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US Battle to Revive Manufacturing – Part II

Jobs remain a central concern for the US voters and the 2012 presidential campaign. Candidates of opposing parties, and even insiders of the Obama administration, debate whether government intervention, including subsidies for particular industries, helps or hurts companies. This YaleGlobal series analyzes the US effort to jumpstart manufacturing, and in the second article, Clyde Prestowitz, president of the Economic Strategy Institute, argues that the US needs to join other economic powerhouses, including China, Japan and Germany, in developing an industrial policy to compete in global markets. China assembles high-tech equipment for firms based in the West, but the intricate components – digital signal processors, chips, optics – come from Japan, Germany and the United States. Manufacturing accounts for two thirds of all research and development, explains Prestowitz, who prior to founding ESI served as counselor to the US secretary of commerce in the Reagan Administration. He argues “if manufacturing contributes disproportionately to economic welfare, perhaps it deserves disproportionate attention.” – YaleGlobal

US Battle to Revive Manufacturing – Part II

The US must do what’s routine for competitive economies – develop an industrial policy
Clyde Prestowitz
YaleGlobal, 13 April 2012
State of industry: Government-subsidized solar panel factory contributes to Chinese domination of the market (top); General Motors, aided by the US government, manufactures an electric car, the Chevy Volt

WASHINGTON: Unmentionable in America for the past half century, industrial policy is suddenly out of the closet and marching down Pennsylvania Avenue from the White House to the Congress and may even be about to storm the long hostile bastions of Anglo-American economic orthodoxy.

In his State of the Union address, President Barack Obama called for revitalization of manufacturing as the basis of an American economy “built to last.” He proposed a number of measures such as special tax credits for investment that creates high valued-added manufacturing jobs in America and greater government support of R&D in manufacturing. Even more telling was another speech given on March 27 at the Washington Manufacturing Conference by National Economic Council Director Gene Sperling, the president’s top economic adviser since Larry Summers returned to Harvard.

For those accustomed to Summers’ tight embrace of market fundamentalism and rejection of anything that might smack of government intervention in the market, the speech represented a surprising 180-degree shift. Long Summers’ trusty acolyte, Sperling turned his back on virtually everything the master had preached. Wasn’t it wrong to single out one sector of the economy for special attention? Not necessarily, because if that sector is manufacturing, it accounts for over two thirds of all private R&D spending and a higher than average proportion of productivity gains and innovation. So, if manufacturing contributes disproportionately to economic welfare, perhaps it deserves disproportionate attention.

Obama’s instincts are similar to those of most Americans who wonder why so much of what they buy is made in China.

But wouldn’t such attention distort markets and cause inefficiencies and misallocation of resources? Well, no, not necessarily, because economic studies have shown that there are positive spillovers, gains for the overall economy that cannot always be captured by one firm and won’t be developed without some public support.

These arguments are not at all new. As a member of the Reagan administration, I had this same discussion 30 years ago with a member of the Council of Economic Advisers. The arguments are as valid now as they were then. But they were buried by successive waves of hate-government-intervention-of-any-kind Republican economists and love-rational-expectations-econometric-models-of any-kind Democratic economists. 

So the arguments are now being exhumed.

The reasons are twofold. At one level, it’s simple. The president is asking some fundamental questions. At a White House meeting which I attended more than a year ago, he asked: “Why can’t we build high-speed trains in America? Why can’t we make batteries in America?” So Obama’s instincts are not so different from those of most ordinary Americans who wonder why everything they buy is made in China, Japan or Germany. His questions trigger a search for answers. At a more fundamental level, the president is asking these questions because he knows that America is not paying its way in the world and that its productive base is no longer generating sufficient wealth to maintain America’s far-flung geopolitical commitments while also delivering the American dream to future generations. The president knows that if he can’t revitalize the productive base, he and the country will both fail. And in the search for answers, his advisers have inevitably been driven to industrial policy.

So far, they’ve only addressed one dimension of the industrial-policy argument and that is, perhaps, the less important dimension of so-called positive spillovers or externalities. There’s nothing wrong with that argument, but the most compelling reason why America must have a pro-active industrial policy is because most of the other leading economic players – Korea, Germany, China, Brazil, Japan and others – do.

Countries can determine their own future or have it determined by another country’s industrial policy.

In such a world, the choice is not between having a policy or not. It’s between determining your own future or having it determined for you by another country’s policy. Take solar panels as an example. Three years ago at a White House meeting there was a debate about whether or not to provide favorable government-backed financing to US producers of solar panels. At the time, I noted that Germany, Denmark, Japan, Korea and China were all providing massive subsidies to their solar industries and argued that unless the United States was prepared to match those subsidies it would be madness to consider an American entrance into the industry. I was told that market forces would prevail, and I asked, “What market forces?” Obviously the market was determined by the countries providing massive subsidies.

Today, US solar producers are in desperate trouble, and China along with Korea and Japan appear to be dominating the global markets. If a major country adopts a policy of becoming a dominant player in an industry, that policy will preclude other countries from developing that industry unless those countries have similar and countervailing industrial policies.

So the decision not to have an industrial policy is also a decision to exit those industries in which other countries do have active industrial policies. In short, no policy is a de facto policy. In view of the large variety of comprehensive industrial policies of the likes of China, Brazil, Japan, Germany, Korea, Singapore, Taiwan, France, Sweden and Israel, it’s difficult to imagine that the United States can remain competitive in many industries without effective industrial policies. This inexorable conclusion has led to the resurrection of industrial policy in Washington.

Many believe the objective of industrial policy should be a manufacturing renaissance that will create millions of high-paying manufacturing jobs. Unfortunately, this is virtually a contradiction in terms. High-paying industries are not likely to be labor intensive. On the other hand, others seem to assume that whatever Americans can do in manufacturing, Asians and Germans can do better. That is also far from the case.

