National Industrial Policy: An Overview of the Debate

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National Industrial Policy: An Overview of the Debate

July 12, 1983 44 min read Download Report
Richard B.
Senior Associate Fellow

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275 July 12, 1983 NATIONAL INDUSTRIAL POLICY AN- OVERVIEW OF THE DEBATE Richard B. McKenzie Visiting Fellow INTRODUCTION Through the passage of a wide range of government initiatives grouped under the rubric of l'national industrial policy If a growing coalition of American political, labor, and business I leade r s is seeking to realign in a fundamental way public and private decision making in the economy. The proponents! objec- tives are laudable to renew economic prosperity and growth in national wealth and to enhance social justice. The attendant rhetoric, how e ver, echoes appeals of bygone generations of social reformers intent upon spurring social improvement through greater government control of the economy. Senator Gary Hart (D-CO) has I Today, more than at any other time since the Depression, tradi tional p o licies are producing unintended consequences. They are I increasingly irrelevant to the unique economic realities of this decade I summarized a now familiar political theme within the movement What Hart and many other industrial policy champions argue is t hat a new holistic approach to public policy can be forged by 'Imelding'l the Jef fersonian principle of free competitive economy1I Professor of Economics, Clemson University; author of Fugitive Industries The Economics and Politics of Plant Closings (San Francisco: Pacific Institute forthcoming of Research Assistant Gregory L. Klein.

The author wishes to acknowledge the contribution to this paper Gary Hart, "Restoring Economic Growth," a policy statement presented to the National Committee Strategy Counci l, February 6, 1982, p 1. These views are recited by Robert Reich, Professor of Business Policy at the Kennedy School of Public Policy, Harvard University, in his new book The Next American Frontier (New York: Times Books, 1983 2 with the ffRooseveltian p r inciple that economic success cannot be divorced from social conscience.1t2 D-SC), for instance, stresses that we need a Ifunity of purposetf to economic p01icy Harvard University Professor Robert Reich. In The Next American Frontier, he contends that Iti n the emerging era of productivity social.justice is not incompatible with economic growth, but essential to it security, and participation will generate greater productivity than one premised on greed and fear.lf4 the industrial world (or, perhaps, having originally articulated that vision for Hart), Reich writes, 'IAmerica has a choice: It can adapt itself to the new economic realities by altering its organization, or it can fail to adapt and thereby continue its present decline But failure to adapt will r end the social fabric irreparably. Adaptation is America's challenge It is America's next frontier I5 Senator Ernest Hollings A founding father of industrial policy is A social organization premised on equity Mirroring Hart's vision of The trouble with th i s new talk about industrial policy is that it is not new mercantilism and as familiar as this century's disastrous experi ments with central planning, the corporate state, and five-year plans. From what industrial policy proponents have been saying so far , there is no reason to believe that their repackaged schemes will be any less catastrophic than the earlier models.

To be sure, most industrial policy enthusiasts have noble concerns.

But their arguments are replete with internal contradictions that draw into question the movement's intellectual foundation. While several specific policy proposals warrant examination by Congress mainly because they attempt to correct problems with existing policies, much of what has been proposed as "national industrial p o licytt is a 1980s version of the social politics of the late 1960s and early 1970s. It calls for more federal money and more federal intervention 'in the activities of workeks, businessmen investors, and consumers. Strangely, the lessons painfully learned in the past decade seem to be willfully ignored most alarming is that backers of these policies fail to acknowledge or choose to ignore, a critically important and central point in such debates: government control of capital ultimately translates into con t rol of people, whether the control is instituted by democratic or by authoritarian means It is at least as old as the 18th century's What is Ibid P- 4 Ernest Hollings, "Statement of Candidacy," remarks presented at Midlands Technical College, Columbia Sou t h Carolina, April 18, 1983 Reich, op. cit p. 20 Ibid p. 21. 3 MAJOR POLICY PROPOSALS6 As evidenced by the array of policy proposals, national indus trial policy NIP) means different things to different people, a point that may go far in explaining the pol itical appeal of'calls to join the movement. Consider several of the major proposals of frequently cited industrial policy advocates.

The Hart Proposals Senator Hart offers a reasonably complete, bro ad-based policy menu TO encourage investment in physical and 'human capital, the tax code should be changed to a progressive expenditure tax exempting savings from taxes and thus stimulating investment To encourage new investment and to reduce the tendenc y of the.1981 tax cut to favor existing firms over emerging firms that have limited capital. bases and, therefore, have minimal deprecia tion allowance to deduct from taxable corporate profits, the tax code should allow capital expenditures to be treated a s an expense.

Further, a new form of common stock should be created, Called new capacity stock it would be used to finance new plant, equip- ment, and research and be exempt from capital gains taxes To encourage "new entrepreneurial frontiers, I# federally financed Wenture Development Centers should be established to provide technical assistance and seed money to small businesses The corporate income tax rate would be reduced for small businesses and small business shareholders would be allowed to deduct c o mpany losses from their taxable personal income To stimulate research and development, federal support of science and engineering schools would be increased, the patent laws would be strengthened, and government procurement policies would tlpull technolog i cal progress forward To expand global markets for American goods, the federal government would free international trade of tariff and nontariff barriers and eliminate export subsidies provided'to other coun tries! industries To reduce the crowding out eff e ct of government deficits, the 1983 tax cut was to have been postponed, while defense expenditures would be trimmed by $20 billion. To reduce inflationary pressures a ##Tax-Based Incomes Policy would impose a tax penalty on price For a description of spec i fic legislative proposals before Congress, see an accompanying paper by Gregory L. Klein, "Industrial Policy: A Summary of Bills before Congress," Heritage Foundation Issue Bulletin No. 96, July 12, 1983. 4 and wage increases'exceeding a "pre-established target" and would focus on the 2,000 largest firms in the country.

Hart would also revise anti-trust laws to allow for more joint research and development projects among competing domestic companies, impose a !'security feel! on imported oil that would ref lect the now-hidden cost of our "energy vulnerability,If and expand federal aid to education, incorporating a IfGI Bill in Reverse," meaning a program under which students would pay back their federally subsidized loans by work in areas of Itnational need . If7 Generally speaking, Hart's NIP is designed to ease what he sees as the adjustment process of !'old line basic industries commonly called llsunset industries,If and to facilitate the emer gence of small high tech firms in what are described as Itsunris e industries If The Reich Proposals Robert Reich believes that the key to revitalizing the American economy is Iladaptationll to the new economic realities of production. These he defines as flexible production processes highly skilled workers (the presume d source of America's compara tive advantage in international commerce), and Ifprecision, custom and technology-driven products.If Such adaptation, for Reich, re quires a'number of policies similar, but not identical, to those of Senator Hart To reduce str uctural unemployment and to speed the "adjust ment process Congress would enact an unemployment voucher system by which the federal government would pay half of firms costs for training people unemployed for longer than three months.

