A minimum industrial policy

My last post on America’s incoherent and internally contradictory de facto industrial policy elicited a number of comments (published and un-published) that suggest I have inadvertently confused a lot of readers. So let me take another stab.

Some seemed to conclude from my listing of farm, housing, medical, and other subsidies that I was calling for similar subsidies for industrial R&D and manufacturing. Some of these readers pointedly raised the question of whether such subsidies have done the nation any good. Let me hasten to emphasize that I believe the bulk of the farm, housing , and other subsidies have done more harm than good to the economy, and I in no way am calling for imitating them in the industrial/manufacturing realm.

The main point I have long tried to make is that industrial policy is not really about subsidies. Perhaps the term industrial policy is inadequate. What I believe to be really important might better be called an economic strategy. What I see in the United States is a situation in which analysts, commentators, and economists hold strongly to the view that we don’t want any industrial policy or economic strategy (so called picking of winners and losers) on the grounds that such actions distort and harm the economy. Yet, our politics, geo-political and military policies and practices, humanitarian instincts, and policy fads drive us to make vast interventions without regard to any overall criteria of productive health and competitiveness. So the absence of a policy or of guiding criteria does not lead to absence of interventionist policies. It only exacerbates more incoherent and counter-productive intervention.

Some readers have commented that much evidence demonstrates that moving away from European-style planned systems greatly improves economic performance. This seems to me to be true only to a certain extent. In other words, moving away from communist style central planning and white elephant national champions is certainly beneficial. On the other hand, the German and Scandinavian style of government-labor-management cooperation and coordination and competitiveness planning seems to be working better than Anglo-American laissez faire. Even more significant is the out- performance of the Asian economies like Singapore, China, Korea, and Taiwan that engage in extensive development of five year planning to create criteria for judging and guiding appropriate policy interventions, subsidies, and investments. Of course, none of this is perfect. But the existence of an overall strategy with guiding criteria tends to make the inevitable intervention more coherent and sensible than the free for all system of the United States.

So my plea for the United States is for an Office of Competitive Assessment that benchmarks U.S. performance against that of other leading economies on a systematic basis and that develops alternative scenarios of U.S. development with guidelines on how to optimize performance. Of course, this kind of indicative thinking wouldn’t always carry the day, but it would be extremely useful to have.

A final point is the issue of intervention in response to the policies of others. In principle I believe the U.S. market is big enough and robust enough to support virtually any industry on a competitive basis without special government support. However, a problem arises when foreign governments decide to target those industries for special assistance as part of a "catch-up" effort. We have seen this for the past forty years in the cases of the European Airbus, the Japanese steel, semiconductor, auto, and machine tool industries, the Korean semiconductor and electronic industries, the German solar panel industry, and many, many more. The question always is whether to respond to the foreign subsidy or trade or regulatory barrier in kind or not. Of course, it would be ideal if everyone could just sit around the conference table at WTO headquarters in Geneva and agree on free trade. But history has demonstrated that that just doesn’t work, and it doesn’t work because countries know from experience that by intervening they can become competitive and obtain substantial spillover and scale benefits. The Airbus is perhaps the best example.

But these situations are always zero-sum games. The win of the Airbus is the loss of the U.S. aircraft industry, for example. Or the win of the Japanese semiconductor industry was the loss of the U.S. semiconductor industry. In these circumstances, game theory tells us that tit for tat is the optimum strategy. Thus the United States (or any other country) needs an industrial policy at least to the extent of offsetting the interventions of other governments and that offsetting needs to be automatic and instant rather than at the end of a long period of drawn out complaint filing and negotiation during which the effect of the original intervention increasingly takes hold.

Ideally, this kind of response would lead to trade negotiations and disciplines within the WTO and/or other bodies to govern the interventions and responses as has been the case in the past with regard to direct export subsidies. But, if not, the target industry would not be left to wither on the vine.