Smoking the Green Shoots

Question for the day: Where is the economic recovery going to come from?

We are still at the stage of the recession where economic downdrafts
are producing more downdrafts. Reduced purchasing power leads to fewer
retail and factory sales and more layoffs, further reducing consumer
demand. The Obama stimulus package, about 2.5 percent of GDP for each
of two years, doesn't make up enough of the difference. But the federal
deficit, caused mainly by falling revenues and not by increased public
spending, is alarming the budget hawks. The administration worries,
correctly, that deficits will be high for several years to come and
wonders who will keep lending Uncle Sam the money. Yet cutting back
spending before recovery comes would be suicidal.

In addition, the financial sector has not yet returned to health,
despite outsized profits (and bonuses) reported by the likes of Goldman
Sachs. This is the kind of purely financial engineering that caused the
collapse. The fevered activity at Goldman is a sign of lingering
economic illness, not economic health. The rest of the economy, which
depends on the financial sector for real investment capital, is still
deeply depressed.

Louis Uchitelle's piece in Sunday's New York Times provides some instructive numbers.

Every major sector that reflects the purely private economy has been
losing jobs, the only exception being energy extraction plus a tiny
increase in computer systems design and management consulting. All of
the other expanding sectors that are actually adding jobs reflect
government spending - education, health, general government. But the
declines in the workhorse parts of the private economy such as
manufacturing, construction, and retailing are huge.

With purchasing power still declining and unemployment still rising,
where will the recovery come from? White House economic chief Lawrence
Summers, in a major speech at the Peterson Institute July 17, emphasized the good news.

"We were at the brink of catastrophe at the beginning of the year
but we have walked some substantial distance back from the abyss," he
said. And, ever the empiricist, Summers reported that a Google search
revealed that "hits for economic depression have returned to baseline
levels." That's nice, but what Summers did not forecast was a robust
recovery.

And if we stay on the present path, recovery will not come for a
long time. Federal deficits will be large enough to raise questions
about who will keep lending us the money - but not large enough to
power a real recovery that increases real incomes and provides good
jobs. The last time we had a massive financial meltdown like this, it
took the hyper-stimulus of a war - World War II - to recapitalize
industry and re-employ workers.

What, then, is the moral equivalent of war for the 21st century? Let's think way, way outside the box.

We might begin with a serious strategy for rebuilding American
manufacturing. American corporations and politicians have been cavalier
about just letting manufacturing go. Uniquely among advanced and
developing nations, we have no national strategy for nurturing
manufacturing at home. There's even an office in the Commerce
Department that helps companies outsource.

As a result, even a modest uptick in purchasing power will not
produce enough American jobs because there are so many things that
America no longer makes.

We could start with clean energy, and move on to mass transit, and
reclaim America's capacity to make things. Right now, even if we
massively shifted to wind and solar energy, other nations would get
most of the production jobs because most solar panels and wind turbines
are not made here, while Americans would just get the temporary
installation jobs.

We could also get serious about insisting that other trading nations
not coerce or bribe our manufactures to locate facilities overseas as a
condition of doing business - a flagrant violation of trade law. We
could start having a real industrial policy for commercial industry in
the way that we have long had a tacit industrial policy for products
deemed essential to the military.

The administration is confused about how to reconcile industrial
goals with trade law. It had to do a lot of backing and filling so that
tens of billions of taxpayer dollars to modernize the auto industry
didn't end up subsidizing more outsourcing of jobs to China. If trade
law interferes with our ability to revive American manufacturing, then
there's something wrong with trade law and let's change it.

For a fine summary on how to revive domestic manufacturing, take a look at the new book, Manufacturing a Better Future for America, edited by Richard McCormack and written by some of America's best experts on reviving manufacturing.

The book is published by the Alliance for American Manufacturing.

After manufacturing, we need to get serious about investing in a new
generation of public infrastructure - everything from smart-grid
electrical systems to broadband and modern water and sewer and
transportation systems. That will produce lots of good jobs, and make
for a more efficient and productive economy.

As far as the deficit is concerned, it will probably need to get
bigger before it gets smaller. During World War II, when the nation was
a lot poorer and nearly half of our national output went to defeat the
Axis powers, my parents and grandparents and tens of millions of
Americans like them bought war bonds.

We didn't depend on foreign borrowing, even though the deficits were
far larger. Today, the government should create Recovery Bonds and
market them to Americans, so that we can finance our own social
investment and cease to be financial wards of foreign dictatorships.

The good people at Goldman Sachs can demonstrate their patriotism -
not by offering to make money as financial middlemen - but by buying
the first issue of these bonds as an investment. The government needs
no investment bankers to market these bonds. It can sell them directly
to citizens

Gentle reader, we are in a national economic emergency. This is not
just about talking up the economy by emphasizing good news. The
administration needs to stop smoking its own green shoots and offer
strategies equal to the magnitude of the crisis.