Reality Check

While President Clinton studiously avoids the term, advocates of “industrial policy,” such as Robert Reich, Ira Magaziner, and Laura Tyson, [...]

May 1 1994 by Edwin J. Feulner


While President Clinton studiously avoids the term, advocates of “industrial policy,” such as Robert Reich, Ira Magaziner, and Laura Tyson, now dominate his administration. These and other cheerleaders for government intervention in the economy speak in grandiose terms of “targeting” key industries and “rebuilding America‘s crumbling infrastructure.”

Unfortunately, many corporate operatives and business organizations think they or their members will benefit from policies that put bureaucrats in charge of many of America‘s most important investment and production decisions. Indeed, some executives already are lining up for the goodies they expect.

Instead of waiting for a government check, perhaps these executives need a reality check.

Government intervention may provide some businesses with a bigger slice of the pie in the short term, but the inevitable market inefficiencies of a planned economy-and that’s what it is, folks-will prevent that pie from growing. If bureaucrats knew better than entrepreneurs and venture capitalists how to invest, they wouldn’t be bureaucrats; they’d be making real money in the private sector.

Bureaucrats have no localized, specific information on which to base their decisions. They have no “bottom line” to discourage them from sacrificing accuracy to appease political interests. And, since such huge sums of money are at stake, both in government subsidies and “profits” that depend on government intervention, industrial policy goes hand-in-hand with heavy lobbying and even political corruption. As Kazuo Nukazawa, a managing director of the Keidanren, Japan‘s leading big business association, puts it, “You may find you are basing your decisions on phone calls from congressmen and senators, rather than on economic rationality. This is the dark side of industrial policy.”

Bill Clinton seems anxious to stumble around in the dark. For example, he wants to boost NASA funding to develop “an environmentally friendly, fuel-efficient, lightweight passenger aircraft” that could be commercially manufactured by the year 2005. NASA hopes such an aircraft would breathe new life into domestic aircraft manufacturing and create 140,000 jobs.

Along the same lines, the administration announced last October that it is teaming with the Big Three automakers to help Detroit build a “super car” that would more than triple the gas mileage achieved by today’s typical car. Washington intends to spend several hundred million dollars and to use the nation’s weapons labs to assist the automakers in the 10-year cooperative effort.

Another element of the grand plan is a commitment to support-even protect-certain “strategic” industries on which America‘s economic future supposedly depends. This is the notion of “picking winners and losers,” which is central to the theory of industrial policy. This “strategic trade” theory holds that government. can create high-paying jobs in high-technology industries by directly or indirectly investing in certain anointed industries and by taking aggressive action against foreign firms that compete unfairly with U.S. companies. Fair competition is defined by the political muscle of industry lobbyists, rather than the established rules of the game.

Of course, all these actions are based on the idea that inherent shortcomings in the current U.S. economic structure are so serious that private-sector mechanisms cannot correct them. In fact, the real problem is that overregulation makes it impossible for the free market to operate at its full potential.

Nevertheless, the argument oft-repeated by industrial planners is that many business opportunities are too difficult (if not impossible) for the private sector to exploit. They say only the government can shoulder the financial risks involved in moving many ideas off the drawing board and into production.

It’s ironic that Japan, with all its current troubles, is still held up as the exemplar of industrial-policy planning. In fact, the vaunted Ministry of International Trade and Investment has produced as many disasters and near-disasters as “successes.” In the 1950s, MITI tried to hold back a small company named Sony, because it thought electronics would be a dead-end industry for Japan. MITI also nearly wrecked the Japanese auto industry by trying to force it into a giant monopoly. Despite decades of “targeting,” Japanese computer products are losing out to more innovative U.S. competitors. Japan‘s industrial-policy consortium also has failed to produce a high-definition television system competitive with that developed by General Instrument Corp. The New York-based company’s technology has been adopted in the U.S. and Europe, while Japan is playing catch-up.

The U.S. itself has a dismal record of picking and supporting new technologies. Remember the Synthetic Fuels Corp., launched in 1980 to develop substitutes for oil? Overtaken by a sharp drop in world energy prices, this costly fiasco was abandoned in 1986.

Another example: The idea behind the U.S. government-supported Sematech consortium was that U.S. semiconductor producers could make huge inroads in the world market by pioneering innovative production techniques. Instead, all the breakthroughs were made by small, entrepreneurial firms that emphasized innovations in semiconductor design. Sematech has had little or no impact.

If Congress really wants to strengthen U.S. competitiveness and foster the growth of new industries and better-paying jobs, it should create an environment that encourages entrepreneurship, removing red tape at home and trade restrictions abroad. Specifically, it might heed some of the recommendations advanced in this column, such as capping domestic spending, rejecting costly health-care reform, and reducing taxes on labor income and capital formation. Washington also might consider:

  • Passing product-liability reform and other tort-reform legislation. America‘s lawsuit-crazy tort system drains the economy of tens of billions of dollars annually and hinders product innovation.
  • Enacting regulatory reform. Many regulations directly increase the cost of employing workers and act like a hidden tax on job creation. Congress should establish a federal regulatory budget and place a limit on the total estimated cost imposed each year on the economy-and on employment-by all regulations.
  • Overhauling antiquated US. antitrust laws. Outdated trade laws left over from the turn of the century make it difficult for firms to enter into joint-production alliances (to finance research programs or to develop and market new products) generally permitted in other countries.
  • Negotiating other free-trade agreements. After implementing NAFTA, the administration should negotiate similar agreements with any country desiring bilateral open markets.
  • Reforming U.S. financial and banking laws. Restrictions on interstate banking force many banks to remain small, uncompetitive, and unable to provide both commercial and investment services.
  • Permitting the ‘Baby Bells” to enter the long-distance market. Congress also should allow regional Bell operating companies to manufacture telephone equipment and to own video programming and other businesses. This will promote competition, create jobs, and help build the “data highways” the Clinton administration is so excited about.

At best, industrial policy would leave in place unwieldy barriers to private enterprise. At worst, it would add to them, instituting a checkerboard of special subsidies and privileges.

Instead, U.S. firms need fewer regulations, fewer barriers to trade, and lower taxes-especially on venture capital. Government policy should enhance the general process of competition, not become a player in it.


Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, DC-based public policy research institution. He also serves on the boards of several other foundations and research institutes. Dr. Feulner is the author of “Conservatives Stalk the House.”