The new mystery elixir appearing on the medicine shelves of Democratic Party presidential candidates is labeled "industrial policy."
It is an elixir because it promises to solve a host of painful ailments in the economy--the decline of basic manufacturing companies, the malignant unemployment in the aging "rust bowl" manufacturing cities, the Japanese challenge to future, high-tech industries. It's a cure for the damaging hostility between management and labor, a tonic for the wasted energy and dollars poured into mergers, takeovers and other corporate reshuffling.
It's also a mystery because no two experts seem to agree on what the elixir is made of, and critics call it snake oil.
Nevertheless, if the recovery falters and unemployment remains close to double-digit levels a year from now, there will be powerful political pressure for an industrial policy of some kind. Based on the initial prescriptions of congressional Democrats and outside economist and other advocates, the ingredients are likely to look like this:
* Industrial Banks:
A basic premise of an industrial policy is that U.S. banks and financial markets are not putting dollars where they are needed most. There is too little for promising but unproven new industries, too little for old manufacturing plants struggling to modernize and survive, but too much for the billion-dollar takeover and merger games, and too much for conglomerates that take their manufacturing overseas, leaving unemployment behind.
The solution would be to establish national or regional banks that would make long-term, low-interest loans to older industries facing crippling overcapacity, obsolescence or competition from lower-priced imports. In return, the bank officials could impose new operating plans on the business, remove ineffective managers, extract pay concessions from unions and cooperation from other lenders.
Investment banker Felix Rohatyn, who helped New York City escape bankruptcy in the 1970s as head of a unique Municipal Assistance Corp., argues that the same techniques that saved New York would work with aging American industries. A new, federally chartered Reconstruction Finance Corporation, named and patterned after the RFC of the post-World War I and Depression era, is needed, Rohatyn says.
"Only an RFC, publicly accountable but operated outside of politics, like MAC in New York State, could provide such new capital, as well as negotiating the meaningful concessions that have to come with it," Rohatyn told a congressional committee.
Robert Reich, a professor at Harvard University's Kennedy School of Government and author of "The Next American Frontier," wants the federal government to set up regional banks that would issue government-guaranteed bonds and stock, using the funds to make long-term, subsidized loans to industries that agree to restructure to meet the challenges of the 1980s.
Reich, who was director of policy planning at the Federal Trade Commission in the Carter administration, would have the banks drive a hard bargain: his "restructuring" would require retraining for workers whose jobs would be terminated and a radically different approach by management to employes who remain. Companies would have to invest in their "human capital," upgrading employes' skills, involving them in production and quality problems, and seeing to their long-term security. This approach would make companies flexible enough to shift to new products and technologies in the fast-changing 1980s and 1990s, Reich argues.
* National Planning Authority:
It isn't enough to aid companies in "aging" industries to revitalize themselves, industrial policy advocates say. The United States is in danger of losing the race for leadership in the newest industries that are based on computers, electronics, lasers, genetic manipulation, new plastics and other materials, and other fast-changing technologies.
"The United States is losing an international trade war--unnecessarily," says James F. Bere, chairman of Borg-Warner Inc. Instead of reacting defensively, with tax rebates and import restrictions, American producers must go on the offensive, pooling all society's strengths, he says. "It is time we established a genuine partnership between business and government," patterned after Japan's Ministry of International Trade and Industry (MITI).
An American industrial authority established by government and joined by business could sponsor research into new technologies, provide immunity for competing companies to pool knowledge and expertise, and allow companies in shrinking industries like steel to merge to conserve their strength, without running into antitrust objections.
Such a central industrial authority could help boost American entry into new kinds of markets and "sunshine" industries where costs and risks are high, says Lester C. Thurow, professor of economics at Massachusetts Institute of Technology and a widely quoted advocate of industrial policy.
In May, a National Industrial Strategy bill was introduced by a group of Democratic House members led by Reps. Stan Lundine of New York, David Bonior of Michigan, Tim Wirth of Colorado and Richard Gephardt of Missouri.
Their plan would establish a National Industrial Bank and an Economic Cooperation Council to plan an industrial policy and bang enough heads together to make it work.
"We must negotiate deals," Lundine said in a May 12 House speech. "If the government gives trade protection, we should know that we are going to get investment and jobs as a result. If an industry takes high risks and invests in productive capacity, it should get better terms (for borrowing) . . . or a better break than those who do not make those investments. If workers give us some benefits, they should get real employment security as a result."
