Tag: Industrial Policy

Must-read: Paul Krugman: “Trade Deficits: These Times are Different”

Posted on by Brad DeLong

Must-Read: There are big reasons to be for “mercantilist” policies:

  1. In a world in which a country suffers from a shortage of risk-bearing capacity or a savings glut, exports are a very valuable source of aggregate demand.
  2. In a world in which there are substantial spillovers from the creation and maintenance of communities of engineering practice, exports in associated industries are a powerful nurturant and imports a powerful retardant of such communities.
  3. To the claim that subsidies to such communities are better, the proper rebuttal is “subsidies to whom?” Export champions reveal themselves to be competent productive organizations, and policies that encourage competent productive organizations are likely to do more to nurture communities of engineering practice than policies that encourage competent lobbying organizations.

The arguments against “mercantilist” policies are two:

  1. The little one: such policies are inefficient, in that the losers lose more than the winners win.
  2. The big one: such policies are not win-win, and economic policy energy is best devoted to things that are win-win–at least in the behind-the-veil-of-ignorance sense of win-win.

Paul Krugman: Trade Deficits: These Times are Different: “In normal times, the counterpart of a trade deficit is capital inflows…

…which reduce interest rates, and there’s no reason to believe that trade deficits reduce employment on net, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap. And in that kind of world it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest.

One indicator of how the rules differ in these circumstances: Remember all the hand-wringing about our dependence on Chinese financing, and how U.S. interest rates would spike if the Chinese stopped buying our bonds? Well, the Chinese have stopped buying bonds and started selling them…. And US interest rates remain very, very low — still under 2 percent on 10-year bonds.

I’m not saying that Trump has any idea what he’s talking about; he doesn’t. But we are living in a world where, for the time being — and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense. But then Keynes could have told you that.

Must-read: Justin Fox: “About That U.S. Manufacturing Renaissance…”

Posted on by Brad DeLong

Must-Read: Justin Fox: About That U.S. Manufacturing Renaissance…: “After a brutal period of downsizing and reorganizing…

…the U.S. manufacturing sector has become the most competitive in the world. Output per worker is higher than in any other major manufacturing country. Labor costs per unit of output are lower than in Brazil, Canada and Germany, and only slightly higher than in China. What’s more, writes Gregory Daco of Oxford Economics in the new report from which the above facts are taken, ‘the U.S. is ‘gifted’ with a stable regulatory framework, a flexible labor market, low energy costs and access to a large domestic market.’

So that’s great! Time for a manufacturing renaissance, right?… But… there are few signs of it actually happening yet. Yes, there are the almost 900,000 manufacturing jobs added in the U.S. since early 2010. But it’s important to see that for what it is–a modest rebound after a spectacular collapse…. Why isn’t reshoring taking off? Daco, of Oxford Economics, stressed that such shifts don’t happen overnight. ‘It takes quite a bit of time for a company to modify its supply chain,’ he said in a phone conversation. He also noted that ‘nearshoring’ to Mexico, where unit labor costs are still substantially lower than in the U.S., remains popular….

The countries of South and Southeast Asia… have labor forces that run into the hundreds of millions of workers, so the gradual shift of certain industries to other Asian low-cost countries is likely to continue…. Clothing- and furniture-making, for example, are unlikely to return to the U.S. in a big way. But in capital-goods manufacturing, labor costs matter less than technology and the existence of a local ecosystem of suppliers, consultants and skilled workers that can take a while to put together. In their rush to offshore, then, U.S. manufacturers may have permanently destroyed their ability to make certain products here. As Gary P. Pisano and Willy C. Shih wrote in a 2009 Harvard Business Review article:

In making their decisions to outsource, executives were heeding the advice du jour of business gurus and Wall Street: Focus on your core competencies, off-load your low-value-added activities, and redeploy the savings to innovation, the true source of your competitive advantage. But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

This loss of capability could be what we’re seeing evidence of in the trade data. If so, a true U.S. manufacturing renaissance may be a long time coming.

Concrete Economics @ SXSW!: Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3

Posted on by Brad DeLong

I guess that is it: Concrete Economics @ SXSW!: Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3:

Stephen S. Cohen, J. Bradford DeLong: Concrete Economics: The Hamilton Approach to Economic Growth and Policy] (Allston, MA: Harvard Business Review Press:1422189813) http://amzn.to/22ds5TK

Must-read: Justin Fox: “The U.S. Could Use a New Economic Strategy”

Posted on by Brad DeLong

Must-Read: Justin Fox: The U.S. Could Use a New Economic Strategy: “In his four-plus years as the country’s first treasury secretary…

…Alexander Hamilton crafted an economic strategy that helped the U.S. rise from agrarian former colony to global economic power… [write] Stephen S. Cohen and J. Bradford DeLong write in their brand-new book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy…. No U.S. leader since has articulated and then put in place an all-encompassing economic plan in quite the way Hamilton did. But the country has always followed some sort of economic strategy, even if it has seldom been clearly defined… a succession of strategies–culled from Cohen and DeLong’s book, but given titles by me–that went something like this: The era of free stuff…. The era of intervention…. The era of investment…. The era of financialization…. It is at least possible that this last era has come to an end, with the beginning of financial re-regulation in the U.S. and a halt to the long upward trend in global trade that accompanied the rise of the East Asian export economies. It’s not at all clear, though, what’s going to replace it.

