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Scenes from a Recovery, Such That It Is

Holland, Michigan, is a city of about 34,000 people in the state's southwestern corner, right on the lakeshore and close enough to Chicago to receive its radio broadcasts. Dutch immigrants established the city, as the name suggests, and many of their descendants remain. Lots of people go by the name Vander-something and the annual tulip festival attracts thousands visitors every May, helping to buoy an upscale downtown shopping area that, at least on Thursday, was bustling with activity.

But the appearance is misleading. Like so many other towns in Michigan, Holland’s economic base is manufacturing. Several major auto suppliers and furniture makers are based there. Downsizing has hit the area hard and unemployment now hovers around 15 percent. That’s more than a point higher than the state’s average, which is, in turn, second highest in the country.

President Obama came here on Thursday to talk about the help his administration has provided already and the help that’s on the way--for Holland, for Michigan, and, by extension, the entire country. It's what most Americans say they want to hear from the president and he made a good case--although, I suspect, it was not good enough.

Under the American Recovery and Reinvestment Act, the Department of Energy has made a mutil-billion dollar investment in electric cars, by providing matching grants to companies that help build the cars or the facilities that will help them run. One of those grants went to Compact Power, Inc, a subsidiary of a Korean company, in order to build a factory in Holland that will produce the batteries that go into Chevy Volts and other new electric vehicles.

The company, which matched the $151 million federal grant dollar-for-dollar, says the factory will eventually employ 300 people--most of them in the kind of well-paying manufacturing jobs that are increasingly hard to find. Eight other factories like it are under construction, most of them in the Midwest. By 2015, the administration estimates, domestic manufacturers will get nearly half of the batteries for plug-ins and hybrids from U.S. factories. Right now, car-makers rely almost entirely on foreign factories.

The case for program is that it promises to accomplish three goals simultaneously. In the short term, it stimulates economic activity by putting money in the pockets of local workers and contractors. In the long term, it helps to build a manufacturing "ecosystem" that has its own economic virtues. (I’ll go into what this means some other time; for now, just read this article by former Intel chief Andy Grove.) Along the way, it makes more energy-efficient cars available to consumers, which is good for the environment.

The main case against the Energy Department program is that it’s a form of industrial policy, which more conservative experts, in particular, tend not to like. As the argument goes, the government is lousy at picking winners and losers. We might end up with a thriving electric car industry in a few years. Or we might end up with a huge glut of batteries that nobody wants and an overbuilt industry that can’t sustain itself without government subsidy. The better strategy, in this view, would have been to put the money directly in people’s pockets and let them spend it, effectively letting the market choose where and when to invest.

It's a reasonable disagreement. Over the last few days, I canvassed about a half-dozen on an ideological spectrum stretching from Dean Baker on the left to Douglas Holtz-Eakin on the right. I thought the liberals had the better of the argument, in part because the Recovery Act did, in fact, put money in people's pockets. Besides, if there's a case for paying people to dig and then fill holes, as Keynes once suggested, the case for making batteries to power climate-friendly cars has to be even stronger. (Of course, the case for a real public works program seems stronger still.) But the conservative case has its merits--and, again, I'm not an economist myself--so I’ll give a more detailed version of that debate more sometime soon.

Whatever you think about this particular program, though, it’s hard to make the case that Holland, like the rest of America, isn’t much, much better off because of the recovery package in its entirety. Economists disagree over the precise impact of the stimulus, but the vast majority think it did some good and most think it did a lot of good. And that’s to say nothing of the impact of the rescue package for Chrysler and General Motors, particularly here in the Midwest. Had Washington let Detroit go into unstructured bankruptcy without financial help, as many conservatives and even some liberals were urging, job losses could have numbered in the millions, according to credible estimates. Bankruptcies--by individuals, businesses, and whole cities--would have become an epidemic. Unemployment in Holland and communities like it might have reached 20 percent, instead of 15.

But 15 percent unemployment doesn’t make anybody feel good. And "it could have been a lot worse" isn't much of a campaign slogan. If I hadn't known that before, I sure know it now. While the president was on his way back to the airport and, then, to Washington, I spent some time talking with small business owners in Holland. In an upcoming post, I’ll tell you what they said...

Update: One of the more conservative economists I consulted was Andrew Samwick of Dartmouth. He's posted a longer explanation of his views, which are well worth contemplating. As I said, I'll write more about this soon.