Industrial Policy as the Removal of Self-Imposed Handcuffs

August 28th, 2011 at 11:45 pm

Best read of the day so far is this article on US industrial policy by Jon Gertner in the NYT magazine.  Since I began this blog, I’ve worried about job creation, both cyclical and structural.  Re the latter, one of the many pairs of ideological handcuffs we put on ourselves in this country is the notion that “we don’t pick winners.”

Well, then we shouldn’t be surprised if we lose to countries that do.

And in fact, we pick winners all the time, we just don’t do so particularly thoughtfully.  We have hundreds of tax credits for different types of production and investment, for example, but they reflect more the skill of particular industries’ lobbyists than a coherent economic development strategy.

In reality, the federal government has played a role, often a central one, in every innovation throughout our history, from the subsidizing of machine tools to produce weapons during the Revolutionary War, through the railroads, electronics, lasers, the internet, and today, clean energy.

What the NYT article suggests is that we need to do so with greater intention to get ahead of the market and to capture global market share.  The piece focuses largely on battery production.  I assure you, many, if not most, American economists and policy makers would argue that subsidizing battery production, as the Obama administration has done extensively, is an example of terribly misguided winner-picking.

But as the world moves from fossil fuels to renewables, the efficient storage of energy, whether from wind, the sun, or lithium ions will become increasingly important.  Having a government that’s forward looking enough to get a footprint in that market is key to future growth and to creating a path for our manufacturers to move from contracting to expanding industries.

That means recognizing self-imposed limitations compared to the practices of our competitors:

“Federal agencies like the Department of Energy have long financed scientific research — through university grants, for instance — on technologies like lithium-ion batteries. But a basic feature of government policy is to allow corporations and entrepreneurs to pick through the results of that research, commercialize the promising ideas and let the market sort things out. In other countries, it often works differently. Governments are more willing to help companies pool information about a new industry or technology and (especially in Korea and China) assist with the early-stage commercialization of products, including the construction of plants.”

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2 comments in reply to "Industrial Policy as the Removal of Self-Imposed Handcuffs"

  1. Tom Cammarata says:

    Regarding “Industrial Policy as the Removal of Self-Imposed Handcuffs,” I would suggest American industry for a long time just suffered from a case of NIMBI (Not In My Basic Industry) and often couldn’t recognize a winner that was staring it in the face. One example from electronics.

    From after WW2 until the late ’70s, most electronic research was industrial, meant to improve various industrial or commercial, not consumer uses. The video tape recorder was invented by Ampex here in the States. No American company, including Ampex, recognized its consumer potential until the Japanese applied miniaturization technology (which was itself a byproduct of NASA’s space programs) and gave us the home VCR. By then and by that fact, they won and owned an industry we started. All the American electronic firms like Motorola, Admiral, Zenith, ended licensing Japanese consumer designs.

    It wasn’t really until the 1980s when a new generation of nerdy kids working in their garages—including Steve Jobs and Steve Wozniak—who didn’t have a blinkered corporate mindset and could see the potential of consumer electronics, that American industry really ventured in. By then the Japanese, the Korean and the Taiwanese dominated the field.

    One could make a similar case for the American auto industry in the 1960s, mostly ignoring compacts and subcompacts which the Japanese and Europeans saw as necessary to address the rising cost of oil. Detroit instead gave us muscle cars with much higher profit margins than compacts and subcompacts. That gave foreign manufacturers the chance to take over the small care market, then the mid-car market, and finally the luxury car market.

    I think the resurgence of a corporate urge to merge (to buy patents) is largely driven by narrow managerial vision for possible futures, and the desire to cash in as cheaply as possible once they stumble onto one.

    As you might suspect, after 40 years of dealing with corporate managers (in advertising), I’m not terribly impressed with their collective imagination. Being from Detroit originally, I had a box seat watching the auto industry commit hara-kari.

  2. rootless_e says:

    People who use the internet to circulate their arguments that the government can’t create wealth are like people who broadcast flat earth society tracts on satellite radio.