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Ed Luce Worries About America's Long-Term Economic Development Strategy

Applied Materials is the canary in the coal mine.

Ed Luce:

Summers’ departure opens door for new ideas: Given that Congress appears to have abandoned any pretence of a serious debate on what needs to be done to restore America’s declining economic competitiveness, the move will doubtless come as an intellectual liberation for Mr Summers. The bigger question is whether Mr Summers’ departure offers Mr Obama his own opportunity for intellectual liberation.

There is barely an economist in the world who would deny that Mr Summers has a bigger brain than they do. Nor, in spite of valid criticisms of how the politics has been conducted, would most dispute the fact that the Obama administration’s handling of the bank bail-out and fiscal stimulus was indispensable to preventing another Great Depression. Mr Summers was the architect.

These are high marks. Yet many of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

But in practice researchers benefit from proximity to the production processes, which require constant trial and error. A cursory look at the US’s trade deficit illustrates the trend. Far from importing low cost manufactured goods, the US is buying high-tech stuff from such countries as China and Brazil, including aircraft engines, computers, turbines and heavy duty trucks. And it is exporting growing volumes of low-tech stuff, including pulp and paper, oil seeds and other commodities. People who lose their jobs in the US are on average moving to jobs that pay roughly a fifth less than their previous jobs. Others are having difficulty finding any jobs at all.

That trend has only been accelerated by the Great Recession.... America is not producing new jobs in anything like the quality or the quantity it needs to replace the high-end jobs it is losing. Mr Summers’ exit therefore offers Mr Obama an unusually important chance to think radically about the kind of economic legacy he wishes to leave.

Speculation has focused on whether Mr Obama will choose somebody from the business community to counter the growing distemper corporate America feels towards his administration. It has also focused on whether the job will be taken by a woman. Ann Mulcahy, the former chief executive of Xerox, has been mentioned as has Laura Tyson, who held the job in the 1990s.

A bolder choice would be Jeff Immelt, the chief executive of GE, who is one of the few corporate leaders to have worried openly about America’s declining competitiveness. As the head of a company that has done as much offshoring as any, Mr Immelt knows what is driving the reduction of America’s productive capacity. Presumably, therefore, he would have some ideas about how to reverse it. Somebody must.

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