The U.S. economy needs an exports-led boost

By Dimitri Papadimitriou
November 26, 2013

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 U.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.

PHOTO: U.S. President Barack Obama arrives to speak about the economy during a visit to ArcelorMittal steel mill in Cleveland, Ohio November 14, 2013. REUTERS/Kevin Lamarque

34 comments

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We’re, “between inventions” now. The past great breakthrough inventions: Watt’s steam engine, the Wright’s flying machine and the semiconductor have been endlessly iterated, refined and now, standardized such that they can be manufactured any place with a decent industrial infrastructure.

Government can help with Basic research funding in areas such as Molecular Biology and Nuclear Energy. However, any applied research, regardless of the field, is soon assimilated worldwide by the related global manufacturing infrastructure and lost as a sustainable U. S. advantage.

Electronic products, for instance, can now be manufactured and tested in many places because the hardware,(Semiconductor)platforms are widely known,rock-solid and so are the code platforms that animate them.

Posted by LOTOGO | Report as abusive

The author of the article as well as commenters fail to identify the major obstacle to US high-tech exports that is US foreign policy.
Ban on export of anything that can have prospective dual usage (read: nearly any high-tech product and component) to some rival countries with vast markets (read: China) at least HALVES US high-tech export.
US policy of US content and harsh sanctions for violation means that it is very dangerous and uneconomical for any manufacturing high-tech company in any country to source its components or products in United States. If there are 2 high-tech components/products: one manufactured in US and the other in Germany/South Korea/Japan any corporation would not buy in US even if US product is price competitive.
Because by sourcing in US the upper-mentioned company has to practically cease exporting to China (the largest high-tech market).
Germany, Japan and South Korea are main beneficiaries of this policy in civil technology and Russia in military one. As well as… China becasue it streamlines indigenous research.
I do not mean to bash US policy. It is a rational approach. Chinese industry is much bigger than US and eventually so will be its economy. US competitive advantage is in technology. But this sensible foreign policy has its drawbacks.
The issue of supply chain is also very important because being “the world factory” China has a lot of competitive advantage. High-tech exports jobs cannot be generated without exports. And unfortunately manufacturing jobs will never come back.
The picture, the visit. A lot of populism in Obama administration, audience is mainly at low-end of US society spectre. Steel ? In United States ? In 2013 ? Steel industry is thriving in developing countries, output of China alone is 50% of world output 780 million Mt in 2013, US about 80 million Mt. There are other very cheap producers like India, Turkey, Ukraine. Just cannot compete.

Posted by Wantunbiasednew | Report as abusive

@tmc
Yes USA became USCA but this unfortunately will not change because:
1. politicians need about 1.5 billion US dollars in donations each year for campaigns (2 billion for Presidential every 4 years, about 2 billion for Congress every 2 years), at least 1 billion is from USCA,
2. US 2 party system means that USCA is the issue of the greatest bipartisan unity among Republicans and Democrats.
Only social unrest of the great scale, like revolution or sth could change this. Because of vast internal resources, even deteriorating US economic and political situation makes it improbable in the foreseeable future.

Posted by Wantunbiasednew | Report as abusive

Quite true @Wantunbiasednew, but I fear that unrest is coming sooner than we all think. If we begin to explain it now, think about it, answer it, later the unrest may not be as bad.

Posted by tmc | Report as abusive

@tmc
1. United States has very effective means to ensure citizen compliance: police is very efficient (read: brutal) for developed country, citizens are under total intelligence control, I’m sure NSA can even tell in which of your bathrooms you pee most often or did it in March of 2007, and you have dozen of agency that can just disappear people (only from that moment they are called terrorists).
2. Vast internal resources: people that are not starving or are not homeless never make good revolutionists. Frankly speaking every revolution known to me was preceded by rise in food prices.

Posted by Wantunbiasednew | Report as abusive

Again I agree with you, but times have changed. Joe or Jose six-pack is happy as long as he has his six pack, flat screen TV, cable channels & a cell phone, and a pick-up truck. Since none of those are made in the USCA, and cable/phone costs are 1/3 of a paycheck he may actually lose those (temporarily at least) if we have another more severe financial collapse. I realize that the G20 does not want that to happen, but has far to little control in stopping it once it starts. The current form of western capitalism will not work for much longer. It is inevitable that it crashes and new more modern approaches are taken. But there will be a “bad patch” for several years. How we emerge from it will determine how bad things get and for how long. We should sow the seeds now. Discuss new economic theories (Yes @OOTS, those Star Trek theories) now so we have something to draw upon and quickly present as new alternatives.
Social media in the western nations has taken root very deeply in society. It will hasten unrest just as it did in the Middle-East. The western governments have been very stealthily trying to mitigate this threat but the actual governments are so ineffective now that it has not born much fruit. Corporate America seems to not see the threat, as the profits in it cloud there judgment. So I still think it possible that unrest can occur in the USCA and other western nations. The “occupy” movements were just a test…

Posted by tmc | Report as abusive

TMC, talking about USCA you mean the oligarchy Republic; I assume. However, this is “oligarchy of open type.” The oligarchy (1 per centers) effectively recruits young talented people for their needs. And then we get 10 per cent. With families, it is the upper percentile – at least 20% of population.
Having the institutional system that is near impossible to change, it creates a relatively stable structure.

Still. The elite is never solid; it can be split; one part of it can be put in opposition to another. That’s why we used to say, “the elites.”

Any revolution is out of question. However, if you consider a society with divided members/citizens, it also applies to the elites. The elites’ only priorities are: money-power-survival.

I believe there is a ground to play. It looks ugly today. But there are opportunities for a non-revolutionary change.

I will take this USCA idea of yours for the forum.

