I have often lamented the lack of new economic thinking in Washington, thanks to political gridlock and ideological paralysis. And I have criticized Barack Obama on a regular basis for his unwillingness to bring these new thinkers into his administration. Instead the president has spent a lot of time lamenting that, as I reported in December 2010, Reaganite free-market absolutism still rules Washington. As one prominent economist invited to the White House back then said of a private meeting with Obama, the president complained that "it was hard to change the narrative."
So it's a pleasant surprise to hear some bold new thinking coming from a non-economist, Gene Sperling, who happens to be head of Obama's National Economic Council. In a little noticed speech calling for a "renaissance" of American manufacturing on March 27--highlighted today by Ezra Klein--Sperling got to the heart of the matter: it's time to stop pretending that we can endure without industrial policy of any kind in a world in which the U.S. is no longer automatically the most dominant economy. And yet because our policy-makers continue to pretend that markets will simply take care of themselves, this administration and others have had to do industrial policy on the sly, Jared Bernstein, Vice President Biden's former chief economist, told me for an article I did last fall called "The Left Behinds." "It’s all under an ad hoc hush-hush regime that ends up favoring the groups with the best lobbyists,” Bernstein said. Ad hoc, as in the last-minute bailout of the Detroit automakers or the eleventh-hour rescue of Wall Street in 2008.
The problem with ignoring the need for industrial policy--or dismissing it as just more "Big Government picking winners"-- is NOT just that we are gradually losing U.S. manufacturing, which now makes up only 12 percent of the economy. What is so dangerous to America's future is the loss of manufacturing COMBINED with the reduction of the U.S. market into just another player in a world economy with many new competitors. Why? Because that means that we are at risk of losing, perhaps forever, our best edge in the global economy: innovation. Multinational companies tend to move their R&D to the biggest consumer markets; it is no accident that, according to McKinsey Global Institute, China now leads us in patents and is graduating more engineers and scientists than us. This is happening in large part because China has become such a huge consumer market that U.S. multinationals are flocking to it, and China is reaping the benefits not just in job growth or wealth but more importantly in the innovation game, which will largely determine its future as a global power. We are losing the "virtuous cycle," for example what happened with IT in the '80s and '90s when both most of the consumption and the innovation was occurring here.
This is what Sperling focused on in his speech. Citing work by Harvard Business School professors Gary Pisano
and Willy Shih in 2009, Sperling warned that the "the virtuous cycle can become a vicious cycle, where following the loss of
manufacturing capacity, the unique process engineering expertise cannot be
maintained and our innovative capacity is drained."
Sperling, who since his days as Bill Clinton's NEC head has been a master at trying to find common ground on economic policy, tended to blunt his message a bit by arguing that the U.S. was an attractive place to invest for multinationals anyway. He's right; it is. But he only gave critics fodder with which to say simplistically, yet again, the market will take care of things, and that Obama's plan for infrastructure investments and manufacturing tax credits isn't needed. The future crisis is such that he needs to make his case "clearer than truth," as Dean Acheson once did in making the case for the Truman Doctrine against the Soviets.
Still, at least we are hearing some new economic thinking in town. Hopefully we will hear a lot more.
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