A case for developing a US industrial policy

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.

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.

Q Did the '81-'82 recession change this situation in any structural way, or was it simply a cyclical feature?

Mainly a cyclical feature. The whole trouble with '81 and '82 was a bad fiscal and monetary policy mix. That can be undone. These problems of reindustrialization, or restoring competitiveness, are longer-range problems that transcend the '81-'82 recession.

Q To what extent is an industrial policy responsible for Japan's economic success?

I think to a large extent. (Japanese experts) say that MITI consciously chose certain areas for expansion and that there was an enormous use of national consensus to agree to do these things. Professor (Michio) Morishima (with the London School of Economics), in a book entitled ''Why Did Japan Succeed?'' says it really is something inherent in the national character - the philosophy of putting the corporation ahead of self, the government ahead of self, the work team within the corporation ahead of self. Having centuries of that built into a culture made it possible for a coalition of industry, government, trade unions, and ordinary workers to go ahead with a very conscious, deliberate industrial policy.

When I was a student, the Japanese slide rule was the one-dollar cheap version and inaccurate. The German slide rule was expensive and correct. Now the Japanese product is high-quality and inexpensive. They had to have a conscious policy to overcome all this.

The revolving door between Japanese industry and Japanese government is very important. The exploration of foreign markets and producing exclusively for foreign tastes, foreign needs, and foreign sizes was very consciously done in terms of an integrated policy.

Q What about the argument that a good part of Japan's success is due to a high savings rate and capitalizing in the early years on technology already developed elsewhere?

Some people say the success of Japan was due to the corporate structure, including lifetime employment, and the high ratio of debt to equity capital. Some say it was income distribution and the high savings rate. That's a complicated story. And we're not going to handle the problem of industrial policy by that story.

Such explanations will tell you how Japan grew in the last hundred years. And particularly how it grew in the last 30 or 40 years. But that isn't going to tell you what the Japanese did to make the surge during the 1960s when they really turned on the steam, when they changed from this concept of cheap, inferior products to high-quality products underselling the market.

Q Now that the Japanese have caught up technologically, is government intervention in Japan better equipped to foster industrial policy than would be the case here?

I have just come back from a visit to Japan, particularly to Tsukuba University, where high-technology efforts are centered. They told me that Japan did have an industrial policy in the '60s that was successful, but it was like a piece of cake. Almost anything they touched worked out pretty well. Now all the choices are tougher. It isn't so certain they are going to be successful. The competition from other countries wanting to do the same thing is much fiercer.

Q For an industrial policy to be successful, it must be able to pick winners and protect losers. Is a US government agency better able to do that than the private sector?

The government is not now better able because it is not gearing up to (do) it. The effort has to be in the hands of a sympathetic administration, or it won't work. (A government agency) has to be dedicated and needs to have dedicated civil servants to make the right kind of studies. Those studies are not presently being made.

Q Does the US political system allow the government to favor one industry or one group of workers or one region over another?

Maybe, and maybe not. We have already started to implement some aspects of industrial policy. That required getting permission to do certain things - easements, so to speak. We have some trading companies. A trading company is an essential part, one little cog, in the wheel of industrial policy. To get a trading company into operation, we had to make sure we could circumvent the antitrust laws. We had to make sure we could circumvent some banking laws and have banks engaged in close association with nonbank business activities.

For that particular piece of industrial policy, we had to do something special for the banking sector and for the industrial sector. Those were done. We now have three or four trading companies in operation. People say they are doing well, but we have to wait and see what the results are.

Q What are trading companies and how do they work?

One trading company is General Electric. Another is Sears Roebuck. They buy masses of goods and sell them in foreign countries. They acquire masses of (foreign) goods and bring them to the United States. They don't bring only their own goods. They have to arrange the financing, so they need a bank. They have to arrange shipping. They need market research teams.

Also, the National Science Foundation is making grants to business to enter new high-tech activities, requiring venture capital. That's a part of industrial policy - small scale, but I think it is a change in practice from what the National Science Foundation used to do.

Q What about government help to save Chrysler as an example of industrial policy?

I don't know if you'd call the Chrysler bailout successful or unsuccessful yet. I'm not sure you would say that that was really good industrial policy, but it seems to have been capable of being implemented under American conditions.

The Chrysler bailout cannot be considered costless, even though the government did not shell out cash. It had an effect on capital markets. If you did such things on a bigger scale, it would have a bigger effect on capital markets. Somebody has to pay for that activity.

Q Is there a danger, since the pool of capital available for intervention would be limited, that it would be channeled in the wrong directions - protecting losers rather than picking winners?

My former student, Prof. Jim Ball, who is principal of the London Business School, says that to him industrial policy means picking the winners, not in the sense of a day at the races, but in the sense of improving the breed. And that is exactly the way I would put the situation.

I'd channel money into R&D, channel money into basic scientific research, restore research to the position it held at the end of the 1960s, before it started to slip in real terms. Secondly, approach the retraining (of workers) more carefully and have it a much more cooperative venture between the private sector and the public sector.

I would give much more sympathetic treatment to R&D expenditures in the private sector, through tax treatment and the fostering of venture capital. All these things we would want to do, and that, I think, would reduce the danger of picking individual losing companies or individual losing industries.

Q Are we beginning to see a better climate for industrial cooperation, in terms of labor-management relations?

The answer is yes. The fact that we had a labor representative on the Chrysler board, that in a few cases we've seen people willing to take wage moderation to protect their jobs, all point to a somewhat better climate.

Q Did the productivity decline of the 1970s reflect structural problems in the way the US economy works, which might be benefited by an industrial policy?

The decline was both structural and cyclical. The principal structural problem was a long-term shift in the terms of trade vis-a-vis energy-supplying (oil-exporting) areas of the world. But there was also a long-term increase in the industrial cost of protecting the environment. This brought down some of the productivity gains of the past. Out of that we have learned how to live and deal better with both the environmental and energy issues.

We are on the threshold of starting progressive productivity again. In the early stages, as we come out of the recession, we will see cyclical gains in productivity. Then in the later stages I think there will be a follow-through with the new technologies and we will see some trend gain in productivity.

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