We were very happy that President Obama's recent State of the Union address included a call to expand our manufacturing base in the United States. There is clear consenus that manufacturing is a signifcant factor in a nation's economic competitiveness and, in some polls, is identified as the single most important factor. As we venture into the world of government influenced industrial policy, I would like to remind our readers of something we wrote back in October of 2009...
We believe that there is a role for government in setting industrial policy to assure not just economic competitiveness, but national security as well. However, we implore would be policy makers to understand the following realities:
- Industrial policy should be about productivity, not jobs. The ability to produce more value with fewer resources – productivity – has been the economic security blanket for nations that have enjoyed meaningful GDP growth. When discussing lost jobs in the manufacturing sector, it is easy to lay the blame on low cost countries, but the fact is that more manufacturing jobs have been lost to automation than off-shoring and this is a good thing because it raises productivity. The lesson is clear, industrial policy should be based on goals for productivity improvements, not job creation.
- Avoid the economic zone trap. Policy makers will be tempted to direct benefit toward geographic regions that are most destitute. There is frequently talk of "economic zones" where there are specific incentives offered to businesses to invest or even make direct government investment. While well intentioned, this tact is ill advised. Not only is there a long track record of failure, the new structure of manufacturing will be away from large centralized plants built for scale and toward more flexible, focused facilities as close to demand as possible. This necessary distribution of manufacturing assets means that a policy that tries to concentrate on a specific region will be counter productive.
- Enable the policy with infrastructure investment. The distribution of manufacturing assets has implications for how to think about infrastructure investments as well. The existing transportation infrastructure is in dire need of an overhaul but perhaps not as much as the $12 trillion some industry groups have suggested. The Interstate Highway System, built out under Eisenhower, enabled economic growth, but is based on large centralized production plants and cheap fuel. Since both of those underlying assumptions have changed, we must consider how to support long haul of raw materials via rail and short haul deliveries using natural gas, electric, and hydrogen powered vehicles. More efficient delivery of energy and a national wireless data backbone would also enable an industrial policy based on productivity objectives.
- Do not enable industrial policy with fiscal policy. Past attempts at industrial policy have used tax mechanisms such as investment tax credits to encourage new activity with only modest results. There are, however, two things that can be done that may lift impediments (although not necessarily enable) to productivity growth. First, policies that seek to tax foreign profits of domestic companies will not bring jobs back home and will actually have a negative effect on productivity. Secondly, a tax exemption for those companies that create real economic value (i.e. manufacturers) should be considered. This exemption will encourage more investment and remove barriers to domestic expansion.
- Focus on fair trade policies. Foreign trade policy has emphasized free trade for most governments and this in turn has fueled tremendous global growth. However, the recent recession brought some fairly aggressive sanctions and retaliation that has made trade a bit more contentious and raised fears that economic conditions could be worsened much like what happened during the great depression. Industry policy must be supported by trade policy that his based on a doctrine of fairness – encouraging the free exchange of goods but discouraging tactics like currency manipulation.
The President adressed these last two, fiscal and trade policy, well in his speech. However, we fear there may be an inclination to direct investment to certain geographies or, worse, industry segments like green energy. Trying to mainipulate the investment in this way is likely to lead to similar policy failures as was experienced in Japan.
In looking at how the industry will reset for the "intelligent economy", industrial policy can be an important enabler to individual national competitiveness and contribute to a stronger global economy. Policy makers must not be dragged into the old approaches and make policy based on economic outcomes, not political ones. For manufacturers, movement toward this type of industrial policy will put a renewed importance on being connected, intelligent, and collaborative – intelligent execution for the intelligent economy.