Wonkbook: Is industrial policy back?
"Why did everyone ignore Gene Sperling's industrial policy speech?" tweeted the FT's Ed Luce. Luce's curiosity had a self-promotional tinge: His tweet linked to his Sunday column, which decidedly did not ignore Sperling's manufacturing speech. But he also had a point. Sperling's speech deserved more coverage than it got.
Sperling, director of Obama's National Economics Council, delivered the address on March 27th. You can read it here. It is best read as reopening a debate between economic policymakers and economists that economists thought -- or perhaps merely hoped -- was finished.
The debate, in short, is this: Economic policymakers often want to subsidize specific industries. Sometimes, they think it's a good idea. Sometimes it's just good politics. But in recent decades, academic economists -- an overlapping, but not always identical, group -- largely persuaded their policymaking counterparts that such efforts were counterproductive. "Picking winners and losers" -- also known as "industrial policy" -- substituted the government's imperfect and often self-interested judgments for the cold, clear decisions of the market.
But that debate is no longer closed. In his speech, Sperling builds on recent work from thinks tanks like Third Way and the Breakthrough Institute, arguments from an array of manufacturing titans (notably Intel's Andy Grove and Dow's Andrew Liveris), and even work by some economists to argue that the cozy consensus against industrial policy is, at least when it comes to manufacturing, flawed.
"While we know that economists often start from the premise that any type of preferential treatment of a single type of investment over another is viewed as distortionary," Sperling says, "we also know that 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."
In other words: There's a market failure here. Manufacturing firms, Sperling argues, generate important economic benefits that the firms themselves don't capture -- so-called "spillover effects." There's evidence that they make surrounding firms more productive. There's anecdotal and theoretical reasons to believe they lead to more innovation. There's evidence that manufacturing firms work best when clustered near one another, which means the loss of some firms could lead to the loss of hyperproductive "agglomeration economies" that are worth far more than the sum of their apparent parts.
There is, in other words, a building argument that the market is failing to appropriately price the benefits of manufacturing firms. They're worth more to the economy than they are to individual firms. And that's the key to this new argument: Sperling isn't saying America should support the manufacturing sector because it delivers good jobs, or it's been important to America's middle class, or even because China is competing unfairly. He's saying there's a market failure. And even the most orthodox economists will tell you that it's appropriate for the government to intervene to correct market failures.
For all this, the Obama administration's strategy to promote high-tech manufacturing is modest: A couple of tax cuts, mostly. Some money for research into basic technologies and new techniques. And a sustained effort to talk up the industry's importance and thus signal to investors that America intends to fight for its manufacturing base. None of these are gamechangers. But the fact that they're happening, and that so many policymakers are spending so much time building a theoretical argument to justify sustained support for the manufacturing sector is evidence that, in Washington at least, the game, when it comes to supporting specific industries, is changing.
Democrats are readying a push for the Buffett Rule. "President Obama and Senate Democrats will kick off a coordinated pressure campaign on Republicans next week ahead of a tax day vote on legislation to enact the president’s 'Buffett Rule,' which would ensure that the rich pay at least 30 percent of their income in taxes...The push comes ahead of a procedural vote on April 16 that will decide whether the Senate will even debate the bill, and Democrats give it little chance of reaching the necessary 60-vote threshold. The blitz comes with some risks. After Friday’s jobs report for March fell short of expectations, Republicans will make the case that raising taxes -- even on the very wealthy -- would do nothing to put Americans to work...The Senate legislation would establish a minimum 30 percent tax rate for households earning at least $2 million a year, with a lower minimum rate for incomes between $1 million and $2 million." Jonathan Weisman in The New York Times.
Big companies' strong recovery hasn't helped unemployment. "Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt. An analysis by The Wall Street Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis. Deep cost cutting during the downturn and caution during the recovery put the companies on firmer financial footing, helping them to outperform the rest of the economy and gather a greater share of the nation's income...The performance hasn't translated into significant gains in U.S. employment. Many of the 1.1 million jobs the big companies added since 2007 were outside the U.S. So, too, was much of the $1.2 trillion added to corporate treasuries." Scott Thurm in The Wall Street Journal.
