Evan Soltas
Feb 6, 2012

Manufacturing: Romer vs. Obama

In the NYT, the former advisor sets the President straight

Factory, Deposit NY
Christina Romer, President Obama's former chairwoman of the Council of Economic Advisors, asks "do manufacturers need special treatment?" And refreshingly, she answers no:
A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada. The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories [market failures, jobs, income distribution]. None are completely convincing...So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.
I've articulated before the "market failure" argument in my post about new trade theory -- the gist of it is that an industrial center creates externalities in the form of industrial know-how and human capital, and that therefore the free market alone would tend to create too few of these. Although I found the "industrial commons" argument very interesting--looking at the more established idea of urban "knowledge spillovers." (See this excellent paper for more.) Romer thinks the benefits, "while real, may often be small," which is entirely possible but merits further exploration on my part. Her other two criticisms (jobs and income distribution) are easier to support, yet the President hangs his argument largely on them:
[T]his blueprint begins with American manufacturing. On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number-one automaker. Chrysler has grown faster in the U.S. than any major car company. Ford is investing billions in U.S. plants and factories. And together, the entire industry added nearly 160,000 jobs. We bet on American workers. We bet on American ingenuity. And tonight, the American auto industry is back. What’s happening in Detroit can happen in other industries. It can happen in Cleveland and Pittsburgh and Raleigh...So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it...[I]f you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here.