"Industrial policy," a popular rubric for ideas about how to cure the ills of smokestack America, has become an empty political phrase standing somewhat in the way of serious proposals to improve the nation's economy.
That harsh verdict was tendered informally but nearly unanimously by a group of prominent economists that met here recently to examine the origins of the apparent decline of American industry and what might be done about it. The three-day session was sponsored by the Federal Reserve Bank of Kansas City.
As the lack of substance and detail in many industrial policy proposals was attacked by speaker after speaker, former Labor secretary Ray Marshall, now an economist at the University of Texas, labeled the phrase "a caricature . . . a word rapidly losing its value as a way to communicate."
Observed Barry Bosworth of the Brookings Institution, "In many respects, it has been a negative session, a debunking of some myths" both about the causes of the relative industrial decline and what might be done about it.
"The title of industrial policy is no longer meaningful," Bosworth continued, except as a rallying cry for Democrats versus Republican supply-side economics. "It will last one more election campaign," he predicted.
A number of the economists nevertheless indicated that they favor expanded use of some government programs and policies that are on most lists of what an industrial policy might include. Marshall, for instance, strongly defended federal jobs programs as a useful and cost-effective means of improving income levels for disadvantaged groups. And Lawrence Klein, the Nobel laureate from the University of Pennsylvania, declared, "I think that are some real problems and we have to think about an industrial policy."
But what Klein has in mind are such elements as better coordination of domestic economic policies among industrial nations, with less reliance on monetary policy as the lever for controlling economic activity, and policies aimed at stabilizing commodity prices to assist less developed countries that are major markets for American exports.
Many in the group urged a shift toward an easier monetary policy, with lower interest rates, and a tightening of fiscal policy with tax increases to reduce budget deficits. Such a switch in the United States' macro-economic policy mix would aid some hard-hit industries that are particularly sensitive to the level of interest rates.
One reason for emphasizing macro-economic policies rather than programs to aid specific industries, several of the economists argued, is that most of the distress in American industry is due not to unfair foreign competition or successful industrial policies abroad.
Instead, they said, the decline in industrial output and employment is primarily the result of domestic economic policies that have sought to slow inflation by reducing the economy's total output of goods and services. As in the past, those policies fell hardest on industries producing durable goods, such as autos, steel and housing.
Moreover, the heavy reliance on tight money and high interest rates to accomplish that inflation objective has helped attract billions of dollars worth of foreign investment to the United States, boosting the value of the dollar on foreign exchange markets to the point that it is severely hurting U.S. exports of industrial goods.
Another Brookings economist, Robert Z. Lawrence, told the conference that despite the widespread claims that selective support for industries abroad have helped foreign companies greatly increase their share of the U.S. market, American manufacturing industries have responded better than their counterparts in other countries.
"There is no puzzle in explaining aggregate manufacturing production: it is almost exactly what one should have expected given the performance of the total economy," Lawrence declared.
During the 1970s, he pointed out, investment in manufacturing in this country grew more rapidly than in the rest of the private economy and the ratio of net capital stock per worker grew nearly twice as fast from 1974 to 1980 as it did between 1950 and 1973.
Meanwhile, spending on research and development in manufacturing, which grew 1.9 percent annually from 1960 to 1972, actually accelerated to 2.4 percent a year from 1972 to 1979, the latest data available, Lawrence said.
Turning the argument of many backers of industrial policies on its head, Lawrence concluded, "There has not been an erosion in the U.S. industrial base. The decline in employment shares relative to other parts of the economy has been the predictable result of slow demand and relatively more rapid labor productivity growth in manufacturing because of an acceleration in capital formation."
Lawrence said international comparisons indicate "that this economy has been adaptable" to changing economic conditions and more adaptable than many other industrial economies, particularly those in Europe.
Given that devastating summation, it was small wonder that there were few defenders of the basic list of industrial policy ingredients that are usually offered, most intended to correct problems that Lawrence's reading of recent history suggests do not exist.
Paul R. Krugman, an MIT economist who spent the past year at the Council of Economic Advisers, told the group that the industrial policy ingredients list usually includes these four proposals:
Shift resources into industries with a high value-added per worker, such as in high-technology fields.
Increase investment in so-called linkage industries--steel and semi-conductors, for example--whose outputs are used as inputs by other industries.
