The Limitations of Industrial Policy

...It's bad policy of any variety to allow the shut down of New York City's garment center for three days during one of the busiest buying weeks of the year, as happened this summer, because of a water main break...

...Is industrial policy in the end a good idea...

...The Japanese are different Aided perhaps by Zen, Tokyo's policy elite takes independent initiatives, on occasion against initial business opposition Their American counterparts do little more than register on the political Richter scale the comparative intensity of seismic disturbances Good industrial policy operates well in advance of economic earthquakes...

...A final cautionary word Business is much this country's strongest interest group Liberals should temper their enthusiasm for novelties susceptible to capture by corporate boardrooms In an ideal America, a coherent, progressive industrial policy would be an attractive prospect In our own confused society, it is just possible that progressives would be happier with the existing muddle...

...Why shouldn't the Bank fund job training schemes as the AFL-CIO urges, or rehabilitation of urban infrastructures as Felix Rohatyn advises...

...Indeed, industrial policy scenarios make it clear that their proponents, overtly or otherwise, are pursuing their usual objectives by slightly different techniques Business Week's, 1980 version of planning stressed wage restraint, higher profits and extensive deregulation of business The AFL-CIO advocates measures such as the domestic content auto bill to keep wages high Robert Reich conditions aid to corporations upon their willingness to mend their ways, retreat from inefficient merger games, and behave like long-range planners Is it likely that our chief executive officers will march obediently into the Japanese night m conformity with Reich's liberal goals...

...In a more sympathetic national administration, Congress might enact and President Mondale-Glenn-Cranston-Hart might sign a National Industrial Strategy Act If its machinery, against the odds, actually works, it still will at best complement, not substitute for, the kind of sound fiscal, monetary and incomes policy so usefully promoted in these pages by the late Sidney Weintraub The next President, whoever he is, will in 1985 confront the huge deficits generated by reckless tax cuts and massive defense appropriations...

...Organizational structure, astute students of small and large group politics know, is more important than any quantity of policy rhetoric and statements of objective...

...The opposition's communal yearning for a better style of economic management derives its emotional charge from the poor employment and growth record of the last decade or longer In industry alter industry-steel, cars, air conditioners, color television, videore-corders, radios, computer chips, cameras, motorcycles, and a good many more-American producers have lost ground to foreign rivals This years...

...If the term means public action that favors some private activities over others, we have had an industrial policy since George Washington's first Administration In his influential "Report on Manufactures," Alexander Hamilton, who dominated Washington's Cabinet, articulated the infant industry argument for protection that justified high tariffs for over a century In our own century, Franklin Roosevelt's National Industrial Recovery Act and Agncultural Adjustment Act were attempts to plan manufacturing and agriculture The reciprocal trade treaties negotiated by his Secretary of State, Cordell Hull, complemented these efforts Outright planners like Rexford Tugwell found hospitable bureaucratic niches in the New Deal World War I and World War II were massive exercises in the targeting of human and nonhuman resources to the exigencies of military strategy...

...Even Reagan, should bad fortune continue him in office, will have to ask Congress for new taxes A Democrat will seek more taxes than a Republican in order to repair some of the damage done to social programs in this Administration...

...Nor do we lack industrial policy in Ronald Reagan's America Like his predecessors, Reagan emits free trade rhetoric while deploying the instruments of selective, targeted protection "Voluntary" agreements with other countries check the flow of textiles and vehicles into the American market Trigger prices aim not very successfully to turn the same trick on behalf of home produced steel The 1981 Tax Act's depreciation clauses favor capital intensive over labor intensive industries Several kinds of subsidy, including an expensive Reagan innovation, Payment in Kind (pik), transfer tax revenues to farmers to slow the decline of the agricultural sector For many years, the Internal Revenue Code has diverted consumer spending to residential housing and discriminated against renters by allowing homeowners to subtract mortgage interest and property taxes from income subject to Federal levy Neutrality among contending interests is not a feature of American political history There is, however, a useful distinction to be drawn between our current course and true, i e , Japanese, industrial policy What we now endure is a set of reactions to claims upon the public purse from organized groups Let farmers, steel magnates, unions, or auto makers scream loudly enough and any President as well as any Congress will surely respond, especially if the vocalists have prudently contributed to appropriate campaign committees and PACS...

