Obama Administration makes crucial pivot on trade and jobs.

Moving into the 2012 election season, the Obama Administration is making a critical  pivot in its political and economic narrative on trade and jobs. During his Midwest trip this summer,  Obama extolled American workers as the most productive in the world,  and talked about free trade treaties as the solution to the job problem. The implication was that nothing was wrong, and the return of jobs was only a matter of time.

But the White House has just issued a new report entitled “Investing in America: Building an Economy That Lasts”  that tells a very different story. The new report starts by saying:

Over the past decade, real business investment in production capacity stagnated.     Economic growth in the U.S. relied far too heavily on an unsustainable boom in residential and commercial real estate fueled by an unchecked financial sector.    The bubble created by this boom distorted our economy and undercut the international competitiveness of our products and services.    Companies increasingly chased low‐cost labor outside of the U.S., moving their manufacturing production, and some of their services, like call centers and software development, abroad.

The report points to the stagnation in business investment, the rising trade deficit, and falling manufacturing employment as real problems.

The dramatic decline in the level of manufacturing employment after 2000 signaled that something fundamental had change

This is an extremely important report, both politically and economically. Economically it points to trade as a major reason for job loss. In particular, it makes the point that the boom pushed up production costs above sustainable levels.

Politically, the report positions Obama in favor of  taking effective steps to bring jobs back to the country. This is a much better stance to run against a Republican like Mitt Romney, since one way that private equity firms cut costs is by outsourcing production overseas.

To me, this report appears to reflect the influence of the new CEA head, Alan Krueger. Krueger, a labor economist, has a realistic idea of how trade has affected the U.S. labor market.

I would suggest that for its next step, the White House should support the idea of a Competitiveness Audit, which identifies the industries where insourcing makes sense, and points out places where more work needs to be done. This would be relatively cheap way of improving the speed of insourcing, and getting more jobs created here more quickly.

Comments

  1. I am glad to see this change of attitude on the part of the Administration. Too bad it’s about three years late.

    I have nothing against a competitiveness audit, but surely there are enough shovel-ready ideas on increasing employment in circulation already. The problem will be whether or not those ideas are politically acceptable.

  2. The issue with the audit is that it is only half-way into doing right things. There is a lot of flexing muscles aka governmental agencies that steer the economy off. Even today there is clear understanding that infrastructure helps – games distract. But governmental agencies like NSF favor the later for being popular.

  3. Successive administrations looked the other way when first low-tech industries like furniture and textiles, and then increasingly hihgh-tech such as electronics, autos and planes, got moved to offshore production. There was PLENTY of business investment going on … but all in China, transferring painstaking IP and production equipment there. The only reason people are looking at insourcing now is that the “China Price” has eroded due to exchange rate changes and labor costs going up; but big companies are not likely to pull out of China, because that’s where the growth of consumers is. Also, none of the low cost countries seem able to build infrastructure and hence, the logistics difficulties outweigh the cost advantages. China solved the infrastructure issues with massive investment from friendly internal banks aka the government, and without that, they’d never have had the growth they did. As cash gets squeezed, the complete inability of a China-based supply chain to react means its more advantageous to have production closer to consumption. Companies need their investment back first. They also haven’t been able to repatriate their profits; but they are gearing up for that one the GOP get in power, and then they’ll get given a bunch of tax credits and what have you to insource as well. Multinational companies like GE know how to play this game – they constantly find governments falling over themselves to not tax profits because they want the jobs.

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