More on manufacturing and trade policy

There has been, and there will continue to be a lot of speculation about manufacturing and tariffs. Tariffs started to increase with Trump in 2017, and were kept by Biden. But among the differences between Trumponomics and Bidenomics (for more go here and here) was the smarter use of industrial policy, in the latter case.

The figure below shows Total Private Manufacturing Construction in the United States. Essentially how much firms spent on constructing of manufacturing installations. A poor proxy for manufacturing output (or potential), if not employment. Actual manufacturing output didn't grow much (a discussion on re-industrialization here; a very old post on deindustrialization here).

As it can be seen, it is flat during the first Trump presidency, and takes off at some point towards the middle of 2021. This in part reflects the CHIPS Act and the Inflation Recovery Act, both from well into 2022, but given the timing, it also shows that simply the expansion of spending, that occurred as soon as Biden assumed the presidency, with the $1.9 trillion package of March 2021, may have been instrumental. By about mid-2024, the boom had lost steam.

I think there are good reasons to be skeptical about Peter Navarro's manufacturing boom (see last post here).

Some brief thoughts on Bidenomics

 

There has been a lot of writing about Bidenomics (a name that might stick, like Reaganomics; nobody really thinks of Clintonomics as a thing) recently. It is fundamentally about the return of industrial policy, even if I personally think that this is less momentous than what people think. Don't get me wrong, both the rediscovery of fiscal policy after the 2007-9 recession (no fiscal packages after the 1990-91 or 2001 recessions, but packages after both 2007-9 and Pandemic in 2020), and the rediscovery of industrial policy, in part because of the rise of China, and in part because of the Pandemic/Chain supply shock, are important. And Bidenomics might stick because it announces a New Washington Consensus, that at least in theory abandons the neoliberal stances of the old one (see Jake Sullivan's speech).

My concern is that on both counts, the macroeconomic or fiscal front, and on the microeconomics, or industrial policy front, rhetoric is stronger than action. Or that it will be, at any rate. I'm not trying to blame Biden (or his team) for not breaking (or not enough) with conventional views. I mean I might have my views on how lefty or progressive (or even pro labor) Biden is (he did sign vote for every Free Trade Agreement possible, but he is allowed to change his mind). My concern is how much the common sense within the Democratic Party has changed. And while the the 2007-9 recession had moved many Dems and their advisors to rethinking about the macroeconomic consensus (not long ago Larry Summers was saying posties were right, and the economy had no tendency to full employment), the Pandemic inflation has done the opposite, as I noted here.

If the lesson was that Summers had been wrong (and Christina Romer right) on the size of the fiscal package needed for a fast recovery back then, now it seems that most economists (in the mainstream) agree with the notion that excess demand (particularly the last fiscal package early in 2021, and less the Pandemic ones, but that's another story) caused inflation, and the Fed fell behind and was correct in raising rates substantially. Note that the mechanism by which the Fed would reduce inflation is the conventional one, higher unemployment, less demand, lower prices (Summers, ironically, is one of the few actually that brings up the issue of bargaining power of workers with lower unemployment). And this diagnosis remains even though the level of unemployment didn't go down (after the recovery) at the same time that inflation came significantly down.

Of course, there's room still to discuss whether the Fed (together with the freezing of fiscal spending growth for next year by Congress) will end up throwing the economy into a recession or not. But either way, part of the legacy of the last crisis will be to reinforce the conventional new consensus model. Note, however, that the political risk is huge. Because Biden is forced to defend the notion that the economy (that recovered fast from the pandemic, no doubt) is doing great. And of course, the pre-Pandemic situation was far from ideal, and there's a reason why over the last decades a right-wing, blue collar movement has emerged. On that, trade policies were central, and the new industrial policy should play a role.

On the industrial policy front, it is worth remembering the existence of what Fred Block called the hidden developmental state, which suggests that the US always did industrial policy. But I doubt that the main effect of the New Washington Consensus will be to bring back many manufacturing jobs. Most of the ones that the establishment wants to move away from China (or at least part of the establishment, Adam Posen's views suggest that some are in doubt, about the movement away from the old one) will move to other Asian countries, like Vietnam and India.