...Dragging the Federal Reserve into the act hardly seems a plus to me And in the absence of a single, strong administrator comparable to, say, Jesse Jones who headed the Reconstruction Finance Corporation in the 1930s, it is doubtful the Bank would be capable of taking swift, consistent action The Council's carefully balanced representation also appears more likely to generate endless discussion and fudged conclusions than new industrial strategy Is there any justification in advance of developing a program for splitting the Bank's $12 billion between smokestacks and hi-tech...

...balance of trade deficit may rise to $90 billion Erosion of domestic and foreign sales has devastated the industrial Midwest, damaged the Northeast, and stalled growth in Southern cities such as Birmingham that rely upon smokestack industries rather than energy or hi-tech In 1980, campaigner Ronald Reagan's sales kit included supply-side economics and monetarism as magical cures for economic stagnation In 1983, it is apparent to all except the most besotted Reaganauts that even with the help of a dash of military Keynesianism, the "cures" were worse than placebos They left the patient weaker than ever, much like the situation of an 18th-century sufferer after bleeding The President, nevertheless, seems to have convinced a good many people, including blue-collar workers, that the Great Society was an expensive failure and a source of higher taxes and rising inflation Although there is good reason to dispute the accuracy of the judgment, it appears to explain the caution of Democrats in emphasizing full employment and comprehensive health care, as well as other standard progressive objectives...

...Of course if wishes were horses, beggars would ride It is one thing to endorse American adaptations of Japanese institutions and another, much harder task to specify the mechanisms needed to translate "targeting" and "restructuring" into effective action Human beings, after all, must select new industries for targeted assistance and demand particular alterations in the management of older enterprises-restructuring, as quid pro quo for financial aid Who will choose the choosers...

...Assume the planners win the argument That brings us back to the question of who will do the actual planning...

...Here it is enlightening to examine Representative Stanley N Lundine's National Industrial Strategy Act, which will surface in Congress this fall Like many if not most Congressional supporters of industrial policy, Lundine, an upstate New York Democrat whose district borders Republican Jack Kemp's Buffalo constituency, represents voters dependent upon increasingly dormant smokestacks His bill would establish two new agencies The first, an Economic Cooperation Council, would recruit its members in equal numbers from business, government, labor, and the public at large After collating data on the international competitiveness of numerous industries, the Council would "formulate a strategy" for restructuring old industries and accelerating the advance of new ones...

...I sympathize with Congressman Lundine, a highly intelligent legislator He seeks to defuse opponents by embracing them and making them eligible for Council and Bank membership Yet in so doing and soothing his Congressional colleagues with assurances that they will exercise continuous oversight over the planners, he may be trading hope for the evolution of new policy for political support I can't help a certain skepticism about the substitution of cooperative for adversary attitudes...

...How new, one must ask at the outset, is industrial policy...

...At last count this had been formally embraced by Walter Mondale, Gary Hart and Alan Cranston, among Democratic Presidential aspirants, the party's most prominent noncandidate, Edward M Kennedy, Democratic tycoons like financier Felix Rohatyn and Irving S Shapiro, DuPont's recently retired chairman, the Executive Council of the AFL-CIO, and Robert Reich and Lester Thurow, a pair of economists who frequently counsel these and lesser Democrats In an article published at the end of August, the Sunday New York Times Magazine also invited its numerous readers to think about industrial policy The issue can now be raised in respectable company...

