An Industrial Renaissance Policy

For years Larry Summers and I had a running argument over industrial policy.

As a mainstream economist in good standing, he, of course argued that governments can't pick winners and losers and that even if it could, special interests would inevitably capture the process and distort it. Under no circumstances, he emphasized, should America have an industrial policy.

My view was that as an industrial nation we would inevitably make decisions that involved picking winners and losers. Breaking up AT&T, standards setting by the FCC or FDA, R&D spending by N.I.H, etc. are all examples of such decisions. The only question was and is whether those decisions would be guided by some overall productivity optimizing criteria or by chance or, more likely, the very special interests Larry feared.

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Beyond GM: Our Bankrupt Industrial Policy

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Well, now that the U.S. government owns the banks, insurance, and auto companies with Larry as the chief winner and loser picker, that whole discussion has become moot.

But now that we are picking winners and losers, the question of how we are doing it has become very important. So far, the answer is "not very well."

While pouring big bucks into GM and Chrysler to keep them alive, the administration has largely ignored one of the biggest factors making them uncompetitive - the exchange rate. The strong dollar and the policies of China, Japan, Korea and others to undervalue their currencies tend to undercut the rescue effort. Industrial policy will only work if it is a complete policy, and a complete policy in this case must be one that deals with the exchange rate question.

More important, however, is the question not only of saving Detroit, but more broadly, of revitalizing the whole U.S. productive base. To avoid a repeat of the experience of the past two years, we must come out of this crisis with a vastly reduced trade deficit. But to do that, we must begin to produce more of what we consume, which is, after all, what Obama has been talking about when he discusses creating green and other kinds of jobs. But the problem is that right now, the greener we get, the more we import because we don't make most of the stuff we would need to install.

Take batteries for instance. Electric cars, lawn mowers, and other devices need batteries. With a few small exceptions, U.S. companies don't make batteries. They also don't make windmill blades and turbines. They also don't make solar cells or concentrators.

Even if GM and Chrysler survive in some reduced form, a lot of workers are going to lose their jobs as a lot of factories are shut down. A sensible industrial policy would be looking at ways to replace those auto factories with battery, windmill, and solar cell plants. The new Commerce Secretary ought to be talking to Korean battery makers, Danish windmill producers, and Japanese photovoltaic cell manufacturers about why they should be investing in the U.S. and why they should be doing joint ventures with American companies. He should have some financial investment incentives to use to entice these companies to U.S. shores.

At the same time he should be creating government-industry consortia to promote development of these technologies in the United States. Use the Sematech consortium that was set up in the late 1980s to meet Japanese competition in semiconductors as a model. He should also be working with State governors to see to it that new factories are located so as to replace old ones and to take advantage of concentrations of worker skills.

In short, America needs a real industrial renaissance policy, not just a save GM and Chrysler policy.