Posted by OUTPOST2012.NET | Report as abusive

I have been posting with the concept that the USA has perished and the USCA (United States of Corporate America) has risen for quite some time now.
I don’t really see the USCA as the 1%. It isn’t the people, it’s the system. The US has created a system that has create uncontrollable entities (corporations) that are superior to citizens. I don’t believe anyone controls them. They can be influenced though. Normally by many of the management level people all coming to a conclusion that something must be changed. Yes, the 1% has the greatest influence, and any one of them may have direct control over a few entities, but even they cannot significantly change the system when they want. Influencing a change in the corporate system takes time. Usually several years. The media plays a large part in it. Social media does not as that is personnel communications tool and not part of the system. In fact it is a tool and product of the system. When I say that civil unrest, or a large event, a financial collapse, etc.., are needed to change the system what I mean is it requires these types of events for enough people in corporate America to see the need for change, and start that long influencing process. I do not mean the old fashion civil uprising of mobs in the street, civil wars, mass starvation and all of those other doomsday scenarios. The financial crash of 2008 was not significant enough to cause change. It was masterfully handled by the system with the support of all political parties in virtually all nations. No one wanted a major crash. So it was basically averted. Yes, it had some noticeable effects on economies and jobs, but not severe enough that the system could not handle it. So it continued on. But the system has two flaws. 1) it is burning itself out. In very simple terms it is a game of Monopoly (http://www.hasbro.com/monopoly) and as all games do, it ends with a winner and a bunch of losers. The game has not be “re-started” since WWII and is nearing it’s end. There are no more willing players and the majority of current players have already lost. 2) it cannot handle all of the rapid global changes that are occurring. Specifically the rise of China. The Chinese are not willing to continue the current monopoly game and will start a new game. They basically said this during the 3rd plenum a few weeks ago, and have show it by not following the demands of the current “banker” and winning players. They will “De-Americanize the world” or in other words, change the game. I don’t know if you’ve ever played the actual game of Monopoly or not, but one thing most people find out is that the game lasts longer and is more fair when the designated banker is not an actual player. Why? because all humans cheat to some degree. When the banker is a player they can’t help themselves and will cheat and undoubtedly win the game. But even without cheating, a single player will win. Always. In the current western economies the bankers are players and have been proven to cheat many, many times. So the Chinese are going to change the banker. They are going to continue to pressure until the US Dollar is no longer considered the world reserve currency. The rest the western corporations and banksters will do themselves by allowing the system they created to bankrupt their nations citizens. In other words they (large and global corporations) win the game and the rest lose. But again, this sounds like untold mayhem, but it won’t be. The stock market will crash again, some will panic, but most will listen to the system and be patient. Corporate America will this time see the need for major change as the Chinese change the game and the rules. Influences will be created and…. who knows what will come of it. Maybe a long period of struggle as the systems tries to regain itself, or maybe a short period as it finds new ways. It all depends on who is in the best position to influence it at the right times.
Gorbachev had a plan, and tried to control, but Yeltsin was in the right place, at the right time, with the right words and hence had the greater influence.
So my hope is the using social media we can increase the chance that the influences will better server the people. Real discussion among intelligent people instead of automatic responses from the system and the media. The more discussions the people of the system are exposed to, the more likely the changes will reflect them.

Posted by tmc | Report as abusive

No @OUTPOST2012.NET by talking about USCA @tmc had in mind political corruption in United States.
You live in Russia that is an authoritarian oligarchy, well latest 13 years under Putin is more like monarchy. Democratic institutions are only for show. Russians, in the last 200 years had only very short contact with real democracy, namely in the 1990′s. But unfortunately it was also time of serious economic crisis. So Russians do not know what they loose by having current system it is a real blessing. Minority: mainly young and rich, that are able to live abroad even for a short period of time, never return to Russia.
On the other hand United States has democratic traditions, so Americans (at least minority that has intellectual capability to understand the mechanism) are pissed off when laws of the country for the last 20 years are written by corporate lobbysts for corporations.

Posted by Wantunbiasednew | Report as abusive

So we should start a trade war with the Chinese to muscle our way into low margin, compete-on-price industries while endangering our higher margin, compete-on-innovation industries where we successfully compete…smart.

Posted by jambrytay | Report as abusive

@Wantunbiasednew

I have absolutely no interest to discuss Russian matters here.
It is a completely different subject. Which needs some knowledge exceeding an ordinary MSM feed.

Posted by OUTPOST2012.NET | Report as abusive

@OUTPOST2012.NET
I learned Russian for 10+ years, most of it unfortunately forgotten. I like Russian very much, because the same as my mother toungue (Polish) it has a rich world of senses and words, completely unknown for speakers of English. English is a good code for communication like C++ or Pascal, but not for literature. I read a lot about Russian history during my studies, mainly post WW2 economic history as it was interconnected with the history of my country. I did not want to offend you, but I just wanted to show you the difference between authoritarian and democratic country, the difference i know from first hand experience.

Posted by Wantunbiasednew | Report as abusive

No hard feelings. We simply disagree. Which used to be a normal thing between the Russians and the Poles :-)
I think I also have a first-hand experience. I lived in D.C. area for three years. And I have been working with Americans all my life long.
So… we simply see the things differently. It’s okay.

Posted by OUTPOST2012.NET | Report as abusive

@jambrytray, we are already in a trade war with China. And losing because people like you think we’re…. somehow not?

Again: China charge us 20% on the goods we there. We now charge them 1.5% for the goods they send here. This is the result of multi-national business groups lobbying to provide free access to our markets, but no one else’s (we’re the richest consumers). Are you surrendering?

Posted by AlkalineState | Report as abusive