What America needs and can do is capital and technology-intensive manufacturing that may not create a lot of direct jobs, but will create the wealth that creates many innovations and industries that create lots of high-paying indirect jobs.

It’s difficult to imagine that the US can remain competitive in many industries without effective industrial policies.

Think about it this way. There’s been much talk about Apple producing its iPhones and iPads in China and about how Steve Jobs told Obama that “Those jobs are never coming back.” But which jobs was Jobs talking about? The iPad is not really made in China. It’s assembled in China by workers being paid a 10th or less of what American assembly workers would need to be paid. Maybe those assembly jobs aren’t coming back. But they account for only about $7 worth of a $200 iPhone. The heart of the iPhone is its high-value components such as digital signal processors, electronic displays and memory chips. Those aren’t made in China. Rather they’re made in Japan, Taiwan, Korea, Germany and the United States. Production of these components is not labor intensive. There’s no reason why they can’t be produced competitively in the United States.

To achieve that, a new US industrial policy should focus on providing incentives such as free land, tax abatements and low-cost loans to lure global companies to put new production facilities in America. At the same time, the US government must aggressively coordinate with corporations to identify regulations and other measures that might be altered to enhance the attractiveness of investing in America. There should also be special training programs for workers and constant discussion between US officials and global companies about their needs and opportunities in the United States.

In short, Washington needs to start doing what many other countries do routinely. It’s not rocket science. It’s just good old industrial policy as first invented by Alexander Hamilton

Clyde Prestowitz is founder and president of the Economic Strategy Institute. Prior to founding ESI, he served as counselor to the Secretary of Commerce in the Reagan Administration. He regularly writes for leading publications, and his latest book is The Betrayal of American Prosperity: Free Market Delusions, America's Decline, and How We Must Compete in the Post-Dollar Era.

Rights:Copyright © 2012 Yale Center for the Study of Globalization

Comments on this Article

23 April 2012
Re instincts of Obama, I have based my view of his instincts on personal discussions with him. He did not actually say anything about manufacturing policy or about his intentions. He only asked questions. But I inferred from the nature of some of his questions that he has an instinctive feeling that America probably should be manufacturing more things. I don’t know why it has taken him four years to begin to articulate a manufacturing strategy, but I suspect that a lot of it had to do with the fact that Larry Summers, who has always been a manufacturing skeptic, was his chief economic adviser. With Summers gone, it seems Obama is moving more toward his own instincts. That is my sense of things, but, of course, I could be wrong.
-C Prestowitz , Response
23 April 2012
With scaling up of capital and technology intensive manufacturing, sufficient wealth should be created to enable generally rising wages in non-tradable sectors while the high-tech manufacturing assures continuing competitiveness and trade balance.
-C Prestowitz , Response
19 April 2012
The article mentions Obama's instincts...
A politician's instinct is to go where the votes are!
If to get those votes the politician has to lie, he will lie!
So, do not count on politician's instincts as a savior for the market...
By the way, Obama is there for four years, has anyone wondered why he took so long to find out aboutthis manufacturing decline thing?
-Paulo Borges , Brasil
19 April 2012
Thank you, CP. My question had to do with scaling up,and particularly of scaling up high tech low labor industry. How do the additional value figures you cited change as this sector of the national economy grows? What happens in other sectors if the domestic labor costs remain high? Is there up or down wage pressure on the domestic high labor sectors? And how does it play out globally if one or a few countries focus development this way? Does higher labor-lower tech manufacturing become a larger part of the production sector in other countries? Have these things been modeled out?
-BW , USA
19 April 2012
In response to the comments on the environment, it is of course true that jobs created at the expense of the environment are not real, long lasting jobs. The fundamental problem is that of the commons for the preservation of which we do not provide prices or costs. In fact, the global supply chain of our present globalization essentially assumes no cost in terms of carbon, water, and other pollution. From this perspective any policies that tend toward local production and away from global supply chains are to be welcomed.
-Prestowitz , Response to Richard and Ana
19 April 2012
One dollar spent on manufactured goods creates about $1.35 of additional benefit for the U.S. economy. This more than any other sector. In retailing for example, the additional benefit of spending one dollar is about $.90. So these ratios suggest that the best way to stimulate additional employment and GDP growth in the U.S. economy is to promote manufacturing. To be competitive from a U.S. base, manufacturers must be capital and technology intensive. So we need investment in things like semiconductor fabrication facilities. Such plants do not directly employ a lot of people but they create high income that, when it is spent and further invested, creates many additional jobs in the services and other sectors.
-Prestowitz , Response to BW
18 April 2012
This article makes such good and common sense. Thank you. You touch on the emergence of low labor high tech industry, and point out that since such industry is not labor intensive the high costs of labor in the US compared to other parts of the world do not create a competitive barrier for manufacturing in the US. You also say that although these industries do not by defintion produce many jobs directly, they can do so indirectly. Can you please comment further on possible viable mixes of high and low labor manufacturing within an economy like ours in the US, and how this interacts with government policy choices?
-BW , USA
18 April 2012
Thank you for post.
-Fragman , Uganda
17 April 2012
I agree with Richard. Currently our planet is under huge environmental constraints that get taken for granted everyday. Without water, oil & food, how can any country flourish?
-Ana , USA
17 April 2012
Any policy decisions need to be made in the light of the ecological constraints that the planet is under. We need to recognize that the over-arching system is the environment and that the economy is a sub-set of that system. Our economy is totally dependent on flourishing ecosystems to produce the food fibre, and other raw materials necessary for any economy to be sustainable. Without question, jobs are important to our society, but jobs created at the expense of ecological overshoot is penny wise and pound foolish. Nature bats last.
-Richard Sumpter , Kansas City, KS