Who Pays For Economic Change?

By Mark Danner and , Charles Schultze, Barry Bluestone, Benjamin M. Friedman, et al.
February 26, 1985

In the American religion there stands no icon more sacred than the "free market," embodying as it does the belief that Americans must trust in the benevolence of unseen forces to fulfill their destiny of wealth and power. In times of economic unrest, however, when factories close down, workers lose their jobs, and towns become impoverished, the prayers to the mysterious market gods give way to cries of anger and disbelief.

In the past few years, various heretical sects have put forward a new faith called "industrial policy." Its apostles see hideous economic change churning beneath the surface of America's apparent prosperity. They notice the nation's rapidly disappearing hegernony in world trade, its declining manufacturing industries, and its dwindling stock of middle-class jobs. To correct these misfortunes they demand tariffs and government rules against plant closings and wholesale layoffs. All these proposals advance the doctrine most feared by believers in the free market-c-government planning.

How harmful are these transformations in the American economy? Should government rescue our manufacturing industries and try to ensure "distributive justice" for their workers? Does America need an industrial policy? The five eminent economists who address these questions raise the further question as to how America can best pay the price of economic change.

This Forum is drawn from a discussion held at Harvard University's Institute of Politics, in Cambridge, Massachusetts. Benjamin M. Friedman served as moderator.

is a professor of economics at Harvard University and director of
financial market research at the National
Bureau of Economic Research.
He is author of
Economic Stabilization Policy and Monetary Policy in the

United States.

was director of the Bureau of the Budget during the Johnson Administration
and chairman of the Council of
Economic Advisors during the Carter Administration.
Among his books are
The Politics and Economics of
Public Spending; Pollution, Prices
and Public Policy; and The Public Use of Private Interest.

is a professor of economics at Boston College
and senior research associate of the Social Welfare Research
His books include Low Wages and the Working Poor; The Retail Revolution;
Aircraft Industry
Dynamics; and The Deindustrialization of America,
written with Bennett Harrison.

is a senior fellow at the Brookings Institution and author of
Commodity Prices and the New Inflation,
written with Barry P. Bosworth,
and, most recently, Can America Compete?

is a professor of political economy and planning at the
Massachusetts Institute of Technology. He is author of

Education, Training and the Urban Ghetto and Urban Economic Development,
and co-author of The
Deindustrialization of America.

BENJAMIN M. FRIEDMAN: We are here to discuss whether the United States needs a so-called industrial policy. Proponents of such policies argue that our economy is currently undergoing a dramatic and largely negative transformation: a massive shift of resources and jobs, from manufacturing to a new "service" economy, that two of our panelists have called the "deindustrialization of America." Jobs are being eliminated in the Northeast and Midwest as factories in those areas close down or reduce production, while new jobs are being created elsewhere, primarily in the West and Southwest. At the same time, job opportunities are disappearing for traditional blue-collar groups and increasing for the more highly skilled and educated.

Those who advance these ideas claim deindustrialization is responsible for regional depressions, a lower standard of living for a large part of our population, and the shrinking of the middle class. They also argue that the government must intervene to slow or halt these harmful changes in the economy by protecting failing industries, helping depressed areas, and so on. Basically, an industrial policy is a coordinated program of such interventions, though specific proposals vary greatly.

Others argue, just as vigorously, that we do not need an industrial policy. In part they dispute the "fact" of de industrialization; in part they suggest that what is happening is either beneficial, or inevitable, or both; and in part they despair of finding remedies that will improve the situation rather than aggravate it.

Our purpose today is not to debate the virtues of specific proposals for an industrial policy, but to discuss whether the United States needs such a policy at all. Thus, our first question must be, What exactly is happening to the mix of job opportunities and production technologies in the American economy? Are we really on the road to becoming a service-based economy? If so, how fast are these changes occurring, and what do they imply for the future standard of living of American workers?

Our second question is, Why are these changes occurring? Are they part of the natural, inevitable maturation of the U.S. economy? How are they related to the wage gains achieved by unionized workers in the heavy manufacturing sectors - gains, some argue, that have helped make many of our industries uncompetitive in world markets? And what part have government policies played? Does our government's present involvement in the economy already constitute a de facto industrial policy, although perhaps an unwise one?

