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Manufacturing Policy is NOT “Industrial Policy”

Computer chip example

During the 1992 presidential election, Bush economic advisor Michael Boskin infamously stated “computer chips, potato chips, what’s the difference” to reflect his disapproval of candidate Bill Clinton’s proposals to support the high-tech industry. Many people at the time scoffed at Boskin’s comment, thinking how could anyone actually believe this. But in fact, many, many people believed it and still do. Those people are called neoclassical economists. For them the market is sacred and all-knowing and any effort by government to “pick winners,” no matter how mild or broad, is doomed to failure and will only make matters worse. For these ideologues the actual industrial composition of an economy is irrelevant. If America ends up with no high-tech manufacturing, or even no manufacturing at all, we are actually better off for it, since this result would have been produced by the all-knowing market.

Lest you think I exaggerate, just read today’s New York Times article, about the White House’s effort to “lure” jobs to America.

The reporter quotes the usual suspects of neoclassical economists whose job it is, like the Iranian morality police who crack down on anyone with the audacity to think independently, to punish economic apostates. Case in point is C. Fred Bergsten, director of the Peterson Institute for International Economics, who says when asked if the President’s plan could be effective: “The best we could possibly get is continued modest growth in manufacturing jobs.” What he is really saying is that manufacturing is no different than any other sector. Since we can’t get many jobs in manufacturing, there’s no point in favoring this sector. We’d be just as well off getting jobs in health care or fast food restaurants. Not surprisingly, since they all sing from the same neoclassical cannon, Harvard economist Larry Katz agrees, stating, “It’s totally implausible to think that there’s going to be a surge in manufacturing jobs.”

But this completely misses the point since it treats manufacturing jobs (and the traded export sector more broadly) as exactly the same as the jobs in any other industry, like fast food restaurants or bowling alleys. Repeat after me: “It’s not the jobs!” Or perhaps more accurately, “It’s not just the jobs.”

Even the White House makes this mistake when they defend their plan on the basis that manufacturing is important because it creates good jobs. Sure, but if you defend your plan on the jobs basis you open yourself up to attack from the neoclassical priesthood who will rightly say it doesn’t create many jobs.

The point is not jobs, it’s about economic competitiveness. There is simply no way to run a robust fast growing economy if the nation’s traded sector is in uncompetitive. Manufacturing makes up a large share of America’s traded sector. If America loses its manufacturing base to foreign competitors—which contrary to the neoclassical belief is what has actually been happening to the U.S. economy over the past decade, as ITIF’s report The Case for a National Manufacturing Strategy made clear—that value similarly disappears as the industry’s supply chains and industrial commons are hollowed out. Moreover, when an economy loses 1/3 of its manufacturing in a decade (which is what the United States did in the 2000s), a rate greater than in the Great Depression, that loss turned the U.S. economy into a leaky boat with worn sails so it couldn’t tack the headwinds that increased into a gale force in the last decade. It’s not the manufacturing jobs per se, it’s the ability to have a competitive economy which then creates jobs

But there is a second, more subtle, but ultimately more important impact on the economy with regard to the loss of U.S. manufacturing competitiveness: it erodes the confidence of businesses, workers, and consumers. Ultimately, a strong and brisk recovery will depend on a faith that America will once again lead in the global economy. Absent that faith—or in the presence of a sense of economic foreboding and decline—the rational exuberance needed to power investment and spending will be lacking, and recovery will continue to drag along. As Keynes noted, “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” And given that America has lost a greater share of its manufacturing jobs AND output in the last decade than virtually almost any other nation, that goes a long way to explain why the animal spirits are so weak.

So given that reality, shouldn’t we put in place policies to restore U.S. manufacturing competitiveness? Not for the neoclassical priesthood. Bergsten is quoted as saying that trying to slow the offshoring of jobs by making America more competitive was “trying to buck two major trends.” This is simply nonsense. There is no inherent trend that says an economy must suffer from massive trade deficits. There is no iron law of economics that says that if your corporate tax rate is the second highest in the world that perhaps reducing it might “buck a major trend” and actually lead companies to invest in manufacturing in the United States. Moreover, if this is a major trend why have other nations like Germany, Sweden, Austria, and Japan not seen losses in manufacturing output? Of course, it all goes back to the neoclassical religion. Any “trend” in the economy is sacred because the market produced it. “Bucking” it is the dreaded “industrial policy.”

Which gets me to the last point about the article. The New York Times author summarized the situation as, “It all adds up to what economists might call an industrial policy, the out-of-favor practice of using tariffs, taxes and other measures to help a particular industry.” First of all the term is only out of favor among the neoclassical economics priesthood. Second, have we really sunk so low in our intellectual discourse about economic policy to where even a policy to broadly support manufacturing is derided as “industrial policy.” That term—a completely loaded term that cuts off all opportunity for rational debate, not that most neoclassical economists are noted for rational debates—historically has referred to government efforts to pick particular firms and technologies. That is not what the Obama administration and others like ITIF who support a national manufacturing policy are advocating for.

To be clear, we don’t agree with all of the Obama proposals (especially ending deferral of foreign sourced income), but a policy that seeks to increase tax incentives for ALL domestic manufacturing, to enforce trade agreements, and to train workers is far from “picking winners.” If we’ve come this far (or low) in the debate that a policy to help ALL manufacturers is industrial policy, then essentially neoclassical economists are saying that all policies need to be completely neutral between industries. Potato chips, computer chips, what’s the difference. And, in fact, that is actually where we are. What a sad state of affairs that neoclassical economists can’t tell the difference between potato chips and computer chips. Every other nation can. But, it appears, not us.

This is too critical an issue for our nation’s future for it to be decided in the newspaper articles and offhand quotes from neoclassical economists. So Fred or Larry, anytime you’d like to debate this critical issue in public, I am happy to do so.

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