...The planners have a ready answer Our basic industries are dominated by huge corporations no less bureaucratic than government agencies The private bureaucrats have made appalling blunders While Japanese and European steel companies were shifting in the 1950s to the basic oxygen furnace technology invented in this country, their American rivals were wasting millions of dollars on additional open hearth furnaces As for automobiles, it took a pair of opec price coups and the Japanese incursion into the small car market to rid General Motors, Ford and Chrysler of their infatuation with land monsters It is hard to imagine that politicians and civil servants could have misunderstood their markets more completely than the highly paid top officers of a great many of the enterprises listed in the Fortune 500...

...Less feverish apostles of competition charge that planning, no matter how gentle, substitutes sluggish, unimaginative and inefficient bureaucratic behavior for the sensitive responses of free markets to shifts in consumer tastes Miti, they add for good measure, is far from infallible It discouraged Sony and dithered over automobile export policy...

...Thus economic adversity and political exigency combine to intensify the hunt for attractive novelties The searchers quickly turn to post-World War II Japanese experience Japan-watchers differ in their explanations of Japanese mastery of world markets, but almost all of them assign importance to the Ministry of International Trade and Industry (MITI), which presides over fruitful collaboration between business and government Unashamedly, MITI picks winners and targets government contracts, subsidies and preferential financing to them The Japanese must be doing something right Just possibly miti's strategy can be adapted to American needs...

...It all depends on the shape it takes and the uses to which it is put If, as in the naive Business Week version, industrial policy tightens the corporate grip upon American workers and consumers, most of us are better off in its absence If it is deployed as a means of stimulating economic growth, the better to move at last toward high employment, job retraining, improved health care, and vigorous antipoverty measures, industrial policy can play a modest yet useful role in the promotion of traditional liberal objectives...

...But even before they grapple with the membership and powers of a U S miti, partisans of industrial policy find themselves embroiled in a traditional American battle between planners and free marketeers In the September issue of the far Right American Spectator, the equally reactionary economist Melvyn B Krauss entitled his review of Robert Reich's The Next American Frontier, "Reich's Friendly Fascism " Krauss went on to contend that our Chief Executive had his history straight when he asserted "Anyone who wants to look at the writings of the members of the Brain Trust of the New Deal will find that President Roosevelt's advisers admired the fascist system They thought that private ownership with government management and control a la the Italian system was the way to go and that has been evident in all their writing " Well, at least it is a refreshing shift from the usual analogies with Soviet central planning...

...One way or another, the Federal Reserve needs to be put under political control Thus far, with the possible exception of Gary Hart, none of the Democratic hopefuls have dared grapple with incomes policy For well-known reasons, our economy tilts toward inflation before any approximation of full employment is reached Operating at low percentages of capacity, auto and steel makers have already nudged their prices upward Unless key prices are restrained, policy makers soon face an unpleasant choice between more inflation and an aborted recovery Ronald Reagan and Margaret Thatcher can plump for the second alternative without fatal loss of popularity among their conservative constituencies As Jimmy Carter learned, a Democratic chief of state, who relies upon blue-collar, minority and female votes, enjoys no such luxury...

...OLD WINE IN JAPANESE BOTTLES The Limitations of Industrial Policy BY ROBERT LEKACHMAN During the hot summer, the Democrats and the media discovered that our public schools are mediocre 01 worse, and that the Republic urgently requites an industrial policy I shall leave the plight of the schools to others better qualified on that subject and locus in what follows upon the call for an industrial policy, a softer name for some version of economic planning...

...Strategy means money Hence the second agency, a National Industrial Development Bank, as the instrument of implementation The Bank's 16 directors are to be nominated by the Council, the Federal Reserve Board and Congress, with the approval of the President Lundine envisions capitalizing the Bank at $ 12 billion, to be split 50-50 between basic and new industry...

...A bit further on the political Left, the economic journalist Bob Kuttner doubts that the private sector will ever create enough jobs He urges the government to create new markets for socially useful innovations...