Don’t lose manufacturing but don’t use industrial policy

If you think the president’s economic and technology advisers are confused, self-contradictory, and captives of a dying conventional wisdom, you are correct.

The latest and greatest evidence of this is the Report to the President on Ensuring American Leadership in Advanced Manufacturing just released by the President’s Council of Advisers on Science and Technology (PCAST) and the President’s Innovation and Technology Advisory Committee (PITAC). It is just a wonderful example of an elite group struggling to avoid the policy consequences of its own conclusions in order to conform to a deeply engrained conventional wisdom.

The first part of the report is straight forward, honest, and devastating in its analysis and conclusions. It states unequivocally that U.S. manufacturing, which has been the world leader for a century, is in serious decline compared to the manufacturing of other advanced countries like Germany, Japan, and Switzerland whose wages and social expenditures are far above those of the United States. This is a direct contradiction of the claims of the U.S. community of professional economists and, more importantly, of the National Association of Manufacturers that U.S. manufacturing is holding its own and has never been better. In this regard, the report emphasizes that the decline of U.S. manufacturing is not limited to low tech manufacturing, but is also dangerously advanced in high tech manufacturing. It further states that innovation is closely tied to manufacturing capability and concludes that the United States cannot remain the global engine of innovation without maintaining a leading position in manufacturing. This is a direct contradiction of conventional U.S. economic doctrine that holds manufacturing to be unimportant for the U.S. economy in what it posits as the post-industrial services and high technology age. In their conclusions, the PCAST and the PITAC say there can be no high technology age without leading edge manufacturing. These are bold and courageous conclusions.

But then we get to the solutions and recommendations where confusion and conformity creep in. The report calls for a "coherent Innovation Policy to ensure U.S. leadership in new technologies and approaches and high quality jobs for Americans in the manufacturing sector. " To achieve this it calls for an Advanced Manufacturing Initiative to support "applied research programs for promising new technologies, public-private partnerships around broadly-applicable and pre-competitive technologies, the creation and dissemination of design methodologies for manufacturing, and shared technology infrastructure to support advances in existing manufacturing industries.

The report further notes that both in advanced countries with leading manufacturing capabilities like Germany and Switzerland and in developing countries that are rapidly overtaking U.S. manufacturing like China, extensive use is made of a variety of industrial policies.

Nevertheless, it warns that "we do not believe that the solution is industrial policy in which government invests in particular or sectors."

Excuse me. The PCAST and PITAC want support for applied – not basic but applied – research for promising new technologies, and public-private partnerships, and shared technology infrastructure. Okay, they are not calling directly for government investment in a particular company as in the case of the GM and Chrysler bailouts. But clearly these recommendations would provide no support for paper making or tree harvesting or anything that is not high tech. Moreover, who is going to decide what exactly is meant by "pre-competitive" and "promising new technologies" and "shared technology infrastructure." These are all subjective judgments that clearly would entail governmental "picking of winners and losers" to some extent. In other words – industrial policy. Clearly the PCAST and PITAC want and are advising a kind of industrial policy. But they fear to utter those dread words because of their vilification by conventional economists.

Even more interesting is the fact that the PCAST and PITAC clearly agree that other leading manufacturing countries use industrial policies including investment in state owned enterprises and in other private companies that happen to have particularly promising capabilities. So in warning against a U.S. industrial policy, they are effectively saying that we don’t want to do what is helping to make the leaders the leaders. Why not? If it works for them why can’t it work for us? Again, the reason for the obvious semantic maneuvering of the advisers is their fear of violating taboos of U.S. economic mythology.

Well, better an industrial policy by some other name than no industrial policy at all. But it would be nice to just have an honest discussion at some point.