Target for assistance industries that are not now competitive on world markets but will be or can be made to be competitive in the future.
Assist industries whose foreign competitors are being aided by their governments, lest this nation's industrial structure become determined by other countries' targeting.
Krugman concluded that in each case there are good reasons to reject the proposed assistance, but with a year of work in Washington behind him, he concluded, "At some point in the next decade the United States will probably adopt an explicit industrial policy.
"This policy may include general incentives for capital formation, R&D, retraining of labor, and so on; but it will also almost surely involve 'targeting' of industries thought to be of particular importance.
"Support for some kind of targeted industrial policy comes from a remarkably wide sprectrum," Krugman said. "The idea is favored by nearly all Democrats and many Republicans, nearly all liberals and many conservatives, nearly all unions and many businesses. The only fairly unified opposition comes from professional economists.
"It is a tribute to the force of free-market ideology that we have resisted industrial targeting as long as we have."
The union support was renewed recently by the AFL-CIO's Executive Council, which said that a national industrial policy is essential "to modernize basic industries, support development of technologically advanced industry in the U.S. and reverse the deterioration of public services and infrastructure."
However, according to Krugman, the criteria for picking the targets--the four common ones outlined above--"are poorly thought out and would lead to counter-productive policies" that likely would lower national income rather than increase it."
Krugman's conclusions were either endorsed specifically or not seriously challenged by most other conference participants other than Rudy Oswald, director of economics for the AFL-CIO. (Some other advocates of an industrial policy, such as MIT economist Lester Thurow and Harvard political scientist Robert Reich, were invited but unable to attend the conference.)
In his analysis, Krugman said that focusing on industries with high value-added per worker, such as petroleum refining, could backfire and cause an increase in unemployment.
The high output per worker, he said, reflects high inputs per worker: large quantities of capital and extensive training and education. If total national investment were not changed, channeling more into the high value-added industries would mean both less employment and slower economic growth, Krugman argued.
The second criterion, focusing on the "linkage" industries, would help only if there were "multiple returns" to the output from such industries. "Saying that steel is used in many industries conveys the impression of multiple returns to output," Krugman said. "But while steel is used in many industries, a particular ingot of steel is used only once. A linkage of industry's products can be made to sound like 'catalysts' for the rest of the economy, but unlike a real catalyst, steel does not get to be reused many times."
As for fostering future competitiveness, Krugman said that "having the industry grow up healthy is not enough; its existence must generate enough extra national income to compensate for the initial cost."
Finally, he added, "an industrial policy aimed at meeting foreign competition would probably lead to government encouragement of investment precisely where the returns to investment are depressed by the targeting of other governments . . . In general, meeting foreign industrial policy seems to be almost a recipe for picking sectors where there is excess capacity and low returns."
That is precisely what happened in the most celebrated of all foreign industrial policies, the Japanese targeting of steel. For a variety of reasons, the channeling of low-cost capital to the industry, the primary form of help, did little to affect the course of U.S.-Japanese competition, "and to the extent it was effective it probably reduced Japanese national income," Krugman said.
The economists also generally rejected the claim that some form of an industrial policy is needed because structural changes within and among industries have speeded up in recent years. Klein, Lawrence Summers of Harvard and James Tobin, Yale's Nobel economist, all said there is no evidence that structural changes are occurring more rapidly.
"That's an optical illusion," said Tobin. "They are victims of macro policies, not micro economic change. Added Summers, "The pace of structural change . . . within manufacturing did not increase in the 1970s compared to the rest of the post-war period."
William Diebold Jr., a senior fellow at the Council on Foreign Relations, an advocate of industrial policies and the final speaker at the conference, summed it up this way:
"Clarity is complexity in this field. Distaste for the subject in no reason for not taking it seriously," something that many economists have not done to date, Diebold maintained.
Diebold agreed that the phrase itself was not very precise. "It's a shorthand for a whole series of overlapping considerations . . . It's many different things." And he also agreed that, "The first thing to do is to get macro policy right. That would relieve some of the pressure."
But Diebold stressed that many of the problems under discussion at the conference involved what economists call "market imperfections," cases in which for whatever reason competitive forces are not working as well as they might.
Several of the other economists agreed that when the market is now working well, there might be a case for government intervention. On the other hand, there is no guarantee that that intervention might not make things worse.