Even larger subsidies would go to those firms training workers in areas of high unemployment. Retraining vouchers for those unem ployed for more than two years would be redeemable at universities and technical colleges. In addition, companies could establish human capital rese r vesll-funds set aside to reflect the deprecia tion of the skills of the company's employees. These reserves would lower corporate profits and would be used to upgrade worker job-related skills, just as similar reserves now are used to replace worn-out equ i pment To reduce the lfinequity1! in the current disparity in tax treatment of human and physical capital and the inclination of physical capital to move, a Ilhuman capital tax credit,ll in con nection with training costs similar to the investment tax cred i t on physical capital, could be instituted, which would lower the after-tax training and retraining costs incurred by businesses mergers and acquisitions and tax avoidance), the tax code could To reduce forms of "paper entrepreneurship1 specifically Hart, op. cit pp. 1-35. 5 allow an interest deduction only for purchasing new or modernizing old plants and equipment taxes would be more directly related to the unemployment experi ence of firms To reduce cyclical unemployment, unemployment insurance To ease t h e decline of decaying industries, such as textiles steel, automobiles, and rubber, tlregional development banks It along the lines of the Reconstruction Finance Corporation of the Great Depression era, would be organized to provide low interest rate, subs i dized loans to companies promising to retool and re train workers or, in Reich's words, "to restructure themselves to become more competitive.Ir8 such banks could redistribute investment funds among regions urban and rural areas, and industries with the i n tent of enhancing social justice and job security and facilitating the adjustment process exist among businesses, labor groups, and government, tripartite councils would be organized. Such councils would seek consensus which Reich acknowledges may be diff i cult to achieve) on how capital investment would be allocated differently than it is in free capital markets With their federal subsidies TO reduce the adversarial relationships that now presumably To relieve unemployment and other social problems, the fe d eral government would offer grants to entice firms to hire the unemployed, handicapped, or other groups subject to discrimination and unfortunate circumstances. Washington also would fund, through firms, such social services as "health care, social securi t y, day care, disability benefits, and relocation assistance.If9 In short, tifirms will become the agents of their employees, bargain ing for different packages of government-supported social services.tF10 To ensure that the programs negotiated by firms wi th govern ment are run with the workers in mind, a form of "industrial democ racyt1 would be imposed. The employees Itwill elect representatives who will select the combination of benefits and choose the providers.

Through labor-management councils, also i ncluding worker representa tives, workers will participate in company decisions about physical capital, helping to choose the direction and'magnitude of new investment in research, plant and machinery.lIll economy, as now organized, is insufficiently adap t ive and that In summary, Reich starts with the propositions that the 8 9 10 11 Reich Ibid Ibid Ibid 9 op cit p. 243 p. 248 6 even now there is no "free market" due to extensive federal subsi dies to businesses and government protection from domestic and i n ternational competitors. In Reichls view, the federal govern ment already has an Itindustrial policy.i1 Yet it lacks sufficient coordination to serve the broad general public. No expanded involvement in the economy by the federal government is necessary s a ys, Reich subsidy and protection resources already at its command to extract public benefits from businesses He maintains that Washington simply could use the The Mondale Proposals Having acclaimed Reichls book as 'lone of the most important works of the d ecade," former Vice President Walter F. Mondale has not sketched in the details of his own brand of industrial policy is Itdestroying industry--not building it. Itl The broad outlines of his NIP include five strategies ful mergers and acquisitions.It Inst e ad he complains that the country's industrial policy First, he believes something must be done to reduce "waste Second, he suggests altering the anti-trust laws to allow more joint research and development ventures to Itenhance inter national competitiven e ss without reducing domestic competition.tt13 here at home,lt because companies are shipping high technology production jobs abroad and !'leaving the lower-end jobs here at home Fourth, he endorses the call of other liberals for the creation of an ItEcono m ic Cooperation Councillt with functions similar to those of the old Reconstruction Finance Corporation Third, Itwe've got to shape a policy to keep high technology Fifth, he wants federal aid to Vhose communities and regions hit hardest by economic change ," which for him means targeting infrastructure programs and impact aid--automatically triggered by measures of distresstt and adopting plant-closing restrictions.

Though insisting that he is a 'lprofound believer in our free enterprise system,It Mondale h astily adds that Itgovernment must work in partnership with the market. Irl l2 l3 Walter F. Mondale, address to the Twenty-First Constitutional Convention of the United Steel Workers of America, September 11, 1982, p. 5.

Walter F. Mondale, excerpts from a speech to the Industrial Union Depart ment Legislative Conference, May 4, 1983, p. 2 l4 Ibid l5 Ibid p.4.government. Examples orated Reconstruction Finance Corporation (RFC) to allocate capital as directed by a council of labor, business, and government A long with Reich, Rohatyn advocates establishing a reinvig 7 I The Rohatyn Proposals To reduce problems caused by unexpected inflation and to moderate competing claims on the national income realized in strikes, l'Annual negotiations resulting from one yea r contracts with no cost-of-living escalatorsi1 should be institutionalized To improve labor-management relations, a "larger share of the compensation package [would be in the form of profit sharing To better coordinate U.S. domestic policies with Western E urope and Japan, the U.S. should consider recreating ''something like the Bretton Woods agreements,l! providing for central bank intervention within certain bands of exchange rates, like the European monetary system To permit underdeveloped countries to d e velop, to ''avoid enormous distress in those countries,Il to enable underdeveloped countries to repay their loans, and to avert protectionist measures the International Monetary Fund should be Irreliquified.'l This means increasing U.S. contributions to t h e IMF.16 Rohatyn admits that he tends to Illook at money as a tool or a weapon to leverage concessions from unions, suppliers, banks management, legislatures.1117 He justifies this by arguing that the basic issue to me is whether we have a government with a philosophy that will look upon intervention as a philosophical imperative when disparities in the country become too great, or whether government's philosophy is simply to take its hand off the steering wheel and let the market work its The Thurow Propo s als MIT economist Lester Thurow bases his prescriptions on his diagnosis "that our economy and our institutions will not provide l6 These positions are discussed in Jeremy Bernstein, "Profiles: Allocating l7 Ibid p.78 Sacrifice The New Yorker, January 23, 1983, pp. 45-78 l8 Ibid a jobs for everyone who wants to work" and that "we have a moral responsibility to guarantee full employ~nent To him, the federal government must be employer of last resort paying wages above the minimum and (in agreement with othe r NIP advocates expanding training and retraining programs this would "create a socialized sector of the economy."20 Quips Thurow m]ajor investment decisions have become too important to be left to the private market alone Japan Inc. needs to be met with U . S.A. I~C He acknowledges that Seconding Reich, Thurow wants to use the government to accelerate the transition from sunset to sunrise industries.22 To the extent that government helps people make the transition the risk of economic change is 'Ispread'I am o ng all citizens-a point also emphasized by Reich above and in the Bluestonefiarrison proposals considered below.23 He believes that private investment banking should once again be made legal and that public investment banking, such as Rohatyn's new Recons t ruction Finance Corporation could be organized to lengthen private managers' time horizons that, according to Thurow, 'lare too short to encompass projects that will off for a decade and too many benefits cannot be captured by the firm making the i nitial investment Thurow advocates the establishment of a "Ministry of Technology to encourage civilian industrial research.25 The Ford Proposals Practically every two years for the past decade, Representa tive William Ford (D-MI) has introduced a proposa l to restrict plant closings. The first proposal, which was introduced in the Senate in 1974 by Walter Mondale, concentrated primarily on the problem of the "runaway shop'I--those firms that pull up stakes in one locality and reestablish elsewhere. More re c ently, Ford has been attacking plant closings in general, even those resulting from firms going out of business altogether. Closed plants cause unemployment, says Ford, and create many economic and social problems for the workers and communities involved. As such, he wants to restrict closings to ameliorate these problems. At issue is the basic right of firms to open. and close, expand and contract their businesses.