Finally, what if anything ought we to do about these transformations? Must we take steps to avert or modify them? Would such steps make the situation worse? In short, can an industrial
policy work in the U.S. economy? Perhaps it would be mosr helpful to begin with a definition. Charlie, what exactly do people mean by the term "de-industrialization" ? Is it a new phenomenon?

CHARLES L. SCHULTZE: Well, there are various definitions of deindustrialization. But common to all of them, I suppose, is the belief that the free market tends to misallocate capital and other resources, and that as a result the structure of the American economy is being twisted out of shape; in particular, steel, automobiles, and other heavy manufacturing industries are receiving too little investment, and the so-called service industries - fast-food restaurants, financial institutions, small retail businesses, and so on - are receiving too much. This supposedly skewed investment gradually eliminates high-paying blue-collar jobs in manufacturing - workers are laid off and not replaced, factories close - and replaces them with generally lower-paying, lower-skill service jobs.

Now, the general point of all industrial policy advocates is this: major economic change, without new interventionist government policies, inevitably means workers lose their jobs, which causes hardship. Well, that is certainly true. But proponents of industrial policy also claim that this is a particularly serious problem now - and I think that is highly debatable. Between the early I950s and the late '1960s, for example, eight important industries that employed 40 percent of America's manufacturing production workers lost, on average, 14 percent of their work forces. That is, one in seven jobs were lost. In a dynamic economy, old factories close' and new ones open, workers are laid off and then rehired. This process is always going on.

BARRY BLUESTONE: No one is claiming we have not had major changes in the American economy before. The pertinent questions, as Ben said, are these: first, how fast are those changes now occurring? And second, can the country absorb them without suffering serious social consequences? The debate about the decline of American heavy industry really centers on the relationship between the speed of deindusrrialization in different industries and regions and the ability of the economy to transfer the capital displaced from heavy manufacturing production jobs into new jobs that promise a decent standard of living for workers.

ROBERT Z. LAWRENCE: You speak about "a decent standard of living for workers," but I think what you're really worried about is that certain people are moving from high positions on the income scale to somewhat lower ones. If, for example, a steel worker or an automobile worker loses his job, it's very likely that he or she will suffer a substantial decline in living standards. The question is, is that something we should be trying to prevent? Should the state be guaranteeing people that it will perpetuate their current income levels by imposing import quotas or otherwise protecting certain industries? It seems to me the answer ought to be no. To ask people who earn $13,000 or $15,000 a year to subsidize the jobs of production workers who earn $26,000 or $28,000 a year seems to me both inappropriate and inequitable.

BLUESTONE: You've set up the problem as though the only players in the game were high-paid and low-paid workers. What about the owners? During the seventies, while they were closing mills and refusing to upgrade their domestic factories, corporations like U.S. Steel were paying record dividends to their stockholders.

And in any case, we're not talking about $28,000 jobs. Most of these laid-off workers have fallen from about $16,000 a year to about $11,000, which puts them some $1,000 above the poverty line for a family of four. Deindustrialization does not affect only auto and steel workers. During the last four years alone - a period that includes a very strong economic recovery - twenty of our twenty-five basic manufacturing industries posted declines in total employment. What's more, this loss of production jobs has been going on for fifteen years. Employment in the household appliance industry, for example, fell by 18 percent between 1973 and 1980 - a loss of almost one job in every five. The footwear industry, the clothing industry, the textile industry - all basic sectors of the American economy - have been shrinking dramatically, leaving people without jobs and, towns and cities with ravaged tax bases. Since many industries are tied to particular regions, industrial decline has caused severe local dislocations - closed plants, widespread unemployment, once-prosperous communities fading into virtual ghost towns. Between 1973 and 1980 Michigan lost 17 percent of its manufacturing base, while California increased its manufacturing base by 21 percent and Texas by 32 percent. Overnight, ghost towns are created in one set of communities and boom towns spring up in others.

BENNETT HARRISON: Look, the question we should be focusing on here is really this: given the situation Barry just described, what is happening to the American worker's standard of living? Between December 1982 and July 1984 almost as many jobs were created in the wholesale and retail trade ndustry alone as in 'all durable manufacturing industries put together. Last year McDonald's became a larger employer than U.S. Steel. What does this mean for the American worker? I'll give you a simple answer: last July the average wage of a manufacturing worker was $370 a week, while the average wage of a service industry worker was $248 a week. The conclusion is obvious. We are seeing a shift toward lower wages in new jobs in the United States.

