February 18, 1990
"How to Compete - Industrial Policy is Inevitable, So Make It Productive"
San Jose Mercury News
By Timothy Taylor
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EARLIER this month, the cover of Business Week promised to foretell "The
future of Silicon Valley." I don't want to say that the article is wholly
gloom and doom, but if it is even halfway correct, planning for growth around
here is redundant.
The cover then followed up with a subheading: "Do we need a high-tech
industrial policy?" Two answers were provided, with handy little hollow boxes
for your checkmark.
- "YES: The U.S. must take drastic action to save its high-technology industry.
U.S. companies can't compete when foreign countries protect their own markets
and subsidize exports."
- "NO: Government intervention in the market is costly, ineffective, and
overly political. America's entrepreneurs and its well-managed companies are the
best competitive weapons."
If these are the only two answers, I want a new question. The choice posed
on the Business Week cover misses the real issues altogether.
Opposing all government intervention in the market doesn't make any sense.
Claiming that the government can avoid an industrial policy is like claiming that
the band can march across the football field in the middle of the fourth quarter
and not intervene in the game. After all, federal and state spending now total
about one-third of the entire U.S. economy.
The "yes" answer is confused as well. Why is action needed only for
the high-technology industry? An awful lot of industries besides high tech are
having problems out there in the cold cruel competitive world.
The second sentence in the "yes" answer implies that the main cause
of America's competitiveness problems is the clever trade policy of foreign countries.
Frankly, that view is pretty lame. Trade barriers and export subsidies have been
around for decades, even centuries, and America still has its share of both, but
somehow they didn't cause $150 billion trade deficits until the mid-1980s.
Two much more plausible causes of the trade deficit are that huge budget deficits
allowed this country to consume more than it was producing, which could only be
done by importing, and that many of the imported cars and steel and semiconductors
were better-quality products made in a more efficient way.
So the important issue is not whether the United States should avoid an industrial
policy (it can't) nor whether scurvy foreign trade policy has ruined U.S. competitiveness
(it hasn't). Instead, the issue is what sort of government industrial policy can
best improve competitiveness. I sometimes divide the competitiveness agenda into
three loose categories.
The first includes the steps that almost everyone agrees on, like cutting the
budget deficit; making the tax credit for R&D permanent; adjusting the antitrust
laws to allow more collaboration in innovative activity.
A second category is of controversial and probably misguided ideas, like clamping
down on international trade; cutting the capital gains tax rate; and providing
direct government aid to a small group of industries.
The third category is of ideas that are neither agreed upon or controversial,
but simply unexplored. For example, one idea recently pushed by Robert Heller
of the Federal Reserve Board of Governors was that the United States needs to
Heller said, "Only Yemen and India have as low an export to GDP ratio
as the United States. Would it come as a surprise to you to know that the United
States and Yemen share something else in common? They are the only two countries
in the world that have not yet gone metric! If an American manufacturer has to
retool first in order to sell his wares abroad, his incentive to do so is considerably
reduced, and it makes his first step into export markets all that much more expensive."
Another suggestion from Heller is to allow nationwide branching for banks.
He found that 85 percent of all small American manufacturers finance their own
foreign trade, often because their local bank is not permitted by law to have
branches or representatives in various key cities around the globe.
A third appealing idea is for a government service to translate Japanese and
German technical papers and journals into English as they appear. Although such
an investment wouldn't make sense for any individual company, it would assure
that U.S. companies have ready access to information that is already in the public
domain for their chief competitors.
A fourth idea is for the U.S. government to spend a lot more on civilian R&D,
mainly through universities and research laboratories. The R&D effort shouldn't
focus on only high- definition television, or only semiconductors, or only cars
or steel, but should choose all of the above and more. Corporate R&D spending
tries to pick winners; government R&D spending should be aimed at making sure
that America has some money on every horse in the technology race, because no
one can be sure which ones are going to win.
Industrial policy is inevitable. During the 1980s, this country has been pursuing
the industrial policy of using much of its investment capital to finance federal
budget deficits; of cutting government's investment in civilian R&D by 13
percent; of threatening trade retaliation against countries whose main offense
is economic efficiency; of encouraging business and consumer debt through the
tax code; and so on.
What America needs is an industrial policy that isn't so benighted.
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