Manufacturing redux

CHALK one up for continental Europe's economic architects. For the past several decades, the Anglo-Saxon consensus was that state interference in the private sector economy was a mistake.

Government bureaucrats were in no position to pick economic winners and losers - and if standing aside meant letting the forces of creative destruction sweep away entire industries, so be it.

The continental Europeans, most successfully the Germans, demurred. They were unconvinced that the shift from manufacturing to services was either good or inevitable, and they used the full might of the state to try to hang on to their industrial base.

The financial crisis may have briefly felt like a vindication of this model - but the near collapse and continued frailty of the euro brought a quick end to that moment of schadenfreude.

When it comes to manufacturing, though, the European approach is being embraced in the White House. In a speech this week, Gene Sperling, director of the National Economic Council and assistant to the president for economic policy, laid out the economic rationale for the US shift.

When I spoke to him afterwards, Sperling was careful to point out that the new approach did not amount to industrial policy, or an attempt by the government to pick winners and losers.

But the White House has come to believe, Sperling said, that manufacturers more broadly should be first among equals. Giving manufacturers slightly lower taxes and more support for their research and development is a good idea, Sperling argues, for two reasons.

First, because manufacturing has a particularly powerful spillover effect on the rest of the economy.

The benign effect of manufacturing Sperling is most enthusiastic about is the connection with innovation. That link, he argues, has been drawn out in research by the Massachusetts Institute of Technology's Production in the Innovation Economy initiative.

Its premise, which Sperling embraces, is that in most new technologies, innovation happens most quickly and effectively when the inventors work close to the builders.

Apple is today the most beloved - and financially successful - US manufacturer of physical stuff. But Sperling's argument amounts to an assertion that the Apple approach - with designers and engineers in California and factories in China - works for the IT business, but not for much else.

In most industries, Sperling contends, those who outsource manufacturing will soon find that they have outsourced their innovative edge, too.

The second pillar of the White House approach is to insist that the decline of US manufacturing, and, by extension manufacturing in the rich Western economies, is not inevitable. Manufacturing, Sperling argues, is not the agriculture of the 21st century, a sector fated to provide fewer and fewer jobs over time.

Instead, Sperling believes that the United States has a chance to bring jobs back home. "The degree that the US is becoming more and more competitive in bringing manufacturing facilities and jobs back to our shores is very encouraging," Sperling told me in an interview this week after he gave his speech.

This is clearly one of the administration's talking points this season - on Wednesday, Vice-President Joe Biden trumpeted the rise of "in-sourcing" in a campaign-flavoured speech in Iowa.

This White House's view that the government can - and must - support manufacturing relative to other businesses is a profound shift in the conventional wisdom of the English-speaking world.

Since the days of Margaret Thatcher and Ronald Reagan, the received transatlantic wisdom has been that state intervention is an inevitable failure, that the decline of manufacturing is inevitable, too, and that service-sector jobs can be just as good anyway.

The shiny towers of the City of London and the canyons of Wall Street are evidence of that last conviction and, at least for a while, seemed to be a vindication of it as well.

Sperling is an earnest technocrat, and his speech this week was a determined effort to document the intellectual foundations of the White House's pro-manufacturing tilt.

"Let me begin by acknowledging upfront that this is an area where otherwise like-minded economists disagree," Sperling said at the start of his remarks. His goal is not so much to convince his listeners that he is right as it is to assure them that his approach is intellectually respectable.

But for all its nerdy leanings, the White House is not the Harvard faculty club, and an election is coming up. Manufacturing could be an area of strong contrast between President Barack Obama and his most likely challenger, Mitt Romney. Romney has more hands-on experience, but Obama may have a more deft popular touch.

Unless you have a doctorate in economics, your intuition probably accords with Sperling's point that building things is essential to a country's economic well-being. Romney, who opposed the bailout of the Detroit carmakers, often finds himself on the other side of that argument.

Inside the United States, the big political story this week is the Supreme Court's deliberations on the legality of Obama's healthcare overhaul. Elsewhere, that is a barely comprehensible local story - all other rich countries provide some version of universal coverage and spend less money and achieve better outcomes than the United States.

But from Berlin to Beijing, the debate about manufacturing and whether governments have a duty to support it is a live issue. That is one more reason this US election campaign matters so much to the rest of the world.

 - Reuters

* Chrystia Freeland is the editor of Thomson Reuters Digital.