasn’t able to get space for it,” he recalled.

A year ago, Obama and Bloom sat in the presidential limo winding south toward a manufacturing event in Alexandria. On that ride, Obama made clear that he wanted an ambitious manufacturing strategy. He “wanted this change in administration focus to be real,” Bloom said.

In the limo, Obama looked at Bloom and asked, “Why is Germany so successful at running a high-wage manufacturing sector?

The country’s culture, Bloom responded. It has a long tradition of job training programs integrated into the fabric of German society. And the country’s banks have made a top priority of financing manufacturers.

“Why can’t we do this?” the president demanded.

Bloom said there are things the United States could do: subsidize research and development, build stronger relationships between universities and companies, better enforce trade laws. The president could use the bully pulpit more, too.

Obama then did something unusual for the professor-president. He offered a view from his gut.

“If they can do it,” he said, “we can do it.”

Window of opportunity

The president was not just taking a leap of faith as he began to push his team to build a manufacturing plan. He was making a considered judgment, influenced both by political calculation and emerging economic evidence.

From centrist Democrats in the House like Steny H. Hoyer (Md.) to old-fashioned liberals in the Senate like Sherrod Brown (Ohio), the president had faced intense pressure to promote domestic manufacturing. Hoyer’s motto, “Make it in America,” even made it into one of Obama’s speeches.

Obama’s political advisers reviewed polling data showing the popularity of manufacturing. And, of course, it had special appeal in swing states in the Midwest.

Beyond politics, Obama based his thinking of new economic research and data. Research showed how unfettered free trade with China had led to fewer jobs and lower wages in the United States and outsourcing was depriving the nation of the know-how, production facilities and skilled workforce that is necessary to build the high-tech products of the future.

But he also saw signs that the United States might be able to reverse these trends. China’s low-cost advantages were beginning to wane. The auto industry, and manufacturing overall, had started to bounce back after recession lows. Academic research suggested that manufacturing had unique benefits that “spill over,” leading to better paying and more secure jobs and benefiting companies down the supply chain.

Manufacturing was the one area where business and labor leaders alike agreed progress could be made.

“He certainly feels that his economic instinct that there could be a resurgence in manufacturing has been increasingly validated,” said Gene Sperling, a Michigan native with a soft spot for manufacturing who replaced Summers as Obama’s top economic adviser.

A building block

In his State of the Union address earlier this year, Obama invoked manufacturing 15 times — on earlier occasions, he had never mentioned it more than three times — and called it the building block of his economic vision.

Still, the strategy has skeptics. Romer, Obama’s former top economist, wrote an op-ed saying the president’s case isn’t “completely convincing.” In an interview, she said it is right for the White House to ask whether manufacturing has special benefits, but said the evidence it cites is “inconclusive.”

While manufacturing is enjoying a modest rebound from a slide in the recession that was unusually swift, it’s not clear the growth will be sustained. Last month, after growing since the end of the recession, the nation’s manufacturing activity suddenly started to contract.

What’s more, as a result of international competition, wages for many factory jobs are under immense pressure not to rise. And while China might be paying its workers more, U.S. wages are still many multiples of what laborers are paid there.

Sperling said the president is optimistic, but understands not every job is coming back. “He doesn’t want to over-promise by suggesting we can protect every job from global competition,” he said.

Still, on the campaign trail lately, Obama has been raising a lot of hopes.

“I bet on American manufacturing,” the president said in Cedar Rapids, Iowa, on Tuesday. “What’s happening in the auto industry can happen in other industries, and I’m running to make sure it does. I want high-tech manufacturing to take root in places like Cedar Rapids and Newton and Des Moines.”

And not just in those places, according to his stump speeches. Obama has said manufacturing can come charging back across Ohio — in Youngstown, Cleveland and Columbus. There’s great promise, too, in Pittsburgh, Detroit and Baltimore. And across this land, from Richmond and Charlotte to Chicago and Denver — all places where he’s said manufacturing should see a renaissance.

 

12 Responses to “Can Obama save manufacturing?”

  1. Mo says:

    An economic report delivered to Reagan in 1982 showed that over 25% of all services in the economy get consumed in manufacturing processes. So you can’t have a services economy without a manufacturing base. Unfortunately politicians think service sector jobs are only waiters, tour guides and customer service reps.

    Also nothing in free trade theory or economic theory says the economy will eventually mature into a services economy. Politicans saying this are engaging in central economic planning where they believe their opinion or the opinion their economic advisors give them is fact. All that happens is that as manufacturing gets more captial intensive it may become more automated. But just because a sector becomes more automated doesn’t mean it loses its importance. Look at the agricultural sector. Only a few million people farm in the US today but over 30 million people work in food services which involves workers working in veterinary medicine, fertilizer research and production, transportation, genetic engineering, etc.

