The New Industrialism

At the very end of 2012, I wrote a piece for MIT Technology Review (paywall) about an interesting schism in Democratic economic policy circles. Gene Sperling had replaced Larry Summers as director of the National Economic Council in early 2011, and over the next couple of years the Obama administration seemed to talk more about industrial policy, although they didn’t call it that.

The term was “advanced manufacturing.”

But in early 2012, Christina Romer, former chair of Obama’s Council of Economic Advisers, questioned the administration’s manufacturing agenda publicly, writing in The New York Times:

AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

A survey of economists from around the same time confirmed that the conventional wisdom in the field was firmly against intervention to boost manufacturing.

I didn’t get to interview the players in this debate, but my piece highlighted a group of policy wonks willing to defend a certain sort of industrial policy. I talked to Mark Muro of The Brookings Metropolitan Program, which had released research emphasizing the importance of manufacturing, and Rob Atkinson of ITIF, a think tank promoting an aggressive innovation policy agenda.

Not much came of this debate, at least that I could see. But perhaps a broader warming to some revised form of industrial policy is now perceptible?

Enter economist Noah Smith at Bloomberg View, writing about new ideas in economic growth. Neoliberalism still has its adherents, but what’s the competition?

Looking around, I see the glimmer of a new idea forming. I’m tentatively calling it “New Industrialism.” Its sources are varied — they include liberal think tanks, Silicon Valley thought leaders and various economists. But the central idea is to reform the financial system and government policy to boost business investment.

Business investment — buying equipment, building buildings, training employees, doing research, etc. — is key to growth. It’s also the most volatile component of the economy, meaning that when investment booms, everything is good. The problem is that we have very little idea of how to get businesses to invest more.

My Tech Review story called this group the “institutionalists,” which one of my sources coined when pressed to distinguish his faction. But “New Industrialism” is far clearer.

So who’s a part of this agenda? Smith mentions The Roosevelt Institute’s excellent reports on short-termism; ITIF and Brookings Metro belong on the list; we’ve published a lot at HBR that I think would count (a few examples here, here, here, here).

And one could argue that Brad DeLong and Stephen Cohen’s forthcoming book on Hamiltonian economic policy (my employer is the publisher) is in this conversation, except arguing that such an agenda isn’t new at all. Here’s their recent Fortune piece:

Hamilton’s system was constructed of four drivers that reinforced one another, not just economically but politically: high tariffs; high spending on infrastructure; assumption of the states’ debts by the federal government; and a central bank.

As Smith writes,  “New Industrialism… is not yet mainstream,” and frankly there’s still a lot to be fleshed out before we can even ask whether such an agenda is superior to the alternatives. But he concludes that “it could be just the thing we need to fix the holes in our neoliberal growth policy.” He may just be right.

Win-win economics

The assumption that economic growth and equality are necessarily at odds is fading fast.

wsj productivity inequality

That’s via Greg Ip and The Wall Street Journal.

If inequality were the price we paid for growth, you’d expect productivity and income captured by the rich to go hand-in-hand. Instead, we see virtually the opposite.

Sure enough, the conversation here is changing. Suddenly, you’re no longer considered a pollyanna for suggesting we can further growth and equality at the same time. For instance…

Christine Lagarde, managing director of the IMF in The Boston Globe:

The traditional argument has been that income inequality is a necessary by-product of growth, that redistributive policies to mitigate excessive inequality hinder growth, or that inequality will solve itself if you sustain growth at any cost.

Based upon world-wide research, the IMF has challenged these notions. In fact, we have found that countries that have managed to reduce excessive inequality have enjoyed both faster and more sustainable growth. In addition, our research shows that when redistributive policies have been well designed and implemented, there has been little adverse effect on growth.

Indeed, low growth and high inequality are two sides of the same coin: Economic policies need to pay attention to both prosperity and equity.

And Larry Summers:

Trade-offs have long been at the center of economics. The aphorism “there is no such thing as a free lunch” captures a central economic idea: You cannot get something for nothing. Among the many trade-offs emphasized in economics courses are guns vs. butter, public vs. private, efficiency vs. equity, environmental protection vs. economic growth, consumption vs. investment, inflation vs. unemployment, quality vs. quantity or cost and short-term vs. long-term performance…

Yet I am increasingly convinced that “no free lunch” oversimplifies matters and makes economics too dismal a science. It would be true in a world where all opportunities to make things better had been fully exploited — where, to use another cliché, there were no $100 bills lying on the street. But recent experience suggests that by improving incentives or making strategic investments, we can achieve apparently conflicting objectives to a greater extent than conventional wisdom would suggest…

A quite different example involves the alleged trade-off between equity and efficiency — specifically, the concern that redistribution hurts economic performance and stymies growth. It is true that tax increases produce at least some adverse incentives and that providing income-based government benefits involves implicit taxes. But matters are much more complex than a simple trade-off. Antitrust laws that attack rent-seeking promote both equity and efficiency, as do measures that increase educational opportunity. The rational strengthening of financial regulation reduces the incidence of financial crises, thus improving economic performance while promoting fairness by helping consumers. In demand-short economies, the greater equity achieved through more progressive taxation means more spending and fuller employment of resources. These examples do not deny trade-offs between equity and efficiency. They do, however, suggest that there is nothing ineluctable about them. Both can be enhanced through proper policy.

And David Wessel, reviewing Robert Gordon’s new book:

Whatever the causes of the distressing slowdown in the growth of productivity (the amount of stuff produced for each hour of work) and the increase in inequality, what policies might both increase productivity and decrease inequality?

Many years ago, economist Art Okun argued that we had to choose between policies that increased efficiency and those that increased equity. Perhaps. But  if there are policies that could achieve both, it’s time to try them.

Tradeoffs remain real, as do unintended consequences. Here are two examples that challenged my biases. Activist hedge funds seem to represent a tradeoff between rising productivity and rising wages. And there’s some reason to think that new overtime rules won’t work the way they’re intended.

Not everything works out the way you’d hope. But sometimes the interests of growth and equality are happily aligned. Which is good, because we could use a whole lot more of both.