Staying On Top: The Business Case for a National Industrial Strategy
Phillips, Kevin P.
STAYING ON TOP: THE BUSINESS CASE FOR A NATIONAL INDUSTRIAL STRATEGY Kevin P. Phillips/Random HOuse/$15.95 Roger Martin We have always been told by the promoters of industrial strategy that in...
...As a result America has industry-wide unions that have contributed to demolishing the competitiveness of entire industries (e.g., steel, textiles, large appliances), while Japan has company-wide unions that have a strong incentive to work with management to ensure competitiveness...
...It only managed to raise permanently the cost of capital for American business...
...There is no indication that Phillips is able to evaluate what he hears...
...Instead, he chose to focus on "questions of political strategy, the receptivity of public opinion, and a general sense of what approach may have a constituency and what probably does not" by interviewing anyone who is anyone in the Industrial Strategy Social Register and dutifully reporting the latest gossip...
...reduced disincentives to corporate investment by accelerating depreciation schedules and reducing inflation...
...They pay no capital gains tax, can avoid paying tax on interest income through use of employer savings plans and multiple post office savings accounts, and pay much lower taxes on dividend income...
...Not quite...
...GATT in 1947 under Truman...
...The centerpiece of his book, which he calls his fifteen point "market-oriented competitiveness strategy," reads like any other industrial strategy package...
...It enables Japanese corporations to utilize much higher debt-equity ratios than American corporations, and thereby enjoy a lower cost of capital (because debt capital is less expensive than equity capital...
...This had the effect of setting the interests of the debt-providers (the banks) in opposition to the interests of the equity investors...
...Industrial strategists largely ignore such market fundamentals and instead attack the Reagan Administration for its "uncoordinated" approaches...
...They are allowed no deductions for interest expenses...
...Though companies responded rationally to the tax-system bias, cutting down on net capital expenditures and gearing up on the acquisition front, we heard shrieks of "paper entrepreneurialism" from Reich and accusations of "complacent, stodgy, short-term oriented management" from Mr...
...In his new book Staying On Top Kevin Phillips does Reich one better, imagining for himself an intellectual free agency not seen in America since the days of Jerry Brown...
...What is the substance of Phillips's careful, restrained, pro-industrial strategy...
...At a 50 percent corporate tax rate it would therefore save $50,000 in taxes over each of the next ten years, earning $500,000 extra in after-tax dollars over the period...
...and brought about the most dramatic change in antitrust enforcement over the past fifty years through the appointments of William Baxter (and Paul McGrath) to head the Justice Antitrust Division, and William Miller to head the Federal Trade Commission...
...Distortions have not been limited to capital markets...
...unfair trade practices law...
...Now it is not inconceivable that a large merchandise trade deficit is a serious problem even for an economy that is primarily involved in the production of services...
...Often, the empirical basis for his measures is confined to a quote from a disgruntled C.E.O...
...He is, in his own words, a "careful, restrained, pro-industrial strategist"-a state that is above conventional (and even neoliberal) ideological configurations...
...Paper entrepreneur-ialism, according to Robert Reich, involves "dextrous tax and accounting manipulations which extract paper profits from economically senseless acquisitions...
...This incentive system provides a large scale subversion of the capital markets by providing a huge disincentive to investment, except in housing...
...In other words, foreign industrial policies that target specific sectors for export growth in order to capture larger world market shares would be per se violations of U.S...
...They occasioned little open debate or challenge, despite their extraordinary significance...
...For example, a corporation purchasing a machine worth $1,000,000 would be allowed to deduct $100,000 from taxable income in each of the next ten years...
...And what would we do with countries found to be in per se violation...
...Is it the inherently thrifty nature of those Japanese citizens...
...Again short-sighted government set the wheels in motion by accidentally subverting the capital market...
...For example, Phillips's number one performance preoccupation is America's growing merchandise trade deficit, which he blames on incoherent trade policy and foreign industrial strategies...
...Corporate income taxation begot corporate tax accounting which provided an allowance for depreciation on plant and equipment...
...It is, on balance, what may be termed the Rona Barrett approach to economic thinking...
...Certainly, what distinguishes Staying on Top, in the end, is its confusion, and the sense that what passes for reasoned objectivity is in fact a glib superficiality about how economies work and what has sapped America's vitality...
