04/24/2012 03:44 pm ET Updated Jun 24, 2012

Republican Base, Manufacturing Base: Which Is the More Important?

The Republican Party likes to pretend (even to itself) that it doesn't have an industrial policy. It also likes to pretend that the U.S. economy is currently in such deep trouble because the Democratic Party does.

Not so. Both parties have industrial policies whether they acknowledge them or not.

The American economy is in trouble now primarily because the industrial policy to which the Republican Party currently subscribes remains hugely influential and entirely inadequate.

Not that you would know it, of course, if all you listened to was the campaign. The campaign rhetoric is always the same. The U.S. economy is safer in Republican hands, Mitt Romney regularly tells us, because Democrats over-tax, over-spend and over-regulate. Republicans, by contrast, do none of those things. They get government out of the economy. They set the private sector free. They reward rather than penalize initiative, innovation and success. They don't pick winners and losers. They let market forces do that. They don't put their trust in bureaucrats. They put their trust instead in the ingenuity and genius of the American people. Like Ronald Reagan before them, modern Republican lawmakers don't see government as part of the solution. They see it as part of the problem.
Oh that it was that simple, but it is not.

It is not now, and it was not in Ronald Reagan's day.

It is true that there was a fierce debate within U.S. governing circles in the 1980s between those who favored an active industrial policy geared to strengthening U.S. manufacturing in the face of Japanese competition, and those who did not -- and that the latter won that debate, and won it decisively. The Democratic Party under Walter Mondale favored an active industrial policy. The Republican Party under Ronald Reagan didn't; and the Democrats were so heavily defeated in the 1984 election that for a whole generation thereafter the Reagan position held total sway across both parties. The rhetoric of the Reagan position was that U.S. economic recovery required small government and free markets. The rhetoric was anti-government, even moderately libertarian: but the substance of policy was not. The Reagan Administration was quite willing to use the global weight of the U.S. economy to initially force quotas onto the Japanese, and then to trigger a major revaluation of the Japanese yen -- a revaluation that significantly eased international competitive pressures on U.S.-based manufacturing industry. The Reagan Administration was also quite willing to spend heavily on defense, to subsidize oil and agriculture, and to systematically deregulate Wall Street. The Reagan Administration had an industrial policy, alright. It was one later characterized (and criticized) by Reagan's own principal trade negotiator with Asia, Clyde Prestowitz (2010:270-1) as:

to over-consume, and to promote weapons production, financial services, construction, medical research and services, agriculture, and oil and gas consumption and production. Further, it [was] both to offshore production and provision of all tradeable manufacturing and services as well as, increasingly high-technology R&D, and to expand the domestic retail, food service, and personal medical services industries. At the macro-level, the strategy [was] to run up massive debt and to borrow as much and as long as possible.

Such a gap between rhetoric and reality is always there when Republicans play the "small government" card, because public policy cannot avoid having both a major direct and a major indirect impact on the workings of the private sector. Public policy has an inevitable direct effect on any industry that the federal government privileges by taxation, purchasing or deregulation. Public policy also has an unavoidable indirect effect on the entire private sector, depending on the nature of public policy on each and every aspect of the economy's physical and social environment. (From public policy on education, training and labor rights on the one side, to policy on consumer protection and environmental regulation on the other.)

We should never fall for the argument that the public and private sectors are necessarily in tension with each other: the case for federal and state economic activity as a supplement to, and a support, for private sector prosperity and growth is well-established. Nor should we fall for the claim that one major American political party does both direct and indirect industrial policy while the other only does indirect. As voters this November, we need to be much more savvy than this. We need to ask all the candidates a set of key questions: what industries do your policies directly favor? How indirectly supportive of economic growth will your entire program actually be? What are the major disagreements on industrial policy between you and your political opponents?

In alerting ourselves to an unavoidable industrial policy debate, there are at least three lessons to be learned from the Reagan years.

The first is that the federal government can be a very effective leader of industrial change, if it has the institutional capacity and political will to play that role. Don't let free-market rhetoric mislead you: the United States has long done state-led industrial growth, and it has long done it extremely effectively. It just happens to do it these days primarily in support of America's global imperial role rather than in support of its domestic economic priorities. In the Reagan years -- and indeed since -- the Pentagon has acted as the U.S.'s main industry department, and has proved highly effectively at sustaining the global competitiveness and superiority of the American military-industrial complex. There has been no arms-length relationship between government and industry where armaments are concerned. On the contrary, a close public-private partnership has maintained world leadership: so if that partnership works there, why not elsewhere in the U.S. economy also.