The council members, appointed by the president and approved by Congress, would represent business, labor, government and "public interest" organizations. Since it would have only advisory powers to make the deals Lundine calls for, it would have to rely on political persuasion and pressure. Lundine says that with its visibility, that would be enough, particularly if its decisions were supported by cash from the industrial banks.
The philosophy behind this scheme is that painful decisions lie ahead in shifting American industry from products and processes that are no longer competitive to new areas that promise stronger growth. The steel industry, for example, which has closed half its plants and wiped out half its jobs in the past five years, can survive on a smaller scale, producing specialized, higher-value products in more modern, automated and cleaner plants--but not without help, says Thurow.
And not without some national-level dealmaking to assure all sides that the sacrifices are distributed fairly, says Lundine.
* National consumption tax:
Some powerful new source of revenue is needed to finance the subsidies, retraining assistance, relocation aid and the rest of the scaffolding for a widespread restructuring of American business, the industrial policy advocates say.
Reich calls for a "progressive tax on consumption," not a sales tax strictly speaking, but a levy imposed on the part of each taxpayer's income that is spent, not saved. In his book, he says that "income would not be taxed so long as it remained as savings. But money withdrawn from savings during the course of a year would be taxable, as would sums borrowed for consumption. The tax rate would be greater the more money was spent," and the tax should be accompanied by stiffer taxes on inheritance and gifts.
Such a consumption tax would replace the current federal income tax, Reich urges, with some of the revenues going to finance job retraining, day care and other employment expenses.
Unemployed workers would receive vouchers that could be cashed in at companies that were looking for additional workers and were willing to train them. Firms that accepted the vouchers would have half their training costs paid by the government, for up to three years, Reich proposes. Business, not government, is best equipped to replace the current welfare system by providing the chronically unemployed with work skills, he says.
Reich calls the present system of taxation and economic regulation a "casino" where the privileged are admitted to battle for tax breaks and concessions, while the majority of the public pass by outside, becoming more and more cynical about the workings of government. "Our government is tainted by backroom deals in which well-connected parties try to pass losses on to someone else . . . We are losing the competitive struggle because we cannot work together." The farther this trend goes, the harder it will be for government to help arrange a public consensus on the shift to new industrial and social policies, he says.
Reich argues that while all of this sounds utopian, there already is a clear, if haphazard, movement toward most of his goals. An ever larger share of workers' health, security and other benefits are coming through the employer, putting companies into the social services field. Government is deeply involved in industrial policy areas now, conveying tax breaks to certain industries and rewarding certain kinds of business capital investments, determining the level of import protection companies receive and giving financial incentives to firms that export.
The truth is that America has been conducting continuing experiments in industrial policy since the development of government-backed railroads in the last century. And the challenge that the industrial policy proponents will face is finding success stories among all of that history, says Jerry Jasinowski, a former Commerce Department economist and now vice president and chief economist of the National Association of Manufacturers. While a continuing debate over industrial policy is essential, most of the solutions proposed so far "are largely irrelevant to the problems facing American industry," he argues.
Despite Rohatyn's endorsement, the original Reconstruction Finance Agency, established by Herbert Hoover, has a long list of critics. Will Rogers observed that: "The Reconstruction loaned the railroads money, medium and small banks money, and all they did with it was pay off what they owed to New York banks. So the money went uphill instead of down."
Robert N. Noyce, vice chairman of Intel Corp., a leading U.S. manufacturer of semiconductors and computer components--one of the nation's most successful industrial innovators--says that the membership of national economic councils would likely be dominated by executives and labor leaders from troubled industries like steel, not the so-called "sunrise" industries like his whose prospects seem to be brightest.
Moreover, Noyce said in an interview, companies with good ideas and promising products don't need help in finding capital for growth--so long as the overall economy is healthy and there is a well-run policy in Washington.
Philip M. Klutznick, secretary of Commerce in the Carter administration and an experienced financier, told a congressional hearing on industrial policy two years ago that real entrepreneurs can find support. "I don't know of a single solid deal today--whether it's manufacturing or something else . . . that can't find credit in one way or another." The most important need is to maintain the growth of small, mid-sized and minority businesses, he said--since they offer the greatest hope for job creation. "That can't be done by a massive lending organization."
The question for the industrial policy advocates is whether the opposite approach--a national solution imposed from the top--could work without a huge level of governmental control that society has normally accepted only in wartime.