The mild winter may have inflated recent jobs numbers. "Economists say the mild winter has artificially inflated job growth. February alone stole as many as 72,000 positions from March and future months, according to Macroeconomic Advisers...Typically, these bumps in demand are evened out through a process called seasonal adjustment. That allows researchers to compare one month’s economic activity with the next for a more accurate picture of the nation’s health. But this year’s weather was so abnormal that those models fell short, and economists are now scrambling to figure out how much of the growth over the past three months was simply due to a glitch in their systems. 'When the weather does not follow a normal seasonal pattern, then the seasonal adjustment cannot adjust for it,' said Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers. Ylan Mui in The Washington Post.
Some still see a gloomy path -- and even a fresh recession -- ahead in the US economy. "When a lackluster jobs report came in on Friday morning, some economists, investors and forecasters were hardly surprised. Call them permabears. A solid six months of good and getting-better data -- fewer Americans claiming unemployment benefits, rising industrial production and improving economic sentiment among them -- have failed to convince them of the strength of the recovery. Some offer outright dire predictions. There is the Economic Cycle Research Institute, a New York-based forecasting firm, which foresees a new recession. There is A. Gary Shilling & Company, a consulting firm in Springfield, N.J., which argues that the economy will weaken through the rest of the year...Others -- call them the baby bears, perhaps -- simply offer what they say are more realistic assessments of both the weakness of the economy and the tepid pace of the recovery, despite a few months in which a spate of reports surprised to the upside." Annie Lowrey in The New York Times.
'Stand your ground' laws have coincided with a spike in justifiable homicide cases. "In Florida and across the country, 'Stand Your Ground' laws -- the same kind of legislation that authorities cited for not arresting a neighborhood-watch volunteer after 17-year-old Trayvon Martin was killed in Florida in February -- have coincided with a sharp increase in justifiable-homicide cases. Prosecutors still reject many claims of self-defense under the new law, and no long-term studies definitively tie the rise in justifiable killings to the passage of laws that relieve citizens of the responsibility to back away from threats. But the Martin case has focused a spotlight on incidents in which the mere statement that people feel endangered allows them to -- depending on your sense of what’s right -- defend themselves against thugs or act like vigilantes. This sharp turn in American law -- expanding the right to defend one’s home from attack into a more general right to meet force with force in any public place -- began in Florida in 2005 and has spread to more than 30 other states." Marc Fisher and Dan Eggen in The Washington Post.
LUCE: Is industrial policy back? "Could industrial policy be creeping back into fashion? The correct answer is that it never went out of favour, even if the term itself became taboo. Whether it is the schooner-rigging of tax incentives for Wall Street - and the federal tax system’s subsidies for debt over equity - or the panoply of write-offs for Big Oil, Washington never stopped promoting favoured sectors. Manufacturing was simply not among them. America’s competitors, from China to Germany, which have lured away so much research and development, have long recognised that researchers need proximity to their production lines - most innovation comes through trial and error. Only in Washington, and perhaps London, does this still fail to convince. Yet when the facts change, people often change their minds. Sometimes even a hegemon may revisit its assumptions when its global influence is on the wane. Might we be seeing the stirrings of a recalibration in America?" Edward Luce in The Financial Times.
@rodrikdani: The problem with "industrial" policy is it connotes too much manufacturing. It should focus on creating better jobs, wherever.
@rodrikdani: If the US, of all countries, cannot create good jobs in high value services for its middle class workforce, we are globally doomed.
KRUGMAN: Barack Obama is right about Paul Ryan's budget plan. "The Ryan cult was very much on display last week, after President Obama said the obvious: the latest Republican budget proposal, a proposal that Mitt Romney has avidly embraced, is a 'Trojan horse' -- that is, it is essentially a fraud. 'Disguised as deficit reduction plans, it is really an attempt to impose a radical vision on our country.' The reaction from many commentators was a howl of outrage. The president was being rude; he was being partisan; he was being a big meanie. Yet what he said about the Ryan proposal was completely accurate...The proposal is exactly as President Obama described it: a proposal to deny health care (and many other essentials) to millions of Americans, while lavishing tax cuts on corporations and the wealthy -- all while failing to reduce the budget deficit, unless you believe in Mr. Ryan’s secret revenue sauce." Paul Krugman in The New York Times.