At any rate, there are some reasons to be mildly skeptical about Bidenomics from a progressive perspective. Of course, I do think this is a huge improvement on Clintonomics, which was just Reaganomics, but more fiscally conservative.

New ILO Book: "Transforming Economies - Making industrial policy work for growth, jobs and development"

From the introduction

Building on a description and assessment of the contributions of different economic traditions (neoclassical, structural, institutional and evolutionary) to the analysis of policies in support of structural transformation and the generation of productive jobs, this book argues that industrial policy goes beyond targeting preferred economic activities, sectors and technologies. It also includes the challenge of accelerating learning and the creation of productive capabilities. This perspective encourages a broad and integrated approach to industrial policy. Only a coherent set of investment, trade, technology, education and training policies supported by macroeconomic, financial and labour market policies can adequately respond to the myriad challenges of learning and structural transformation faced by countries aiming at achieving development objectives. The book contains analyses of national and sectoral experiences in Costa Rica, the Republic of Korea, India, Brazil, China, South Africa, sub-Saharan Africa and the United States. Practical lessons and fundamental principles for industrial policy design and implementation are distilled from the country case studies. Given the fact that many countries today engage in industrial policy, this collection of contributions on theory and practice can be helpful to policy-makers and practitioners in making industrial policy work for growth, jobs and development.

Be sure to see the chapter by Robert Hunter Wade - "The mystery of US industrial policy: the developmental state in disguise" - on page 379.

The book is available as a pdf for free download here.

Chang & Grabel on The End of The Neoliberal Approach To Development

The following is an extract from Ha-Joon Chang and Ilene Grabel's new book Reclaiming Development: An Alternative Economic Policy Manual :

We should take note of what we see as the beginning of the end of the neoliberal approach to development. The process of discrediting that development model begins in the aftermath of the east Asian financial crisis of 1997–98. At the time there appeared to be nothing new in the nature of the east Asian crisis or in the crisis response. But, in fact, the east Asian crisis marked the gradual beginning of the end of the neoliberal consensus in the development community. The severe constraints on policy space that followed the east Asian crisis created momentum behind a new vision – that developing countries had to put in place new strategies and institutions to prevent a repeat of the events of the late 1990s. Policymakers in a number of Asian countries and in other successful developing countries sought to insulate themselves from the hardships and humiliations suffered by east Asian policymakers at the hands of the IMF. Indeed, as a consequence of the crisis, the IMF suffered a loss of purpose, standing and relevance. In the early 2000s, demand for the institution's resources was at a historic low. In 2005, just six countries had standby arrangements with the fund, the lowest number since 1975. From 2003 to 2007, the fund's loan portfolio shrank dramatically: from $105bn (£63bn) to less than $10bn. The fund's loan portfolio contracted even further after the loans associated with the east Asian crisis were repaid, as those countries that could afford to do so deliberately turned away from the institution. This trend radically curtailed the geography of the IMF's influence. In this context, the IMF began to soften its traditional opposition to policies that regulate the international movement of capital (ie policies called "capital controls"). At the same time, the World Bank also began to show signs of grudging change in its traditional opposition to industrial policy.

Read the rest here.

Note: Chang & Grabel's book has an introduction written by Robert Hunter Wade. Although I could not transcribe parts of his intro into this post, let it be known that much of Wade's position with respect to the topic at hand is illustrated here.

Nassif and Feijó on why Brazil doesn't grow since the 1980s

New paper by André Nassif and Carmen Feijó in the Brazilian Journal of Political Economy (Revista de Economia Política). From the abstract:

