Does America need an industrial policy?

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I was reading The Wall Street Journal the other day and came upon an essay that made me feel as if I had been shoved into a time machine and sent back to 1985. No, it wasn’t about or a new Molly Ringwald movie or a longing for acid-washed jeans. The essay, written by Jeremy Wiesen, a professor at New York University’s Stern School of Business, was advocating that the United States adopt an industrial policy. Here’s a bit of what Wiesen wrote:

We shouldn’t need to implore the government to have at least as many officials focused on new business creation as are measuring GNP and GDP. The term “industrial policy” should not be seen as a pejorative. It certainly isn’t in China. Nor should it be anathema for the U.S. government to provide capital and other incentives to keep scientific and entrepreneurial talent at home, give aggressive trade assistance, and incubate new businesses—all of which is done in China.

Wiesen has blown the dust off an idea that has been bounced around for decades. Whenever the U.S. feels pressure from rising competition, especially from Asia, calls erupt that Washington should do what Asian policymakers supposedly do – foster the development of certain industries, or “pick winners.” The U.S. has generally avoided going down that road. Such a strategy has run counter to America ideas of free enterprise. Government officials, Americans believe, can do more harm than good when they stick their fingers into matters of markets and private business.

But does the U.S., as Wiesen argues, finally need to get past its ideological hang-ups to compete in the 21st century? Does the U.S. need an industrial policy?

The American fascination with industrial policy is very much a result of the rise of Asia, and originally Japan. In the 1960s and 1970s, the bureaucrats in Tokyo were the patron saints of modern industrial policy, who employed special loans, trade protection and other methods of support to nurture new industries that could compete in international markets. Beginning in the 1970s, American scholars and businessmen looked in wonder at the rapid emergence of Japanese companies in sectors such as steel, shipbuilding and semiconductors and credited Japan’s industrial policy. That’s when the calls began in the U.S. urging Washington to adopt similar policies, or lose out to Japan and its supposed superior economic model. Now the argument has been resurrected. This time, the country to mimic is a rising China, with its supposedly superior form of state capitalism.

Should the U.S. forge its own industrial policy? The notion isn’t really as much of an affront to American ideals as many people think. The U.S. government already intervenes in the economy in ways that influence how companies invest – through, for example, tax breaks – and offers help for specific undertakings – with, for example, research grants. So how big of a step would it be to just make those efforts more coordinated and intensive? Such a concept goes back to the earliest days of the republic. Alexander Hamilton advocated a form of industrial policy while serving in the cabinet of George Washington.

But if the U.S. does adopt an industrial policy, will it work? I did a lot of research on Asia’s experience with industrial policies for my book, The Miracle: The Epic Story of Asia’s Quest for Wealth, and I think Asia’s experience can teach us a lot about the pros and cons of industrial policy. My bottom line is that industrial policies were not the defining reason behind Asia’s industrial ascent, and we shouldn’t have any illusions that similar policies in the U.S. would make that much of a difference to the future competitiveness of the American economy.

True, industrial policies probably aided the emergence of a narrow number of new industries in Japan, South Korea and Taiwan. But advocates usually focus too much on this small group of success stories and exaggerate the role of the bureaucrats in their advance. The reason companies in “targeted” industries, like shipbuilding in Korea or electronics in Taiwan, have proven so successful is that the private entrepreneurs who launched them used the state support they received wisely and made products that people wanted to buy on international markets. But the real knock on industrial policy is that many of Asia’s most influential companies and sectors were never “targeted” at all. The powerful Japanese consumer electronics and motorcycle industries, for example, never got significant direct aid from Japan’s bureaucrats. Nor did prominent companies such as Sony or Honda.

Wiesen correctly points out that America’s economic future depends on continued innovation in groundbreaking technologies and the development of lifestyle-altering products. But the examples he provides – Sony’s Walkman, Microsoft’s Windows and Apple’s iPad — don’t prove industrial policy is necessary to important innovation. None of those products emerged from government programs.

Now I’m not ideologically opposed to the idea of government supporting business. More focused government efforts to spur on new technologies, like alternative energy, might – and I’ll stress the word might here – do some good in helping the U.S. compete in such industries of the future. But in the end, the impact of industrial policies would be limited and spotty. Many analysts have made the mistake of believing Asia’s ascent was crafted by its bureaucrats, when in fact, it was created by its businessmen. The future of the American economy, too, will be found in its private boardrooms, not government offices.

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