WARSH: The private sector, not the government, deserve credit for the recovery. "The medium-term prospects of households and businesses are not significantly affected by fleeting changes in fiscal policy. Families and businesses cash their "stimulus" checks and pocket one-time incentives, but a strong foundation for future growth demands balance-sheet repair. So middle-income families have made tough choices and deferred some consumption. They deserve our encouragement. Instead, government seems keen to tempt them to reacquire old, bad habits—borrow, consume and hope it all works out...U.S. firms—as measured by earnings, profit margins, strength of balance sheet—are also systematically outperforming expectations and foreign peers. This is not due to a government mandate. When the economic environment deteriorated, U.S. companies reacted with force and purpose to cut costs and drive productivity. Because they prioritized, they are now poised to attract capital and grow." Kevin Warsh in The Wall Street Journal.
@conorsen: State/local education employment will fall during Obama's first term -- first time on record that's the case.
CAREY: The last generation is to blame for the explosion in student debt. "American college students now owe more than $1 trillion on their student loans, more than total borrowing on credit cards or auto loans. Given how much people in our society like to drive cars and put their shopping bills on plastic, this is an astonishing sum. Borrowing for higher education used to be rare. Now students routinely leave college with tens of thousands of dollars in debt and, in the current job market, shaky prospects for paying it back. The average amount of student debt carried in the United States by graduating seniors? $25,000. But many owe more than twice that, and forget about it if you plan to get a professional degree. This represents an inter-generational betrayal with far-reaching consequences for the shape of civic life. Basically, our parents have sold us out." Kevin Carey in The New York Daily News.
SHILLER: Financial innovation can be a force for good. "Financial innovation, of course, takes unanticipated forms, but wherever it turns next, we can expect some breathtaking transformations during the careers of today’s students. And despite the damage to its reputation from the subprime mortgage crisis and its aftermath, financial innovation could help solve many vexing problems -- including many for those in the 99 percent. Finance is substantially about controlling risk. If risk management is suitably democratized, and if its sophisticated tools are better dispersed throughout society, it could help reduce social inequality. Future financial innovation, for example, could deal with the problem of rigid entitlements -- like Social Security or health benefits -- that are making our national debt problems so difficult. The essence of finance is that contracts should benefit all parties." Robert Shiller in The New York Times.
Top long reads
Tyler Cowen on how America could once again become an export-driven economy: Over the past twenty years, the United States has suffered an oddly unfavorable position in the global economy. China has been wealthy enough to bid up resource prices, including oil, but not wealthy enough to buy enough major American exports to bring buying and selling into even rough balance. Nor has China been innovative enough to come up with new products for American consumers. As China continues to grow, America will become a bigger winner. Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council.
Elizabeth Dwoskin on Nina Olson, the woman who protects you from the IRS: "There has been only one national taxpayer advocate, Olson, who has held the position since Congress created it a decade ago. She presides over 2,000 caseworkers and data analysts—a sliver of the IRS, which employs over 100,000 people. Individuals, corporations, small businesses, millionaires, and even sovereign nations have sought the help of the Taxpayer Advocate Service, as have thousands of accountants and trained tax preparers who find the tax code and the IRS impossible to navigate. In a typical year, Olson wins relief for 70 percent of the 300,000 people and businesses that open a case, according to her office."
Jazz interlude: Stan Getz plays "I Remember Clifford" live in Copenhagen.
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Still to come: CEO pay stays high; another health law faces a court challenge; lobbyists fight for their right to host; grants for renewable energy created jobs; and a lemur's first experience with rope.
Construction workers have become the focus of a debate over what do to about joblessness. "Why so much attention on construction workers? The reason is that they have become the focus of a much broader political debate among economists over how best to address lingering joblessness. On one side of the debate, some say that a significant chunk of the current unemployment stems from shifts in the economy that have created a 'mismatch' between the skills that workers have and the skills that the economy needs...This explanation suggests that merely stimulating the economy with monetary policy or government spending won’t work...On the other side of the debate are those who believe that more government stimulus is the right way to reduce unemployment. These economists minimize the role of skills mismatch as a cause of unemployment, and say instead that unemployment persists because the economy needs to be stimulated -- and they favor government policy to do that." Peter Whoriskey in The Washington Post.
