Industrial Policy

Since 1981 industrial policy has developed into a center of the nation's debate over the government's proper role in the economy. Controversies within the young field encompass problems of definition, scope, and feasibility.

The following excerpts are from a Crimson roundtable on industrial policy held last week with Robert B. Reich, lecturer on public policy and author of The New American Frontier, a leading book on the subject; Joseph L. Bower, professor of business administration and a member of Harvard's faculty seminar on industrial policy; and Lawrence J. Summers, professor of economics, who worked for two years on the staff of President Reagan's Council of Economic Advisors. Lavea Brachman and David L. Yermack moderated the discussion.

Crimson: Is a sophisticated, coordinated industrial policy feasible for the United States without completely restructuring our governmental system?

Reich: Descriptively, I think of an industrial policy as mainly a nation's blanket economic policy--trade, tax, credit, procurement, research and development policies, anti-trust policies--as they affect the pace and direction of economic development, and every nation has an industrial policy. Some of them are good or bad. In the United States, we have a fairly elaborate industrial policy. Almost half of our research and development support for the private sector comes from government. Upwards of 70% to 80% of basic research and development comes from the government. We have a quite elaborate anti-trust and trade policy, with regard to creating barriers to entry or producing barriers to entry for various industries. My interest is the relationship between these micro-policies and micro-components.

Summers: By Bob's definition, you inevitably have an industrial policy. I guess the way I'm inclined to think of the industrial policy debate is as rather you should use microeconomic policies to achieve some broad goal, in some coherent, synchronized way to achieve broader goals and higher productivity growth.

Bower: I think that's a terribly important distinction because it seems to me that when I debate with Bob about this. I almost always am sympathetic with large elements of his diagnosis, that is to say that we have a whole set of individual policies that affect industry which are incoherent and have many disfunctional effects, but my problem is when you come to do something about that, on the prescriptive side, what does that mean? Industrial policy is an attempt at a coherent intervention aimed at industry whose goal is to improve macroeconomic performance. It's clear that it cannot be thought of as independent of other macroeconomic performance. How you finance industrial growth has a lot to do with your tax system, your industrial system, the international currency system, and it really can't be divorced.

Reich: I think that the debate can be crystallized if you look at what is happening now in Washington with regard to the automobile industry. In the Federal Trade Commission right now, my former colleagues are trying to debate the extent to which G.M. and Toyota should be permitted to embark upon their joint effort on the West Coast. Simultaneously, in the special trade representative's office, you have Bill Brock negotiating with the Japanese about a fourth year of protection from Japanese imports of automobiles. Simultaneously, you have Elizabeth Dole at the Department of Transportation developing a new scheme for auto airbags. Now we get into interesting questions: what criteria' should the FTC, Bill Brock, and Elizabeth Dole use to make the decision that they're going to make with regard to the automobile industry?

Summers: Where I would dissent is from the view that we ought to think about the auto industry as a problem. The example that I like to use is that the federal government has dozens of policies which affect the viability of the press: tax policies, policies regulating job conditions in newspapers, financial policies. It would be a terrible idea, it seems to me, for the government to sit down and make a decision about how large the press should be, what kind of a press we wanted to have, how much diversity we wanted to have in the press.

Bower: My differences with Bob have to do with the ability or wisdom of trying to get a coherent intervention. Let's take the G.M.-Toyota example. Presumably, how you handle G.M. Toyota is going to have something to do with the trade position of the United States and effect on negotiations. Should the U.S. negotiator talk to the person who might block the deal for anti-trust reasons? And vice versa. There's an intimate relationship between one policy and the other, and I think that raises the question: should we have a coherent policy?

Crimson: Given the scenario of the auto industry, and the complex nature of our economy today, how can we overcome these problems without some kind of government intervention or a margin of government?

Summers: The viewpoint that says that it's a poor idea for the government to be involved in trying to use microeconomic policies for goals rests upon, in large part, a view that people in the government or people outside of the marketplace directly are likely to be poor at making judgements about what strategies are right. People inside the market are likely to be better. The people that can judge an industry the best are those that are in the industry. But I would at this point want to emphasize that I think the micro focus here is quite misplaced. If you look at the automobile industry, the macroeconomic effects seem to me to dwarf whatever it is that's going on with G.M. and Toyota. If you look at what has happened to the demand for total car sales, you ask how much of the decline in US car sales is traceable to foreign penetration. The answer is that much more of the decline is traceable to the recession than to foreign penetration.