...But superficial and lightly considered institutional structures are simply not the answer...
...It is also fashionable to marvel over the high Japanese savings rate and the resultant high rate of capital formation, and to compare them to America's meager savings and capital formation rates...
...Though arguably noble in intent, under the influence of visionary-or more accurately, imaginative-justices such as Louis Brandeis, they have become a major perverse influence on important American product markets such as computers, telecommunications, steel, aluminum, automobiles, and groceries...
...The Japanese savers and investors...
...Well, I never . . .) - In pursuing this non-economic, non-directed approach, Phillips is predictably co-opted by the mainstream industrial strategists, the self-interested businessmen and the embittered (primarily liberal) politicians with whom he speaks...
...Robert Reich was rewarded for his efforts on behalf of new approaches to industrial strategy with the title neoliberal-which apparently was to mean that he had the advantage both of being a liberal and not being one...
...In 1890, the Sherman Antitrust Laws were enacted to protect the competitiveness of American industry...
...But in fact, the Japanese advantage has less to do with their cooperative spirit than our Glass-Steagall Act of 1933 which prohibited banks from making equity investments in corporations...
...It comes as no surprise that in the end Phillips is led to making perfectly ridiculous recommendations, such as the one he got from the Labor-Industry Coalition about rendering foreign industrial policies effectively illegal...
...Say nasty things about them at the UN...
...Further, the 1914 Clayton Act and the 1932 Norris-LaGuardia Act explicitly exempted labor unions from antitrust provisions, establishing the double standard that it was acceptable for unions to monopolize and endanger the functioning of markets, but not for business to do so...
...Phillips admits that he has not "plumbed the various legal, economic and technological issues at stake...
...The huge growth in venture capital funding following the halving of the maximum capital gains tax in 1978 provides a vivid example of the power of irrational tax policies to subvert the capital markets...
...The Glass-Steagall Act may have appeared at first blush to have been an appropriate measure in the wake of the great stock market crash...
...A final example of capital market subversion relates to the "paper en-trepreneurialism" of the 1970s and 1980s about which industrial strategists whine incessantly...
...Depreciation allowance reflected the corporation's need to set aside earnings to replace capital assets as they wore out...
...But it did not prevent the domination of the equity markets by huge institutions (i.e., the insurance companies and the pension funds...
...Reagan has even talked, at his extreme peril, about eliminating the senseless double-taxation of corporations (whereby corporations pay income tax...
...This mechanism was appropriate until the explosive inflation of the late 1970s...
...and the rest of the Democratic party, "the neo-New Dealers" and the "tired, old-style interventionists," is simply proposing a return to the policies that failed in the past...
...It is now fashionable, for example, to look with envy on the cooperative spirit which characterizes the relationship between Japanese banks and corporations...
...It may also be that the problems of America's markets are simply beyond the ken of these critics...
...America has chosen to punish personal saving and investment by heavily taxing capital gains, dividend income, and interest income...
...The Japanese policies remain neutral, allowing the natural incentives of savings and investment to fuel the investment process...
...And so publicly traded assets could be bought at an already-discounted price, whereas new equipment bought at full-price would then suffer discounting by the market...
...Publicly traded companies which had made investments assuming continued low inflation traded at low market prices that reflected the drop in value of those investments...
...The whereabouts, for instance, of the Republican tradition of free market and free trade from which Phillips so noisily removes himself is a mystery, especially since Republican administrations over the years have been responsible for the Morrill and War Tariffs of 1861-64, the Wool and Woolens Act of 1867, the Repeal of the 1872 Tariff Act in 1875, the McKinley Tariff of 1890, the Dingley Tariff of 1896, the Payne-Aldrich Tariff of 1909, the Fordney-McCumber Tariff of 1922, the Smoot-Hawley Tariff of 1930, and the New Economic Policy of 1971...
...or the result of a simplistic opinion poll...
...In fact, Reagan's response to the subversion of America's markets has been anything but "uncoordinated": He has lowered average and marginal personal tax Rates so as to alleviate some of the disincentives to personal investment...
...That is the basis of Phillips's justification for "new" approaches, but his criticisms have the feel of straw men...
...The result is a muddled potpourri of recommendations which reflect a combination of the typical industrial strategist biases, misunderstanding of American economic history, and superficial treatment of what are complex economic issues...
