Manufacturing, Exports, and the R&D X-Factor

Obama, Cleveland, ArcelorMittal Steel, 11-14-13.jpg

A recent visit by President Obama to an Ohio steel mill underscored his promise to create 1 million manufacturing jobs. On the same day, Commerce Secretary Penny Pritzker announced her department’s commitment to exports, saying “Trade must become a bigger part of the DNA of our economy.”

These two impulses — to reinvigorate manufacturing and to emphasize exports — are, or should be, joined at the hip. The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade.

It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide.

The Obama administration is proud of the 2012 increase of 4.4 percent in overall exports over 2011. But that rise hasn’t provided a major jolt to employment and growth rates, because our net exports — that is, exports minus imports — are languishing. Significantly, the U.S. is losing ground in the job-rich arena of exported manufactured goods with high-technology content. Once the world leader, we’ve now been surpassed by Germany.

America’s economic health won’t be strong while its trade deficit stands close to a problematically high 3 percent of GDP (and widening). Up until the Reagan administration, we ran trade surpluses. Then, manufacturing and net exports began to shrink almost in tandem.

Our past performance proves that we have plenty of room to grow crucial manufacturing exports, and even eliminate the trade gap. The rehabilitation should begin with a national commitment to basic research, which in turn boosts private sector technology investment. The resulting rise in GDP would be an important counterbalance to a slightly higher federal deficit.

Just-completed Levy Economics Institute simulations measured how a change in the target of government spending could influence its effectiveness. The best outcomes came about when funds were used to stoke innovation specifically in those export-oriented industries that might yield new products or cost-saving production techniques. When a relatively small stimulus was directed towards, for example, R&D at high tech manufacturing exporters, its effects multiplied. The gains were even better than the projections for a lift to badly needed infrastructure, which was also considered.

Economists haven’t yet pinpointed a percentage figure that reflects the added value of R&D, but there’s a strong consensus that it is significant. Despite the riskiness of each research-inspired experiment, R&D overall has proven to be a safe bet. Government-supported research tends to be pure rather than applied, but, even so, when aimed to complement manufacturing advances, small doses have a good track record.

Recognition that R&D outlays bring quantifiable returns partly explains why the federal National Income and Product Accounts have recently been altered to conform with international standards. NIPA will now treat R&D spending as a form of fixed investment. This will be a powerful tool to help reliably gauge its aftermath.

Private sector-based innovation has also proved to be far more likely to occur when it is catalyzed by a high level of public finance. (For amazing examples, check out this just-released Science Coalition report.) Contractors spend more once government has kicked in; productivity rises and prices drop.

The prospect of a worldwide positive-sum game is far more realistic than the “currency wars” dynamic so often raised by the media. Overseas buyers experience lower prices and the advantages of novel products. Domestic consumers, meanwhile, enjoy higher incomes and more employment, with some of the earnings spent on imports.

An export-oriented approach faces multiple barriers. Anemic economies across the globe could spell insufficient demand. Another challenge lies in the small absolute size of the America's export sector.

But the range of strategic policy options for the U.S. is limited. A rapid increase in research-based exports is the only way we see to simultaneously comply with today’s politically imposed budget restrictions and still promote strong job and GDP growth.

Instead of stimulating tech-dependent producers, though, we’ve been allowing manufacturing to stagnate and competitiveness to erode. Public R&D spending as a percentage of GDP has dropped, and is scheduled for drastic cuts under the sequester.

Sticking with the current plan means being caught up in weak growth and low employment for years. Jobs are being created at a snail’s pace, with falling unemployment rates largely a reflection of a shrinking workforce.

For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period.

We need this boost. It’s urgent that we bring down joblessness and grow the economy. A change in fiscal policy biased towards R&D shows real promise as a viable way to help rescue the recovery.

Dimitri Papadimitriou is president of the Levy Economics Institute of Bard College, a professor at Bard, and a widely published economist. His policy positions include a past vice-chairmanship of the Trade Deficit Review Commission of the U.S. Congress. This article originally appeared under the title "The U.S. Economy Needs an Exports-Led Boost," at Reuters.Com.

Photo by Lawrence Jackson: President Obama at the ArcelorMittal Steel factory in Cleveland, Ohio; November 2013.