Ford's current proposal, called the National Employment Priorities Act of 1983, embodies a number of industrial policy concepts l9 2o Ibid p. 206 21 Ibid' p. 192 22 Ibid' pp. 191-193. 23 Lester C. Thurow, The Zero-Sum Society: Distribution and the Possibilities for Economic Change (New York: Penguin Books, 1981 pp. 203-204 C. Thurow, testimony p repared for the House Subcommittee on Economic Stabilization, June 14, 1983, p. 2 24 Ibid p. 3 25 Ibid' p. 4 9 To remedy the social and economic problems felt by workers and their communities when a plant closes, Congress would require firms that close pl a nts 1) to give up to one year's notification of a pending closing 2 to provide severance pay equal to 85 percent of one week's average pay for up to fifty-two weeks, not to exceed 25,000 3 to continue the employer's contribution to employee benefit plans f or up to fifty-two weeks, and 4 to provide restitution payments to the communities where plants are closed equal to 85 percent of the average tax payments of the three years prior to closing To discourage firms from moving outside the U.S such firms would have to pay community restitution of 300 percent of the average tax payment of the three years prior to closing To prevent plants from closing, the federal government would provide 1) technical assistance helpful in avoiding closure 2) aid to firms in the form of "loans, loan guarantees interest subsidies, and the assumption by the Secretary of the Treasury] of any outstanding debt of such concern 3) subsidies' to employee groups interested in buying their plants and keeping them open, and 4) targeted proc u rement plans that would save faltering industries To ease the adjustment process when plants do close, federal assistance would be provided workers to cover training programs job placement services and job search, and moving expenses.26 The Bluestone-Harr i son Proposals Economics professors Barry Bluestone (Boston College) and Bennett Harrison (Massachusetts Institute of Technology), in their book The Deindustrialization of America, accept the contentions of Congressman Ford that plant closings cause social problems that extend beyond the private spheres of managers, their workers and even their immediate community private firms, interested almost exclusively in making profits are recklessly l'deindustrializing the country. As such, many of They believe also that 26 National Employment Priorities Act, H.R. 2847, U.S. House of Representa tives, 98th Congress, 1st Session, May 2, 1983. 10 these problems can be remedied by increasing the cost of closing via closing restrictions, because closing restrictions conv e rt into operating costs, and they make continued operations relatively less costly than closing for many firms. Though Bluestone and Harrison endorse the basic precepts of Ford's National Employment Priorities Act, they have advocated even tougher .restri ctions on closings.27 radical reform, if not outright socialization, of the U.S. economy.

Their panacea is called national economic democracy and planning in which I'a risinq standard of livinq for working people, more equally shared" will be substituted f or private profit as the guiding criterion for economic decisions and in which Ilhumanization of the workplace should be the major objective of any truly democratically planned restructuring of the economyll (emphasis in the original).28 Their industrial policy entails worker buyouts government bailouts, and Ilselectivel' nationalization of industries.

Central to their NIP scheme are lt'planning agreements' between the public and private 'partners on policies concerning pricing location (and relocation), s ourcing, automation, affirmative action in hiring and promotions, health and safety, environmental protec tion, and the maintenance of the workplace environment conducive to greater experimentation with new forms of internal economic democracy What Bluest o ne and Harrison explicitly want is the Bluestone and Harrison conclude that the principles of any newly established industrial policy should include, at a minimum: spreading the burden over all the citizens of the society; public disclosure of company dat a to enable democrati cally constituted bodies to decide whether and to what extent assistance is needed; research by and consultation with workers in the affected plants and advisors of their own choosing; planned agreements wi'th companies receiving bail o ut specifying a quid pro' quo with respect to increased democratic management of production, restrictions on the subcontracting of components or supplies to nonunion or foreign shops, the phasing in (and control over the e use) of new technology, new plan t location, and product pricing; and 27 The National Employment Priorities Act of 1979 required firms to give up to two years notice of a pending closure depended upon the number of employees affected by the closure, as it does today.

Barry Bluestone and B ennett Harrison, The Deindustrialization of America Plant Closings, Community Abandonment, and the Dismantling of Basic Indus tries (New York: Basic Books 1982 pp. 244 and 245 The length of notice then 28 29 Ibid 11 some government ownership of the subsid i zed corpora- tion 30 More explict than other NIP proponents, Bluestone and Harrison chart a course for centralized economic planning tempered by the demands of active worker participation in the decision making of their firms 31 The HollinQs Proposals Dra w ing on his experience as Governor of South Carolina from 1958 to 1962, Senator Ernest Hollings sees expanded educational opportunities, especially technical and science education as a central ingredient of any industrial policy recipe. This implies howeve r , a return to past policies--more federal money for nutrition child care, community health centers, student loans, as well as more federal dollars for science, math, and on-the-job training including a 5,000 across-the-board federal pay hike for all teach ers in the country (which would add 14 billion to the federal budget, virtually doubling federal outlays on education).

At the same time, Hollings wants to freeze aggregate spending and opposed the individual tax reductions He argues that the federal defic it must be cut to make more private savings available for investment. He also strongly supports greater protection from imports, especially textiles, a dominant industry in his home state. Although his program lacks specifics, Bollings talks of government becoming involved in ltplanningIf and acting as a catalyst in bringing business, labor and agriculture into part nership." He says: "We would not have a fixed industrial polic But the many facets would amount to the best industrial Y The Wirth I l Yellow Brick Road" Proposals After months of hearing proposals for industrial policy, the House of Representatives Democratic Caucus Committee on Party 30 31 32 Ibid., p. 256 The Bluestone/Harrison proposals are not the most extreme in the industrial poli c y movement. Professors Samuel Bowles (University of Massachusetts David Gordon (New School for Social Research), and Thomas Weisskopf (Uni versity of Michigan) advocate An Economic Bill of Rights" that includes the right to *'a decent job p ublic child ca r e and community service centers, a shorter standard workweek and flexible hours, flexible price controls, p ublic commitment to democratic trade unions democratic production incentives, democratizing investment, money, and foreign trade, environmental dem o cracy conservation and safe energy good food, a national health policy Samuel Bowles, David M. Gordon, and Thomas E. Weisskopf, Beyond the Waste Land: A Democratic Alternative to Economic Decline (Garden City, New York: Anchor Press/Doubleday, 1983 p. 270 .

