It's no secret American manufacturing is in crisis, and that its problems form a significant component of our present economic mess. I've written before about how the Obama administration may (may!) be starting to get serious about the problem.
Another small but significant data point on the question of whether the administration is serious took place this last week: the government's new National Network for Manufacturing Innovation held its first conference, designed to elicit public input on how this program will be designed and run.
The event was held at Rensselaer Polytechnic Institute, a good engineering school in Troy, NY, and while I was not there myself, the head of my organization was, and he debriefed me on what went on. (The NNMI website is here. RPI's page on the conference is here. Click here for a pdf of the conference schedule.)
Now the details of NNMI haven't yet been settled, so I can't comment on them. But it is possible to know, even at this early juncture, that if it is to succeed, its policies must rest upon understanding and implementing a correct vision of its economic rationale. Absent this, it is likely to either fail to generate economic benefits to the nation, or collapse outright in a flurry of Solyndra-style scandals. There is a huge temptation to just declare manufacturing "holy," as environmental technology was previously declared holy, and throw public money at it.
So what should NNMI do instead?
The first rule of industrial policy is that "create jobs" is not a valid strategy, despite the political appeal of this concept. Anyone can spend $1.00 to create $.75 worth of jobs. The problem is that the $1.00 has to come from somewhere--it has to be taxed, borrowed, or cut from other spending. And $1.00 in the public's pockets will, other things being equal, create $1.00 worth of jobs, not $.75. As a result, while benefits may be apparent, they will not be real.
Effective industrial policy depends upon finding uses for $1.00 that will somehow create more jobs than would have been created if the money had just been left with the public. This can be done: the idea that it is impossible is ultimately identical with the proposition that markets are perfectly efficient: a known falsehood in other areas of economics and ultimately an ideological dogma.
Government has a number of legitimate roles to play here, and many of them are quite complex. But most of what is fundamental boils down to solving two key problems that the private sector cannot solve on its own:
So-called infratechnologies fall into the first category. These are technologies, like the Internet, which enable a huge number of profitable innovations but which are themselves, for various reasons, hard to make a direct profit off of. As a result, the free market tends to under-supply them, and there is a strong prima facie case for the government to fund their development.
To take one example, commercial nanotechnology companies depend, according to Greg Tassey of the National Institute of Standards and Technologies, upon the following key infratechnologies:
Mainstream neoclassical economics assumes (often tacitly and without even realizing the issue exists) that new technologies grow automatically from advances in pure science. It also assumes that new technologies automatically commercialize themselves. But both these assumptions are observably untrue, largely due to appropriability and time-horizons problems.
Historically, the U.S. solved the problems of appropriability and time horizons by indirect means. We privileged certain oligopolistic sectors of corporate America to reap exceptionally high profits in exchange for developing technologies that would otherwise probably not have been developed.
Some of this was done by way of defense contractors, some by way of very large companies with monopoly or quasi-monopoly power over their ultimate product markets. Thus the old AT&T with its Bell Labs, the old IBM with its Watson Laboratory, the old RCA with its Sarnoff Research Center, the old Xerox with its Palo Alto Research Center, or GM in its glory days.
Because of these companies' oligopolistic power, they were assured of a) capturing the value of whatever they discovered or invented, rather than having it swiped by a competitor, and b) bringing in enough money, over a long-enough time frame, to pay for expensive laboratories that could take many years to produce results.
Unfortunately, these companies are largely gone, or so internationalized that they confer no especial benefit upon the U.S. economy, as opposed to any of the other nations where they do business.
Worse, because the U.S. solved the problems of appropriability and time horizons indirectly, there never crystallized an explicit ideological consensus in this country about these being the key rationales for active industrial policy. Indeed, to a huge extent, we fooled ourselves into thinking that our national economic success was caused by our (fictional) embrace of extreme laissez-faire.
Contemporary venture capitalists almost never operate beyond a seven-year time horizon. (Thus we observe that the technology underlying Google was developed from research funded by the National Science Foundation on digital libraries.) For all its very real achievements, the venture capital system is largely a system for harvesting fundamental innovation, not creating it.
It follows that the key question that will need to be asked, whenever NNMI considers funding some project, is whether it is being asked to fund something that the private sector should be funding on its own. (Solyndra clearly fell into this category, as there were no appropriability or time-horizons issues presented in their business model.) Instead, NNMI should seek out projects that have the following characteristics:
These two key issues are a highly abstract description of the problems involved, and they ramify enormously and interact with other issues--giving rise, for example, to the notorious "valley of death" problem in innovation. So they should not be misunderstood as exhausting the concerns here. But getting these issues right will be fundamental to any successful active industrial policy.