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Molten Salt Reactors

Dimitri, let me offer a couple of what I hope are constructive comments to your article. First, the world is now dominated by a form of state sponsored capitalism that is mired in cronyism, everywhere. We have been pretending the role of the free trader, while elsewhere we see a kind of competitive cronyism taking hold. This forces an outsized reliance on political influence and all the economic inefficiencies that entails. The pre World War One model of exchange has been abandoned for competitive paper money debasing and all the financial volatility that that brings with it, including the current financialization of the US economy, where Wall Street is the dominant player and where entrepreneurial energy that would otherwise be unleashed is sidelined into speculation, rent seeking and influence peddling. The unionized government schools are putting out a bumper crop of incompetents and the hold of the unions on schooling goes without serious opposition. The State apparatus has become such a burden on our resources that little is left in the Main Street private sector to give a boost to the economy. Regulations choke off all but the most certain projects. The Police State is out of all control. We need freedom. We need honest money. We need cheap abundant energy.

Let me put forward a suggestion on the last comment I made concerning cheap abundant energy. Today there is a revival of the pioneering work done by the former director of the National Laboratory at Oakridge, Tennessee, Dr. Alvin Weinberg. In the 1960s, building on the work of Eugene Vignor, a Nobel Laureate in Chemistry, he developed for the Air Force an alternative to the current type of nuclear reactor. He called it the Liquid Fluoride Thorium Reactor. It was abandoned by Richard Nixon in favor of what we have today, largely because it provided no weaponizable by-products. It was far superior to our current designs due to its lack of waste by-products and also due to the ready availability of the fuel it needs to consume. There is at least a thousand year supply out there identified at this moment. Its scalable modular nature makes it ideal for manufacturing these reactors on an assembly line.

The Chinese are developing this technology right now. If we were to commit $3 Billion to its development, we could build one by the end of the decade and reignite American manufacturing. The existing rust belt could bloom again. I urge everyone concerned to go to these websites:, the (or .org) and google the Weinberg Foundation in the UK, or Baroness Worthington, member House of Lords. We have this path before us. Let us take it before our competitors do. Wind energy and solar are not the road to a thriving future. I hope the intelligent reader will look into this, while we still have time.

Add the land-rent racket to your list of indictments

I have disagreed in the past with one or 2 things you have written before, but mostly I agree with you, and I agree with what you are saying there.

I would just add one point that most people are missing, and it is just as much a part of the problem as dishonest money.

Possibly the biggest amounts of zero-sum economic rent that have been building up in western economies, relate to urban land rents. "Save the planet" urban planning increases the economic rent per unit of urban land by a factor of some tens or even hundreds once the racket has been going long enough, as it has in the UK (since 1947).

This robs potential productive investment of capital. The "tradables" sector of every economy with an urban land price inflation (that is pretty much every first world economy since Al Gore's agitprop movie) shrinks as the urban land prices are inflating. Private sector debt mushrooms even as the proportion of debt that is self-liquidating falls.

Economic productivity is always eroded by under this new paradigm by way of a number of mechanisms. Excellent sources of analysis on this are, the McKinsey Institute report, "Driving Productivity and Growth in the UK Economy" (1998); Alan W. Evans' "Economics and Land Use Planning" (2004); Evans' "The Best Laid Plans" (2007); and a whole series of papers from the London School of Economics "Spatial Economics Research Institute". The SERC Blogspot is worth following.

Of course the UK is a far worse example of how to drive industry offshore than the USA is. There is nowhere in the UK where any sort of manufacturing revival can occur; no equivalent of "Right to Work" States and no cities with unconstrained growth, cheap land, cheap housing and low workforce cost pressures. Even the UK's Rust Belt cities still have unaffordable housing and high urban land costs at the same time as high and chronic unemployment.....! Imagine Detroit with high density housing and house price median multiples of 6+ instead of a revival-encouraging <2 (and that for low density housing). Imagine Detroit with blighted large industrial sites where the landowners are still holding out for a million dollars an acre selling price.

One crucial point that has now been widely accepted by urban economists in the UK, is that nothing like Silicon Valley could ever evolve in the UK due to its urban planning system. Silicon Valley evolved on low cost exurban land. This is a no-no in the UK. Planners in the UK have attempted to defy this prediction by designating "high tech" zones; the Barker Review of 2007 noted that these have been failures, with potential site occupants complaining that they could not afford the asking prices/rents. Now there's a surprise! No planner has the first clue about this unintended consequence of "planning" and rationing of the essential resource of land.