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A case for developing a US industrial policy

By Harry B. EllisStaff writer of The Christian Science Monitor / October 27, 1983


Shaping up as a prime 1984 election issue is ''industrial policy'' - a hot debate over to what extent, if at all, the government should meddle in the workings of the vast United States economy.

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Democratic aspirants for the presidency, backed by the AFL-CIO and many lawmakers, want to create a government apparatus analagous to Japan's famed Ministry of International Trade and Industry (MITI). The Reagan administration wants no such thing.

On Sept. 30 the Monitor published a forceful argument against an industrial policy in an interview with Charles L. Schultze. Today's interview with another distinguished economist, Nobel Prize-winner Lawrence R. Klein, explores a different point of view.

Even with full economic recovery, says Professor Klein, the US economy will suffer from structural problems that the private sector by itself cannot handle.

Some form of industrial policy, says Dr. Klein, will be needed - government programs tailored to help specific sectors of the economy, including unemployed workers in declining industries and young people unable to get a foothold in the job market. Government intervention in the economy, he says, should aim at restoring America's competitive edge in world markets.

Klein is Benjamin Franklin Professor of Economics and Finance at the University of Pennsylvania and the Wharton School. He also chairs the scientific board of Wharton Econometric Forecasting Associates.

Excerpts from the interview follow:

Q What is meant by an industrial policy?

It means getting economic policy beyond the macro level into the sectoral level and making policy for sectors - not only for industries, but for age groups, dealing with youth unemployment; or for productivity groups, the retraining of displaced workers. It means having a series of economic policies that impact on specific sectors of the economy.

Q What are the basic premises that underlie proposals for a US industrial policy?

What has people worried is the answer to the question: Are we competitive? The basic theme is that we have lost our competitive edge and we cannot compete effectively with other countries, particularly Japan. Other concerns are to improve productivity, to lower American costs and make us cost effective - also to take care of the structurally unemployed, and deal with other problems that persist.

Q Is the American manufacturing sector declining, causing the US to deindustrialize?

I don't think we have lost in the long run. That's the whole point of industrial policy, to get us back on a natural track. I think the energy turbulence of the '70s got us off the track for a good long while. This was quite important in slowing down productivity growth and in exposing our lost edge. I think we have overcome that problem - we became energy-efficient.

At the same time, I regard our economy as having gone into a setback on research and development, beginning in 1968, with the expenditure limitation and tax surcharge act of Lyndon Johnson. From that point forward I believe we paid insufficient attention to basic research and to research and development effort.

Q In restoring the US competitive edge, should we distinguish between the old-line smokestack industries and high-tech industries?

Probably, but I do believe that that problem is exaggerated. A better mix of fiscal and monetary policies - that is, macroeconomics - will help the smokestack industries, there is no doubt. But even with a better-than-expected macroeconomic performance, we still will not get back to where we used to be on employment and level of production in some of those industries. There remains the need to deal with the residue of structurally unemployed people.

Q Recently, Philip Caldwell, chairman of the Ford Motor Company, said that the US automobile industry of today, far from being an old-line industry, is a leading high-tech industry.

The product that the automobile industry makes is not so much high-tech, but the techniques they use to make that product are high-tech. It is a leading case of the application of automated processes.