Industrial policy strips the gears

Bill Clinton says we need a national “economic strategy” to revitalize the U.S. economy. Ross Perot speaks with admiration of the “coordinated” way the Japanese seem to run their economy and advocates a similar approach to “reindustrialize” America. Favorable stories on “industrial policy” have been given prominent attention by the national media.

Whatever you call it, the idea that the federal government should pick winners and losers in our economy is becoming fashionable again. Our flirtation with the federal government guiding, rather than just enabling, the nation’s economic development seems to increase a s economic competition between nations replaces the Cold War’s emphasis on military competition. Before we get carried away with the idea of industrial policy, we should soberly review the record.

  • Great Britain’s ailing coal industry and its moribund automobile industry are products of the Labor government’s post-WW II industrial policy. There was a time when MG, Triumph, Rover and Rolls-Royce set global standards, but no amount of government direction could save them from the onslaught by the Americans and the Japanese.
  • The European Community has an industrial policy. The first institutions of the EC focused on “rationalizing” coal production. Then they moved to agriculture, where Europeans now spend more than $48 billion a year in subsidies (the U.S. is down to about $8 billion). As a result, European consumers pay some of the world’s highest prices for energy and food.EC planners now focus on “local content” in everything from aircraft to television programs. These efforts to “save” inefficient industries such as agriculture or to create new companies such as Airbus to compete with the likes of Boeing, are extremely costly to taxpayers. They also lead to protectionism as bureaucrats join forces with industry leaders in so-called public-private partnerships to inoculate their investments from competition.

    History shows that protectionism in one sector, such as agriculture, easily slops over into others. For example, EC subsidies of agriculture are now the major obstacle to expanding free trade globally

  • Even in Japan, industrial policy has a mixed record. In the 1950s, Japan’s powerful Ministry of International Trade and Industry (MITI) decided it was not “rational” to have more than one additional auto company to compete with Toyota. However, companies such as Honda, Mazda, Nissan and others had a different idea and successfully resisted MITI’s “guidance.” The rest is history.

MITI also decided in the he 1950s to develop a domestic transistor industry. They told Akio Morita, head of a fledgling company called Sony. that he could not freely import transistors. Morita threatened to take his production off-shore and MITI backed down. From the early transistor portable radio to the contemporary Watchman TV we can see that Morita had a better grasp of the nation’s long-term economic interest than government planners.

At the same time, some of Japan’s most troubled industries, such as shipbuilding and textiles, are the products of “successful” industrial policy.

So, let’s hope our renewed interest in industrial policy will keep things in perspective. Certainly government investments in some areas, such as railroads, highways and other infrastructure, are critical to economic growth. But government “guidance” and “coordination” of private investment decisions through a public-private partnership dominated by large institutions is a formula for economic disaster.

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