Cultivating the Economy : Industrial Policy Debate Renewed

One day in August, 1982, Walter F. Mondale sat down to read the manuscript of a new book titled “Minding America’s Business” by Ira C. Magaziner and Robert B. Reich, advocates of a new approach to federal industrial policy, which concerns the government’s relationship with particular industrial sectors. “This,” he remarked enthusiastically to his wife when he finished, “should do it for the Democrats in 1984.”

For a time, Mondale’s comment seemed prophetic. By early 1984, industrial policy remedies for the nation’s economic malaise, such as a federal development bank to assist beleaguered industries, were being espoused by nearly all the Democratic presidential aspirants.

But by last summer, the malaise having given way to a boom, industrial policy had all but disappeared from Democratic rhetoric. Some political analysts, however, see the last campaign as only the prelude to what conservative commentator Kevin P. Phillips calls a “great mid-1980s debate,” an intense, far-reaching struggle between liberals and conservatives over government’s proper role in guiding the affairs of American business.

Denounced Proposals

During the campaign, the Republican response to Democratic proposals was simply to denounce industrial policy, and reaffirm the party’s traditional opposition to extensive intervention. Yet, Phillips and others on the right argue that conservatives must now take a much more activist stance and come up with an alternative industrial policy.

They argue that while the deep recession that provoked the Democrats’ interest in industrial policy is over, demands are growing for new federal action to revitalize the sagging international competitiveness of American industry as evidenced by last year’s record $123-billion trade deficit.

The deficit has been largely attributed to the soaring dollar. But “U.S. Competitiveness in the World Economy,” recently published proceedings from a Harvard Business School colloquium, says the main cause is that, unlike the United States, chiefly East Asian trade rivals pursue “coherent national strategies through which each country mobilizes and shapes its productive capabilities to achieve economic growth and global competitiveness.”

As an example, the book cites Japan’s highly successful nurturing of its semiconductor industry. After identifying the industry’s vast export potential in the early 1970s, the government provided interest-free loans, research and development subsidies, insulation from foreign competition, exemption from anti-monopoly laws and, once the industry was competitive internationally, aggressive export promotion. Japanese firms have rapidly increased their market shares at the expense of U.S. companies.

Develop Own Strategy

The book does not advise that the United States copy the Japanese model. But it does suggest that the U.S. government adopt a much more “productivity-oriented development strategy” toward business.

“A new round of government involvement in the economy is developing, and the question is who is to control it,” Phillips says in his recently published “Staying On Top: The Business Case for a National Industrial Strategy.”

“If the conservatives abdicate and liberals win . . . “ he writes, “opinion could possibly lurch toward a new array of government mechanisms . . . to usurp corporate managers’ authority on behalf of politicians and government regulators. That becomes a clear possibility if the country slips into another recession in 1985-86. On the other hand, if business and conservative strategists co-opt the trend and shape new government involvement toward a ‘support enterprise’ direction, then the new agenda could have a conservative cutting edge.”

The outlines of the new conservative agenda are already taking shape. On Feb. 13, the President’s Commission on Industrial Competitiveness, formed in 1983 to provide an alternative to Democratic industrial policy proposals and composed mostly of business leaders, recommended a wide-ranging program to meet what commission Chairman John A. Young, chief executive of Hewlett-Packard Co., called the “new reality of global competition.”

Range of Proposals

The recommendations, among other things, would promote exports, stimulate research and development, relax federal regulations that the commission believes unnecessarily hamper innovation and competitiveness, create two new Cabinet-level departments--trade and science, and technology--foster an “effective dialogue” among government, business, and labor, and generally enable the government to take a more active and coordinated approach to encouraging business investment and performance.”Sure, it’s industrial policy,” says commission member Michael Porter of the Harvard Business School, “except that the philosophy is fundamentally different from what the Democrats were proposing. We don’t believe in direct subsidies of specific industries. We believe in improving the environment for all industries.”

President Reagan has not formally acted on the report. But Phillips reports an “emerging consensus” among business and government leaders for a “pro-business competitive agenda” developed through “new kinds of business-government collaboration.”

If such a program receives official backing from the Reagan Administration, Democratic industrial policy advocates can be expected to reassert forcefully their own agendas.

The outcome of the resulting industrial policy debate could be of profound importance to the future shape of the American economy. As Michael L. Wachter and Susan M. Wachter, professors at the University of Pennsylvania’s Wharton School, have written, the two approaches may “lead to quite different distributional and quality-of-life results.”

