Why We Need an Industrial Policy

BY Hank Thayer

[This is Part I of a three-part series.]

The idea of pursuing an industrial policy has been attacked from both Left and Right. On the Left it is viewed as corporate welfare. On the right it is viewed as interference with the free market.

There is some truth to each of these charges, but they both obscure what a proper industrial policy can do, and the actual need for one. The reality is that most of our trading partners, and almost all of the successful ones, have an industrial policy. Japan, Germany, the Republic of Korea, Taiwan, China, Singapore, and the European Union as a whole have policies intended to foster and protect industries they feel are critical. We are currently at a disadvantage competing with them.

Opponents of industrial policy like to quip that the government should not be in the business of picking winners and losers. At the risk of responding with a quip of my own, the Japanese (among others) have been picking winners and losers for decades now. They have picked their own companies as winners and our companies as losers. The results can be seen in the abandoned factories and depressed communities of the rust belt.

"The Old Carpet Factory" by Joel Bedford is licensed under CC BY-ND 2.0

Here is a basic run down of what has happened in the last 50 or so years: There used to be three major companies, and one minor company in the United State making passenger cars. General Motors, Ford, and Chrysler dominated the American auto market and had a major presence overseas. AMC also made competent cars, including the still iconic JEEP.

Now, there is only one American company (GM) still making passenger cars in the United States. Ford still makes trucks and Mustangs, but does not make passenger cars anymore. Chrysler is owned by Fiat and produces so few passenger cars that a Dodges is less common on the roads than the Fiats they sell through their remaining dealerships. You can still get a JEEP, but it is made by Chrysler, which again, is owned by Fiat. The reality is that the US auto industry has been destroyed by a combination of mismanagement, bad luck, myopic government policy, and predatory foreign completion.

It is easy enough to cast aspersions on the Big Three. But the problem is not confined to automobiles.  There used to be five American companies making tires in the United States (Goodyear, Firestone, BF Goodrich, Cooper, and General) -- now there are two (Goodyear and Cooper). The United States used to be a major steel producer; now we have a few mills producing specialty steels, and virtually all commodity steel is imported. There used to be four American companies making televisions in the United States; now there are zero.

Some will shrug these facts off by saying we should not worry about losing sunset industries. There are two responses to this argument. First, consider the impact of these losses in the Rust Belt. The industrial heartland of America has been, in wide swaths of the region, almost totally gutted.

Second, consider the case of large commercial airliners. In 1970, if you wanted a first rate airliner, you bought American; Boeing, MacDonnell-Douglas, and Lockheed were the industry leaders. There were a few niche players in Europe, but if you wanted the best, you bought American.

Today Airbus, a notable product of EU industrial policy, is the world’s leading manufacturer of commercial aircraft. Boeing is struggling to hold on to a shrinking market position. MacDonnell-Douglas is gone, and Lockheed has long since left the commercial aircraft industry.

(And then there are D-RAM chips. But that is a story for another time.)

We have been, or are in danger of being, almost completely forced out of other key industries as well, including machine tools, medium duty trucks, consumer electronics, hand tools, foot wear, and others. If we do not adopt an industrial policy, we will likely be forced out of many others.

“Why does it matter?” This is a question I often hear, especially from economists. “If the Japanese make a better product, aren’t we all better off buying it?” The most extreme case I heard was an economist who said, when asked what if some day we are buying our aircraft from Mitsubishi, “If they make a better product, than it would be a good thing to buy all our aircraft from them.”

The mind boggles. I sometimes wish they would have these debates in a workingman’s bar in Detroit during happy hour. There might be some eloquent responses. The short answer to the question “Why does it matter?” is that our people need jobs. The longer answer is that our people need jobs, and we can make the best products in the world if given a chance.

The other argument against an industrial policy is the old buggy whip argument. “If we protected old industries, we would still be making buggy whips.” This is a deeply unserious argument and should be treated as such. No one, or nearly no one, uses buggy whips any more. But we do use tires, and earth moving equipment, and machine tools, and medical equipment, and railroad rolling stock, and airplanes, and computers, and so on. We do not need to protect every industry, nor should we. But that fact should not prevent us from protecting and fostering key industries and protecting jobs for our own people. We need an industrial policy.

In Part 2 I will discuss how we might structure such a policy. In Part 3, I will discuss which industries should be fostered, which might be allowed to fade away, and how to cushion the loss of dying industries.

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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