Executive pay remains sky high. "Is any C.E.O. worth $1 million a day? That’s roughly $42,000 an hour. Or $700 a minute. Or $12 a second. Think of it this way: In the time it took to read those words, you could’ve pocketed $100. Finish this article and -- well, you do the math...Of course, most of us can’t begin to wrap our heads around pay figures like these. An American with a bachelor’s degree, after all, typically makes $2.3 million, not in a year, but over a lifetime, according to a recent study from Georgetown University. Data on C.E.O. compensation in 2011, albeit preliminary, confirm what many of us already know: the top brass generally do much, much better than the rest of us, whether times are good or bad. After the ups and downs of the recent boom-bust years, pay among the 100 best-paid chief executives at big American corporations held fairly steady in 2011." Natasha Singer in The New York Times.
Money for training the jobless is receding. "Across the country, work force centers that assist the unemployed are being asked to do more with less as federal funds dwindle for job training and related services...With 12.7 million people still searching for jobs, the country is actually spending less on work force training than it did in good times. Federal money for the primary training program for dislocated workers is 18 percent lower in today’s dollars than it was in 2006, even though there are six million more people looking for work now. Funds used to provide basic job search services, like guidance on résumés and coaching for interviews, have fallen by 13 percent...At the peak in 2000, the federal government was spending more than $2.1 billion a year in today’s dollars for training programs aimed at dislocated workers under the Workforce Investment Act. Stimulus funds added close to $1.5 billion over two years, but now annual spending has receded to about $1.2 billion." Motoko Rich in The New York Times.
CEO pay at bailed out firms will stay frozen. "Overall pay will remain frozen again this year for chief executives of American International Group Inc., General Motors Co., and Ally Financial Inc., three firms that haven't repaid all their government bailouts, the Treasury Department said on Friday. Treasury gained power in 2009 to approve executive compensation at firms that received exceptional federal assistance, following public outrage at big bonuses paid at AIG after the financial crisis bailouts. CEOs at AIG, GM and Ally didn't request pay increases this year, people familiar with the matter said. Total compensation for the top 69 executives at the three companies fell 10% from 2011, with some getting more and some getting less, the government said. In part, the decrease reflects the departures of some higher-paid executives...The government said its goal in reviewing the pay packages is to ensure that pay doesn't exceed what is offered at comparable firms." Damian Paletta in The Wall Street Journal.
@morningmoneyben: So I'm spending the weekend in a windowless, fluorescent-lit room reading a giant pile of macro research. Isn't everyone?
Mash up interlude: Every Blink-182 album in a minute.
Another health law is heading to court. "Two weeks after fighting for the survival of its signature healthcare reform law before the Supreme Court, the Obama administration will be back in court Tuesday to defend another part of the president's agenda to make Americans healthier. The D.C. Court of Appeals is scheduled to hear oral arguments in a case brought by five tobacco companies challenging regulations requiring graphic warning labels on cigarette packs and advertisements starting in September. Once again, the administration is finding itself accused of overstepping its constitutional authority, this time on First Amendment grounds...While some conservatives are eagerly anticipating another blow against the Democrats' agenda, congressional Republicans have been largely silent on the matter after many of them voted for the law that made the regulations possible...Two other courts - the U.S. District Court for the Western District of Kentucky and the U.S. Court of Appeals for the Sixth Circuit - have upheld the labeling requirements." Julian Pecquet in The Hill.
Debates over Obamacare's constitutionality recall an old case. "It is time to brush up on Lochner v. New York, a 1905 decision reviled enough to lend its name to an era of discredited Supreme Court rulings. Some supporters of the Affordable Care Act saw an apparition in the Supreme Court’s arguments on the act, and recalled the days when the court struck down progressive economic regulations...In its ruling, the 1905 court struck down New York’s Bakeshop Act, which limited the hours bakers could work. Joseph Lochner, a Utica baker, had been convicted of requiring his employees to work longer hours. He challenged the constitutionality of the law under the 14th Amendment, which provides that no state shall 'deprive any person of life, liberty, or property, without due process of law.' The court agreed, finding a 'liberty of contract' that disallowed New York’s attempt to regulate such working hours." Robert Barnes in The Washington Post.
As the recession hit, welfare limits hit the poor. "Perhaps no law in the past generation has drawn more praise than the drive to 'end welfare as we know it,' which joined the late-’90s economic boom to send caseloads plunging, employment rates rising and officials of both parties hailing the virtues of tough love. But the distress of the last four years has added a cautionary postscript: much as overlooked critics of the restrictions once warned, a program that built its reputation when times were good offered little help when jobs disappeared. Despite the worst economy in decades, the cash welfare rolls have barely budged. Faced with flat federal financing and rising need, Arizona is one of 16 states that have cut their welfare caseloads further since the start of the recession -- in its case, by half. Even as it turned away the needy, Arizona spent most of its federal welfare dollars on other programs, using permissive rules to plug state budget gaps." Jason DeParle in The New York Times.