Different Approaches

Conservatives claim their plans to support, stimulate and unshackle business would produce greater economic growth. Liberals also want to promote growth, but maintain that government also must target and direct industrial policy to ensure that incentives and assistance programs do not favor the wealthy, exacerbate the decline of certain industries and regions, and ignore serious social problems such as structural unemployment.

Government policies, of course, have always had a large impact on business. “The government has had an ad-hoc industrial policy for years,” says Stuart E. Eizenstat, President Jimmy Carter’s chief domestic adviser and now a Washington lawyer. “We just never admit it.”

The U.S. government functions as what has been termed a “broker state,” in which policies toward business tend to evolve through behind-the-scenes maneuvering by special interests. America’s ad-hoc industrial policy consists of a broad array of regulations, subsidies, tariffs, loans and guarantees. Federal aid to business during fiscal 1984, according to the Congressional Budget Office, totalled $132 billion. Among the notable beneficiaries have been such industries as steel, agriculture, banking, defense, textiles, and shipbuilding.

Many analysts complain that broker-state policy-making, as Eizenstat puts it, is “‘disjointed, uncoordinated, and inefficient.” But while tolerant of ad-hoc policies, the public has been leery of explicit, more rationalized national planning.

Seen as Socialism

That resistance seems rooted in America’s tradition of individualism, suspicion of powerful political institutions and the example of planned communist economies. National planning is often seen as the equivalent of dictatorial socialism and the antithesis of freedom and democracy.

Public attitudes, though, reflect ambivalence. Few object to the elaborate planning mechanisms maintained by state and city governments, corporations, universities, the military services, and other large organizations. Almost no one questions the federal government’s role in trying to smooth out economic cycles and control inflation through fiscal and monetary policies.

During crises, and nearly always under Democratic administrations, the United States has supplanted market forces with formal industrial planning. Powerful agencies were established to help the country mobilize for the two world wars. President Franklin D. Roosevelt employed numerous planning bodies, such as the Reconstruction Finance Corp., in an effort to pull the country out of the Great Depression. These agencies, though, were usually dismantled when the crises ended.

The government began considering more permanent forms of planning during the 1970s. Stagflation and a variety of economic shocks raised doubts about orthodox economic policy, and the United States’ problems came to seem more structural and immutable than cyclical and episodic.

Nearly Embraced Policy

In the latter years of the Carter Administration, with the economy and many basic industries deteriorating, the White House came closer to embracing national industrial planning than at any time since the New Deal.

Carter coordinated the Chrysler rescue, established “tripartite” task forces of business, government and labor representatives to develop a federal strategy toward the steel and auto industries, and in August, 1980, unveiled a broad “economic revitalization” program. It included tax incentives to spur business investment and an Economic Revitalization Board headed by DuPont Co. Chairman Irving S. Shapiro and AFL-CIO President Lane Kirkland. The board was to develop broad strategies and help organize an “industrial development authority” that would “mobilize” financial resources to “help revitalize American industry in areas most affected by economic dislocations.”

The latter idea originated with investment banker Felix G. Rohatyn, chairman of the Municipal Assistance Corp., one of two non-elected agencies established by New York state in 1975 after New York City’s near bankruptcy to oversee the city’s financial affairs. Rohatyn sees his agency as a model for a reconstituted Reconstruction Finance Corp.

Shift in Emphasis

The Carter program marked a major but still little appreciated shift in the emphasis of American industrial planning. Most earlier planning schemes not associated with wars focused on broad government intervention in the market to foster full employment. Carter’s planning had a clear liberal cast in that it called for special assistance to displaced workers and depressed industries. But it also reflected new appreciation by mainstream liberals for the virtues of the market.

Japan’s well-publicized example was compelling:a nation whose economic success was attributed to the government’s ability, in collaboration with business, to unleash the dynamism of the private sector.

What had come to be called industrial policy focused less on supplanting than stimulating market forces. As the University of North Carolina historian Otis L. Graham Jr. put it, industrial policy “is a supply-sided effort, (and) operates from a solicitude for production. . . . (It) appears to imply a framework in which the state asks capitalists how the rest of us can help them do their job . . . .”

Though most never got off the ground, the Carter initiatives provided a philosophical starting point for Democratic strategists agonizing over the Reagan landslide and looking ahead to 1984. The Democratic vision still seemed mired in the welfare state ideology of the New Deal, which had been soundly thrashed by Reagan’s anti-government, pro-growth platform.