Now, the United States is not a young, underdeveloped country, where generations of untrained
people must endure miserably hard, dirty, low-paying work as the price for developing a strong industrial base. Our grandparents and parents already paid that price so we could enjoy a high standard of living. That standard of living is being threatened by structural changes in the world economy, and by the particular ways in which American corporations have chosen to respond to them.

SCHULTZE: But that doesn't mean that the proper way to deal with economic changes is to have government try to stop them. Industrial policy advocates argue that government should somehow "correct" the market's allocation of investment among industries and regions, that government ought to intervene massively and somehow force the economy to move in what they define as a desirable direction - a different direction, that is, from the one the market is providing naturally. Their basic assumption is that there's too much industrial change and that it's happening too quickly.

Now, I don't believe you can deal with economic change by trying to stop it or slow it down. You can only try to maximize the positive side. For example, Barry Bluestone pointed to the huge growth in the Sunbelt during the last fifteen years, growth he believes was largely at the expense of the Frostbelt in the Northeast and Midwest. Well, it so happens that the Sunbelt lost a higher percentage of jobs to factory closings than the Frostbelt did. The crucial difference was that in the Sunbelt a lot more jobs were created. I believe that if the government wants to encourage successful economic adjustment in a particular region so that the local economy experiences both rising productivity and minimal - not zero, but minimal - economic pain, it shouldn't try to prevent changes in the economy. Attempting to do so will only produce economic stagnation. What the government should do is, first, try to ensure, through fiscal and monetary policies that promote overall growth, that along with the layoffs and closed factories, new jobs are created as well. And second, through reasonable unemployment benefits and worker retraining programs, it should try to reduce the inevitable pain of transition.

BLUESTONE: But your premise is that laid-off workers just go out and find new jobs in the growing parts of the economy. Well, that's not quite what's happening. Contrary to received doctrine, a rising tide does not necessarily lift all ships. The U.S. economic tide may be rising today, but it is bringing with it greater income inequality, greater regional differences in unemployment, and large increases in structural unemployment.

Why is this happening? First, the new jobs that our economy is creating are usually in very different industries, and require very different skills, from the jobs that are being eliminated in heavy industry. Second, the new jobs are often located in different parts of the country. That is why the most obvious consequence of deindustrialization is rising structural unemployment.
In our growing economy, between 7 and 8 percent of American workers are unemployed, compared with less than 5 percent during periods of similar growth in the 1960s.

What about the new jobs? Well, they are predominantly in the service industries - not just waiters at hamburger stands and clerks in boutiques but a whole range of service occupations, from nurses' aides to security guards to building custodians. In 1969, for example, less than half of all jobs were in industries that paid an annual average wage of $13,600 or less. But between 1969 and 1982 more than two-thirds of all new jobs created were in these lower-wage industries. And we can see the results of this shift to lower-paying jobs in the economy's total job pool: in 1969, 61 percent of all jobs were in the so-called middle-wage occupations; by 1982, the percentage had fallen to 51. The evidence of shrinking benefits is just as clear. The Social Welfare Research Institute at Boston College recently conducted a survey of laid-off auto workers who have found new full-time jobs in other industries. We found not only that these workers earn an average of 30 percent less than they did in the auto industry but also that 41 percent no longer have any employer-paid health insurance, 56 percent have no employer-paid pension, and 40 percent have no employer-paid life insurance.

I think it's obvious that we are witnessing an enormous change in the employment structure of
our country, a kind of "occupational skidding." Large numbers of workers are losing their jobs in basic industries and slipping down the occupational hierarchy. So when people say not to worry, that these laid-off workers are being "reabsorbed" into the economy, they are employing what I consider a rather disingenuous definition of that word.

SCHULTZE: It is true that, an important part of America's huge job growth in recent years has
been in lower-skilled, low-wage jobs. But there is a simple reason for that: relative wages can
change, and that is precisely what happened during the past fifteen years, when enormous
numbers of inexperienced young people and women entered the labor force, and the economy
created new jobs to absorb them. I think it's fortunate that the United States has maintained a flexible wage system compared with Europe. The capacity of the American economy to produce new jobs is the envy of the world. Of course, it didn't produce enough to absorb all of the new workers, or all of those who had been laid off. 'As you say, the result was that we had an' increase in structural unemployment.