  2. Aditya says:

    Very good article on manufacturing in the US,I work for McGladrey and there is a whitepaper on the state of manufacturing in the US, readers may find it interesting @http://bit.ly/IzVhuU

  3. China Watcher says:

    Speechmaking aside, what has the president done?

  4. David Albano says:

    THE REAL QUESTION IS WHAT HAVE THE REPULICONS DONE?

  5. Jim Schollaert says:

    Believing in opportunistic campaign rhetoric, when a politician’s financial supporters and past record clearly contradicts that rhetoric, will get you nowhere. In other words, those who ignore history are doomed to repeat it.

    • There is a little difference in political issues in America, the little difference is focus. The big difference is whether an issue has an election focus or is it a genuine policy issue. As a reader of Senator Fritz Hollings’ writings, U.S. Administrations have limited the trade deficit to an election issue, at least as far back as the Johnson Administration. Politicians perpetrate this shell game by engaging in fragmented thinking, picking and choosing the aspects of an issue that is convenient for them to propagate their ideology. With a comprehensive or systemic approach to the issue lacking, no meaningful solution ever has a chance to get vetted.

  6. Bob Goldschmidt says:

    Up until 1970 our wages tracked productivity and the Middle Class had plenty of purchasing power to drive our economy For the past four decades we have seen continued wage destruction due to outsourcing resulting from the lowering of tariffs well below 10%, the emasculation of unions, the reformation of monopolies and rapid automation.

    The resulting wage-productivity gap means there is not enough wage-based demand to keep our economy afloat. That is why the Fed encouraged the housing bubble with low interest rates and subprime, negative amortization and undocumented loans. Greenspan even encouraged homeowners to tap their equity. All of this was done to fill the wage-productivity gap with rapidly rising credit to keep our economy from faltering.

    Now that inevitable bubble has burst, and we have come down to earth, we need to understand that shipping jobs to low-wage countries is knocking the economic pins out from under our economy as it is in Europe. Since we don’t have any form of a world government with enough teeth to control these damaging flows, each country must look out for its own financial health and the only proven method for accomplishing this is with higher tariffs — the same 30% tariffs that the US imposed during every period of significant growth (except after WWII when most of the world industrial capacity had been destroyed).

  7. Frank Shannon says:

    Why now? When he campaigned in 2008 we heard the same rhetoric. After 3.5 years in office – nothing. Now he is campaigning agian on the same promises.

    Fool me once – shame on you. Fool me twice – shame on me. He really must think we are fools.

  8. Bob Goldschmidt says:

    The Japanese and South Koreans developed their Auto and Electronic industries with federal funding and China is eating our lunch right now in Solar with federal subsidies. Are they so smart and we so stupid when it comes to investing in our future? I think not. Well over half of our industries today are the result of fallout from the NASA Moon Mission while the Internet was developed by DARPA. Let’s stop measuring ourselves by a double standard with respect to the rest of the world and start investing in our future — energy transformation and quality life-extension technology.

    • Tom T. says:

      What company would invest in manufacturing in the U.S. when they know that Chinese imports will under cut them whenever they want and our USTR will not be proactive in stopping predatory tactics by foreigners? No one in their right mind would invest in the U.S. under these circumstances unless there were sufficient barriers of entry into the industry or their markets.

      We currently have a “free trade” policy that is self destructive. As Bruce says, the costs imposed in the U.S. on labor, tax revenue, the environment or other is not imposed on imported goods. Imports have a comparative and competitive advantage because that has been the policy we have adopted.

      Free trade is great when everyone has to follow the same rules. In the United States everyone has to follow the same rules (not really because cronies get advantages handed out by politicians for their support).

      This is so simple that a 5th grader could understand it. I am beginning to believe that the competence level of our policymakers is much below a 5th grade level, thanks in part to these over educated MIT advisers and the bubble that is bought and paid for by the oligarchs.

      “His economists, top academics from schools like Harvard and MIT, replied that there wasn’t much evidence. In fact, they argued, manufacturing represented relatively few jobs in the nation’s economy. And governments had terrible records of investing in specific industries, anyway.”

      Since a 5th grader can understand this in much simpler terms, perhaps we would be better off paying 5th graders the MIT and Harvard economist’s salaries and give the advisers a 5th grade allowance. Just think, we could decrease the costs of college at the same time.

      Tom T.

  9. Bruce Bishop says:

    Over the last six months, Obama has golfed 10 times and held 106 fundraisers, but his jobs council has never met.

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