Manufacturing matters. Employment in the service sector is never an adequate substitute for a strong manufacturing base. There can be no long-term strength for an economy that lets its manufacturing base slip away. As the debate around the 1984 election campaign made clear -- and recent evidence has merely reconfirmed -- manufacturing industries remain the great drivers of productivity growth and high wages in the economy as a whole, and the core centers of crucial linkages that sustain strong service provision and support industries in integrated regional economies. Letting manufacturing relocate abroad corrodes those wages and weakens those linkages: and rebuilding strong regional economies within the territorial United States is hugely more difficult than sustaining the regional economies already in place. Letting manufacturing relocate abroad also drags down American wages across the economy as a whole, and puts in jeopardy the long-term financial security of the entire American middle class.

Direct and indirect industrial policy come together in an overall growth package -- and it is the quality of that growth package that ultimately counts. An industrial policy that deregulates financial institutions and labor markets, tolerates outsourcing and privileges military production over civilian manufacturing can ultimately only generate an economic growth strategy based on increased income inequality, stagnant wages, and rising personal and international debt. Rakes' progresses of the kind described by Prestowitz always end in misery. The Reagan growth model, the one that both the Clinton and the Bush administrations then slavishly followed, certainly did: which is why now again, as in the 1980s, it is worth debating whether we need a new set of policies -- direct and indirect -- to lift the U.S. economy back onto a sustainable growth path.

Is such a set of policies readily available? It is certainly not from the party of Paul Ryan, John Boehner and Mitch McConnell, or from the ever-more-conservative Mitt Romney. What all these leading Republicans are currently offering is effectively Reagan II: protection of military spending, further deregulation of banking and labor markets, cutbacks in public spending on education, infrastructure and healthcare -- what the New York Times this morning called "callous choices in the House." That particular package gave the U.S. economy a period of sustained growth in the 1990s, when the Japanese economy was stalled and China still struggling to shed its Maoist past: but the package hasn't worked since, and the whole economic edifice it sustained came crashing down in 2008 at great cost to the majority of working Americans. Or rather, the Reagan growth package worked well both before and after 2001 for the CEOs who finance the Republican Party, but not for the bulk of the American electorate, including not for that section which votes Republican because of social agenda concerns.

Is such a set of policies available from the Democrats? Well, not if the Clinton-era orthodoxies remain in place. But then the Reagan-inspired orthodoxies are beginning to erode. The latest Clinton economic plan was definitely a move in the right direction. So was the tone of the 2012 State of the Union Address; and now we have just heard an explicit call for an active industrial policy from the very top of the Obama Administration -- from Gene Sperling addressing the Conference on the Renaissance of American Manufacturing. "The economic evidence is increasingly clear," Sperling said:

... that a strong manufacturing sector creates spillover effects to the broader economy, making manufacturing an essential component of a competitive and innovative economy... when a manufacturing plant chooses to invest in a county, the investment result[s] not just in new production at the site of the plant, but actually increased productivity of other firms in the surrounding area -- a concept that economists refer to as an 'agglomeration spillover.' Other economic studies reinforce the insight that the location of manufacturing impacts who benefits from such 'knowledge spillovers.'... such spillover benefits decline with distance, indeed by over half when they are more than 700 miles away... More than any other industry, manufacturing firms account for a disproportionate share of innovative activity in the U.S. -- 70 percent of private sector R&D and over 90 percent of patents issued. As a country, it matters where those benefits occur.

The President is on record as wanting further spending on education, on labor training, and on infrastructure. He is on record as wanting to reward manufacturing companies bringing employment back to the United States. No one is campaigning for the reconstruction of low-skilled low-paid textile manufacturing in the U.S. Such industries are presumably permanently and happily gone. The fight now is to attract and sustain the new manufacturing sectors based on sophisticated technology and high labor skills: in industries as important as alternative energy and biotechnology. The President is on record as enthusiastically supporting policies that will bring the U.S. back up to speed on just these industries -- the ones now developing rapidly in competitor economies abroad. The President is on record, but are his opponents? If they are, are the policies to which they are wedded likely to be more or less effective than his?

This is one of the big questions for November. Will the U.S. rediscover its capacity for global economic leadership simply by tax-cutting the rich, further deregulating Wall Street and pruning public provision of education, training and infrastructure? Or will that rediscovery require active and sophisticated industrial policy -- beginning with infrastructure spending and labor reskilling, and stretching out to new policies on industrial location and income distribution, even perhaps to the questioning of free trade? This choice is surely a no brainer. If only to maintain competitive standing in a world increasingly occupied by overseas economies benefiting from active industrial policy, we need to follow suit. And to pull decent jobs and wages back to the U.S., we need to get ahead of the curve. Markets reward winners and penalize losers. The U.S. has spent a decade losing manufacturing employment and manufacturing wages. Do we really want to spend the next decade doing the same? I sincerely hope that we do not.

First posted, with full academic citations and notes, at