Give Industrial Policy a Second Chance

Abstract

GIVE INDUSTRIAL POLICY A SECOND CHANCE Lee Price he American economy is facing its trade problems like a big family that is used to a swimming pool but has gone to the beach for a couple ofweeks and finds a rough surf. The service boys and girls are enjoying the sun, the sand, and watching the waves. The manufacturing boys and girls are great pool swimmers who have fun only in the water. But in the ocean many of them are struggling for air. They don't understand why, and want to go home to the pool. One manufacturing boy after another has to be rescued from the surf, yet no one else is disturbed. Those who know the number of rescues and how the expense is cutting into everyone's vacation budget are keeping it quiet. The family would be more likely to profit from its vacation if it examined how certain of its children got into trouble and why they had to be rescued, gave all the children lessons in surf swimming, learned some lifesaving techniques, and adopted new rules that were unnecessary back at the swimming pool. The boast that U.S. manufacturers could take on all challengers in international competition has been part of the American self-image since World War II. The rare industry that fell into dire straits was the victim of unfair foreign competition or overpaid and underactive labor and management . But given a level playing field, hard-working and properly paid American management and labor could handle any foreign competition. In fact, as discussed below, American manufacturers—even the best-managed high-technology industries with below-average pay Lee Price is an economist for the subcommittee on Economic Stabilization of the House Committee on Banking, Finance, and Urban Affairs. The views expressed are the author's alone. 39 40 SAIS REVIEW scales—face mounting difficulties competing in the world economy. As the United States adapts to cope with this new environment, a new and more activist framework for trade policy in manufacturing is taking shape. The federal government increasingly aids troubled American manufacturers in difficulty by providing them with import restraint, export assistance, tax relief, regulatory lenience, government purchases, and direct subsidies. Although the government's decision to assist an industry hinges on the industry's economic conditions (macro- or firmspecific ) and political clout, the rationale stated for public consumption is almost always the need to counter foreign unfairness. Consonant with the country's outdated self-image, American officialdom propagates the myth that the government assists specific industries only to offset foreign unfairness. This "unfairness only" myth persists because it serves the interests of the heads of corporations and the government . The corporations find they can obtain unconditional assistance with trade problems by invoking the bogeyman of foreign unfairness. The government, for its part, finds the doctrine ofunfairness a useful diplomatic figleaf for its inability to force adjustment on industries with political clout. At the moment Americans seem preoccupied with finding external actors and circumstances to blame for the nation's trade deficits. Before proceeding, we should situate our argument within the long-running debate over trade and industrial policy. The debate too often seems to pit against each other two sets of mythmakers: those who castigate or praise clever foreigners in defense ofindustrial policy, versus those who pretend the United States has a free market that is working fine. In fact, the United States has little prospect of either changing foreigners or emulating them—nor would it help us substantially if we could. The U.S. government is heavily involved in assisting specific industries but is doing a poor job. Industrial assistance will intensify in coming years but would have greater success with the political participation and support of the American public. The unfairness doctrine in trade policy fits neatly with the prevailing governmental philosophy that counsels against sector-specific intervention in the economy. In this view, government should emphasize economy-wide incentives to encourage industries to invest, research and develop new technology, and pursue export markets. In the recent debate over the Reagan administration's trade policy both sides seem comfortable with the unfairness doctrine. Until recently the administration belittled...