What the U.S. Economy Needs More Than Manufacturing

President Obama emphasized reinvigorating American manufacturing in his State of the Union address, as well as boosting American exports. What do you make of his proposal?

The idea is important because we need demand in this economy in order to create jobs. Domestic demand is being constrained because our government is trying to get its fiscal house in order. Housing is depressed. Consumers are tapped out.

When you look around and ask where you get growth in this economy, one logical place to look is exports. That’s well chosen as an objective. But when it comes to achieving the goal of doubling exports in five years [a goal Obama outlined in his 2010 State of the Union speech], we already did the easy part: because our exports were so depressed due to the global financial crisis, we saw growth in the first couple of years. But if you look at the last year, global financial exports have been very disappointing. He’s not going to achieve his goal.

The real problem is slow growth in the rest of the world. At the end of the day, our exports are very dependent on two things, neither of which we have very good control over. The first is how rapidly our trading partners grow; a European crisis is not good for us. Slowdown in China and elsewhere is also not good for us.

The second big driver in our exports is our exchange rate — and not necessarily our exchange rate vis-à-vis China, which a lot of people point to. The truth is, we don’t actually compete much with China in our export markets; it’s mainly with the Europeans, the Canadians, the Japanese. We’re selling sophisticated machinery, and so are the Japanese and Europeans.

What about Obama’s emphasis on manufacturing and infrastructure?

The concrete thing I heard is that we want to improve our infrastructure, which is a good idea for a number of reasons — and it does raise costs to some degree for our exports. He also mentioned a plan for some sort of a stimulus to technological innovation, starting these manufacturing centers [like the one in Youngstown, Ohio].

That will make a contribution marginally, in my view. The real core questions are things like the way we tax companies. There is sort of a consensus that what we need to do is lower the corporate tax rate. In fact we have the worst of all worlds because we have a high tax rate at 35%, and then we give the firms a lot of deductions. At the margin, if you’re thinking about the next dollar, it’s going to be taxed at a high rate, and that discourages investment in the United States. And it discourages companies from bringing their money back to the United States.

It does seem to me that tax reform is a critical component of making ourselves more competitive.

He mentioned the tax code briefly in his speech, but do you think Obama has paid close enough attention to corporate tax reform in general?

This is an area where there could perhaps be a meeting of the minds between what the Republicans want and Obama wants. He has spoken about trying to get rid of the tax breaks that the oil companies get, for example. But I think we need a concrete proposal and leadership in that area. …

In an ideal world, what would that concrete plan look like?

You’re corporate tax rate would be 20, 25%, and then the allowances and all the special parts of the program that allow for deductions would be eliminated.

There’s also a very complex problem at the moment in the sense that companies keep their money abroad to escape U.S. taxation, and so that also needs to be confronted. Ideally, with a lower marginal rate, companies would have more incentive to bring it home, but you need to have some kind of program in place as well.

In your March 2012 HBR article, you unpack three myths about U.S. trade policy. Where do they sit now? Let’s start with the first myth: that an open trade policy is the cause of manufacturing job losses.

We’re still debating this one. … I really don’t think manufacturing is the answer to our jobs problem. We’ve done studies where we look and say, how many jobs are embodied in the trade deficit? And we get a number like 2 million. That sounds like a lot of jobs.

But we have something like 150 million people in the U.S. labor force. So even a resilient manufacturing sector will not make a huge difference to our employment problems. That can only be solved with stimulating total spending within the economy. Demand is deficient and you need a strategy to fix that.

And even if we see a revitalization of the manufacturing sector, basically it’s going to be built on high-tech and it’s going to require high-skilled workers. The workers who were displaced are not going to be the ones who are re-employed in manufacturing, by and large, unless they have those skills.

Obama says we need to educate people so they can work these high-skilled jobs. But is this push not really going to solve the problem?

I think that 90% of the new jobs are actually not going to be in manufacturing. Yes, people need to get skills, but they aren’t necessarily skills that are in manufacturing. What I missed in his speech was the strategy for the other 90% of the labor force.

Don’t get me wrong; I’m not against stimulating manufacturing and stimulating exports and so on. But a jobs strategy has to be based on aggregate demand throughout the economy.

If exports are the future, some of the jobs may well come in manufacturing. But a lot of them will be in services. One-third of all our exports are services. In fact, we don’t have a trade deficit in services. We’re highly competitive in services. But we’re still sort of looking in the rearview mirror when it comes to thinking about the structure of the economy.

While trade is part of the story, it’s a relatively small part of the story as compared with the combination of rapid productivity in the growth of manufacturing — which means we need fewer and fewer workers — and the productivity that brings down the price of goods. But consumers aren’t responsive enough to that falling price; what they do is that, when goods get cheaper, they buy services.

That’s the big issue that’s not recognized. Your iPhone got cheaper, but what did you do with your iPhone? You bought a whole lot of apps and paid Verizon for your telephone services. You’ve got a nice, big flat screen HD TV. But where’s your money going? It’s going to the cable company.

So the relative role of spending on goods is falling. Consumers are devoting more of their money to services. That’s just a fact of life.

What about the second myth: that U.S. standards of living are falling and wage inequality is rising because of competition from developing countries?

The big story in inequality in the United States, and particularly in the last five years, is not between skilled workers and unskilled workers. All workers are doing poorly compared to profits. The big story is profits.

Another part of the story is the incomes of the very wealthy. It’s a different kind of an inequality that you would expect if it was inequality based on competition with low-wage, emerging market economies.

I don’t think that the dominant source of that inequality is the global force. It may have something to do with it, but the bigger factor is that we have a deeply depressed economy and a deeply depressed labor market.

Then there’s the third myth: that growth in emerging markets like China and India are why we have higher oil prices?

What the U.S. Economy Needs More Than Manufacturing

SourceFromUSA.com