THE PRACTICAL test of industrial policy, as it is now being discussed, is the automobile industry. Policy in the abstract is too glib. The question to press is how it might apply to actual cases, of which the most difficult is automobiles.
It's quite true that the existing government policies toward the industry lie at cross-purposes with each other. The air pollution and safety rules were imposed at a time when an aura of vast wealth surrounded the companies, and the tighter requirements seemed to be, in economic terms, free. It's also true that while the government's rescue of Chrysler has been a great success for that company, its benefit to the industry as a whole has been less clear. Unless you are prepared to argue that everyone buying a Chrysler car today would otherwise have bought an import, you have to conclude that Chrysler was saved at a cost in current sales to the other American auto companies. To prop up one threatened company does not necessarily strengthen an industry to meet international competition.
For the future, the auto industry's points of vulnerability are pretty evident. It suffers from an embedded tradition of harshly adversary labor relations and from wages that are far out of line with those in most other American manufacturing industries. But industrial policy isn't likely to want to get into those areas. Many of the domestic automobile industry's customers seem to feel that it does not maintain quality control as carefully as some of the producers in Western Europe and Japan do. Again, the government hasn't much to offer there--or in the matter of labor productivity, where the American companies, to their great disadvantage, score significantly less well than some of their foreign competitors.
Sometimes the government's efforts to help one industry inadvertently harm another. When the government keeps cheap foreign steel out of the American market, it imposes a competitive disadvantage on the American companies that use steel --like the automobile manufacturers.
Industrial policy--government intervention to strengthen one industry specifically--does not seem on the whole very promising for automobiles. But does the government have no responsibility at all?
Historians are likely to observe that the interest in industrial policy rose in this country during a period of failed macroeconomic policy that was generating huge deficits. The deficits in turn have contributed to the very high exchange rate of the dollar and to high interest costs. The automobile industry is extremely vulnerable to both. The high exchange rate not only makes United States exports expensive abroad, but makes imports cheap in this country. The assistance that narrowly focused industrial policies can offer is trivial compared with the enormous burdens now being imposed by a national economic policy gone awry.