Georgetown Politicians: Push Localnomics!

Rana Foroohar writes an excellent piece in Time Magazine about investing in jobs at home. Here's some key points from the article.

Manufacturing Matters

As finance fades into the backdrop, manufacturing takes center stage, and each hometown accomplishment brings crucial carryover effects for the surrounding economy.

It's not being overly dramatic to say that the world is on the verge of a new industrial revolution as manufacturing regains its traditional role as a global growth driver. Manufacturing's share of global output is 17.4%, the highest it's been in over a decade. The growth has been driven not only by China but also by the U.S. (the second-biggest factory nation by output), which got a boost from the government's Detroit bailouts. Indeed, if the U.S. manufacturing economy were a nation, it would be the ninth largest in the world.

Government support is certainly one of the reasons for the boom. Manufacturing is politically very important because it's one of the few areas of the economy that is creating solid middle-income jobs. (See Rule No. 3. Export-oriented jobs pay 9% more on average.) The reason the latest U.S. jobs numbers aren't worse than they are is that Detroit has been holding its own. A weaker dollar and more-competitive global wage rates have also helped U.S. manufacturing, as have two other key trends: the rise of emerging markets, which buy a growing chunk of American exports, and a homegrown energy boom in shale gas and oil, which is goosing other parts of the economy like commercial construction and agriculture. This underscores manufacturing's important spillover effect for the rest of the economy. The Bureau of Economic Analysis calculates that every $1 of manufacturing GDP drives an incremental $1.42 of activity in the nonmanufacturing economy.

Local Leaders Must Step Up

Localnomics has great potential. But how much can governments do to nurture local economies? And how much should they do?

Economists on both sides of the political spectrum have begun to argue that we need to rethink laissez-faire trade policies when we are up against state-run capitalist systems in places like China, which openly gives preference to homegrown firms and limits foreign capital even as it exports massive amounts of cheap goods. Groups like the Council on Foreign Relations and the Information Technology and Innovation Foundation agree that the U.S. needs to get more aggressive about pursuing trade violations and punishing violators. Some economists call for sanctions or temporary tariffs.

There's even a push in some quarters for the U.S. to shed its Alan Greenspan--era taboo on economic planning. "Manufacturing is thriving in China, Germany, Sweden and Singapore only because their governments set up specific vocational institutes to prepare workers for new industries," wrote Kishore Mahbubani, head of the Lee Kuan Yew School of Public Policy in Singapore, in a Financial Times op-ed. "China has rapidly overtaken the U.S. in green technology because of a coordinated national response, not because Chinese businesses alone invested in green technology."

In the U.S., industrial policy remains a third-rail notion. (See what happens if you mention Solyndra.) And developing policies to support localnomics is tricky, as many factors that support it--currency, oil prices and even labor rates--can change quickly. In just the past couple of months, manufacturing in the U.S. has begun to soften a bit as Europe and emerging markets slow down.

There's a risk of pitting state against state and city against city in a battle for short-term gains that can easily become a race to the bottom. Caterpillar decided to put a new factory in Texas because of, according to a spokesman, "port access, proximity to supply base and a more positive business climate." A good chunk of that last factor has to do with superlow tax rates and nonunion labor. But states that try to outdo one another on tax cuts may eventually undermine infrastructure and services needed to fuel longer-term growth. And localnomics doesn't mean the pressure on labor ends.

Caterpillar creates lots of jobs, but even as profits and revenue rise, the company is seeking worker concessions and is embroiled in union skirmishes.

Yet many economists continue to believe that localnomics is America's best hope for a real recovery. The McKinsey Global Institute recently published research noting that a large portion of the difference in economic growth between the U.S. and Europe is due to America's more vibrant cities and regional centers of growth, rather than just a few large capitals that generate most of the nation's wealth.

So count on cities to become more aggressive about protecting their economic future. Witness how Californian communities like San Bernardino and Stockton, driven to bankruptcy by mass foreclosures and frustrated by banks' reluctance to renegotiate mortgages, have announced plans to seize loans on underwater homes and forcibly restructure them. Or how Ohio and Tennessee are making sizable commitments to attract high-tech research institutions. Or how Seattle and Philadelphia are cementing niches in the global clean-tech arena. All these initiatives represent a bracing response to gridlocked politics as usual in Washington. And they also add up to local-centric approaches that may someday take us beyond the slow growth of a 2% economy.

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