Hollings, op. cit., p. 3. 12 Effectiveness issued a dolor of its cover, is packed with platitudes wide-ranging report that, because of the known as "The Yellow Brick Road.ft33 It is and vague generalities.. Congressman Timothy Wirtii (D-CO) is emerging i s the primary spokesman for the package. According to Wirth, the "Yellow Brick Road" rests on four cornerstones Boosting the level of gross national product spent on research and development to a goal of 3 percent, providing new incentives to entrepreneur s , helping universities upgrade their research .equipment, and encouraging innovation in the economy Improving the education and training needed to compete in the world economy, including making computer literacy a goal for all students, and attracting tal e nted teachers and professors in areas of special needs such as science, mathematics, and foreign languages workers in sectors of declining employment so they can become productive in areas of increasing employment A major public-private effort to train an d retrain Rebuilding the,decaying public infrastructure Investing in energy resources with the goal of becoming a net exporter by 1990, through expanding coal exports, building an solar technologies and conventional and unconventional drilling techniques, a nd returning to an aggressive energy conservation effort. 54 These programs would be funded by higher taxes for segments of the population and by shifting a greater share of the burden of defending the West to our allies. These programs would also be coor d inated by an llEconomic Cooperation Council to help our country gather the right information and improve our ability to make long-term economic decisions-not as a centralized monolithic planning agency, but as a national arena to clarify complex I choices and build broad support for national initiatives.tt35 Given its description in a bill being prepared (at this writing for introduction, we must assume that the Council will be composed of interest groups, such as the AFL-CIO, National Association of Manuf a cturers, the Chamber of Commerce. It would raise legitimate fears of economic policies being guided in the interests of the established ttcorporate state Suggestions in the proposal that the Council will seek and recommend a consensus by those in the asse m bly imply that Congress will, if the bill is passed, delegate a portion of its policy-making duties to the interest groups fortunate enough to be represented on the Council (which will i 33 Democratic Caucus Committee on Party Effectiveness, Rebuilding th e Road to Opportunity: A Democratic Direction for the 1980s (Washington Committee on Party Effectiveness, September 1982 34 35 Ibid Timothy E. Wirth,-"A Democratic Policy Agenda for the Future," Wall Street Journal, October 19, 1982, p. n.a 13 necessarily e xclude the interests of many groups And it means that economic issues, like the allocation of capital or which industries will llwin,ll will have to adjust their economic be havior to the consensus, which will reflect I1truthlf as seen by the political po w er structure. Economic behavior will be further standardized in a very large nation noted for diversity Other Proposals Among the less ambitious industrial policy proposals suggested Joel Kotkin and Dan Gevirtz, co-authors of a forthcoming book en titled A Business Plan for America, focus on policies designed to encourage entrepreneurship. They suggest that the federal govern ment should 1) eliminate the capital gains tax 2) dispense with the corporate income tax on profits of less than $500,000 3) relax t h e unwritten but enforced formula relating bank loans to firm equity that banks must follow in making loans to emerging offset the implied tax bias in favor of larger companies involved in the current investment tax credit, and 5) launch a major federal ef f ort to train workers for new industries.36 companies 4) expand the research and development tax credit to I Former Governor of Florida Reuben Askew, on the other hand flirts with centralized planning. He calls for Ifgovernment poli cies, especially target e d tax policies, which give direction to the pattern of investment by making full use of market forces in a constructive way. We need a conscious, concerted, coordinated and comprehensive policy for economic growth in the United States 113 7 George Hatsopo u los, founding member of the American Business Conference, and Chairman, Thermo Electron Corporation, argues that the critical difference between economic growth in the U.S. and Japan is that in the U.S. the real rate of interest (the nominal market rate o f interest minus the current inflation rate) is three times higher than it is in Japan. To narrow this, he suggests 1) that the federal government revamp the tax code to allow cumulative preferred stock dividends to be treated the same for tax purposes as i nterest on debt so that equity capital flows into companies 2) the federal government must restore the benign macroeconomic conditions of the 1960s, which included a 4 percent inflation rate and low equity risk.38 36 Joel Kotkin and Dan Gevirtz Why Entrep reneurs Trust No Politician Needs Friends Who Ruin Your Business While Aiding Corporate Dinosaurs?"

Washington Post, January 16, 1983, pp. B1 and B2.

Reuben Askew, "The Democratic Alternative speech prepared to be presented to the Democratic Business Council, French Lick, Indiana, April 24 1982, p. 12 Who 37 38 The Economist, April 30, 1983, pp. 118 and 119 14 A number of giant firms seem tempted by NIP. Edward Jefferson Chairman of E I DuPont de Nemours Company, recommends a ' ' cherry picking i..e selective) approach to industrial policy, one providing special tax incentives, loans, and loan guarantees for research and development efforts.39 Believing that the promise of high tech jobs will not replace the need for jobs in basic industries, Jefferson maintains that such subsidies will llshore up your industrial base and ease the unem loyment problem at a time when the economy is in transition.f14g He adds The kind of government involvement I'm talking about should be highly selec t ive limited to asserting the national interest on behalf of our declining industries. That's no different from the concern we expressed for agriculture when it was in great diffi~u1ty.l TBE PREMISES OF NIP Proposals for a national industrial policy rest o n three common premises Premise One. The U.S. economy is in serious decline, which will remain unchecked unless America changes the way it does business.

Reich, for example, begins his book with a depressing and very questionable observation Since the late 1960's America's economy has been slowly unraveling. The economic decline has been marked by growing unemployment, mounting business failures, and falling productivity. Since about the same time Amer ica's politics have been in chronic disarray. The phen o mena are related. Economics and politics are threads in the same fabric This link is perhaps stronger today than at any time in America's past be cause we are moving into an era in which economic progress depends to an unprecedented degree upon collabo ra t ion in our workplaces and consensus in our Similarly, Bluestone and Harrison open their book by approv ing the Business Week conclusion that llthe U.S. economy must undergo a fundamental change if it is to retain a measure of its economic vieility, let al one leadership in the remaining 20 years of this century. The goal must be nothing less than the reindustrialization of America," a feat that would require a 39 40 41 42 How to Turn Recovery into Long-Term Report, May 2, 1983, pp. 51-52.

Ibid. p. 52.

Ibid Reich, op. cit p. 3 Prosperity I U.S. News and World 15 Ifconscious effort to rebuild America's productive capacity.