DeLong… and Cohen… don’t offer a plan. They simply recommend that discussion of economic policy focus on the concrete–what works–rather than theory and ideology. How’s that been going lately? Donald Trump’s economic platform, however muddled and unrealistic, is at least a break from the narrow ideological orthodoxy on economics that has held the national Republican Party in thrall for the past couple decades. On the Democratic side, Bernie Sanders and Elizabeth Warren have offered a challenge to the financial-sector-friendly approach that the party’s mainstream settled on in the 1990s. Some in that mainstream have been reconsidering their stance as well…. The economics profession’s turn away from theory and toward empirical work, which I wrote about in January, will presumably offer pragmatically inclined policy makers more material to work with in the coming years.

Still, it’s not easy to figure out what the U.S. should do next. Nations playing catch-up… have concrete examples…. But the U.S. of 2016 is the biggest economy on the planet…. In the latest World Economic Forum global competitiveness rankings, for example, it trailed only Switzerland and Singapore. There is surely much we can learn… but… the U.S. remains largely sui generis.

I’m almost certain that more infrastructure investment would be a smart part of any new U.S. economic strategy. But I’m not so sure what should be built and where, or what else…. Got any suggestions?…

For an explanation of this, I recommend ‘Cabinet Battle #1’ from the musical ‘Hamilton.’

Must-read: Diane Coyle (2013): “Learning Economic Lessons from Asia”

Posted on by Brad DeLong

Must-Read: Diane Coyle (2013): Learning Economic Lessons from Asia: “Studwell… conclude[s]… successful economic development… follow[s]…

…(1) An initial land reform… family-based labour on small farms has proven a far better footing than greater use of capital equipment at large scale for improving productivity…. In addition, the increased incomes of largely rural populations are vital for growing the domestic market for manufactures…. Land reform is politically difficult… needs to be accompanied by… extension support, rural credit and infrastructure investment.

(2) The next stage is to grow domestic manufacturing… [via] ‘industrial policy’… much subtler than the [mere] use of trade barriers… (i) a willingness to use government funding to support domestic manufacturers until they reached a scale that would make them globally competitive… (ii) opening domestic markets to imports of key inputs for exporters….

(3) The third stage extending the role of financial services, while keeping finance on a short leash…. Any economist who thought globalisation was a turbulent but broadly good thing (this includes me) surely has to accept that there was too much liberalisation of cross-border portfolio flows, and that emerging economies should keep the ability to control these flows in their policy armoury….

It’s a model of tying together historical knowledge, empirical evidence and analysis. It is also a good complement to Justin Yifu Lin’s The Quest for Prosperity: How Developing Economies Can Take Off, which sets out a Chinese policy maker’s perspective…

Must-read: Cardiff Garcia: “China and Traditional Industrialisation-Led Development: The World Was Not Enough”

Posted on by Brad DeLong

Cardiff Garcia: China and Traditional Industrialisation-Led Development: The World Was Not Enough: “[My] reaction was to be startled by [Justin Yifu Lin’s] comparison of China’s current position…

…to that of Japan in 1951 and South Korea in 1977…. Japan and Korea started rebalancing and liberalising their economies much later in the process than China did. Distortions… continued to linger for a long time after the rebalancing… the eventual opening is also challenging both in terms of timing and execution…. Japan and Korea are nonetheless held up as success stories of fast catchup growth in living standards. The best account… is Joe Studwell’s How Asia Works — check out Diane Coyle’s summary. Why were Japan and Korea able to pursue this model until per capita living standards were closer to those of rich countries, while China is undergoing this wrenching process so much sooner?…

A note by Credit Suisse economists offers a convincing explanation….

[A]fter growing at a steady pace of around 11% over the decade up until 2001, the pace of real Chinese export growth more than doubled in the period up to the Great Recession…. The problem with an increase in market share is that the adjustment is likely to be a one-off…. For China, this ‘adjustment’ back to a more normal growth model has been made much more difficult by external events and by the sheer size of the Chinese economy…. Despite GDP per capita only increasing to a still-modest 25% of that seen in the US, China now accounts for fully a third of global industrial production (up from only 5% as recently as the 1990s)….When you are that big, it becomes increasingly difficult to grow exports and production at a pace materially faster than growth in final global demand….

