Industrial policy has been practiced by the government of the United States to a greater or lesser extent since its inception. Tariffs, subsidies, intellectual property protection, industry regulation, labor regulation, and safeguards have all impacted the development and growth of industry. In fact, industrial policy may be politically inevitable because many people want the government to "do something" to improve the economy. Perhaps because of the lack of a nationwide discussion of the attributes of an effective policy, the government has failed to articulate a coherent framework within which its industrial policy choices should fit and a standard against which its industrial policies may be measured. Thus, industrial policy in the United States has included a mix of sectoral, general, and other approaches that have met with varying success.
As early as 1791, Alexander Hamilton advocated a form of infant industry protection and price distortions in order to encourage the development of a favored industry—manufacturing—in the United States. Since that time, the government has used price controls, trade restrictions, tariffs and taxes, and industry regulation to provide special advantages to certain firms in favored industries. These controls provide direct incentives to private firms in the form of increased profits. Advocates of such policies hope that these private firms enhance the welfare of the nation by investing the profits in research, development, and infrastructure that provide benefits to many individuals and firms outside the company. These approaches have been criticized because they involve “picking winners” and because the information and administrative costs associated with the government’s effective implementation and monitoring programs may outweigh the benefits from the policies. Another concern is that the effectiveness of the programs eventually becomes diminished by entrenched interests. For example, the benefited firms might keep the excess profits without reinvesting them or use the rents to create an effective political apparatus whose purpose is simply to perpetuate the policies advantageous to those firms.
In 1993, Steve Charnovitz published a paper that criticized sector approaches to industrial policy and advocated a “general” approach. He suggested that the focus of any policy should be at the national level rather than at the firm level. Providing subsidies for institutional infrastructure, such as public education, job training programs, and financial markets, may improve the welfare of the nation by correcting market failures. In other words, Charnovitz believed that, in some cases, social returns from certain investments were higher than private returns, and that the government could compensate for this by making appropriate investments and eliminating many impediments to private sector growth. Some ways in which a general industrial policy approach could be implemented are reducing the burden of regulation, developing better labor markets with unemployment insurance and information services, and developing venture capital funds for which small businesses must compete. One drawback to general approaches is that the effectiveness of the approaches may be very difficult to measure. Moreover, the effect of a general approach may be too long term to allow a rapid development cycle for the approach.
One effective and interesting industrial policy approach is illustrated in the U.S. Government's loan guarantees given to Chrysler Corporation in 1980. The agreement between the automaker and the government provided an opportunity for the private firm to continue operation, but the assistance was contingent on management and workers agreeing on several concessions. In effect, Chrysler and the government attempted to identify the causes of the problems that were plaguing the firm. Once the bottlenecks were identified, the government and the firm worked together to eliminate them by undoing several constraints to which management and workers had previously agreed. This example may suggest a third approach to industrial policy—one in which government incentives are conditioned on certain benchmarks set by the government. One difficulty of this model is that it is difficult to evaluate whether the continued existence of Chrysler was actually beneficial to the nation. Thus, the measurement difficulties presented by the general approach may also be present in this strategic approach to industrial policy.
I believe that law should seek to facilitate the identification and adoption or, alternatively, the rejection of an industrial policy based on the policy’s effectiveness at achieving benchmarks that are agreed to before the industrial policy is created. In this manner, the government can create more turnover and variety in its approaches, and academics can then develop better theories to describe what approaches work best using the new data. What the country needs are better independent institutions to measure and report progress that polices make towards their agreed-upon goals.
4 comments:
Lance,
You are exactly correct in stating that better reporting is the key to unlocking the potential of government industrial policy. For the most part, private industries are better left untouched by government industrial policy. Passing tariffs, taxes, providing subsidies, and other practices taken by government entities to protect certain industries usually creates a "deadweight loss" that arises from lost consumption and/or production. This means that, in general, government intervention should only be limited to certain, extreme circumstances.
In circumstances such as Hurricane Katrina in New Orleans, government intervention in the private sector may be required. In these limited cases, better management and more well-defined benchmarks are definitely required. Usually, poor management is brought to our attention by the press and the media. Independent entities could definitely take an increasing part in overseeing government expenses.
Loren and I talk about the energy problem all the time. Could "government incentives" for the development of an infrastructure of renewable resources for energy really compete with "government intervention" in behalf of oil production?
Government intervention in the economy has generally increased rapidly as a percentage of GDP since the 1930s. These days, the bulk of the intervention comes about through money-transfering entitlement programs such as Social Security and Medicare.
These policies tend to reflect the "general approach" to industrial policy identified by Mr. Charnovitz more than the "sectoral approach" advocated by Alexander Hamilton because they are nationwide and do not involve picking winners (i.e., choosing to distribute resources to one industry at the expense of another). Of course, even general industrial policies can produce deadweight loss-type effects--I'll try to identify some of them in a future post.
Sectoral policies are still alive and well, though. One major example is the energy bill passed and signed into law in 2005. It continued a federal gasoline tax (an industry-specific tax) that is inadequate to fully pay for massive highway and other road subsidies provided by the federal government, provided subsidies for certain favored "future energy sources" research (i.e., subsidies for energy businesses having a well-developed lobbying effort), and provided major incentives for oil and gas exploration and reserve identification. Most of the provisions in the bill involve picking winners and make it more difficult for the best energy solutions and practices to develop.
The rationales offered for such provisions include the arguments that special circumstances (e.g., high price of gasoline) warrant government intervention to attempt to reduce the price. I've also heard arguments that domestic oil and gas are critical to national security, that highways should receive a general subsidy because they facilitate trade, and that government needs to fund basic research into alternative energy sources before commercialization of such sources becomes viable through the intellectual property system (e.g., energy research is currently in a stage well before the 20-year time horizon for commercialization provided by patent incentives).
I think that these arguments are without merit, even though I think that government-funded basic scientific research may be a beneficial program. The energy policies get into trouble when they select certain industries (e.g., oil and gas) and technologies (e.g., "hydrogen" and corn-produced ethanol) at the expense of other industries and technologies. If the government is spending billions of dollars a year to subsidize the construction of corn-derived ethanol refineries, how are other methods of ethanol production and other alternative fuels supposed to compete?
The nuclear industry subsidies in the energy bill are an interesting illustration of what Kara wrote about. American nuclear energy regulations were changed in the late 1970s with the effect that no more nuclear power plants have begun construction for nearly 30 years. The subsidies are an attempt to restart that industry. Thus, the government spends money to provide subsidies to companies to compensate for the regulation paid for by the government that was designed to eliminate the industry. At the same time, the regulation limited research and development in the nuclear industry that might have improved safety and efficiency of nuclear power plants over the past several decades.
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