FRIEDMAN: But is this rise in structural unemployment the only lasting effect of the changes we're seeing in the economy? Or are we really experiencing an enormous change in the sorts of jobs available to Americans, and in how much Americans earn? Charlie Schultze would obviously say no. Do you think we are witnessing a huge structural change in the American economy, Bob?

LAWRENCE: No, Ben, I think we are witnessing the normal operation of the business cycle. By and large, the behavior of the manufacturing sector during the last few years was perfectly predictable in view of what happened to the economy as a whole. For example, on the basis of  previous recessions, we would have expected that about 10.6 percent of all manufacturing jobs would be lost during the recess ion of 1979 through 1982. As it happened, manufacturing jobs declined by 10.2 percent in that period. And in the first year of a typical postwar recovery, employment in manufacturing increases by about 5 percent - which is exactly what happened in the first year of this recovery. My point is that the decline in the number of manufacturing jobs since 1979 is due primarily to the recession, not to changes in the structure of the American economy. Protecting whole American industries with trade barriers or other new structural economic approaches - the so-called industrial policies - is certainly not the way to deal with these cyclical problems.

Interestingly enough, since 1973 the amount and the rate of investment in the manufacturing sector has increased. A peculiar thing is going on in our economy: the money is going one way, into the manufacturing sector, while workers are going the opposite way, into the service sector. Now, why has the total share of employment in the manufacturing sector declined? It is certainly not because Americans are making do with fewer goods. Rather, relatively higher productivity in manufacturing, achieved through improvements in machinery and other technological advances, has allowed labor to be shifted into other kinds of activities that better meet the general needs of our society.

If manufacturing in the United States is doing rather well - and even Bluestone agrees that the manufacturing sector is declining only in certain regions - that doesn't suggest we should impose an industrial policy on our entire economy. If anything, it means we should design regional policies that address specific problems. If unemployment rates are especially high in Michigan, then we should consider providing increased unemployment benefits to that state, rather than intervening to protect the entire auto industry or whatever industries are centered there. Indeed, if we're worried about our standard of living, it is crucial that we shift workers into those industries where they are most productive. If productivity grows rapidly in manufacturing, say, and demand for manufactured goods does not expand enough to absorb that growth, then it is perfectly appropriate and natural to shift workers to other industries - service industries, for example - where they are more efficiently used. And as Charlie pointed out, such transformations are constantly going on. American agriculture began the same process around the tum of the century. The percentage of American workers employed in agriculture is now a tenth of what it was then. I don't think anyone would argue that government should have stepped in to stop agricultural workers from leaving the farm.

BLUESTONE: But it took four generations to move that labor force out of agriculture - the sons and daughters of agricultural workers were the ones who migrated to the city, not their parents. And when a very swift transformation in agriculture did occur somewhere - for example, in the Mississippi delta, where farms were mechanized very rapidly following World War II - thousands of workers were displaced, most of them black, most of them with no alternative but to migrate to the big Northern cities. Because it happened so rapidly, this structural transformation brought with it immense poverty and dislocation; the poverty in our inner cities is evidence that we are still paying for it today.

The enormous changes we're seeing in our economy today are taking place within a single
generation. It is not the sons and daughters of steel workers who are being forced to look for
opportunities elsewhere, it is the laid-off steel workers themselves. I believe we can design policies to ease the pain of these transitions - to retrain workers and help declining cities and towns. To do this, we must adopt an industrial policy that temporarily protects our basic industry, but also requires that management and labor modernize their industries so that they can once again compete in world markets.

LAWRENCE: I have no objection to retraining programs and other policies designed to facilitate
adjustment by taking care of workers who are displaced. But we must not try to slow the process of change. I strongly oppose government policies designed to revive traditional manufacturing industries. Such a conservationist approach would deny our economy the improvements in productivity that come from allocating labor where it can be most efficiently used.

