How Eric Schmidt can save America

As I have been urging for some time, it now appears that President Obama will appoint Google Chairman Eric Schmidt as the new secretary of Commerce to replace Gary Locke, who is leaving to become the new U.S. Ambassador in Beijing.

Under Locke and his recent predecessors, the Commerce Department has been virtually invisible, with leaders who had little knowledge of, or interest in its potential for being the key to revitalization of the U.S. economy. Indeed, a few former secretaries of Commerce have even scoffed at their own department as little more than an incoherent grab bag of unrelated agencies like the weather bureau and the U.S. Patent Office. (With such attitudes, one wondered why these secretaries even bothered to take the job.)

Fortunately, they have been wrong. Far from being a hopeless backwater, Commerce may be the last best hope for the U.S. economy.

Consider that U.S. official unemployment is currently just below 10 percent and that total real unemployment is probably closer to 15-16 percent including those working part time who would like to work full time and those who are so discouraged they have just stopped looking for work. Consider also that despite this level of unemployment, the United States is running a long term unsustainable trade deficit of around $600 billion and will borrow that much from China, Japan, and other countries to fund consumption of goods it no longer makes. Consider further that this situation is likely to prove politically toxic and that the usual remedies of fiscal stimulus and reduction of interest rates have already been fully applied with no possibility for further doses. Finally, consider that disruption of the global supply chain as the nuclear and earthquake disasters in Japan knocked out the production facilities for large portions of the world supply of key components demonstrated the dangers to the U.S. and world economies of highly concentrated production centers.

There is only one solution. The United States needs a strategy to become a producer again. It needs to make and provide more of the goods and services it consumes and export more of the goods and services it generates. In other words, it needs to foster investment in U.S.-based production, and it needs to funnel that investment into sectors in which the United States is likely to be able to hold its own in international competition. In short, the United States needs an industry sector oriented economic strategy similar to those of Germany, Sweden, Britain, Japan, South Korea, Singapore, and China.

Developing such a strategy is precisely the job of the Commerce Department. It is a job that has been long neglected because the macroeconomists who dominate U.S. policymaking have disdained as insignificant any concerns about the structure of the economy and the global supply chain. But now, the combination of America's lagging performance in the wake of the full application of the macro-economic prescriptions and the shortages arising from the impact of Japan's twin disasters on the global supply chain have demonstrated that Schmidt may be arriving at Commerce at precisely the moment when it is clear that the department's job must be done and done well.

He should begin by taking two crucial steps. The first is to reconstitute the department's industry analysis capability. When I was there in the 1980s, Commerce industry experts had an intimate knowledge of the status, strengths, and weaknesses of every significant U.S. industry and of their foreign competitors as well. Now, if I want to know something about U.S. industries, I find the information provided by Japan's Ministry of Economics Trade and Industry to be the best source. Or take my recent blog post on the iPhone's supply chain. The data were largely developed by the Asian Development Bank. Schmidt shouldn't have to rely on the Japanese or the Asian Development Bank for the analysis on which to base his new policy ideas.

The second step should be to undertake a series of meetings with the CEOs of all significant companies, foreign and domestic, making products in the United States. Of course, there is nothing wrong with service-providing companies, but Schmidt will have to get real here and he'll have to make Obama get real. The job-killing U.S. trade deficit in goods is so large (nearly $700 billion) that there is just no way for services exports -- about a third of U.S. exports -- to reduce it significantly. Moreover, whereas each 100 manufacturing jobs result in the creation of 291 additional jobs for suppliers, services, etc., 100 personal/business services jobs result in the creation of only 153 additional jobs (Economic Policy Institute, Employment Multipliers, 2003). So Schmidt and the administration will need to go where the jobs are.

In these meetings, Schmidt should ask the CEOs why they are not investing more in production in the United States and what it would take to induce them to do so. He should also make clear to them that the U.S. government is very serious about driving investment in America and that companies wanting U.S. government assistance for protection of intellectual property and non-discriminatory treatment for their investments in China and elsewhere should be making a serious effort to invest in America also.

There is, of course, much more that Schmidt will have to do, and I'll turn to that in later posts. But if he just takes these two steps, he'll be off to a flying start and he'll get the Commerce Department back on the public radar screen.

Brendan Smialowski-Pool/Getty Images

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