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 go metric.

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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