Rethinking the Need for a National Industrial Policy
The country is beginning to reopen and the cold reality is that the economy will not be what it was before, nor should it be. Perhaps COVID-19 and the economic havoc due to government forced shutdowns ought to be a wake-up call that globalism which has been good for certain economic interests is not good for all. On the contrary, globalism has only resulted in the loss of our manufacturing base, the export of good paying middle class jobs, and rising inequality. Moreover, it has left us vulnerable as a nation because needed supply chains, especially in pharmaceuticals, are out of the country.
Globalization has essentially left us a two tiered labor market with highly paid and very skilled workers at the top and poorly paid and unskilled workers at the bottom. Sometimes the low-skilled labor market, particularly in services, is referred to as the secondary market. Because we were told by policymakers that globalism would lead to overall growth and prosperity, we readily accepted that perhaps there were sacrifices we all needed to make in the name of the larger public good. The main sacrifices were acceptance of the need for greater wage flexibility and capital flight because firms could be more profitable elsewhere.
In response to increasing capital mobility, there was a debate during the 1980s over whether there was a need for some type of new industrial policy that would put the needs of the nation first. During the 1950s, the CEO of General Motors famously stated that what was good for GM was good for America. If GM prospered, then so too did the U.S. economy. By the 1980s, however, that was no longer true. What was good for GM was no longer good for America, and it certainly was not good for the middle class.
To remain competitive in an increasingly global economy required reducing costs, especially labor costs. In the past rising labor costs would simply be passed onto consumers or perhaps reduce profits. But shareholders were now demanding returns, and management in order to remain competitive found itself having to reduce costs my moving operations out of the country where labor costs were less. At the same time, many firms seeking to sell more in foreign countries also found that they could have better access to those markets while also gaining tax advantages by investing their capital there.
To talk about this increased inequality is to really talk about a symptom of hollowing out the nation’s manufacturing based, which had long been the basis of the blue-collar middle class. Talk of an industrial policy was to some extent part of a larger discussion of whether the nation should return to mercantilism. Mercantilism would put the interests of the nation before the interests of individual producers.
Adam Smith had basically written his Inquiry into the Wealth of Nations as an argument against mercantilism in favor of free trade. For the American colonies prior to the American Revolution this was a particularly sensitive issue because the colonies’ relationship to England was a mercantilist one. The colonies would supply raw materials to England where they in turn would be used to manufacture finished products to be sold back to the colonies at much higher prices.
The American Revolution was as much about creating an economy based on free trade and liberating ourselves from the mercantilist control of the English Crown as it was about the so-called ideals of individual liberty because all men were created equal. Smith had written that through free trade, a nation could become “opulent,” which was the term that he used for wealth and prosperity. In his view, England wasn’t as opulent as it could be because of its stubborn practice of mercantilism.
And yet, here we are almost 250 years later because globalism is the stepchild of free trade. To adopt a mercantilist policy would be to put the interests of the national economy and American workers above those competitiveness in the global marketplace. Discussions of national industrial policy, however, went even further.
Behind the idea of a national industrial policy, which was the principal reason it was so controversial, was the idea that the government should engage in a degree of centralized planning. During the 1980s when American electronics manufacturers were losing out to the Japanese, it was suggested that maybe we should only produce what we were good at while if other countries could produce better electronics, then they should.
Ironically, this was not new. It was essentially the neoclassical economics idea of a production possibility curve which trace its roots to Smith’s division of labor and specialization of function. If we each specialized and produced what we were good at, we would achieve greater efficiency. In turn, we would trade with one another to meet our needs. The production possibility curve suggested that nations would do the same thing.
Centralized planning, in turn, implied that government would pick winners and losers. Industries that were no longer efficient would be allowed to go under or relocate to where they would be more efficient while those deemed essential to the interests of the nation might receive a helping hand. This seemed to fly in the face of Joseph Schumpeter’s model of “creative destruction,” whereby the old and obsolete would be replaced by the new and technologically more advanced.
Or perhaps it was recognition that the model really wasn’t working too well. Schumpeter assumed that those who were displaced from the old would be reabsorbed into the new. But what was happening in the new global marketplace was that those displaced simply did not have the skills to work in the new and hence were on a downward socioeconomic trajectory.
The principal opposition to an industrial policy came from the free market crowd who argued that centralized planning was inimical to the very liberty that built the American economy. Their basic question was why would we believe that planners could do a better job than the marketplace? And even if planners could do a better job than the market, any industrial policy was likely to fall prey to the political wrangling that would destroy its worth before it would be put into action. In other words, the winners would be picked not on the basis of what was good for the economy, but what was in the best interests of the most powerful interest groups.
Still, here we are in what will become the post-COVID economy where many of our supply chains are located in China, which is precisely where this virus came from. If we have to rely on manufacturers out of the country to produce a vaccine once it is discovered, then we will be at a disadvantage. Moreover, it may be a national security risk if supply chains for parts that go into American weapons systems are not manufactured here and we find ourselves dependent on other countries, and potentially hostile ones, for those supplies. What is to prevent those countries from blackmailing the U.S.?
To revisit the issue of a national industrial policy is really to talk about finding ways to bring back manufacturing because that would greatly assist in the restoration of the middle class and lessen the inequality due to globalism. The economic havoc of this pandemic, as well as those communities affected by it, has only laid bare many of the underlying inequalities that have long plagued the American economy, and all the more so in the last few decades.