Caterpillar workers at the company's recently expanded plant in East Peoria.
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There's even a push in some quarters for the U.S. to shed its Alan Greenspan--era taboo on economic planning. "Manufacturing is thriving in China, Germany, Sweden and Singapore only because their governments set up specific vocational institutes to prepare workers for new industries," wrote Kishore Mahbubani, head of the Lee Kuan Yew School of Public Policy in Singapore, in a Financial Times op-ed. "China has rapidly overtaken the U.S. in green technology because of a coordinated national response, not because Chinese businesses alone invested in green technology."
In the U.S., industrial policy remains a third-rail notion. (See what happens if you mention Solyndra.) And developing policies to support localnomics is tricky, as many factors that support it--currency, oil prices and even labor rates--can change quickly. In just the past couple of months, manufacturing in the U.S. has begun to soften a bit as Europe and emerging markets slow down.
There's a risk of pitting state against state and city against city in a battle for short-term gains that can easily become a race to the bottom. Caterpillar decided to put a new factory in Texas because of, according to a spokesman, "port access, proximity to supply base and a more positive business climate." A good chunk of that last factor has to do with superlow tax rates and nonunion labor. But states that try to outdo one another on tax cuts may eventually undermine infrastructure and services needed to fuel longer-term growth. And localnomics doesn't mean the pressure on labor ends. Caterpillar creates lots of jobs, but even as profits and revenue rise, the company is seeking worker concessions and is embroiled in union skirmishes.
Yet many economists continue to believe that localnomics is America's best hope for a real recovery. The McKinsey Global Institute recently published research noting that a large portion of the difference in economic growth between the U.S. and Europe is due to America's more vibrant cities and regional centers of growth, rather than just a few large capitals that generate most of the nation's wealth.
So count on cities to become more aggressive about protecting their economic future. Witness how Californian communities like San Bernardino and Stockton, driven to bankruptcy by mass foreclosures and frustrated by banks' reluctance to renegotiate mortgages, have announced plans to seize loans on underwater homes and forcibly restructure them. Or how Ohio and Tennessee are making sizable commitments to attract high-tech research institutions. Or how Seattle and Philadelphia are cementing niches in the global clean-tech arena. All these initiatives represent a bracing response to gridlocked politics as usual in Washington. And they also add up to local-centric approaches that may someday take us beyond the slow growth of a 2% economy.
TO READ MORE BY RANA FOROOHAR, GO TO time.com/foroohar