Gloomingly regarding the performance of their economy, Americans often wonder if it isn't becoming necessary to steer the course of industrial development more forcefully. How about picking the likeliest growth industries and pushing them? If you don't like that idea, how about manipulating tax and trade policies to encourage industrial growth generally?
That's what President Reagan's supply-side strategy is supposed to do. Since it isn't working, what are the other possibilities?
The Wharton School, at the University of Pennsylvania, called a conference on those questions a year ago. Now two Wharton economists, Michael L. Wachter and Susan M. Wachter, have published the substance of the conference-- the papers, and the comments on them from a range of businessmen and labor leaders as well as economists. There is no consensus among them, just as there is none in the country generally. You will notice that the Wachters' title ends with a question mark.
But if you want one book that covers the breadth of the industrial policy controversy, as it is carried on among thoughtful and sophisticated people, this one will serve you well.
Any discussion of the subject is likely to begin with the claim that other countries--especially Japan, France and Germany--have sharp and clear industrial policies successfully supporting their growth at the expense of the United States.
In an illuminating survey of foreign experience, George Eads, an economist with the Rand Corporation, warns that it adds up to two words: Be cautious.
Rep. Henry Reuss (D-Wis.), the chairman of the Joint Economic Committee, probably speaks for the majority when he says: "Can our federal government do a better job than the market in deciding what products, firms and industries will prosper in the future? I doubt it." There are distinguished dissenters, but there's also an undercurrent of uneasiness that "industrial policy" is turning into a mere slogan, concealing the magnitude of the dislocations ahead.
"Industrialization policy implies a tilt of public policy and private endeavor away from personal consumption and government expenditure, and toward investment, especially in manufacturing," observes D. Quinn Mills of the Harvard Business School. One crucial question "is whether we can develop a society with a high tolerance for change in the industrial workplace."
Are the dramatic troubles of the American automobile industry, and parts of the steel industry, a sign of general industrial decline? Not really. Princeton economist William H. Branson observes that American industry, taken all together, remains very competitive and the country's international accounts are solidly in balance. As the country engages more deeply in world trade, jobs and money are moving rapidly into products where the United States has comparative advantages--industrial machinery, chemicals, agricultural products --at the expense of those with no advantages, most visibly including middle-technology, and labor intensive heavy industries like auto making.
Minding America's Business is a very different sort of book, strongly advocating one specific line of industrial policy. The authors, Ira C. Magaziner, a business consultant, and Robert B. Reich, who teaches at Harvard's Kennedy School, denounce the Reagan program as being solely and excessively focused on financial incentives. Instead, they propose a sort of industrial triage: public intervention to move capital and labor out of uncompetitive businesses, "general incentives" for those enjoying comparative advantages in world competition, and special government intervention to share the risks and promote investment in the comers.
"Without government support," they argue, "American business will find it increasingly difficult to achieve competitive leadership in today's international environment. This does not mean that government can effectively supplant or second-guess the strategic decisions of business. . . . It simply means that the competitive strength of the economy as a whole requires a coherent set of public policies for improving competitive productivity in industry."
Unfortunately, this book is marred by hasty writing and too many vague generalizations. It never deals with the hard questions: How do you pick the winners? How, in the American political system, do you keep the special benefits from turning into life support systems for the terminal cases? Oddly, there's also a degree of a deeper confusion-- as in that phrase, "competitive productivity."
Productivity is one thing, competitiveness another. Productivity is a person's output on the job. Competitiveness is merely the ability to sell goods abroad, and depends mainly on the currency exchange rate. Despite its recent troubles with productivity, the United States has remained highly competitive in recent years by allowing the world value of the dollar to drift downard. Even a country with low productivity can be highly competitive. For example, take Japan.
Some Japanese industries, and some Japanese plants, have reached very high productivity levels by any standard, and the country's rate of growth has been spectacular. But the productivity of the Japanese economy as a whole is only slightly better than Italy's, or Britain's. That puts it well below France's or Germany's.
There are many ways to measure productivity, and international comparisons have special difficulties. The simplest way is to take each country's output and convert it into dollars by the current exchange rate. By that method, Germany and several other countries come out much higher than the United States. But that imposes a severe distortion. Currency exchange rates are set in terms of things traded internationally, like oil and wheat. Most of the things on which people spend most of their money--like housing, haircuts and hospital care--are not traded internationally. To get a valid comparison, most economists say, you have to compare the actual purchasing power of money in different countries. Western European housing costs, for example, are staggering by American standards. When housing is introduced into the calculation, the results change sharply.
By any sophisticated measure, Japan's productivity is now about two-thirds the American level and northwestern Europe's is about five-sixths the American level. American productivity is still, by a substantial margin, the highest in the world. But it has not increased for five years, and that highly disquieting development is the reason for the current concern with industrial policy. If past trends continue, Japan, western Europe and the United States will all be at the same level by the early 1990s. That would be a blow to American pride, although not to American economic prospects.
But perhaps past trends won't continue, and perhaps other countries' productivity won't continue growing much more rapidly than ours. Lawrence R. Klein of the Wharton School, one of the contributors to the Wachter book, offers an unfashionably cheerful suggestion: "There are good grounds for expecting the American performance to be favorable on a comparative scale in the next five to 10 years. Many of our partner countries will be experiencing some of our problems of the 1970s. The baby boom age cohort and high female labor force participation are now hitting some West European countries. In Japan, higher levels of living and a shorter working week are being sought by the working population." Demography, and changing social values, may turn out to have more influence on industrial performance than any public policy has.