Is Obama Getting Serious About Manufacturing? Maybe

Let's take a look at a speech recently given by Gene Sperling, Director of the National Economic Council. It's a good metric of whether the administration "gets it" on manufacturing, and gives a fairly clear picture of the evolution of its thinking.
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America has been waiting a long time for the Obama administration to get serious about the problems of our manufacturing sector.

Finally, there has been a small sign that the corner may -- may -- be turning. Let's take a look at a speech recently given by Gene Sperling, Director of the National Economic Council.

I've edited it a bit for length. But it's still a good metric of whether the administration "gets it" on manufacturing, and gives a fairly clear picture of the evolution of its thinking.

Ignoring the introductory material, here's where Sperling cuts to the chase, i.e. the fact that mainstream economists generally believe that it's a waste of time to pay any special attention to manufacturing -- a sector they see as an inevitable and well-deserved decline as America's economy shifts to better things:

Many economists raise the concern that any focus on manufacturing is distortionary industrial policy or misguided because they believe that manufacturing is in an inevitable and irreversible decline due to decades-long productivity and technology gains that will mean a continual loss of jobs.

This is precisely the myth Americans concerned about manufacturing are fighting, whenever they try to convince Washington that something needs to be done to help the sector.

But it is a myth, as the number of U.S. manufacturing jobs was actually fairly stable from 1965 to about 2000, and productivity was growing all that time. Productivity on its own doesn't kill jobs, because while it may reduce the number of workers needed to make any one product, it also makes it possible to produce more products at a saleable price. Which makes it more profitable to employ manufacturing workers, so jobs are (as they were for decades) created to replace those that are lost.

So no, it's not productivity that's been killing American manufacturing jobs. It's something else, some factor that suddenly got a lot stronger after about 2000. The right answer here is "a $500 billion a year trade deficit and unfair international competition, due to currency manipulation, foreign trade barriers, intellectual property theft, and related factors."

Sperling continues...

Yet, we do believe that even if today only 12 percent of the U.S. private-sector workforce is employed in manufacturing, it is a sector that punches above its weight. When you take into account the outsized role that manufacturing plays in innovation through:

•R&D investment and patents

•The tight linkage between innovation and manufacturing production

•The higher-wage jobs it produces

•Its importance for exports

•The spillover benefits that manufacturing facilities have on firms and communities around them

•The deeper economic harm that comes from allowing our manufacturing production capacity to be hollowed out

Aha! This is what we need to be hearing from the White House. Yes, manufacturing really is a uniquely important sector. It is false that, from a economic point of view, "Computer chips, potato chips, what's the difference?" -- in the words of Michael Boskin, one of George H.W. Bush's economists.

Sperling goes on to successfully hit all the key points of this problem. Manufacturing, contrary to its image as an outdated sector, is responsible for 70 percent of America's R&D, despite being only 12 percent of our economy. And it's very hard to innovate, or learn to make things better, when you don't know how to make them in the first place. Manufacturing jobs average about 25 percent higher pay than non-manufacturing jobs. Manufacturing is also the key to America's trade deficit, as we can't balance our trade by exporting more soybeans or movies: the numbers just don't add up.

The economic evidence is increasingly clear that a strong manufacturing sector creates spillover benefits to the broader economy, making manufacturing an essential component of a competitive and innovative economy.

Correct. America can't be a serious country -- let alone a superpower -- without a world-class manufacturing sector.

When an economic activity has positive spillover effects that an individual firm cannot capture, there is a risk we as a nation under-invest in areas that can be beneficial to the economy at large.

Correct. The free market -- which doesn't exist in foreign trade, anyway -- won't solve all our problems. Contrary to laissez-faire mythology, which would have appalled Republicans such as Teddy Roosevelt and Abraham Lincoln, there is a public-sector component of economic growth. This is not a liberal or a conservative idea, it is just true, though liberals and conservatives can (and should) argue about the right way to implement it.

If we care about the location of the innovation, we should also care about the location of the manufacturing production. ... The ecosystems that grow up around these intersections of innovation and production tend to be complex. They are the result of evolutions that occur over periods of years and decades. Once the virtuous, reinforcing cycles are broken they are difficult to recreate, and they can turn to a vicious cycle. ... That's why losing pieces of our manufacturing base should be such a serious concern.

A strong manufacturing sector is not the work of a day, or of any one single government policy. It is something that takes decades to build up. It is therefore something that we should not allow to be torn down by the mercantilism of foreign nations. We can't afford to wait until all the damage is done, as then it will be too late.

Without these capabilities, companies do not create the process technologies that allow firms to create and scale new products. So when we remain indifferent to the decision to compete for the manufacturing products of the present, we have to understand that if it leads to a more serious loss of our manufacturing capacity, it can trigger the loss by our nation of the ability to compete for and create the next generation of technologies. It's a story we're already all too familiar with in the United States. In consumer electronics. In metal castings. In machine tools and others. In each industry, firms shifted production out of the U.S., sometimes as products became commoditized. The subsequent loss of manufacturing capabilities led to leadership in other industries being developed elsewhere.