Finally… the Great Recession was a tremendous setback to the ultimate objective of more balanced growth…. The main policy mechanism for fighting the slowdown in 2008 and 2009 was a massive increase in investment, which we now know occurred at just the time that the export-driven growth model was breaking down….

The issue is complicated…. Automation… raises the prospect that premature de-industrialisation will be forced on countries who try this strategy anew…. Demographic changes surely also matter…. Still, what I take from the note is that China was just too big (or the world ex-China too small, if you prefer) for the model to ever work as well as it did in Japan and Korea…. That’s not to suggest that China was either right or wrong to follow this particular approach to catchup growth. Given this development strategy’s record in the case of Japan and Korea, maybe it made sense to try. Who can say what a counterfactual approach would have yielded?…

Must-Read: Ricardo Hausmann: The Import of Exports

Posted on by Brad DeLong
Photo of container stacks and port cranes by Andrey Kuzmin, veer.com

Must-Read: There is an interesting argument to be made here about how the speed of innovation in a sector is related to the extent of the market and thus of potential competition. And there is a very interesting argument made here about the export sector as the key link:

Ricardo Hausmann: The Import of Exports: “To pay for what they want from out-of-towners…

…they must sell them some of the things that they do know how to make…. The goods and services that a place can sell to non-residents have a disproportionate impact on its quality of life–and even its viability. A mining town becomes a ghost town when the mine closes, because the grocery store, the pharmacy, and the movie theater no longer have the capacity to buy the ‘imported’ food, medicine, and films they need. In contrast to non-tradable activities, a place’s export activities need to be pretty good to convince out-of-town customers–who have ample other options–to buy…. The higher the productivity and the quality of export activities, the higher the wages they can pay and still remain competitive….

To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents. Indeed, the need to act on new export opportunities and remove obstacles to success is probably the central lesson from the East Asian and Irish growth miracles.
Non-tradable activities are akin to a country’s sports leagues: different people like different teams. Those engaged in tradable activities are like the national team: we should all root for them–and organize ourselves to make sure they succeed.

Must-Read: John Thornhill: Lunch with the FT: Mariana Mazzucato

Posted on by Brad DeLong

John Thornhill: Lunch with the FT: Mariana Mazzucato: “The first time I saw Mariana Mazzucato in action…

…she intellectually eviscerated a guileless American venture capitalist at an economic conference in Italy. Anyone who has read… The Entrepreneurial State… could have probably guessed it would be a bad idea to argue within her earshot that Silicon Valley’s success was due solely to brilliant entrepreneurs doing whizzy things. But the venture capitalist was sloppy on his due diligence and was whacked by a formidable Mazzucato…. It was electrifying, especially if, as I do, you appreciate intellectual blood sports…. She chooses to meet at the Gilbert Scott restaurant in the renovated St Pancras hotel, right by the Eurostar rail terminal, close to her London home…. For the next three hours she talks at mind-spinning speed….

My mission was to change that debate. If we want to have more sustainable, long-run growth, rather than finance-driven, speculative growth, then we had better understand where growth comes from. If we actually look at the few countries that have achieved smart, innovation-led growth, you’ve had this massive government involvement. How can we square that with the whole austerity discourse?… As soon as I started looking at these issues, I started realising how much language matters. If you just talk about the state as a facilitator, as a de-risker, as an incentiviser, as a fixer of market failures, it ends up structuring what you do…. [But] you always require the state to roar….

One of the original engines of Silicon Valley’s creativity, she argues, was the Defense Advanced Research Projects Agency (Darpa), founded by President Dwight Eisenhower in 1958 following the alarm caused by the Soviet Union’s launch of the Sputnik rocket. Darpa, run by the US Department of Defense, has since pumped billions of dollars into cutting-edge research and was instrumental in developing the internet. According to Mazzucato, the publicly funded National Institutes of Health has played a similar role in nurturing the US pharmaceuticals industry. The Advanced Research Projects Agency-Energy (Arpa-E), set up by President Barack Obama and run by the US Department of Energy, is designed to stimulate green technology….

Mazzucato is talking so fast that she rarely has time to eat and only picks at her duck…. As we order two macchiatos, we turn to Europe, which she believes is learning all the wrong lessons from Silicon Valley’s success. Governments have rashly asked business what they should do to promote growth. Encourage venture capital, cut taxes and red tape, comes the reply. In many cases, Mazzucato argues, this amounts to no more than corporate welfare.

The irony, if not the tragedy, of what we have today is that not only do we not understand the Silicon Valley story correctly but we are also increasing the risk of free- riding, which worsens inequality. Businesses invest only where they really see future technological and market opportunities. If you bring their tax to zero, you’ve just made them richer, they will golf more. They will not invest…