The White House appears to have dropped its effort to force government contractors to disclose political donations. "The Obama administration has all but abandoned its push to require federal contractors to disclose their political donations. A year ago, the White House composed a draft executive order that would have forced potential government contractors to reveal their political spending as a condition of submitting bids. But roughly 12 months later, no final order has been issued, and supporters and critics alike say they've seen no signs such a change is forthcoming...Leaked last April, the administration's draft order would have required contractors vying for federal projects to disclose any contributions to candidates, parties or third-party political groups exceeding $5,000 in the two years prior to submitting the bid. The rule would have applied to both companies and the individuals running them." Mike Lillis in The Hill.
Lobbyists are fighting limits on their ability to host federal employees. "Tough new limits proposed on the way special interests could court executive branch officials have prompted a fierce counterattack from lobbyists who fear they will end a cherished Washington ritual: hosting federal workers at events like conferences, cocktail parties, galas and movie screenings. Filmmakers and farmers, gun makers and real estate agents, and people in dozens of other industries say the rules under consideration by the Obama administration would choke off their ability to have a mutually beneficial dialogue with government officials. As a result, they say, public policy would be made in a vacuum, and federal rules would be more unrealistic and unworkable. The proposal would extend restrictions now on political appointees to more than two million government workers. Federal employees could no longer accept 'gifts of free attendance' at the many seminars, receptions and other social gatherings held by registered lobbyists and lobbying organizations." Robert Pear in The New York Times.
'Secure Communities' has drawn mixed reviews. "Senior Obama administration officials created major confusion for state and local authorities by providing inconsistent information about a high-profile federal program to identify illegal immigrants who committed crimes, according to a stinging report published Friday by the inspector general of the Department of Homeland Security. The mixed messages about the expansion of the program, known as Secure Communities, from officials at Immigration and Customs Enforcement led directly to 'opposition, criticism and resistance in some locations,' the inspector general, Charles K. Edwards, found. But in a second report released on Friday, the inspector general’s office found that despite the rocky start and continuing political disputes, Secure Communities has been effective at rapidly identifying more immigrants who committed serious crimes -- and in many more places -- than efforts in the past, and at a very low cost to states." Julia Preston in The New York Times.
Many are trying to find a way to measure colleges' performance. "How well does a college teach, and what do its students learn? Rankings based on the credentials of entering freshmen are not hard to find, but how can students, parents and policy makers assess how well a college builds on that foundation? What information exists has often been hidden from public view. But that may be changing. In the wake of the No Child Left Behind federal education law, students in elementary, middle and high schools take standardized tests whose results are made public, inviting anyone to assess, however imperfectly, a school’s performance. There is no comparable trove of public data for judging and comparing colleges. Pieces of such a system may be taking shape, however, with several kinds of national assessments -- including, most controversially, standardized tests -- gaining traction in recent years. More than 1,000 colleges may be using at least one of them." Richard Perez-Pena in The New York Times.
@kevincarey1: Observing that Gates, Jobs & Zuckerberg dropped out of college disqualifies you from serious conversations about college and dropouts.
Adorable animals being adorable interlude: A baby lemur discovers rope.
A grant program for renewable energy was a jobs creator. "A $9 billion Obama administration grant program for renewable energy projects has created tens of thousands of jobs, an Energy Department report out Friday concludes...The report...concludes that the program supported 52,000 to 75,000 construction and installation jobs on average over the three years it was in effect. Between 43,000 to 66,000 of those were indirect jobs in the supply chain (for example, in parts manufacturing). The other roughly 9,400 of the jobs were in the design and development of renewable energy systems...The stimulus-funded program provided cash once a renewable energy project began generating electricity rather than a tax credit the project would receive later on. It was meant to fill a hole left in the private tax equity market by the bad economy. Despite its popularity in the renewables sector, the program lapsed at the end of 2011, and subsequent attempts to revive the program in Congress have so far failed." Alex Guillen in Politico.
Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.