Sparks of a US manufacturing renaissance

Industrial policy is no longer unmentionable in Washington, and signals are growing that Barack Obama is serious about supporting American manufacturing.

FT.com

What if Gene Sperling, director of the White House’s national economic council, declared that a manufacturing renaissance would be strongly in America’s interest? Imagine he added that the US’s manufacturing decline was an aberration that should be reversed. Suppose he came close to breaking a real taboo by saying industrial policy may now make sense. Since Sperling is President Barack Obama’s chief economic adviser – and thus speaking on his behalf – people would take notice, wouldn’t they?

That is precisely what Sperling said in a carefully researched speech in Washington 10 days ago. Almost no one paid attention. The lack of interest may stem from it being an election year – nothing diverts eyeballs like a horse race. Poor White House marketing may also not have helped. In addition, few observers would expect Obama to get anything important through a gridlocked Congress this year – let alone something unorthodox. And they would be right.

Yet Sperling’s words offered evidence of what is starting to sound like a change of world view in the White House. It is true that Obama has created a few incentives here and there for favoured types of manufacturing – the 2009 stimulus contained boons for battery makers and clean energy. He entitled his state of the union address "An America built to last”. In his largely hypothetical 2013 budget proposal (Congress will almost certainly not pass a budget for the fourth year running) he offered incentives for manufacturers to "reshore” to the US.

At the time it smacked of electioneering. Most of his proposals, including a slightly lower tax rate for domestic manufacturers, looked gimmicky and stood no chance of enactment before 2013. Sperling, President Bill Clinton’s senior economic adviser in the late 1990s, seemed the least likely person to announce the abandonment of a sacred plank of Clintonomics. But all this is starting to look like an underestimate of how much Obama is in earnest. 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.

Most are of long pedigree. Some might say it would be easier to pass through the eye of a needle than to separate the fossil fuel sector from its Washington subsidies, which date from the second world war. No presidential hopeful would dare to suggest scrapping Depression-era farm subsidies because they skew so heavily towards key states such as Iowa.

That you can dismantle every nut and bolt of a US manufacturing plant and shift it to China while finding it impossible to relocate the corn fields of Nebraska, is beside the point. Nobody familiar with the US tax code would confuse it with the design of a rational mind. Better to glimpse in its layers a rough snapshot of the past and present of US corporate influence.

The more interesting answer is that industrial policy is no longer unmentionable in Washington. Given the prominence nowadays of people such as Jeff Immelt, chief executive of General Electric, one of America’s largest manufacturers, and John McNerney, chief executive of Boeing, perhaps this is unsurprising. Both agreed last year to head separate presidential advisory councils on the economy.

Both have also shared critical technology with Asian counterparts – GE’s avionics arm recently went into a joint venture with a Chinese state-owned partner. And yet both – Immelt in particular – vent about how the US has to compete with countries that have "industrial policy on steroids”. Their frustration is gaining adherents, notably one or two Republicans, including Rob Portman, the senator from Ohio.

Many things could kill this apparent trend. Obama could lose in November, or he could win and face an even more intransigent Congress. Conversely, a miracle could happen and Congress could agree after November to replace the US corporate tax code with a system free of loopholes. That would end all industrial policies, past and near future. It is also the least likely scenario. Or maybe this is really election-year kite flying after all.

But when figures such as Sperling emphasise that manufacturing accounts for three-quarters of US research and development, and 90 per cent of its patents, something interesting is being signalled. Facebook and Twitter may bring disruptive social change. But the most valuable innovation still comes from making products such as semiconductors, batteries and robotics.

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?

Copyright The Financial Times Limited 2012.