Great Leap Forward

Industrial policy offered the potential for a great ideological leap forward. “It seemed to solve a major problem for the Democrats,” says Robert Reich, a teacher at Harvard’s John F. Kennedy School of Government and one of several academicians including Massachusetts Institute of Technology economist Lester Thurow who provided industrial policy’s intellectual foundation. “It united the goal of social justice and equity with the promise of economic growth through reorganization of the industrial structure.”

Adds one Democratic strategist: “We thought industrial policy could do for us what supply-side economics did for the Republicans.”

Industrial policy surged from obscurity to orthodoxy with a velocity that astounded even its most ardent adherents. Its regression during the spring of 1984 was even more precipitous.

The buoyant economy was a prime reason. If it ain’t broke, said the Republicans tellingly, don’t try to fix it.

But just as important was fierce internecine squabbling within the always fractious Democratic party over the issue.

Most visible was the conflict between factions representing so-called Sunset and Sunrise America. The Sunsetters, blue collar union members and old-line Democrats, saw industrial policy as a way to protect and revitalize smokestack industries. The Sunrisers, neo-liberal “Atari” Democrats, felt industrial policy should promote emerging high-tech and usually non-union industries and objected to “lemon socialism” subsidies and bail-outs.

Opposed to Spending

Both factions were opposed by fiscal conservatives who felt the party needed to project an image of budgetary responsibility and avoid new spending initiatives. They were especially critical of financing institutions proposed by members of both groups--a reconstruction bank by Sunsetters and an innovation bank by Sunrisers--that would direct assistance to specific industries and endeavor to “pick winners and losers.”

The most surprising entrants into the melee on the negative side were liberal economists, particularly those at the Brookings Institution, the Democratic think tank, and even more particularly Brookings senior fellow Charles L. Schultze, chairman of the Council of Economic Advisers under Carter, whose opposition to industrial policy has been nothing less than a crusade.

In papers, interviews, and congressional testimony, Schultze--who called industrial policy “a dangerous solution for an imaginary problem”--and his colleagues argued there was nothing wrong with American business that proper macroeconomic policy couldn’t cure. Opposing undue government interference with the market, which they see as a far superior allocator of resources, they contended that government bureaucrats are incapable of successfully picking winners and losers and that the process would become hopelessly politicized.

Attacked by Unions

The Brookings economists came under strong attack from organized labor, their one-time allies, and found themselves in curious common cause with far-right libertarians and free-market economists at conservative think tanks such as the American Enterprise Institute.

Republicans gleefully distributed copies of the Schultze critiques. “It had a devastating impact on Washington politics,” says a House committee staff member. “Here you had a highly visible Democratic policy adviser saying the party’s hot new policy was a terrible idea.”

Faced with a veritable civil war within the party over the issue, Mondale, though a firm believer in industrial policy, focused his campaign on less divisive issues.

Former Carter aides Simon Lazarus and Robert E. Linton, now Washington attorneys, have suggested that the Democratic party’s deep divisions, chiefly the schism between the Sunsetters and the Sunrisers, illustrate a “deep struggle over the party’s identity” that will hamstring its ability to advance a coherent liberal industrial policy with wide appeal.

Curiously silent during the election year bickering over industrial policy was a constituency that, by anyone’s definition of the term, would have to be directly involved with its implementation:industry.

Despite their free-market rhetoric, many executives are as favorably disposed in principle toward governmental intervention as most Democrats--as long as it does not arrogate business prerogatives.

Consider: Businesses have been among the most active and effective interest groups seeking benefits from the broker state, and have often supported regulation and opposed deregulation. Business executives provided most of the leadership for official planning bodies during World Wars I and II, the New Deal, and the New York rescue. Numerous prominent business leaders have publicly endorsed national planning: Henry Ford II, RCA Chairman Thornton F. Bradshaw, Burroughs Corp. Chairman and former Treasury Secretary W. Michael Blumenthal.

Prefer the Stability

Despite planning’s popular association with socialist regimes, industrial policy today is most successfully practiced by conservative governments in nations such as Japan, West Germany, Taiwan, and South Korea. Business leaders often prefer the stability of consensus and accommodation with government over the vicissitudes of a completely unfettered marketplace.

In the United States, more than two dozen state governments work with local business to pursue industrial policies. These states often target specific industries for grants and make high-tech venture capital investments.

In any clash between conservative and liberal industrial policy advocates, the allegiance of the business community would obviously be crucial.

