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July 4, 2010

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Innovation, Scaling, and the Industrial Commons

Posted: 04 Jul 2010 12:33 AM PDT

Rajiv Sethi:

Innovation, Scaling, and the Industrial Commons, by Rajiv Sethi: ..Yves Smith ... directed her readers to an article by Andy Grove calling for drastic changes in American policy towards innovation, scaling, and job creation in manufacturing. The piece is long, detailed and worth reading in full, but the central point is this: an economy that innovates prolifically but consistently exports its jobs to lower cost overseas locations will eventually lose not only its capacity for mass production, but eventually also its capacity for innovation:

Bay Area unemployment is even higher than the... national average. Clearly, the great Silicon Valley innovation machine hasn't been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

The underlying problem isn't simply lower Asian costs. It's our own misplaced faith in the power of startups to create U.S. jobs... Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs...

How could the U.S. have forgotten [that scaling was crucial to its economic future]? I believe the answer has to do with a general undervaluing of manufacturing -- the idea that as long as "knowledge work" stays in the U.S., it doesn't matter what happens to factory jobs... I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution... our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don't just lose jobs -- we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.

Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted... Unemployment is corrosive. If what I'm suggesting sounds protectionist, so be it... If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Neither Grove's diagnosis nor his proposed solutions will persuade those who are convinced that protectionism of any kind is folly. I am not entirely convinced myself, and suspect that he may be underestimating the likelihood (and consequences) of cascading retaliatory actions and a collapse in international trade. But the argument must be taken seriously, and anyone opposed to his proposals really ought to come up with some alternatives of their own.

I am not convinced either, but the problem of where good jobs will come from in the future is an important concern. If the new jobs that are created are not as good, on average, as the jobs being lost, anything could happen.

links for 2010-07-03

Posted: 03 Jul 2010 11:03 PM PDT

On Second Thought

Posted: 03 Jul 2010 03:17 PM PDT

After thinking more about it, I'm not so sure I got things right in the last post. The problem is that the argument is inconsistent. I said that the public mood was against more stimulus spending due to worries over the debt, but later I argued that when the election comes, people will care more about jobs than the deficit.

Could those both be true? Perhaps. For example, suppose that people have been convinced that deficit spending does not lead to new jobs (despite plenty of evidence showing otherwise). In that case, they wouldn't favor increasing the deficit even if jobs is the primary concern. But then why blame the administration for not doing more?

Another possibility is that Congress misunderstands what people want. They think voters are worried about the deficit when it's really jobs that matter. That would explain reluctance to spend more now, and why this will backfire when the election comes (this was part of the argument I made).

It's also possible that Congress thinks deficit spending will help, but understands that it will be difficult to connect any improvement to the economy to the the increased deficit spending. Thus, whether or not they will receive credit for the improvement in the economy (i.e. credit for an economy that isn't as bad as it would have been) is uncertain, but blame for the increase in the deficit is relatively assured. In the extreme case where most members of Congress don't think further deficit spending would have much if any effect, they wouldn't see any benefit from increasing the deficit even further, only costs (even though, as just noted, the evidence says the benefit is there).

Maybe people really do care more about the deficit than jobs because they have been misled about multipliers, are confused about how short-run austerity impacts the long-run debt, or for other valid reasons (I'm having trouble thinking of those). But I don't think that's the case.

Finally, it's possible that deficit reduction helps with some constituents and hurts with others, and one group has more political clout than the other.

I am with a group of people trying not to be too rude by blogging instead of paying attention to what's going on around me, and some of the looks I'm getting suggest I need to put the iPad away, so I can't give this much thought. Thus, instead of thoughtlessly rambling further and saying more things that I'll be inclined to correct later, let me turn it over to you. An all out effort to sell additional stimulus has been missing. What is it that Congress and the administration are afraid of? Why aren't the administration and its allies in Congress pushing day and night, in public and behind closed doors, for more stimulus?

Deficits or Jobs?

Posted: 03 Jul 2010 10:17 AM PDT

Dean Baker:

Washington Post Pushes Myths on the Economy, by Dean Baker: In its article on the June job numbers the Washington Post told readers that:
the chances of a strong, self-sustaining expansion that can significantly improve the job market -- which seemed a real possibility during the spring -- are now slim ..

It is not clear who saw a "strong, self-sustaining expansion that can significantly improve the job market" as a real possibility in the spring. Certainly the Obama administration did not, nor did the Congressional budget office. Both projected very slow growth that would leave the unemployment rate above 9.0 percent by the end of the year. Most private forecasters had similar projections. The Post does not identify anyone who had a more optimistic assessment.