HARRISON: We're not advocating a simple "conservationist approach"; we want to experiment with different kinds of industrial policies. These might include directing investment and technical assistance to economically troubled sectors of the economy and regions of the country; developing social contracts, or "planning agreements," that require firms to modernize and reinvest in exchange for tax incentives, roads, sewers, and other assistance they now receive from the public; encouraging long-range planning by small committees of workers and managers and by elected representatives at every level of government to develop innovative products and manufacturing processes, to rebuild the nation's infrastructure, and to design experiments to humanize the workplace.

We are not advocating growth for its own sake, nor competitiveness for its own sake, but growth with equity. That's what the industrial policy debate is - or should be - about.

LAWRENCE: To claim that this debate is about "growth with equity" presupposes that the relatively slow growth we're seeing in manufacturing employment is going to have a major effect on the distribution of earnings in the American economy - that such shifts will shrink the middle class. I think this assumption confuses general structural change with a few special, highly visible cases.

Let's look at the general wage situation in the United States. It is true that the group with what I define as middle-class earnings - fulltime workers who earn plus or minus 30 percent of the median male income in this country declined from 50 percent of all workers in 1969 to 46 percent in 1983. One percent apparently climbed above the cut-off point, and 3 percent slipped below it. But the decline in the proportion of jobs in manufacturing is simply not large enough to have significantly affected the percentage of middle-class earners in the entire economy. Indeed, if all manufacturing jobs were eliminated tomorrow and replaced by jobs with an earnings distribution identical to that in the rest of the economy, the proportion of middleclass
earners would decline by only 4 percent.

In any case, if you're worried about what'shappening to income distribution, then the way to change it is not through an industrial policy. If we want to correct what we believe is an inequality in income distribution, let's confront the problem directly, by redistributing income through the tax system. Why resort to inefficient intervention in whole industries if your objective is to redistribute income?

FRIEDMAN: Bennett, this debate seems less about particular numbers than about how we should interpret those numbers.

HARRISON: Well, it's also a question of which numbers we should be looking at. For instance, Bob Lawrence's analysis of the behavior of the manufacturing sector since 1973 is a good example of what I call "macroeconomic myopia." You can massage the employment figures till the cows come home, but you're never going to see certain things if you don't look below the surface. In fact, structural change within the manufacturing sector has had profound implications for public policy, yet it doesn't show up readily in the employment statistics most economists use. Almost all of the new jobs created in manufacturing since 1973 have been for managers, salaried professionals, technicians, and secretaries; the number of production workers has fallen by 7 percent. Many business experts believe this growth of service and especially of management jobs within manufacturing companies is one reason American industry has become less productive and less competitive in international markets. American firms, they say, have become bloated and top-heavy compared with their Japanese and European rivals. Bob's aggregate employment statistics totally mask these underlying problems.

Now, what about the present recovery? Why is the United States creating so many more new jobs than the European countries, as Charlie Schultze said? Charlie, Bob Lawrence, and many other economists want to attribute the recovery to a spontaneous response by private firms to Reagan's big stimulative government deficit.

But when we look below the surface we find that the situation in manufacturing is more complicated. Consider the growth of the single largest high tech employer in the American economy - radio and television communications. Now, you don't have to be an economist to have noticed that the manufacture of television sets, stereos, and video recorders has been shifting abroad, to Japan and elsewhere, for more than a decade. Everyone knows you can no longer buy an American-made color TV. So how has this industry continued to grow domestically? Well, in 1979, 45 percent of American-made radio and TV equipment was sold to the Department of Defense; only three years later, in 1982, the figure had soared to 58 percent. And according to Reagan's latest budget projections, the figure will rise to 63 percent by the end of next year. This means that $5 out of every $8 of sales earned by the American radio and TV communications industry will come from the Pentagon - that is, from the U.S. taxpayer. The decline of the radio and TV communications industry has been arrested, all right,
but not by market forces. The decline has been arrested and indeed reversed by a national industrial policy called military procurement.

What about the much-heralded revitalization of the American auto industry? Is this evidence of cyclical - that is to say, macroeconomic - adjustment? First, let's note that almost half the workers who lost their jobs in the recession have not got them back. Moreover, and this is my main point, the number of re-hired workersis as high as it is only because of the import quotas on Japanese cars - an explicit industrial policy if ever there was one.