"The main goal of our paper is to provide analytical arguments to explain why Bra- zil has not been able to restore its long-term capacity for economic growth, especially compared with its economy in the 1950-1979 period (7.3 per cent per year on aver- age) or even with a select number of emerging economies in the 1980-2010 period (6.7 per cent per year on average, against 2.3 per cent per year on average in Brazil in the same period). We build our idea of convention to growth based on the Keynesian concept of convention. For our purposes, this concept could be briefly summarized as the way in which the set of public and private economic decisions related to different objectives, such as how much to produce and invest, how much to charge for products and services, how to finance public and private debt, how to finance research and development, and so on, are indefinitely — or at least until there is no change — carried out by the political, economic and social institutions. This analytical reference can be connected to the Neo-Schumpeterian National Innovation System (NIS) concept, which emphasizes not only institutions associated with science and technol- ogy per se, but also the complex interaction among them and other institutions. In this paper we identify two conventions to long-term growth in the last three decades in Brazil: the liberal and the neo-developmental. We show that the poor performance in the Brazilian economy in terms of real GDP growth from the 1980s on can be explained by a weak coordination between short-term macroeconomic policies and long-term industrial and technological policies. This weak coordination, in turn, can be associated with the prevalence of the liberal convention from the 1990s on, which has emphasized price stabilization to the detriment of a neo-developmental strategy whose primary goal is to sustain higher rates of growth and full employment in Brazil."

 The whole issue is available here.

India’s Growth Model: A Need for Change

By Suranjana Nabar-Bhaduri (Guest Blogger)

India has been cited as an example of an alternative development strategy under which economic growth in the early stages of development is service sector-led rather than manufacturing-led. The international press has heralded its exemplary growth performance, projecting it as one of the emerging market economies that will take over the world economy. As expected in the process of development, the share of the agricultural sector in GDP has decreased over time. However, the share of the manufacturing sector has not shown any significant increase. Rather, the services sector has emerged as the main contributor to India’s economic growth, especially since the 1990s. Evidence suggests that between 1993 to 2007, more than 60 per cent of the increase in India’s GDP was driven by an increase in services GDP. This growing importance of the service sector is partly the result of a meteoric rise in services exports, mainly software and information technology (IT)-enabled services. This performance has been greatly associated with the offshoring process in the developed world, and India’s ability to provide English-speaking workers at relatively lower wages. India’s trade balance and current account have shown persistent deficits, and it has relied on earnings from services exports, remittance inflows, and capital inflows to sustain these deficits.

When one evaluates the ability of this current growth path to generate inclusive and sustainable development, the picture is far from promising. The contribution of the IT-enabled services and the IT industry to employment generation has been miniscule, given the size of the Indian workforce, and the fact that a major part of this workforce remains rural and unskilled. While the total estimated size of the Indian workforce is more than 450 million, total employment in these services is only around 2 million workers. The rest of the employment in the services sector has been in low-productivity self-employment services in the unorganized sector. Furthermore, employment in IT-enabled services and the IT sector falls way short of the annual increment of around 12 million in the Indian workforce. 65 per cent of India’s population of nearly 1.2 billion people is now below the age of 25, leading to the emergence of a young population, a fall in the dependency ratio and a rise in the worker-population ratio. Without concrete policy efforts to accelerate the growth and expansion of agriculture and manufacturing, India cannot tap into the demographic advantage of a relatively young population by providing productive employment for both expanding output, and making the process of growth more inclusive. Equally important, there remain the questions of meeting the needs of food, clothing, investment and industrial products that must constitute a large part of consumption before a sufficiently high standard of living can be attained.

It has been generally argued that India’s trade and current account deficits can be financed and sustained by earnings from services exports, remittances and capital inflows, particularly portfolio investment inflows. Though India is nowhere close to a balance of payments crisis, this argument neglects the constraint imposed by external demand. There is no guarantee that the strong export performance of India’s services can be indefinitely sustained, and generate sufficient foreign exchange earnings to finance rising deficits. The major destinations of India’s IT-enabled services exports, and the main sources of remittances (since the mid-1990s) have been the US and Europe. The slow economic recovery in the US, economic recession in Europe in the backdrop of the Euro crisis and the possibility of tighter immigration laws in Europe have the potential to significantly affect India’s exports of services and remittances. Even the potential to significantly increase receipts from the Middle East, another major source of India’s remittances, has narrowed with the slowing down of the oil boom in these countries in the late 1990s and early 2000s, and the plateauing out of the Indian diaspora in this region with respect to size and economic scope. Moreover, short-term inflows such as portfolio investment appreciate the real effective exchange rate, and further widen trade and current account deficits. The persistence of large trade deficits, can, over time, reduce investor confidence, ultimately resulting in a reversal of inflows and speculative attacks on the domestic currency.