The Politician have warped Adam Smith's The Wealth of Nations or their self interest.
"Before the passage that Samuelson and Nordhaus excerpted, Smith had argued that investment at home produces more "revenue and employment" than investment in foreign trade."
“Adam Smith on Trade: “He preferring the support of domestic to that of foreign
industry, he intends only his own security; and by directing that industry in such a
manner as its produce may be of the greatest value, he intends only his own gain,
and he is in this, as in many other cases, led by an invisible hand to promote an
end which was no part of his intention.”
The invisible hand promotes the good of society by leading entrepreneurs to invest at home rather than abroad.
There are only time-horizons problems because of free trade, where the profits off cheap foreign labor far outweigh long term planning. Fix that with a Tariff and neoclassical economics, whatever that is, will still work just fine.
These freshly printed paper US Treasury Bonds that the US government printed on fresh paper and then sold to people in industrialized nations HAVE ABSOLUTELY NO VALUE, except that they can be sold for US Dollar electronic credits at a discount and then used to purchase (are redeemable for) title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of redeeming these US dollars with Gold from Ft. Knox. We are running out of assets that foreigners can buy with their freshly printed paper US Treasury Bonds and US dollars, so the US government borrowing "power" will disappear and then US Citizens will have to go back to work and start producing the things that we need so support our lives.
We have one party that deeply believes in building bridges to nowhere (as long as the bridges are in their own districts), and another party that no longer believes in building bridges at all (unless the bridge turns a profit within seven years). The likely "grand bargain" result is that we'll end up with some half-built bridges to nowhere. My advice to fellow travelers: keep a parachute handy.
is that it will always be corrupted by the political process (cronyism) at best, and at worst, is a slippery slide into "soft" fascism.
Bad ideas remain bad ideas, no matter how much fresh lipstick you apply to them...
wow that's deep
we already have that due to the coziness of big money, lobbyists and congress
has nothing to due with industrial policy, countries that have industrial policies have trade surplusses with the US, - china, germany, canada and so forth
What many people, economists and politicians do not seem to get is that manufacturing and innovation go hand in hand. neither can exist in any meaningful way without the other.
Manufacturing is responsible for over 70% of R&D investment per Industry Week. most innoivation comes from the incremental improvements in design and process, and re-application for new purpose of exisiting technologies.
this requires close interaction bewtween engineering and the shop floor. it requires collaboration between manufacturers and their suppliers. this happens when you have clusters of service and supply base surrounding a major industry
take away any part of this process and you greatly diminish your capacity to innovate, and hinder your opportunity to be part of the technology of the future. once these infrastures and expertise are gone, the costs to restart them become prohibitive
offshoring production short circuits the productive innovative process.
An example I like to use is the shoe industry of New England, it created all kinds of related industries and technologies around it. the eyelet industry was driven by the shoe industry. eyelet makers and their equipment makers developed the eyelet stamping processes that evolved into deep draw stamping technologies used by other industries like automotive and aerospace. deep draw stamping drove materials technolgies as well.
the shoe industry is all but gone from new england, and no surprise so too has much of the stamping, materials and related industries as well
Hmmmm....so in essence, the more inputs required to create a $1 of consumer value, the better?
Hmmmm... lots of businesses fail using that approach....
not surprised someone who gets their economic ideology from a second rate 1940s novel would not understand that interelation
But if that given industry manages to verticalize and become practically its own supply chain, then the economic benefits of that industry are concentrated into the hands of few. An example of this is Apple, who employs only a few thousand.
agrument about who should identify and invest in R&D for new or emerging
technologies can become an impediment itself. Focusing your efforts
in areas that need improvement should not.
The ordinary person, such as myself, has the ability to look around this
country and see some basic things. Jobs of tomorrow will require
specific skills sets. How do you get them? Education. People, such as
myself will not be an intregal part of that transition, but we still need to
survive while this new revolution is happening.
Updating our infrastructure allows my generation and the new to blend
our skills, affording me the dignity in dying self sufficient, and the new
generation with experience in applying their knowledge to real world
application, as well as strengthening America's future economic position.
This scenario provides my group the opportunity to still contribute, and the
new, a solid foundation to build upon.
The only problem is, there are too many smart, but greedy people, who
can't see the trees. Technology is great, but for my segment of the
population, it also means greater challenges in living what's left of my
life.
Just as scientist anticipate the human population to at some
point overwhelm the earth's ability to sustain it's numbers and
seek new ways of dealing with food production, availability of
fresh water, refuse removal, and our carbon footprint, nature or
something (disease perhaps) will force correct the population
back within sustainable levels or eliminate humans altogether.