What is the future for American auto workers, regardlessof interest rates, exchange rates, or budget deficits? Here are some not very risky predictions: the big auto companies will install increasing numbers of robots in U.S. manufacturing plants, shrinking the number of production workers still further; they will impose more mandatory overtime on the remaining workers, thus deriving the same number of working hours from fewer employees; and, perhaps most important, the companies will build or acquire more and more plants abroad - both to manufacture parts and to assemble whole autos.

Now, let's lift our gaze a bit from the U.S. economy and take a look at what's happening in the world as a whole. Foreign trade and foreign investment are becoming increasingly, indeed inextricably, interwoven. One reason for this is the proliferation of local content laws. As of 1980, twenty-five countries required U.S. companies to make some portion of their products in that country, using local workers, if they want the right to sell there. Capital and technology
requirements also necessitate more and more co-production with foreign firms.OM and Toyota, for example, are together refurbishing a plant in California so that GM can gain access to Toyota's small-car technology; but all of the highest-technology work will be done in Japan and the components imported into the United States. And some foreign governments are demanding countertrades - that is, barter - in effect saying to American firms, "If you want to sell to us you have to buy certain things from us, even if it is not optimally profitable for you to do so."

SCHULTZE: Are you implying that government should subsidize investment in the same industries that foreign governments are subsidizing? I think that's the worst possible criterion. These industries, such as steel, are precisely the ones with worldwide excess capacity - they are producing more than anyone wants to buy. Such industries are the last place we ought to be using up our precious savings.

HARRISON: Of course we shouldn't permanently 'subsidize industries that have excess capacity. We should, however, be prepared to use public subsidies to slow the adjustment process so that the economy can reabsorb laid-off workers. In any case, my point is that American companies are being increasingly pressured to negotiate new non-market, non-price based contracts with foreign firms and foreign governments, and with one another. International trade in the future is going to have less and less to do with market prices. Governments themselves are playing an increasingly significant role in determining the terms of trade in world markets. We're in a new world. We didn't make it neomercantile; it is neomercantile. And if American companies and the U.S. government don't learn how to play the game, a lot of our firms are going to be wiped out.

Now, whether we like these developments or not, we have to acknowledge that none of them arises naturally from a free market. They're adjustments to political constraints. In other words, they all reflect industrial policies - some by private companies, some by foreign governments, and yes, some by our own government. We have industrial policies now, but they are unacknowledged, disorganized, and often unwise. Why don't we admit it and devise intelligent ones, instead of carrying on this charade about the magic of the free market?

SCHULTZE: Look, no one here is claiming that the market is perfect. But no one has proposed specific criteria that government might substitute for the forces of the market. For an industrial policy to work, government must have objective criteria for making decisions about where investment and other resources ought to go, and how long they ought to stay there. You can't prevent all plant closings - which ones do you prevent? Industrial policy implies that government must find a rational way to pick and choose which industries to support and which to abandon - if, that is, industrial policy is not simply to be another name for a vast pork barrel.

Professors Bluestone and Harrison insist in their book that we must have an "adequate supply of useful goods and services whether or not they can be made at a profit." Well, who determines when unprofitable goods and services are useful? What standards do we use? If we look beyond our domestic economy, as Bennett Harrison suggested, we'll notice Israel, Poland, Argentina, and a host of countries in terrible economic trouble precisely because they are subsidizing "useful goods and services whether or not they can be made at a profit."

What about Bluestone and Harrison's criterion for deciding when to help declining, or "sunset," industries? They say it's OK for government to disinvest in such industries - to let them die - if the product being abandoned is "truly unneeded or technologically obsolete based on criteria worked out by the community and union researchers"? To say it very gently, that is a very naive position. Does anyone really think that any group of workers and community officials are going to declare themselves obsolete, or that political bodies will be better able than consumers in the marketplace to determine obsolescence? On the other hand, Bluestone and Harrison say flatly that moving plants to areas with lower labor costs is unwarranted and socially wasteful; presumably under an industrial policy the government would discourage, delay, and possibly prohibit such relocations. But if we prohibit owners from moving their factories and simultaneously provide tariff protection from foreign competition, we will be granting entrenched unions and oligopoly management carte blanche to hike wages and prices way out of line. In short, we will be strongly encouraging these protected industries to become even more uncompetitive than they are now. That, in rum, will generate pressures for more protection. For example, when unions and management had strong oligopoly power in the steel and auto industries, they were able to increase wages and fringe benefits year after year, from 25 percent above the average manufacturing worker's wage in 1967 to between 65 and 70 percent above average in 1980. Since then unions and management have exerted their political power to win passage of protective quotas that keep workers' wages up, but make cars more expensive for the consumer. Indeed, the whole thrust of these industrial policy recommendations is terribly dangerous to democratic government. The more political power is turned over to groups of producers, for example, business and labor in particular industries - and that's what's inherent in all this the more we invite the domination of politics by economic power and the triumph of entrenched economic interests over the common good.