The article then asserts, with absolutely zero evidence, that ambiguity about the economic situation is responsible for the gridlock in Congress over further stimulus:

The confused outlook is causing paralysis on Capitol Hill, since the recovery is neither strong enough to provoke a turn toward deficit reduction, nor weak enough to lend momentum to President Obama's push for more economic stimulus. As Congress prepared to leave town for the week-long Fourth of July break, even funding for the wars in Iraq and Afghanistan was bogged down by the broader election-year squabble over spending

This statement implies that if the data showed a weaker economy that the Republicans and Blue Dog Democrats, who are currently blocking stimulus spending, would somehow be more supportive of it. The article includes no statements from any of these members of Congress or anyone connected with them in any way that would support the claim that their votes on stimulus would change if the economy was weaker. ...

Do reporters really think that the economy isn't weak enough to justify more stimulus? Or is it mostly politics, not economics, that is standing in the way?

From the NY Times via Brad DeLong:

Over the last few weeks, Democrats in the Senate have failed to muster enough votes to pass a new package of measures to address the economic weakness, reflecting what some of them see as the political perils of further deficit spending. Within the White House, all of the Obama advisers, along with many outside economists, agree that both things are needed — additional stimulus this year and, before long, a clear sign that the government will soon take actions on taxes and entitlement spending, phased in over time, to reduce a debt that mounted during the recession to the highest levels since World War II. The advisers' debate is over the timing and scale of any stimulus or deficit reduction.

Those pressing for more stimulus measures include Christina Romer, the chairwoman of the Council of Economic Advisers; Jared Bernstein, economic adviser to Vice President Joseph R. Biden Jr.; and the Treasury secretary, Timothy F. Geithner, who took that message internationally to the Group of 20 summit meeting of developed nations last weekend in Canada. Lawrence H. Summers, who as director of the National Economic Council tries to broker what he calls the "brakes-versus-accelerator" debates, nonetheless makes the economic arguments for an additional stimulus, officials say.

More focused on deficits — or at least on positioning Mr. Obama to show his concern — are his chief strategist, David Axelrod, other political advisers and Rahm Emanuel, the White House chief of staff, according to Democrats. Their lone supporter among the top economic aides is Peter R. Orszag, the budget director, who will leave the administration this month. Mr. Axelrod... said he often argues for emphasizing deficit reduction in part because "it's my job to report what the public mood is." He added, "I've made the point that as a matter of policy and a matter of politics that we need to focus on this, and the president certainly agrees with that." But Mr. Axelrod said that he and Mr. Obama are also concerned that cutting the budget too soon could retard the recovery or even provoke a relapse like in the Depression era, when the government's premature turn from stimulus to cutting deficits spawned another recession in 1937....

Notice that it is politics, not economics, that is holding up further stimulus ("the political perils of further deficit spending"). What bugs me about this is taking the public mood as a given, unchangeable constraint on the administration's ability to do what they (the economists anyway) think is best. Despite protestations from some to the contrary, I don't think the administration has done the hard work of laying the groundwork to convince the public that this is the right thing to do. Instead, they've tried to pander to the deficit hawks as a political strategy rather than taking them head on, and I think that was a mistake (and despite what Dean says about the forecasts, it may have been based, in part, on an overly optimistic, hopeful view on the recovery of the economy this summer). Yes, public mood has hardened against stimulus now. The hawks have won and the battle now is to maintain the stimulus that is in place, the hope for new spending is pretty slim. But that's partly because the administration (and its non Blue dog allies in Congress)  did not do what was needed to counter the hawks message. Now it's probably too late.

It might be true that there was never more than a slim hope, that the attempt to fight for more stimulus would have simply burned political capital with little to show for it. But when there are large enough benefits from a policy, and putting people back to work has very high value, those policies ought to be pursued even if they may not pay off in the end. I don't think politics should be the determining factor when the working lives of millions of people are at stake, but note that not doing anything further to help the unemployed -- or worse, reducing the deficit during the recovery -- also burns political capital, something the political advisers seem to be ignoring. I know I'm far less supportive and trusting of the administration to do what's needed than I once was, and I don't think I'm the only one. The question, I think, is whose support is being preserved by the decision not to fight for more stimulus, and the answer to that question is someone other than the millions of unemployed who still need jobs.

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