A peoples ability to earn a living and survive is the same. They
will either find a way to course correct, or something else
will force a change. I'll be dead and gone by then. Lucky me.
The USA must create our own new NATIONAL WEALTH to pay for all of our increasing US government expenses without borrowing additional US Dollars (wealth) back from foreign individuals in wealth creating industrialized nations.
International Trade Balances (Deficits for the USA) indicates that Brazil, Russia, India, China, (BRIC) nations, plus Pakistan, South Korea, and the other industrialized countries of the world with positive net foreign trade balances are NET CREATORS of NATIONAL WEALTH for their nations, and the de-industrialized USA and most of the European nations with negative net trade balances are NET CONSUMERS (DESTROYERS) of the existing NATIONAL WEALTH in their nations, whose citizens live “high on the hog” by continuously borrowing wealth from the industrialized countries to pay for government activities and also imported consumer products.
$1 worth of personal training, or $1 worth of steel?
$1 worth of medical care, or $1 worth of shirts?...
We must all understand that the members of that family (tribe, city, state, nation) can then reflect the amount of their real NATIONAL WEALTH and financial security with their net positive accumulation of privately owned grain, gold, cattle, jewels, land, buildings, hotels, casinos, factories, commodities and/or other marketable products that are then available to be used for economic security for reserve use in times of emergency, to raise the standard of living for the members of that family, to take care of those family members that cannot take care of themselves, and also be available as collateral (products, commodities and/or title to locally in-country located assets) to redeem any printed currency that they might care to issue, and/or as “mortgage” collateral for any paper Treasury Bonds that they might care to print and sell.
Another difference is that web designers and personal trainers are limited by their time, while someone who produces coat hangers, steel, and shirts is not. If I own a shirt factory, I can double my output in several ways: running two shifts, enlarging the factory, getting a second factory, etc. But if I design web pages for a living, how can I double my output if I'm already working 12 hours a day?
What a silly premise. It's that the odds, the long term probabilities of success in creating the greatest number of new jobs, are greater dollar for dollar when spent in the private sector rather than by those ivory tower elites in government who take it away from private ownership. Of course any one particular industrial program of gov't may create more that a dollar's worth of new jobs, and any one particular private sector industrial program may fail. But that's not the sum total of 'Industrial Policy".
"Contemporary venture capitalists almost never operate beyond a seven-year time horizon."
Yeah, whereas our Federal Gov't is operating on a half century time horizon based on how many future generations now have crippling debt on their backs. BTW Ian, that's a bug, not a feature.
“As Americans, we realize that there is no taxpayer money that wasn’t first earned by the sweat and toil of one of its citizens. That’s why we reject this president’s unbridled fixation on taking more money out of the wallets and pocketbooks of American families and employers and giving it to a central government.”
I like that statement.
The same is true for all levels of government! Only the private sector businesses and corporations generate and create JOBS for US citizens to create new NATIONAL WEALTH for those same US businesses, and that new NATIONAL WEALTH is then available as business profits, private personal income, property taxes and personal inheritance to be CONFISCATED through taxation TO PAY FOR GOVERNMENT BUREAUCRATIC EMPLOYEE PAYROLLS, GOVERNMENT CONTRACTS, OTHER GOVERNMENT EXPENSES, at every federal, state, county, and local level.
This is true... as long as you don't care where those jobs are created. If you want them created domestically, you are going to have to create policies and/or incentives that make that happen. It won't happen on its own. Unfortunately, the odds of good policy emerging from a politicized DC are virtually nill.
If the USA cannot compete on lower product costs, then maybe the USA could be competitive internationally through other areas such as exporting superior technology, but only if the USA changed the emphasis of our educational system to produce mostly Science, Technology, Engineering and Mathematics (STEM) graduates.
Over the past two or three decades, both major political parties of the US congress purposely destroyed our intently focused critical thinking technically oriented creative STEM human database along with their WEALTH CREATING manufacturing capability that was required for inventing and manufacturing new products when the US Congress created the US “FREE TRADE AGREEMENT” treaties and MFN trade status with foreign nations.
The technical innovation, product development and design capabilities and the associated STEM jobs went overseas with the manufacturing capability as economically required by FREE TRADE AGREEMENTS.
USA is no longer the World Technology leader that the USA was until maybe the early 1970's. Asian countries are now are the technology leaders.
The best and brightest students in the USA have pursued the more financially rewarding non-scientific careers, instead of educations that might have created products that people in foreign countries might purchase.
It is no coincidence that we left the gold standard at the same time. Doing so allowed us to run unsustainable twin deficits that never could have been possible if gold remained as the mechanism to balance global trade. Without gold, our "wealth" generation now consists of debt generation.