Lester Thurow maintains that "Interest in industrial policy springs from a simple four letter word--fear. American industry is being beat en up by its international competition and business and labor are both afraid that American industry is going down for the ~ount.Il4 The perceivedxzauses of the decline vary. Gary Hart is con vinced that government policy efforts have been misdirected bec a use "we have remained mired in an irrelevant debate about the wrong issuesi1 when the U.S. economy has been going through an industrial transformation, inspired to a major extent by the emergence of a global economy.45 While agreeing with Hart and others t hat "false choicesi1 have been addressed, Reich focuses on the extent to which American management has remained wedded to highly structured, mass production processes of the past.46 Senator Hollings, meanwhile, blames Reaganomics, Carternomics and the fai l ure of presidents to "build and head a consensus of Americans for the common good.g147 Bluestone, Harrison, Thurow, and Reich, among others, believe that the .acceleration in technological change, the growing mobility of capital on a world scale, and the p rofit motive are key sources to what they insist is U.S. economic decline. Almost all NIP advocates believe that foreign imports, based in part on low wages and protectionist policies of other countries, have narrowed markets for many American goods. Acco r ding to them, the collapse of the economy, especially the industrial Frostbelt, will continue unabated unless measures are taken to protect basic industries from foreign competition. Crystallizing the sentiments of many industry and political policy advoc a tes, Wolfgang Hager, visiting professor at Georgetown University's School of Foreign Service writes Without trade barriers rich countries are bound to suck in cheap imports from low-wage countries, destroying the domestic industries that used to make thos e products.

There will never be enough 'high tech' jobs to employ those who,lose more traditional jobs. Therefore, un restricted trade would eventually destroy 'the economies of all high-wage, developed countries.48 Premise Two. Other countries have charte d the industrial policy course that should be fol-lowed, with modifications, by the U.S 43 "The Reindustrialization of America I Business Week, June 30, 1980 special issue, p. 58, as quoted in Bluestone and Harrison, op. cit P. 3 44 Thurow, testimony, p. 1 45 Hart,. op. cit p. 1 46 Reich, op. cit 47 Hollings, op. cit., p. 2. 48 Wolfgang Hager, "Let Us Now Praise Trade P'rotectionism.: It's Free Trade That Would Bring Disaster Today Washington Post, May 15, 1983, p. B1. 16 Virtually all NIP backers cite Jap a n as a model. Hollings argues that 12 million Americans are out of work in part because of other countries that "are using government as an active partner in coordinating business and labor, agriculture and science to compete in the international rnarketp 1 a~e.I Reich concludes The recent progress achieved by Japan and several other European countries, and America's relative decline, require no convoluted explanations These countries are organized for economic adapta tion America is not."50 Ford, Bluestone, and Harrison point out that European countries that have plant closing restrictions have grown more rapidly than the U.S. This, they say, proves that such restrictions have no negative effects on the economy.

Thurow adds, "In Japan the banking system is h eavily influenced by decisions of the government. MITI (Ministry of International Trade and Industry) tries to develop a consensus for its industrial policies, and 'administrative guidance" is a way of Other advocates use the Chrysler bailout and American agriculture programs as quintessential examples of the kinds of industrial policies that can be pursued.52 By saving Chrysler, proponents of industrial policy contend, many other firms, and even the City of Detroit, were probably saved from bankrupt~y on the industrial makeup of the country can be achieved.

Premise Three. Through the democratic process, a consensus To NIP'S champions, the culprit 'today is, to a large extent the profit motive.

It mistakenly focuses firms' attention, it is argued, on their individual circumstances and diverts their con cern for Ita broader economic perspective"--meaning the community's interests. Profit-making firms, according to this perspective systematically close plants and ignore .the effects such shutdowns have on wo rkers' investment in their jobs, the community's tax base, home prices, and the viability of other businesses in the community and country.

For reasons not always clear, NIP advocates possess a near religious faith in the sobering effects of public discuss ions on industrial issues, on the extent to which the ballot box rather than consumer and investment choices reveal community preferences and the willingness of people to set aside private interests when asked to vote on policies reflecting the national i n terest. Reich writes that government should not necessarily be asked to become larger (although it is difficult to understand how that can be avoided), only "more open, more explicit, and more strategic.ft53 a 49 51 Thurow, testimony, p. 1 52 Bluestone an d Harrison, op. cit pp. 74-75 53 Reich, op. cit p. 14 Hollings, op. cit p. 2.

Reich, op. cit p. 17. 17 l'B EVIDENCE Industrial policy proposals are founded on a variety of em pirical claims: that the private sector of the economy is calcifying, due mainly to attitudes and inclinations of private profiteers; that the decline in many industries is due to an unprece dented rate of technological change the manufacturing sector, will continue its decline has failed, thus requiring new institutional relationship s have contributed significantly to the economic success of other countries; that without governmental direction the economy, especially that supply-side economics or, more generally, Reaganomics that industrial policy programs in Japan and elsewhere that l ow wages and foreign subsidies of industries explain the loss of markets for U.S. firms in basic industries; that industrial policy efforts of the past, specifically the Reconstruction Finance' Corporation, the wide range of agri cultural programs, and th e Chrysler bailout, clearly indicate the potential success of an expanded industrial policy; that the government actually can !'create1t jobs by enacting additional money bills, designed to rebuild, for example, 'the nation's l1infrastructureiI or that an industrial policy can be instituted without increases in the government's budget and regu latory' authority; and that expanded governmental efforts to enhance economic security can contribute to social justice and economic growth.

Discussions of industrial policies generally start with the reasonable observation that several important industries-steel rubber, textiles, and automobiles, among others-have experienced serious difficulties in recent years. Virtually no one denies this. It is quite another matt e r, however, to maintain that these di.fficulties are symptoms of structural rigidities that can be remedied only by government initiatives. Such a conclusion dissolves when the premises upon which NIP rests are scrutinized A growing body of literature sug g ests that these premises reflect half-truths and massively distorted interpretations of what is actually happening in the economy. Consider the following Brookings Institution Senior Fellow Robert Crandall notes in his review of Robert Reich's book, that t he presumed demise of the manufacturing sector in the United States is based on the careful selection of the years used in his analysis: 18 German and French readers of his [Reich's] book will be amazed to read of their government's success in indus trial policy. Since 1975, industrial production has grown even more slowly in France and West Germany than in the United States.