...One wonders what the poll result would have been had the question read: "Would you support amending the Foreign Corrupt Practices Act to once again allow such practices as the bribery of foreign government officials in order to enhance sales...
...and then their shareholders pay tax on dividends and capital gains) by putting an end to the corporate income tax...
...Under the double-digit inflation, the ten-year stream of tax savings was no longer worth the $500,000 at investment decision time, but $300,000 (assuming 10 percent inflation) because as inflation raged on, the size of the depreciation allowance shrank in real dollars...
...Instead of thinking about a Senate Committee on Paper Entre-preneurialism, we may wish to understand how we have mucked-up the capital markets, so as strongly to encourage "paper entrepreneurialism...
...Reich and his fellow "Atari Democrats" and "high tech futurists," according to Phillips, are unrealistic...
...Again it is unclear whether those responsible for the legislation required to build the complex and perverse capital market subversion in America gave any consideration to the adverse effects they were producing...
...When President Taft, in all his wisdom, decided to tax corporations (beginning in 1909) he set the stage for paper entrepreneurialism seventy years later...
...Not so, according to business historian Thomas K. McCraw (in his new book Prophets of Regulation1): "The Glass-Steagall Act and the Securities Act sailed through during Roosevelt's first Hundred Days...
...It points to lagging performance indicators, proclaims them to be "problems," and establishes institutional structures (departments, agencies) to solve these "problems" without ever carefully exploring the root causes of what are really only symptoms...
...It just may be that this type of approach bores industrial strategists more dedicated to mega-concepts like tripartite cooperation and Japanese culture, and to the proposition that new ideas are necessarily better...
...When Phillips sums up his ideas as "part high-tech optimism, part traditional liberal interventionism, part conservative nationalism and inclination to maximize free-market reliance, and part business-community moderation, synthesis, pragmatism and sheer commercial expertise," it is clear that far from carving out a new policy area between left and right, Phillips has simply become lost somewhere in between.ecome lost somewhere in between...
...You should have heard what Bill Brock said...
...The old ideas, Phillips insists, just won't do when it comes to the unique problems facing the American economy in the eighties...
...Indeed, the only bursts of free-trade and tariff reduction over the past fifty years have been under Democratic administrations relatively inimical to free market concepts: The Reciprocal Trade Agreements Act of 1934 under Roosevelt...
...For example, his recommendation to amend the Foreign Corrupt Practices Act is supported by a 65 percent positive response to the decidedly onesided question: "Would you support amending the Foreign Corrupt Practices Act to allow payment to foreign officials to speed up or unblock routine government action...
...At the same time, America rewards consumption by allowing deductions for mortgage interest and consumer credit interest...
...STAYING ON TOP: THE BUSINESS CASE FOR A NATIONAL INDUSTRIAL STRATEGY Kevin P. Phillips/Random HOuse/$15.95 Roger Martin We have always been told by the promoters of industrial strategy that in responding to new realities they have risen above traditional ideological labels...
...and the Kennedy Rounds of 1962-67 under the Kennedy-Johnson administrations...
...Our economic history is littered with examples of institutional "solutions" which have had savagely pernicious effects on the functioning of our most important markets and have led to calls for more Phillips-like solutions...
...Phillips is even sterner with those in power, the Republicans, whom he denounces as "right wing ideologists" wedded to "market oriented and thus uncoordinated economic approaches" at home, and a deluded defense of the "free global marketplace" abroad...
...And did those responsible for the Act consider its capital market effect before enacting it...
...What must be done, Phillips announces, is to "woo conservatives away from their absolute commitment to the old free-market system...
...Not so with acquisitions...
...His recommendations include creating a Department of International Trade and Industry as well as an agency to monitor foreign industrial policies...
...Having no incentive to do so, the banks will not tolerate leverage as high as the equity investors would prefer...
...Naturally corporations became reticent to make new capital investments...
...Despite his unique (and some would say bizarre) approach, Phillips reverts quickly to the careless, unrestrained thinking he claimed to have eschewed...
...Further, it is not inconceivable that the lack of a coherent trade policy and the existence of foreign industrial policies contribute to the problem so defined...
Vol. 18 • February 1985 • No. 2
