Industrial Policy: Part II
"Bath Iron Works. Launch of battleship Georgia" by amphalon is licensed under CC BY-NC-SA 2.0.
BY Hank Thayer
[This is Part II of a three-part series.]
The principal arguments, at least serious arguments, against industrial policy go something like this: you can’t protect every industry, it is not possible to predict which industries will matter in the future, protection will lead to weak companies which are unable to compete, we may pursue technological dead ends, government involvement will lead to corruption.
Given the realities of history, all of these arguments have some merit. They’re legitimate concerns. A well-crafted industrial policy, however, will account for and work around these potential problems.
First, there is no need to protect every industry. It is possible to distinguish which ones to protect and promote, and how best to protect and promote them. There are several categories we should consider:
Industries vital to our national security.
Industries where we lead and where we want to maintain our lead.
Industries in which we are major players and want to maintain our position.
Industries in which we may need to establish a major presence even if we do not have one now.
Industries for which we need to maintain at least a minimal presence.
Industries with no future in the United States, but which have workforces who will need help transitioning to other work.
A different approach is needed for each of these categories.
It may not be possible to predict all of the industries that will matter in the future, but some are obvious. We will need to be able to make processor chips, aircraft, trucks, railroad equipment, wind turbines, and specialty metals, to name just a few. There will surely be other industries developed in the future which we cannot predict. But we gain little by letting viable industries perish now in the hope a new, unforeseen industry will come along and need the capacity.
Then there is the question of creating weak companies dependent on protection to survive. This problem has bedeviled many countries which protected domestic industries through government policy; most commonly, large inefficient monopolies grew, and the people had to pay for them.
However, Japan found a relatively simple solution to this dilemma: stiff competition among domestic companies in protected industries, especially in manufacturing. For instance, in automaking Toyota must compete with Nissan, Honda, Subaru, and Mitsubishi. Sony competes with Panasonic, Hitachi, Sanyo, and Mitsubishi in electronics. In the heavy equipment space, Kubota must compete with Kawasaki, Komatsu, Hitachi, and (here they are again) Mitsubishi.
The list goes on and on, but the principle is clear; maintain domestic competition to maintain both manufacturing capacity and competitive companies.
There will also be technological dead ends. But potential dead ends are more of a reason to develop a supportive industrial policy than to oppose it. Businesses need to be able to take chances if they are going to innovate. For example, Boeing, the third-largest defense contractor in the world, took huge risks with the 747 and the 777, and they paid off. (In recent years, Boeing has arguably become more risk-averse and largely come to grief.)
Yet another objection some will raise is that government interference facilitates corruption. One company often cited as an example of what can go wrong is Solyndra, the solar panel manufacturer which notoriously went bankrupt despite a $535 million government loan guarantee. Much of the blame for the debacle fell on inadequate government oversight.
No doubt stories like Solyndra’s emphasize an obvious point: we must guard against corruption. But potential corruption is not reason enough to abandon a policy entirely any more than potential police brutality is a reason to defund the police. There will likely be some measure of corruption any time the government involves itself in the economy – it is almost inevitable – but we still need that involvement, just as we need our police departments despite the fact some officers engage in illegal, immoral, or unjustifiable conduct.
History has proven, it is possible to create checks to minimize corruption, even if eliminating it entirely may be too much to ask. What is important is for us to understand the alternative – the loss of key industries and large numbers of jobs – is far worse and far more damaging than instances of corruption themselves can ever be.
Finally, some people will offer the objection “we’ve never needed an industrial policy before, so why do we need one now?” There are two answers to this question.
First, we need one because we are losing critical industries. In many sectors where America once enjoyed dominance, foreign competitors have eaten away at our market share and left domestic companies unable to compete, hire, develop and expand.
The other answer is, we have always had at least a partial industrial policy. Some industries simply could not be allowed to fail.
If you drive North on US-1 in Maine, you will pass through the town of Bath. It is the home of the Bath Iron Works, a ship-building concern. At this point, with global ship building competition incredibly fierce, BIW makes only U.S. Navy ships.
It would probably be possible to buy hulls from another country at lower cost, tow them to BIW and fit them with propulsion and weapons systems. But even the most hardcore laissez-faire free trade advocate would know better than to suggest such a thing. We need the ability to make our own naval vessels. In fact, we ensure, and must continue to ensure, the domestic manufacture of all our critical military hardware.
At the other end of the spectrum, we subsidize farming, and quite substantially. Most people understand instinctively that we must not depend on other countries for food.
So, we already recognize the need to be self-sufficient, or at least competent and competitive, in certain industries. The real question confronting us is not whether to have an industrial policy; we already have one of sorts. The question is what form it should take.
A well-crafted industrial policy should be able to protect and promote key industries without creating unacceptable costs or side effects. In Part III, I will address which specific industries will fit into each category, and how they can be fostered.
Hank Thayer received his Bachelor of Arts in Political Science from the University of Massachusetts, and holds both a B.S. and a Masters in Engineering from Worcester Polytechnic Institute. After serving as a U.S. Army Infantry Officer in the late 1980s, he has spent most of his professional life working in manufacturing. In addition to being an amateur historian he is a fair-to-middling shade tree mechanic.
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