Better than the 'supply-side' way

The loudest voices we hear right now call for government measures to raise the levelm of investment and reduce consumption, so that new capital can be created. In order to accomplish this goal, proponents of "supply-side" measures typically argue that government should interfere less in the economy: taxes should be reduced for savers and investors; regulation and antitrust enforcement should be curtailed; and government should reduce the rate of growth of public expenditures for social security, health, and welfare.

But, since the propensity to save is higher for the rich than the poor, a tax cut for savers and investors may result in a regressive shift in the tax burden. it also may necessitate a reduction in the standard of living of a substantial number of our citizens who, for reasons of age, ill-health, or lack of job training, must rely to a significant extent on public assistance. Such citizens are also particularly dependent on "public goods" like clean air and safe working conditions, which the more wealthy or our citizens can purchase for themselves by living in less polluted neighborhoods and opting for safer jobs.

In any event, although supply-side proponents place great faith in capital formation as the primary source of future productivity, the relationship between capital investment and output is not at all clear. Our rate of productivity growth declined between 1957 and 1973 -- when the rate of growth of capital formation was stronger than it has been at any time in the postwar period. And most experts agree that our future economic growth will be dependent on knowledge-intensive, rather than capital-intensive, sectors.

One possible alternative to supply-side strategies grows in part out of the dynamic and strategic planning models now being adopted on a firm-level within many businesses. Rather than emphasize levelm of investment, its focus is on how government policy can be used to obtain the most productive possible patternm of investment within the economy. the goal is the promotion of high-wage industries in which the US can obtain a competitive advantage in the world economy.

To a significant degree, government already shapes industrial development through its procurement and research and development programs. For example, the federal government now purchases over half of all aircraft, over half of all radio and TV communications equipments, a fourth of all the engineering and scientific instruments, and a third of all electron tubes and nonferrous forgings produced in the United States. Equally important, the federal government currently funds over 45 percent of all industrial research and development.

Our present competitive advantage in aircraft and semiconductors is due in no small measure to government initiative. The federal government accounted for 92 percent of all aircraft sales in the 1950s; a whole generation of commercial aircraft were spun off from these defense-related prototypes. Government purchases of semiconductors accounted for close to 40 percent of all semiconductor sales in the 1950s; our present lead can be traced to this origin. A similar story can be told about rayon, synthetic rubber, antibiotics, communication satellite technology, and nuclear power.

Indeed, international competitiveness increasingly is becoming an explicit policy objective of national governments. Government-owned or -controlled enterprises now produce 85 percent of all the oil of the noncommunist world, 40 percent of the copper, 35 percent of iron ore and bauxite, 54 percent of steel, 35 percent of polyethylene, 20 percent of autombiles.

What would a coherent industrial policy look like? At its most basic level it would seek to anticipate structural changes in world markets rather than to obstruct them with tariffs, quotas, and bailouts designed to protect declining industries.

Military procurement, for example, would be undertaken with due regard for its effects upon the future competitiveness of civilian markets. Will a large procurement program for a particular product or technology allow domestic manufacturers to exploit scale economies and gain substantial experience that can be used in commercial production? Or are the military's needs so different from the commercial market for that product or technology that the procurement program has the opposite effect -- draining off skilled engineers, research, and productive capacity from commercial development, and thereby enabling foreign manufacturers to gain a competitive edge?

Should tax breaks be targeted to apply only to fresh investments like new construction, rather than to the trading of current assets like existing real estate? Should conglomerate acquisitions and mergers be recognized as taxable transactions rather than as mere corporate reorganizations?

Are there some firms that show so much promise of becoming strong international competitors that government should allow them -- even encourage them -- to engage in horizontal or vertical mergers and to expand capacity rapidly, notwithstanding that these strategies may lessen competition in domestic markets in the short run?

While other national goals that underlie these discrete policies should not necessarily be subordinated to that of international competitiveness, industrial policy would at least require that we address these sorts of questions in a coherent manner, and that we u nderstand the trade-offs they imply.

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