The' industrial sector of the United States did not decline markedly from the mid-1960s to 19

80. In fact basic industry accounted for roughly 22 percent of our GNP in 1980 precisely the same share as in 19

47. Our output per person remains. above that of all but a few countries, .such as Sweden and Switzerland (which have not exactly been refuges for the world's dispossessed over the 20th century Reich's contrary conclusions are drawn from a period ending in 1979 extend his calculations to 1981, he would find that the United States has outperformed every major industrial country in the world exce p t Japan since 1975.54 Were he to Few NIP proponents even note the upturn in U.S. manufacturing jobs, even in Frostbelt states, during the late 1970s, before the 1980-1983 recessionary period. With little attention to what is happening to jobs in other ind u stries, proponents of new industrial policies, intent upon making their case as dramatic as possible conclude that the relative growth in the service sector must mean that high-paying jobs of automobile and steel workers are rapidly being supplanted by lo w -paying jobs for janitors and fast food I i waiters. This simply is not the case.55 I National Journal columnist Robert Samuelson, as does I I Crandall, questions whether or not countries with industrial policies have actually, on average, done any better in terms of employment and economic growth over the last two decades than the United States. Several countries with industrial policies may well have performed much worse because of their industrial poli cies. 56 Former Council of Economic Advisors Chairm an Herbert Stein contends that Reich's conclusions concerning the economic decline of the U.S. relative to other countries are based on calculations Stein published in 19

82. Observes Stein I saw the evidence as saying that what has been happening to the U .S.=-the slowdown in growth of output and productivity and the rise of unemployment-has been happening in other industrial countries as'well Reich 54 55 56 Robert W. Crandall, "Can Industrial Policy Work Book World, May 22 1983, p. 8.

This point is developed at length in Richard B. McKenzie National Industrial Policy Robert J. Samuelson The Policy Peddlers," Harper's, June 1983, p. 62.

Six Major Myths Policy Review (forthcoming). 19 uses the figures from my article to show that "other nations are gaining at a rapid clip.11 But the rate at which they are gaining on us is also declining rapidly.

Take Japan. Between 1960 and 1979 Japanese real per capita output rose from 31.5% of ours to 70.2 But the rate of gain on us fell sharply. If it continues to fall a t the same pace, Japan's real per capita GNP would still be only about 74% of ours in 2083.57 George Mason University economist Dwight Lee explains how Reich and others discount the lack of private investment as a source of deteriorating growth in the U.S . economy, thus giving credence to his claims that slowdown is due in substantial measure to the inability of U.S. businesses to adapt and to avoid totally government tax and regulatory policies.58 Lee points out that Reich focuses on gross private investm e nt, which as a percentage of GNP has changed little over the last two decades. However net private investment (that is, gross investment minus replacement investment) as a percentage of GNP declined by over 40 percent during the same period, and much of t h is decline can be explained by past government policies.59 David Henderson, senior economist at the Council for Economic Advisors; Philip Trezise, senior fellow at the Brookings Institution; and Katsuro Sakoh, director of International Economics at the Co u ncil for Competitive Economy, writing independently of one another, question the extent to which Japan's MITI has been responsible for Japan's economic success.6o investment funds go for urban and regional development, environ mental protection, and infra s tructure, causing economist Sakoh to conclude, "There is no evidence that manufacturing industries, in general or any particular manufacturing sector, have been targeted by the JDB [Japanese Development Bank In fact, the share of loans that manufacturing i ndustries has received is negligible.It6l Much of Japan's public funds, moreover, were wasted on supporting illosers.l' Even more telling is that a major part of the Japanese government industrial policy efforts 'has subsidized coal mining Most government 57 58 59 Herbert Stein, "Industrial Policy, a la Reich," Fortune, June 13, 1983 Dwight R. Lee, "Mr. Reich Shows Us the Way: A Review Article," Journal of Contemporary Studies (forthcoming).

See John W. Kendrick, "International Comparisons of Recent Productivity Trends," in William Fellner, ed., Essays in Contemporary Economic Problems Washington: American Enterprise Institute, 1981), pp. 125-170.

David Henderson, "Behind the MITI Myth: The Real Japanese Miracle Fortune (forthcoming Philip H. Trezise, "Industrial Policy Is Not the Major Reason for Japan's Success," Brookings Review, Spring 1983, pp 13-

18. Katsuro Sakoh, "Japanese Industrial Policy," Backgrounder (Washing ton: The Heritage Foundation, 1983 forthcoming p 202 6o 61 Sakoh, op. cit. agricultur e fact, in the 20 and public railways, hardly examples of success. In 1960s the Japanese government attempted to discourage I the emergence of a competitive automobile industry in Japan on the grounds that it did not believe the industry would be a ltwinn e rfl in international competition. Had Japan truly had an NIP it probably would not be much of a threat to the U.S. today Attorney James Hickle argues in Reason magazine that the Chrysler bailout has not saved jobs or even averted 'the bankruptcy of Chrysl e r. Chrysler has, for all practical purposes, gone bankrupt. Over 60,000 jobs at Chrysler have been eliminated since the bailout, and Chrysler has been allowed to discard 600 million of its debt at 30 cents on the dollar.62 The arguments underpinning propo sed restrictions on plant closings have been so flawed, from both empirical and conceptual perspectives, that more than one book was needed to balance the debate.

Granted, the U.S. economy suffers from high unemployment and virtually zero productivity grow th in recent years. Yet the rise in unemployment and the slowdown in productivity growth occurred simultaneously with dramatic increases in government intervention in the economy in the form of higher taxes and regulation. This should be a danger signal f o r those who now call on Washington to IrguideIr free enterprise or to irmanagell capitalism. It would seem that remedies for cyclical and structural economic problems are be found in the institutional changes in private-public relationships envisio ned in many venturesome programs offered by industrial policy advocates.

NIP'S CONCEPTUAL PROBLEMS Advocates of industrial policy romanticize the democracy of eco nomics, maintaining that the results of a democratically determined industrial policy would b e superior to the results of the democratic market system. They see the market system as founded on "greed and fear" rather than on Ilequity, security, and participation. NIP advocates also tend to describe.the nation as suffering from eco nomic rigor mor tis, brought on by entrenched monopolists who are protected from market competition by government franchises, regu lations, tariffs, and subsidies. They tend to believe that the 62 63 64 James Hickel, "Lemon Aid March 1983, pp. 37-39.

Richard B. McKenzie, Restrictions on Business Mobility: A Study In Politi Debeking the Case for the Chrysler Bailout," Reason nterprise Insti Washington: Cat0 Institute, 1982 and Fugitive Industries: The Economics and Politics of Plant Closings (San Francisco: Pacific Institu te for Public Policy Re search and Ballenger Press, Inc 1983 forthcoming).

Reich, op. cit p. 20.political process that has served these special interests (also a major.concern of conservative economists), when given more author ity, somehow co uld be restricted from using this greater authority to provide even more special interest benefits history of government aid to business teaches-or should teach that government rarely accomplishes the noble goals that often originally prompt the policies T he dismal The case for an industrial policy is founded in part on the belief that motives and results form a logical link: Itgoodlt motives (i.e., concern for the community, equity, and fairness necessarily inspire Itgoodft results, whereas libadit motive s i. e concern for profits and self-interest) often, if not always, give rise to I1badt1 results. Dismissed by NIP backers is the historic ally confirmed central point of the market system: that even in the worst of worlds, one driven exclusively by greed (and no real world society even approximates such a state), good results can be expected so long as property rights are respected and enforced.