All sadly true. Losing manufacturing abilities doesn't just cost us today; it shuts us out of the industries of the future. GM was forced to import the batteries for the Chevy Volt from South Korea because nobody in the U.S. had the know-how to make them anymore. China is systematically targeting and killing off America's solar-cell industry.

Now we get to the administration's proposed solutions, and things start to sour.

The president's plan for business tax reform is focused on eliminating loopholes and simplifying tax rates to make the U.S. a more attractive location for firms to invest to spur growth. Recognizing the intense international competition for manufacturing and the benefits manufacturers provide to the rest of the economy, our plan would lower rates for manufacturers to 25 percent and even lower for advanced manufacturing.

Uh oh. This proposal falls squarely into the category of "favors the recipient never asked for." I don't recall any major organization in this field ever suggesting that manufacturers deserve a special favor on taxes. That would be the kind of naked special pleading that our opponents seem to assume, as a matter of course, that we do. I'm not aware of any. (My apologies if I am mistaken; feel free to write me if you know otherwise.)

American manufacturers don't need special favors from the government. They do need to be not especially harmed by unfair foreign competition. The aggressive, cheating economic strategies of foreign nations -- starting with China but not ending there -- hit the manufacturing sector much harder than the service sectors, which make up 75 percent of our economy. The manufacturing sector is structurally vulnerable to trade problems because most manufactured goods, as opposed to most services, are tradable.

That's why the administration is investing in innovation to support manufacturing, increasing our support for advanced manufacturing technologies by 19 percent to $2.2 billion in FY13. We recognize investing in basic research isn't enough to make sure that a new technology crosses the bridge from invention to product development to manufacturing at scale. The president proposed a National Network for Manufacturing Innovation, the creation of up to 15 manufacturing institutes to fill this gap in our innovation infrastructure by letting companies collaborate and access the capabilities of our research universities to support scaling up manufacturing production.

Now this bit is actually good. One of the few special favors the manufacturing sector may legitimately lay claim to is government support of technological research. Why? Because scientific discovery, and its cousin infratechnology, tends to benefit everyone who eventually commercializes it -- not just whoever paid for it. So the profit motive isn't enough, and there's a legitimate public-sector role.

America used to understand all this. (Funny how we used to be the world's unquestioned No. 1 economy.)

Unfortunately, the specifics mentioned here stuff are mostly in the proposal stage. We'll have to see if they really mean it. The past three years of this administration don't exactly fill one with hope here.

And finally, that's why the president has built on a strong record of trade enforcement with new measures to enhance our ability to go after unfair trade practices, including those of China. In September 2009, President Obama ordered safeguards applied to tire imports from China, a move that addressed a surge of tires from China, adding over 1,000 workers in the process. In so doing, the president applied the "Section 421" safeguard law for the first time since China joined the WTO in 2001 -- an action that President Bush never took. In fact, the president has nearly doubled the rate of WTO cases against China from the previous Administration.

Now we're getting downright disingenuous. Anyone who deals with these issues knows three things, none of which is reflected in the above paragraph:

1) The U.S. already has all the bureaucratic institutions in place to enforce our trade laws, with China as with every other country. We just don't use them. Until the political decision is made to offend the multinational corporations and get serious about trade enforcement, new laws and new institutions will mean nothing. It's just posturing to convince people the administration is "doing something."

2) China's currency manipulation is the elephant in the room here. Any administration that wants to "help" American victims of unfair foreign trade practices, but isn't doing anything about currency manipulation, simply isn't serious. It's a 30 to 40 percent subsidy to Chinese exports plus an equivalent tariff on American imports. And it drags along third countries whose own currencies are affected by the dollar-renminbi exchange rate.

3) The "rate" of bringing WTO cases is irrelevant, because the dollar amounts of different cases vary so widely that one big case may make more difference to the American economy than 10 small ones.

Just two weeks ago, the administration brought a new trade case against China on rare earth materials, which are key ingredients making many high-tech products like advanced batteries and high-tech magnets. And in February, the president launched an Interagency Trade Enforcement Center (ITEC), which will enhance our capacity even further, representing a "whole-of-government" approach to addressing unfair trade practices. The president's fiscal year 2013 budget includes $26 million in funding and 50 to 60 dedicated staff.

More nice little bits of posturing. Which on their own aren't bad, but do rather smell of panic in the West Wing of the White House over losing manufacturing states in the next election, rather than a serious policy change.

So where is Obama now on trade and manufacturing? I can't really tell.

Ironically, this is also how I feel about presumptive Republican nominee Mitt Romney. As I've written before, his policy on these issues, though he promises to designate China a currency manipulator on day one in office, leaves one in a state of uncertainty as to whether he really means it. Attacking Obama on China seems to be an emerging element of his strategy to win, but he has a lot of rich friends who'll be seriously offended if he ever does fix the currency problem.

Somebody is going to have to fix America's trade mess -- the key but not sole requirement for restoring American manufacturing to health. But whether it will be a Democrat or a Republican is still up for grabs at this moment.

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