What the Indian economy strongly needs are proactive policy efforts to be directed towards accelerating the growth and expansion of agriculture and industry. This calls for more research and development (R&D) programs through public-private partnerships; credit policies that will make it easier for industrial entrepreneurs to replace outdated or inefficient capital equipment; the establishment of more development financial institutions and subsidies to firms for investing in R&D. Public investment, education policies, vocational training programmes and government procurement policies need to be directed to the increase of labor skills and well paid, high- productivity jobs that reduce the needs for imports, and the dependence on services exports, remittances, and volatile capital flows. There is also a need for more comprehensive employment generation initiatives through infrastructural development and rural development programs. India’s development strategy needs to be one that promotes the growth of the domestic market in order to raise the living standards of its population without hitting the external demand constraint. It should not merely seek to integrate into global markets through a reliance on low-wage services exports, implying the exploitation of its workers, for the benefit of global consumers.

(Originally published in Spanish in Página/12 with information on the author here)

Deindustrialization and American Hegemony

Manufacturing jobs have declined precipitously in the United States since the late 1960s. As the graph below shows they fell from 28% of total employment to 10% last year. The decline is continuous, and, one should add, precedes NAFTA and other Free Trade Agreements, (FTAs) which are often associated with the process of deindustrialization in the US. That the topic is old should be highlighted by the fact that the classic on the subject is Barry Bluestone and Bennett Harrison’s book published in 1982.

However, if one looks at the absolute number of manufacturing jobs, rather than their share in total employment, a slightly different picture emerges. First, manufacturing employment grows up to 1979 (peaking at around 19 million jobs). In other words, the fall in the manufacturing employment share from the 1960s to 1979 is fundamentally the result of a rate of employment growth in the manufacturing sector lower than in the economy as a whole. From 1980 manufacturing employment basically starts falling slightly up to 1994, and from 1994 to 2000 it grows only a trifle, fluctuating around 17 million jobs. Interestingly enough, 1994 is the year of the implementation of NAFTA. The whole period from 1980 to 2000 is a period in which the share of manufacturing employment falls, not just because employment grows faster in other sectors, but also because it stagnates.

However, after 2001 (the year China entered into the World Trade Organization, WTO) manufacturing jobs collapse, with only 11.5 million jobs in 2010. This may suggest that, in part, one may have to revise Bob Rowthorn’s view that North-South trade has no role to play in deindustrialization. But clearly the process that starts in 1979 is of a different nature. One view is that it represents a natural result of economic maturity, and that faster growth in manufacturing implies more workers absorbed in the services sector.

I would suggest, but not elaborate too much here, that deindustrialization in the United States, and I mean the post-1979 phenomenon, is part of a strategy of accumulation, which was based on lower wages and higher interest rates, with demand pushed by increasing the debt leverage of the private sector (as suggested in another post). The weakening of the unions (and FTAs have played a role in this), and the move of manufacturing jobs abroad (mostly to Asia), and, as a result, deindustrialization, are part of the pattern of accumulation since the 1980s. However, this should not be read as a general weakness of the United States industrial sector.

As noted by Fred Block, the United States has a shadow industrial policy machine, that has allowed certain sectors to be weakened, but has promoted vigorously other sectors deemed strategic.  For him:

“The rise of the computer industry in the U.S. was, at every stage, orchestrated by major government initiatives and even to this day large federal investments are being made to keep the U.S. computer industry ahead of foreign competitors. Nor is the computer industry atypical. Virtually all U.S. industries have become heavily dependent on scientific and technological advances that are financed primarily by the federal government's support of university and government laboratory researchers.”

Block argues that there is a hidden developmental State in the US. In that sense, deindustrialization has not been a sign of the weakness of the US, or of the demise of its hegemonic power, as some on the left would argue. On the contrary, is part of the renewed American Hegemony, which has been maintained at the cost of certain sectors, and, in particular, of its working class.