Bower: Let me come out in a different direction. My concern is that I think we know fairly well what is needed in order to have a competitive economy. On the whole, you have to suppress consumption, you have to encourage savings, and then you have to invest selectively in those industries and companies where the returns are highest. My sense is that all central political instruments are designed to do the opposite. They are designed to redistribute in order to achieve some equity. And they are extremely sensitive to the perfectly legitimate needs of interest groups of various kinds: poor people, elderly, etc. My view is that if we create the institutions that can effectively intervene in industry in a coherent way, they will be used by Congress to redistribute. That seems to me to be inevitable. Why? Because that's the way they've been used in every country in the Western world. The only place you see those instruments being used to suppress consumption are in Asia.

Summers: There is a possibility to compare a society like ours to a society like the British, in terms of the extent of government involvement in the economy. The government is much less involved in the economy here. What you're discussing is whether you favor a sizable expansion in the role of government in the economy, not whether you simply favor doing the government interventions that are going to be done differently.

Reich: Larry has put his finger on the area of the debate. And the debate, at its basis, is more political than economic.

Crimson: Isn't this era, which is one of the most conservative of this century, an inopportune time to try to sell industrial policy to the American public?

Reich: I think its a very opportune time to sell the notion that if we already have an elaborate industrial policy and that our political economy is already going to generate an elaborate industrial policy, then we must search for ways of creating greater coherence and making it more consistent with our macro objectives.

Summers: Well my argument at this time would be to tie any kind or level of industry discussions-coalitions to much more active discussions at the industry level, which are currently perceived to be blocked by anti-trust laws. When I say anti-trust exemption, I don't mean a license to steal. I mean that we ought to devise ways of letting companies talk to each other about how to restructure an industry which leaves them exempt during that time from prosecutions.

Crimson: Do you advocate a kind of corporate monetarism, such as President Hoover advocated?

Summers: Hoover's experiment ran right into the depression, so its not clear.

Bower: Let me interject a major qualification about whether people outside the industry shouldn't think about the question of what the industrial structure in the United States should be. All the mistakes come from people outside the activity trying to make a judgement about what we need. But I think this destruction in anti-trust would almost certainly be a good idea. I think we ought to look hard at our anti-trust policies to see if we can make them better.

Reich: There is not a perfect match between private sector decision making, what's good for the shareholders, and what is good for the country. If you acknowledge that there is an imperfect match, then you're back at the first questions we raised: can you fix it, and should you try, and what are the negative side effects of trying?

Bower: I have colleagues who argue that what we need is not an industrial policy, but we need an industrial strategy. And by that I mean that there ought to be an effort in the central government to diagnose what's going on in the economy in macro and sectoral terms, so that one could at least understand what would be attractive if it happened. Giving some sense to the extent to which pieces are interrelated, how they affect a particular part, and what might be attractive. There is an argument that when you do that, the argument for indicative planning, that people do pay attention to those kinds of frameworks and follow them without the kind of apparatus that I deeply object to.

Crimson: Industrial policy is a key issue for the Democratic candidates. Is the lifetime for industrial policy only as long as the 1984 Presidential campaign? And do you feel that because the issue has been politicized, have the ideals of industrial policy been compromised?

Reich: The political meaning of industrial policy will wax and wane. I don't have great hopes that the debate will be enhanced in the next year. My expectation is quite the contrary, that the public debate of industrial policy probably will resort to more caricature and people will see it as the age-old debate between free market and central planning. That will be fairly short-lived. After the election, regardless of who wins. I hope that that element of industrial policy will become quiet for a while, and the more interesting portion of the debate will continue.

Bower: We have a problem we can't walk away from. We have to do something about it and we will do something about it. If we don't, we'll have more ad hoc interventions. I think it extremely valuable that the debate continue, and that it be as informed as possible.

Summers: I think there will be some waning of the debate. The novelty of industrial policy, as a strategy, has led some people, particularly those who aren't experts, into a vastly inflated sense of what it can hope to accomplish.