Industrial Policy

Ideas Matter: Obama Adviser Makes the Case for Helping Manufacturing


A General Motors assembly plant in Lake Orion, Michigan.

Photograph by Jeff Kowalsky/Bloomberg

A General Motors assembly plant in Lake Orion, Michigan.

Economist Christina Romer used to work for President Barack Obama, but in February she handed his opponents a big box of ammunition by coming out against one of his top legislative priorities—policies to boost manufacturing. In an op-ed article in the New York Times entitled “Do Manufacturers Need Special Treatment?”, the University of California-Berkeley professor answered, in a word, “no.” Wrote Romer, who was the first chairman of Obama’s Council of Economic Advisers: “American consumers value health care and haircuts as much as washing machines and hair dryers,” thus asserting the equal value of services and manufactured goods to the country.

The Obama administration could not let Romer’s critique go unchallenged, coming as it did from someone who had been a key member of the economic policy team. Ideas matter in Washington, if not quite as much as money and power. So on March 27, Obama economic adviser Gene Sperling gave a speech that eschewed politics—and never mentioned Romer by name—but carefully laid out a series of arguments for why manufacturing matters to the U.S., and why it really does need special treatment.

Sperling, though a lawyer by training, heads Obama’s National Economic Council, which outranks the council Romer formerly headed. His speech shows evidence of being a team effort, as one would expect for an address from someone who sits in the West Wing and has the president’s ear.

The speech drew little notice at the time, although Robert Kuttner wrote about it the next day in The American Prospect. Edward Luce of the Financial Times revived interest in the speech on April 8 in a column called “America reassembles industrial policy.”

From a policy perspective, Sperling did nothing but reiterate the priorities for manufacturing that Obama laid out in his State of the Union address in January, when he called for “an America built to last.” The step forward was not policy but “the fairly detailed use of some of the scholarly evidence that supports the proposition that manufacturing does make an outsized contribution to economic growth,” says Alan Tonelson, a research fellow at the U.S. Business and Industry Council, who participated in the Conference on the Renaissance of American Manufacturing at which Sperling spoke.

Robert Atkinson, president of the Information Technology and Innovation Foundation, another conference participant, puts it even more strongly: “This is the strongest intellectual case any administration has made for manufacturing.”

The debate over manufacturing policy exposes a fault line in economics that is not strictly left vs. right. Romer, after all, is hardly a conservative. She wrote a memo even before Obama took office saying the economy needed a stimulus on the order of $1.8 trillion. But while she may be a Keynesian, she doesn’t believe in intervening to favor one sector of the economy over another. Obama’s new economic team does—and so do some business-oriented economists who are otherwise suspicious of the Obama agenda.

Here, in a nutshell, are some of the arguments for manufacturing policy laid out in Sperling’s speech:

Manufacturing produces positive spillovers: “A 2010 study by economists Michael Greenstone, Rick Hornbeck, and Enrico Moretti found that when a manufacturing plant chooses to invest in a county, the investment resulted not just in new production at the site of the plant but actually increased productivity of other firms in the surrounding area.”

Innovation and manufacturing need to be close: “That explains why Boeing (BA) moved their engineers out of their offices and into their assembly plants, why Intel (INTC) manufactures its latest chips in the U.S., near where the design itself occurs, and why Bell Labs, the source of incredible innovation during the 20th century, ‘housed thinkers and doers under one roof,’ because they knew that understanding how to make things helped them to innovate.”

Productivity doesn’t have to kill manufacturing jobs: “It was exactly during the period where we saw a significant and long-awaited increase in productivity growth in the late 1990s that we saw manufacturing employment start to increase. Indeed, the manufacturing sector added almost 700,000 jobs from 1993 to 1999.”

The U.S. can be a manufacturing powerhouse: “In looking at relative production costs, the U.S. has been able to reduce unit production costs by 11 percent between 2002 and 2010, driven by gains in productivity, while 17 of the 18 other countries tracked by the BLS [Bureau of Labor Statistics]—primarily advanced economies like Germany and Canada—saw their costs rise. When you factor in these changes in relative costs with other risks associated with global supply chains, the U.S. is becoming increasingly more attractive.”

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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