The drive for profits induces people to produce what others want at the lowest possible price,.hence serving the. community interest.

Even i raw greed dominates private sector behavior-and no con vincing case has been made that it does-=such greed is contained and directed by competitive market forces toward a commonly shared goal: the production of goods and servi ces that people not government agencies, want. At the same time, a market system ensures individual freedom, for individual behavior remains largely undirected by government.

Cases made for an industrial policy are replete with horror These are contrasted with stories of market system performance visions of how a collective of well-meaning people would handle economic tasks. The word ltcooperationtl is used loosely, as if the presumed lack of cooperation in the market system could be expunged simply with g ood intentions. Little is said of the waste and corruption in government and the extent to which govern ment Ifindustrial policyIt in the past has been shaped by the political imbalance between, on the one hand, the private interests that seek protection, subsidies, and special privileges and, on the other, the general public that must pay the bills tlirough price increases and taxes. Furthermore, virtually nothing is said about the resources tied up in the lobbying efforts of the 15,000 registered lobbyis t s in Washington and the thousands of other unofficial lobbyists who regularly ply the streets of Washington and the halls of Congress. NIP advocates do not ex plain how these private interests will be made less harmful greed is the root problem even in an unfettered market system, as NIP advocates argue, then this root will not vanish by assuming it away. Yet this precisely is what is done by NIP,backers when they propose political institutions as market substitutes If Industrial policy proponents seem to u nderstand that the three arbitrary divisions of the electorate--workers, managers and government officials--have competing interests: each wants a larger share of a growing economic pie. But they still perceive 22 politics as a civilizing or harmonizing p r ocess, one in which such competing interests can be reconciled through reflective and sober discussions concerning their common interest, which is to increase the size of the economic pie and to modulate the "adver sarial relationshipsIf that exist among them in market settings.

NIP proponents seem to believe that social welfare is an objective truth that can be deduced by well-meaning people through the voting process. The implicit assumption is that Americans oper ating in their political capacities are different from Americans operating in their market capacities. Given the extensive use of pork-barrel politics, their claims remain unconvincing. Further more, competitive markets are a system for picking Ifwinners If What NIP advocates seem to be complai ning about, at least to a degree is that the market has not picked their chosen ifwinners,lf and there is no reason to believe they should be satisfied with the economic system until "their winnersff are picked.

Adam Smith noted in his Theory of Moral Sent iments more than two hundred years ago that The man of system seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the pieces upon a chess Smith would recognize today's industrial policy advo c ates who claim that they can rearrange the "smokestacksif of American indus tries across the industrial matrix of the country. All they need they say, is to collect Ifgoodif information on what people can produce, feed this data into a Ifproperlylf constr u cted computer program, and then hold votes on what particular configuration of industries should be developed. NIP advocates ignore what Smith explained: that chess pieces have Ifno other principle of motion than that which the hand impresses upon. them," whereas Ifin the great chess-board of human society every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.e66 A critical problem with NIP is that information on what p e ople want is not objective or determinable outside the market process. Centralized planning, whether called industrial policy or industrial democracy, is bound to fail to produce what people want because it cannot obtain the information needed to make the calculations without the markets it seeks to supplant.

Supply and demand identify the limits of what producers and consumers, respectively, are willing to do in markets. Suppliers will hardly reveal they are willing to accept as little as $50 for, a widge t if, in the absence of competition, they can get by with offering it for 1

00. Similarly, buyers will rarely volun tarily offer to pay 100 for the widget if they can get it for 50. Perhaps more than anything else,.the competitive market is 65 66 Ibid Ada m Smith, The Theory of Moral Sentiments (Indianapolis: Liberty Press 1976 pp. 380-381 23 a process for revealing people's limits. Aside from suggesting that reputable people will discuss the issue, perhaps from the banks of the Potomac, and then vote on i t , NIP advocates say little about how industrial policy engineers will secure the information they need to achieve goals of what must be construed as To simply talk of improved statistics, as is done in proposed legislation for an Economic Cooperation Coun c il, is to beg the question; it assumes that the statistics gathered outside of markets overcome people's inclination to hide their true eco nomic limits until forced to reveal them when striking a bargain To assume that government officials can, with reas o nable clarity assess the wants and needs and calculate acceptable trade-offs of those living across this enormous nation is to assume cognitive skills so far undemonstrated by any group of men or cluster of computers. At the very least, industrial policy a dvocates should acknowledge that, as government intervention in the economy mounts-and industrial policy proposals are not modest on this count-the cognitive skills of government officials are bound to wane because prices will become progressively distort ed and accordingly, less useful in guiding policy. Industrial policy proposals will distort drastically the economic data that is needed to undertake the government guidance that is tendered.

NIP advocates will have limited information at their disposal an d a limited capacity to handle it. How are they to pick and favor those industries destined to emerge in the intermediate future, much less the distant future? How are they to identify the industries that will 'IwinlI in the competitive struggle for resou r ces and the pocketbooks of the consumers? What will happen is that the managers of NIP will only be able to subsidize llwinnerslt after they have been picked by the market or, even worse, impose their own vision of what should I1win.l1 A national industri al policy thus discriminates against firms not ''choseni1 by the political process. Like any centralized planning process, NIP will limit the "plans1' to the mental acuity of the planners and in the process, limit economic growth.

If votes are to be taken on the allocation of capital, then NIP advocates must make the case not merely that the market has defects, but-that industrial democracy and central planning are less defective by now that government imposes considerable costs and that greater foul-ups i nvariably follow extension of government authority? Do they not recognize that democracy, while important when other de cision-making forms are unavailable, has its limits and limitations?

National industrial democracy will not alleviate but only exacerbat e America's economic difficulties Do not proponents of industrial policies recognize The historical record reveals a strong coincidence between growth in government economic intervention and growing severity of inflation, unemployment, and lagging product ivity improvements.

While this statistical fact may prove little, it suggests strongly that new government efforts to manipulate the economy should be viewed with suspicion. 24 Industrial democracy will introduce new layers of bureau cratic obstacles for f irms seeking to adapt to economic changes Decisions made on the allocation of capital will be subject to the influence of politically powerful interest groups. Estab lished firms will tend to be treated favorably because they exist, have supporting votes from their laborers and suppliers and have the profits available to sway the allocation decisions.

Because many new companies have only limited constituencies, they will tend to bear the burden of the subsidies given to established firms. Many potentially profitable firms will be thwarted by the potentially heavy tax burden that will be imposed on them if or when they emerge.

Advocates of industrial policy earnestly believe that the burden of economic change should be shared across the country.