While business executives would seem natural supporters of a conservative agenda, a few observers are not sure. Bruce R. Bartlett, a conservative and former executive director of Congress’ Joint Economic Committee, argues that small-business executives would probably oppose even a conservative industrial policy on the grounds it would be dominated by big business. “They know they would be squeezed out because they don’t have political clout,” he says. “Why do you think we give aid to Chrysler and not to other businesses in trouble?”

But Don Gevirtz, chairman of the Foothill Group Inc. in Los Angeles, which finances small companies, claims entrepreneurs are “no longer willing to remain odd men out in national politics” and “are organizing themselves into an independent, coherent political force.” He cites small business’ role in passage of the 1978 capital-gains tax reduction as the “watershed event in the entrepreneurial political movement.”

Spells Out Program

In his book “Business Plan for America,” Gevirtz spells out the quite conservative program they are likely to back, principally tax changes to “incentivize innovation, risk and success” and “target the entrepreneurial process.”

Phillips, who sees business as central to the broad coalition he expects to back a conservative agenda, cites numerous business groups that have proposed industrial strategies, including the National Assn. of Manufacturers, the Committee for Economic Development, and the U.S. Chamber of Commerce.

The Reagan Administration, at first glance, would not seem the most fertile environment for any explicit industrial policy. Reagan has acceded to some of the usual pressures for ad-hoc industrial policy steps, such as import relief for the steel and auto industries, but usually with reluctance. The Treasury Department’s tax-reform proposals and Reagan’s proposed budget cuts seem designed, if anything, to expunge previous ad-hoc industrial policy interventions.

Yet many Washington politicians predict that Reagan, who called for a “stronger and simpler approach to the process of making and implementing trade policy” in his last State of the Union address, will eventually buy some sort of conservative industrial policy.

“It’s got a real good chance,” says Rep. Ed Zschau (R-Calif.), a former Silicon Valley entrepreneur. “Politically, the concept of creating an environment for economic growth, entrepreneurship, and greater competitiveness where the private sector can do its number is very much in keeping with the Reagan philosophy.”

Predicts Reorganization

An authoritative Administration source, while seeing little chance for new Cabinet-level departments, predicts a major “reorganization” within the White House over the next few months that will produce “a more unified and concentrated approach” to the competitiveness problem.

With many Democrats having achieved a new appreciation of economic growth and free markets, both Phillips and Thurow even envision something of a rapprochement between moderates in both parties on the issue. Says Thurow of Phillips’ book, “There are some things he suggests that I wouldn’t do but I don’t look at it and see red.”

Many liberals do, however.

Schultze indicates that he will not abandon the barricades. “In a way, I’m less concerned about RFC-type proposals, which aren’t going anywhere,” he says, in reference to the Reconstruction Finance Corp., “than a seemingly innocuous, more subtle industrial policy from a free-enterprise Administration that could really . . . destroy progress, growth, and dynamism.”

“Our goals and social visions are miles apart,” Reich says. “When (business executives)talk about competitiveness, they mean profits, return on investment, market share, not a higher standard of living, which should be the ultimate goal. Many of the business planners would actually sacrifice our standard of living and reduce wages for the sake of competitiveness.”

Will Limit Agenda

Conservatives are “going to limit their agenda very narrowly to things that affect corporate profits,” argues MIT professor Bennett Harrison. “They’re not going to be very concerned about public health, retooling mass transit, or 110 other things that from a social perspective we need to get done.”

Jeff Faux, president of the Economic Policy Institute, fears that corporations might simply use competitiveness incentives for nonproductive purposes such as takeovers, moving operations overseas, or simply building up cash reserves.

A new study by Citizens for Tax Justice, a coalition of consumer and labor groups, reported that the 1981 investment-tax incentive legislation, which costs taxpayers tens of billions of dollars annually, apparently was responsible for little additional corporate investment.

Reich, finally, is alarmed about the “elitist quality” of conservative proposals, under which strategies might be made by business-dominated, non-elected agencies patterned after New York City’s Municipal Assistance Corp. Rohatyn has recommended that his bank be “publicly accountable” but “run outside of politics.” Says Reich, “It could be very dangerous from the standpoint of democratic values.”

Conservatives and even some liberals dismiss these concerns. Rep. John J. LaFalce (D-N.Y.), who introduced one of several congressional industrial policy bills last year, says he is “confident” Congress can prevent business from dominating any new industrial policy and “getting freebies without the public getting something in return.”

Rep. Zschau offers what will likely be the major conservative response to liberal criticisms. “When you have a rapidly growing economy,” he insists, “everybody wins.”