Obama Push on Advanced Manufacturing Stirs Economic Debate

Before a packed arena at the national convention of the Democratic Party in September, Barack Obama outlined a vision for America’s economic recovery with manufacturing as its engine.

“After a decade of decline, this country created over half a million manufacturing jobs in the last two and a half years,” Obama told the cheering crowd in Charlotte, North Carolina. “If we choose this path, we can create a million new manufacturing jobs in the next four years.”

To fulfill those promises, the White House is turning to an economic tool not seen in Washington for years: industrial policy.

Emboldened by a new cadre of advisors, the Obama administration has proposed policies to boost domestic manufacturing—tax breaks, new R&D spending, and vocational training for two million workers in areas including  advanced technologies like batteries, computing, aerospace, and robotics.

The idea is that manufacturing—especially the kind involving cutting-edge techniques or products—is so closely tied to American technological creativity that these industries must be actively protected from the kind of overseas competition already blamed for destroying the U.S. position in semiconductors, machine parts, and flat-panel displays.

The proposals, set in motion in 2011, represent a remarkable shift in U.S. thinking because the country has not had an explicit industrial policy since the Carter era. It has also stirred a rancorous debate among economists, some of whom say the White House has made a break from mainstream free-market thinking.

That debate burst into the open last February, when Christina Romer, an economist at the University of California, Berkeley, and the former chair of Obama’s Council of Economic Advisers, penned a column for the New York Times questioning whether manufacturers need “special treatment.”

Taking aim at key elements of the White House proposals, Romer said there was little evidence that manufacturing will create significant job growth or stop a slide in middle-class incomes. She disputed the notion that manufacturers should get breaks not available to, say, a software company.

“So far, a persuasive case for a manufacturing policy remains to be made,” wrote Romer. Without hard evidence, she said, White House policy boiled down to no more than “feeling that it’s better to produce ‘real things’ than services.”

But an entirely different school of thought  is now ascendant in the White House, one arguing that manufacturing, even though it employs only 9 percent of U.S. workers, plays an outsize role in the country’s economy. For instance, manufacturing companies carry out around two-thirds of all corporate R&D and file the most patents. There is evidence that factories may yield beneficial “spillovers” of knowledge that improve the broader economy. “Within this administration there’s been a reframing,” says Mark Muro, a senior fellow at the Brookings Institution, a Washington think tank. “The folks on the inner circles of the White House now are strikingly sympathetic to manufacturing and see it as critical.”

At the center of that shift is Gene Sperling, a former economic advisor to Bill Clinton and a lawyer by training. Obama chose him to replace Harvard University professor Larry Summers as director of the National Economic Council in 2011. As cochair of the White House’s Office of Manufacturing Policy, the Michigan native has been the architect of Obama’s advanced-manufacturing agenda and has brought on like-minded advisors.

The White House did not respond to a request for comment, but Sperling is known as a savvy political operative and campaigner. He is “very different in his orientation” from most academic economists, says Rob Atkinson, president of the Information Technology & Innovation Foundation. “This is why this [policy shift] has happened now rather than before.”

Sperling’s group believes that government can and should prevent the decline of U.S. manufacturing. “When we remain indifferent to the decision to compete for the manufacturing products of the present,” Sperling said last March in a policy speech that rebutted Romer and other critics, “it can trigger the loss by our nation of the ability to … create the next generation of technologies.”

Under Sperling’s leadership, the White House has proposed a series of measures to accelerate advanced manufacturing, including an additional $418 million for advanced manufacturing R&D (a 19 percent increase over current levels); $8 billion in new funding for community colleges to train people with the skills manufacturers need; a bundle of tax breaks for U.S. manufacturers; and a $1 billion program to create 15 national institutes aimed at developing new manufacturing techniques in areas such as 3-D printing and nanotechnology.

The government’s approach has a committed chorus of supporters who believe active intervention is needed. In February, the Brookings Institution released a paper arguing for a manufacturing policy similar to that of Germany. That country, which carefully manages its manufacturing sector, still maintains a trade surplus with China and has lost fewer of its manufacturing jobs than the U.S. has.

Yet even supporters of a government assist to manufacturers say some of the proposals are unorthodox. One proposed rule change, for instance, would double the “domestic production” tax break for companies that do advanced manufacturing, but eliminate it for oil producers. Another tax write-off, for scrapping equipment, wouldn’t be available to any company moving its operations and jobs overseas.

Even though many types of businesses, including farmers, get big government subsidies, new tax rules that favor some industries over others are likely to be sharply opposed in Congress. “The dominant view in Washington is that that is inappropriate tax policy,” Atkinson says. “This [will be] a huge uphill battle.”