"America Needs a Growth Strategy"

I am not fully familiar with the things Michael Spence has written in the past, but from what I know I was surprised to hear him call the Andrew Grove article thoughtful, and also surprised by his call for industrial policy:

America needs a growth strategy, by Michael Spence, Commentary, Financial Times: ...America’s economy shows worrying signs of weakness. Worse, and in common with other developed countries, it also lacks a credible strategy for longer-term growth. ...

The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove... He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.

There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unraveling.

Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully...

The availability of low-cost, disciplined labor forces in developing countries reduces the incentive for ... companies to invest in technologies that enhance labor productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking.

The shrinkage creates problems. ... Spillovers between R&D, product development and manufacturing will be lost... Employment will stagnate. Income distribution will move adversely and the social contract will erode further.

Solutions to these problems are not easy to find. The unequal distribution of income can be dealt with through the tax system, although this does not attack the underlying problem. Protectionism could alter the pattern of out-migration of manufacturing, but only by imposing costs on domestic consumers and risking the breakdown of the open global economy model.

To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council ... is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of ... the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labor productivity levels consistent with advanced country incomes. ...

We are already on a lengthy and bumpy road to a new normal. That is unavoidable. The risk is that without a new direction in American economic policy, the new normal may be as unpleasant as the journey.

There appears to be a change in thinking underway among economists on these issues, particularly industrial policy. There are some who will oppose this change with all the shrillness they can muster. If this trend continues, and it looks like it will, there will be big fight within the profession -- more so than now -- about these ideas.