In a column published in Saturday’s New York Times, Christina Romer, former chairwoman of President Obama’s Council of Economic Advisors, questioned the merits of Obama’s revived emphasis on supporting the U.S. manufacturing industry. To conclude, she wrote:
“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.”
Indeed, Romer makes a cogent economic argument against government preference for manufacturing industries over others. And while she points to increased infrastructure spending as the more economically wise alternative—which she is certainly correct in doing—she merely hints at the truth that the only path to a vibrant, sustainable, socially-inclusive U.S. economic recovery is through support for entrepreneurship and innovation, not subsidies for entrenched corporate and labor interests unsuited to America’s role in the globalized world.
The financial crisis of 2008 and subsequent Great Recession offer the United States the perfect opportunity to examine the economic failures of the past and chart a new future. This does not mean looking back to the 1950s in search of answers; the world today, and the United States’ place within it, is quite different from the post-war world. Instead, it means playing to America’s comparative advantages in innovation, high-skilled production, and services provision. Though Obama recognized this reality in his State of the Union address, his proposal to subsidize manufacturing seems incongruent even in his own worldview.
Such a stance on manufacturing represents just one example of our nation’s main failure in response to the crisis: a lack of policy imagination that favors returning to the status quo of pre-crisis days, a failure sponsored by the huge corporations and financial firms that profit from a government beholden to their interests.
On trial here is not capitalism. In fact, as economists Edmund Phelps and Saifedean Ammous contend, the dominance of immense companies resembles more the corporatism of Mussolini than the capitalism envisioned by Adam Smith, our Founding Fathers, or any true free-market proponent before or since.
To put it another way, every business goes through a life cycle. At its conception is an idea, a productive and innovative use of capital that garners resources through this ingenuity. As it grows larger, however, it seeks resources not only through fulfilling consumers’ utility, but also by lobbying the government for more favorable tax policies, subsidies, and regulations. In a country like the United States, where money is speech, the richest companies use the government to help them get richer, while new entrepreneurs and startups must fight over whatever resources remain. This barrier to entry is as much political as it is economic, and it serves only to perpetuate itself.
For years, this distorted capitalism thrived in the United States with little visible negative impact (besides, perhaps, increased income inequality—but who was complaining when they could buy a house for 5% down and cash out on the refinance as their house’s value skyrocketed?). But in 2008, the bursting of the financial bubble and the bailouts that followed exposed this perversion of capitalism to all who were willing to look. Truly, the United States’ current iteration of capitalism, in which the government upholds established corporate interests at the expense of new, innovative firms (here is just one example), bears little resemblance to the capitalism upon which it was founded.
Yet we are not doomed. Again, the crisis provides a unique opportunity to reexamine the orthodoxy of the past, to work towards an economy that rewards all Americans for their hard work instead of rewarding a few corporations through government-subsidized inertia. This does not mean that all corporations are bad, that Wall Street should go away, or that a great business cannot become bigger and better. What it means is that all Americans should have the opportunity to contribute their most productive self to the economy, and that anything less is no route to recovery.
The United States can no longer afford to let millions of its workers go underutilized and thus underpaid. While manufacturing—in the high-skilled and innovative sector rather than the archaic—will play some role in America’s economic recovery, it is not the answer to our woes. Indeed, the United States should not want to return to being a manufacturing country when it has the potential to do much better—and when other countries will remain better at manufacturing (in most cases). Competing with them will only drive wages lower and government expenditures higher. Instead, we must improve our education system to provide every American with the tools and creativity necessary to innovate. We must support startups and remove preferences for parasitic corporate interests, simplifying the tax and regulatory codes that benefit those with the most expensive team of lawyers. If we are to learn anything from history, we should note that innovation transformed the United States from a British colony into a global superpower. With this in mind, we should look to the new, not the old, for a path to a better future.
The President asserted in the State of the Union address: “Our workers are the most productive on Earth, and if the playing field is level, I promise you—America will always win.” While he was referring there to China’s trade policies, let us hope that he bears the same in mind when crafting economic policy here at home.
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