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The Economic Crisis and the (Political) Revival of Manufacturing

Obama at Master-Lock plant in Milwaukee on Feb. 15, 2012

President Obama visits Milwaukee’s Master-Lock plant on Feb. 15.  Photo by WisPolitics.com.

Since his January State of the Union address, President Obama has emphasized the centrality of manufacturing for the U.S. economy. Visits last week to a unionized Master-Lock plant in Milwaukee and to a Boeing facility in Washington state highlighted the president’s focus on the sector. In a rare example of shared cross-partisan priorities (if not specific policy proposals), Obama’s Republican rivals have also emphasized manufacturing in recent months. Rick Santorum has made much of his blue collar roots while emphasizing aggressive trade and currency policies towards China. Mitt Romney too has focused on leveling the international playing field, while also attacking unions as a drag on manufacturing growth and, of course, struggling to defend his past criticism of the auto industry bailouts. Both of the leading Republican candidates thus seem to share with Obama the idea that manufacturing represents a key component of the nation’s economic future.

This is a significant and surprising departure from the economic focus of most recent presidential campaigns. For the past twenty years, manufacturing has mostly been seen as an old and outmoded economic sector that cannot and perhaps should not be sustained or revived. Four years ago, John McCain glumly warned a Michigan audience that manufacturing jobs “are not coming back. . . . And I am sorry to tell you that.” The consensus argument from both right and left has instead been that economic policy should focus on overall growth while citizens should prepare for global competition in advanced sectors such as technology and finance. Market forces, in turn, would be left to shape a process of creative destruction as manufacturing became a nostalgic memory of past greatness. The government would not intervene, other than perhaps through retraining or relocation allowances for displaced workers. Mostly, though, workers have been expected to accept their fate as the industries that helped them gain access to the middle class declined – as did the unions that negotiated the wages and benefits that gave them that status.

We have to go back twenty years, to the 1992 Clinton campaign, to find anything resembling this year’s focus on the manufacturing sector and the workers who earn a living actually making things. Even Clinton that year focused less on support for manufacturing itself than on increasing public investments in human capital and productivity. Job training and advanced skill development, Clinton argued, would create the highly skilled workforce necessary to sustain an advanced twenty-first century economy. Clinton’s first Secretary of Labor, Robert Reich, played a particularly prominent part in advancing these ideas. Reich, however, lost out to Treasury Secretary Lloyd Bentsen and Federal Reserve Chairman Alan Greenspan, who convinced the new president that bond markets would bid-up long-term interests rates and cause a recession unless Clinton addressed the budget deficit. Public investment never happened at anything like the scale Clinton had promised.

At times, Obama too has argued for expanded human capital investments, particularly in his proposals for K-12 education reform and for expanding the nation’s community colleges. His manufacturing proposals, though, actually tap into an even older strain of economic thinking known as industrial policy. This approach, which was hotly debated during the 1970s and 1980s, drew on the apparent success of advanced economies such as Germany, France, and especially Japan in using economic planning and direct state support for the development of particular industries and even companies. European countries used an approach known as indicative planning to identify and support growth industries, while the Japanese Ministry of International Trade and Industry (MITI) directed capital towards key industries such as electronics and automobiles, while also overseeing trade policy and labor relations. As the U.S. struggled simultaneously with inflation and recession during the 1970s (a combination that mainstream economists had previously believed to be mutually exclusive), Americans watched in desperation as deindustrialization ravaged once thriving industrial communities.

Industrial policy seemed like a possible way out. In contrast to the demand-side, macro-economic management approach that had characterized Keynesian growth economics during the post-war decades, industrial policy offered a micro-economic approach, targeting specific sectors with subsidies, R&D support, infrastructure investments, and export promotion. Critically, industries that offered little prospect of competitiveness would be left to whither – or, in some more aggressive versions of industrial policy, actively pruned. In all these efforts, government would work in tandem with business and labor, in some cases taking the lead and in others merely setting an overall framework for the economy.

Industrial policy was not a radical, left-wing idea. Business Week devoted most of its June 30, 1980 issue to the theme of “The Reindustrialization of America.” While favorably reviewing the policies pursued by Japan, Germany, and France, the editors noted the challenge of picking winners and losers, but concluded that “there seems no alternative to social agreement on those sectors of the economy that must be encouraged” (56) and called for “a coordinated effort to establish national priorities – with the participation of all social groups, as in Japan – [that] can serve as a framework to rally competing interests around a common goal” (142). Both the Nixon and Carter administrations flirted with aspects of the idea, and the latter famously bailed out the Chrysler Corporation in 1979. Yet despite serious interest in industrial policy in the media, the business community, the labor movement, and academia, the idea never gained the full support of either Nixon or Carter, much less of Congress or the Reagan administration in the 1980s. Supply-side economics, deregulation (which some have called an implicit form of industrial policy), and globalization became the focus of both policy and debate. A consensus emerged that government should stay out of the micro-economy and let market forces prevail.

Suddenly, all this has changed. Manufacturing is back in fashion, and in a highly modified form, aspects of the industrial policy approach seem to have returned to public debate. Obama, to be clear, has not adopted the exact positions of the editors of Business Week circa 1980. His proposals, and those of his rivals, remain mostly limited to targeted tax incentives rather than detailed economic planning. Still, even the limited revival of a manufacturing-focused policy emphasis has provoked unease among mainstream economists, liberal as well as conservative. Christina Roemer, who chaired the Council of Economic Advisors for the first years of the Obama administration, penned a recent New York Times column in which she argued that manufacturing actually offers few specific benefits over the service sector. Robert Reich attacked from the left, pointing out that without stronger unions, manufacturing growth was unlikely to help average workers.

Such critiques from a president’s allies actually suggest that a consensus is cracking, that an existing paradigm may be breaking down. The renewed emphasis on manufacturing, with its quiet and almost unspoken hints of industrial policy, reflects such a possible shift.  Indeed, already in his administration, Obama has pursued limited steps in this policy direction, continuing the auto bailouts begun by President Bush and providing significant support for alternative energy technologies such as wind-power and advanced batteries

All this raises the question of why this shift has taken place now. In part, the fact that the U.S. auto industry still lives had provided concrete evidence that government can, sometimes, intervene successfully in the economy. Yet the debate has changed because of even deeper forces now at play: the financial crisis and ensuing recession have undermined the reigning assumption that a technology, service, and finance-based economy can provide broad-based prosperity (for voters, if not for economists). Manufacturing, for a few decades at least, once provided the economic basis for a middle class lifestyle for a large percentage (never total) of the U.S. workforce. Manufacturing’s replacements have thus far failed to demonstrate convincingly that they can do the same. While the recent focus on the sector may reflect nostalgia for such a remembered and partly imagined golden age, it also demonstrates that President Obama and his rivals have moved into a policy and political landscape that has been fundamentally transformed by the economic crisis of the last five years.

Guian McKee is an associate professor of public policy at the Miller Center and the Frank Batten School of Leadership and Public Policy. He is the editor of three volumes of the Center’s Lyndon Johnson Presidential Recordings series, and is the author of The Problem of Jobs: Race, Liberalism, and Deindustrialization in Philadelphia (Chicago, 2008)

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