When a plant shuts down, for instance, people other than the workers and community residents directly affected should pay part of the price of helping the plant reopen or of retaining the workers. wages and induce firms to ignore production costs. After a l l the costs of adjustment, if or when it comes, is partially imposed on others, many of whom have nothing to do with the shutdown industrial policy that If spreads the risk encourages workers especially the politically powerful, to raise their wages in th e knowledge that if their firms fail, they will be helped by govern ment through the problems of adjustment. In other words, it allows workers and firms to impose their production costs on others, just as polluters do Any industrial program designed to spr e ad the risk" is a program that will encourage failure and waste of the nation's resources Such forced subsidies encourage workers to raise their An A central lesson of environmental economics is that a stream will be used and abused, i.e., polluted, when p roperty rights to it are not defined and people are allowed to use the stream free of charge for waste disposal. In the vernacular of the environ mental literature, the stream is a Itcommon access resource The cost of the waste is ltexternalizedtl on othe r s--those who have to clean the water before it can be reused. Industrial policy pro posals designed to "spread the risk and cost of social adjustment make the national income stream a tlcommon access resource," just like the water stream and effectively a llow people in their private dealings to tap into other people's income by their own private decisions, which is hardly a democratic means of making decisions.

To insure over time that people do not flexternalize their production costs to the rest of the p opulation, the controls envisioned under various industrial policy proposals will spawn in turn their own controls. This is why Nobel Laureate Economist Friedrich Hayek has called efforts toward even limited national planning as !'The Road to Serfdom in a book by that title 67 67 Friedrich Hayek, The Road to Serfdom (Chicago Press, 1944).

University of Chicago 25 The trip down this road already has begun. A major argument offered in support of industrial policy has been that, if the federal government does not engage in buyouts, bailouts, and selective nationalization, it will have to provide unemployment compensation and welfare benefits. Buyouts and bailouts are seen as cheaper public policy substitutes. Of course, such controls will foster other unfores e en consequences that must be controlled if goals of the program are to be realized. Because costs can be externalized to the rest of the population when government buys or bails out firms failure is encouraged. Additional controls then can be justified, o n economic efficiency grounds, just as the initial forays into industrial control are justified on efficiency grounds.

CONCLUSION Much that is vaunted as national industrial policy translates into more of the same sort of government policies that have give n rise to America's current economic difficulties=-more protection of domestic industries from foreign competition, more subsidies for failing businesses, more welfare benefits for workers whose wages have been raised far above the national average, more s pending on social services and more proposals for the federal government to centralize control of the economy. Several of the policies included in the spate of industrial policy reforms warrant further and serious consideration. Shifting current income ta x ation to consumption taxation, changing to a flatter tax-rate structure, treating preferred stock dividends as interest reducing or eliminating the corporate income tax, and replacing current government employment retraining programs with a retraining vou cher program--all merit study.

In so doing, however, Congress should be vigilant to policies that disproportionately and unknowingly benefit one set of indus tries at the expense of other sets, that choke off entrepreneurial efforts that may make U.S. indu stries more competitive in interna tional markets, and that shorten the investment time horizons of businessmen carefully because NIP advocates are seeking many profound changes in the structure of the U.S. economy. This alone requires that their conceptu a l framework be scrutinized for consistency and cogency. They must be confronted with their factual errors and internal contradictions. Robert Reich, for example, maintains that a major source of U.S. economic difficulties lies in the inability and/or unwi llingness of U.S. businesses to adapt to new realities of a world economy. At the same time, he and others propose to democratize workplaces and the allocation of capital.

Given the difficulties Congress has in voting on the budget--the I inability of gove rnment bureaucracy to carry out its assigned tasks efficiently--the worry becomes that the proposed solution industrial democracy, will do nothing but further reduce the capacity of U.S. industry to adapt and to meet demands of the changing world economy T he industrial policy movement should be watched 2 6 Reich, Bluestone, Harrison, Hart, Hollings, Mondale, Askew and many others contend that the American economy is in the midst of an agonizing industrial transformation, spurred by an accelerating rate of technological change and capital mobility, that supersedes in impact on people's livelihoods, the Industrial Revolution. One must wonder how standards of logical consistency can be met when the solution, changeability, is also believed to be the problem.

A s Dwight Lee has observed, Il[I]n dismissing the obvious [explana tion of our economic difficulties, faulty government policies that, if acknowledged, would have drawn into question his solu tion], Reich has substituted the absurd argument that the creati v ity behind paper entrepreneuralism is explained by the inability of American businessmen to adapt.1168 If businessmen are willing and quite capable of creating a "paper economy,Il why are they not equally able to adapt their production techniques? What s e ems to concern Reich and others is that businessmen have adapted to obvious incentives built in to the tax code and to a political system that allows government to cater to special interests, but not in ways that he and others would prefer advocates appea r to propose more of the same. At the very least they fail to tell us how the political system can be enlarged and, at the same time, closed to further exploitation. A govern ment with enlarged powers to allocate the nation's capital stock with the selecti v e capacity to aid some industries at the expense of others--would likely be viewed by entrepreneurs as a valuable resource (incorporating coercive powers) that can be enlisted through the political process in their pursuit of their narrow private interest s Industrial policy Finally, advocates of industrial policy presume an immense stupidity on the part of profit maximizing entrepreneurs, workers and consumers. Advocates contend that entrepreneurs are system atically willing to close profitable plants, gro s sly mistreat workers who are needed for production and the profits they seek and are unwilling to adapt when adaptation can translate into survival, if not substantial profits. Workers are unable or unwilling to make tolerably intelligent decisions regard i ng training and retraining, say NIP theorists, and consumers are poorly informed about many of the decisions they make daily the same time, advocates of a national industrial policy call for democratization of industrial decisions, which in the end must r e ly not on the advertised wisdom of the self-appointed industrial policy sages but on citizens who are presumed by advocates of industrial policies to be inept at handling their private affairs At The rhetoric surrounding the. debate over a national indust r ial policy is enticing of labor, business, and government leaders to pick winners.Il The suggestion is that the markets, which political institutions organ ized under a national industrial policy would supplant, are devoid There is much talk of 'Icooperat i ve efforts 68 Dwight R. Lee, op. cit p. 13 27 of cooperation and fail to pick winners. Nothing could be further from the truth. The purpose of markets is to do both: to further cooperation among people with compatible interests and to pick winners through competition policy advocates that we need additional means of picking winners we must be concerned that they possess a preconceived view of which firms or industries should be winners Given the insistence of industrial Under private market arrangements, t h ese advocates have .a grand opportunity for insuring that Vheirl' chosen industries can be winners-by using their own resources to invest in their chosen companies or (if they happen to be workers or suppliers) by keeping their costs competitive, making t h e investment of others attractive. A national industrial policy of the kind advocated will tend to replace such voluntary arrangements, constrained by the sobering effects of competition, with political institutions that have at their disposal the coerciv e taxing and regulatory authority of government. In the industrial policy debate, there is no dispute over whether or not government policies affect industrial develop ment in this country development and stability can be, and should be, enhanced through v oluntary or coercive institutions The dispute is over whether or not industrial


Richard B.

Senior Associate Fellow