HARRISON: I think it's a bit naive, Charlie, to pretend that "producer groups" don't already dominate government resource allocation and regulatory policy through their lobbyists in Congress.

SCHULTZE: Of course they have influence, but let's fight it and minimize it, not bless it and enlarge it. What our federal government cannot do is make hard and objective choices among individual industries, firms, and localities, determining which shall live and which shall die, which shall receive help and which shall not. Yet under an industrial policy the government would have to do exactly that: some federal agency or bureaucracy would have to choose what industries or regions to support. The formal and informal institutions of our political system were designed to avoid making just those sorts of choices. The Hippocratic oath of American politicians is, "Thou shalt do no direct identifiable harm." You can do it indirectly, but you can't do it directly.

Consider the Economic Development Administration, for example: it was established during the Johnson Administration to help depressed areas, yet by the time the program went into effect 80 percent of the counties in the United States were eligible for help. Or the Model Cities program, established around the same time to revitalize depressed areas in about fifteen major city centers. By the time the program got through Congress, we had 150 model cities; ultimately each received only a tenth of the amount needed to do the job. Can you imagine some government industrial-policy agency saying to the Weirton steel plant, "Sorry, Weirton, you close down. But Youngstown, you can stay open." Or to the cotton and synthetic textile industries, "You can survive, you'll get government help and protection. But wool, you're dead; you'll never make it." Or to union workers in the steel industry, "Sorry, you boosted your premiums from 25 percent to 70 percent above the average. Give rhose gains back and we'll give the industry help." Yet these are precisely the kinds of choices that some political body, or some subordinate unit of a political body, would be expected to make under industrial policy.

As a way of choosing what private goods to produce, you can't beat the market. The right criterion for making such choices is fundamentally that of the market anyway: to produce those goods and services that people want to buy, at a price that brings in a reasonable profit. Government will not be able to find a better standard; and even if there were one, the political system wouldn't let government use it.

HARRISON: But I think you're caricaturing industrial policy, Charlie. We do not advocate  wholesale protection; we do not advocate rebuilding old blast furnaces. We simply want to develop a planning process involving all levels of the public that will help ease the pain of economic transition and replace the jobs that are lost while democratically choosing the shape of that transition. You asked if any group of workers or communities would ever declare themselves obsolete. The answer is no, for a very good reason: people can't be obsolete. Production systems may become obsolete and commodities may lose their markets, but the solution is to find ways to replace them-and to put the power to do so in the hands of the people who live in communities that are affected. Industrial policy doesn't have to be solely the province of some bureaucracy in Washington. It can be a lot of different things: a community development corporation in the neighborhood; a city council trying to find a way to deliver health care to a depressed community; a state-funded economic revitalization program that allocates tax revenues to start new businesses, retool older ones, or repair deteriorated roads and bridges. And in fact such programs are already under way, in states and cities around the country. "Public" doesn't have to mean the big federal bureaucracy. It means us. We're the public.

Charlie Schultze says the government can't pick winners without objective criteria. Well, whether or not the criteria are "objective," the government makes winners every day. It regulates whole businesses in and out of existence. It creates new markets and capitalizes the physical plant of entire companies-the big General Electric plant north of Boston, for instance, was originally built by. the government during World War II. We have to stop arguing about the ideal of the market versus the ideal of some central planning mechanism and face the situation we have.

SCHULTZE: But the way to face it is not to extend to other sectors of the economy the same wonderful governmental interference. I think the decisions to protect the auto and steel industries through import quotas, for example, were terribly bad decisions. The average American is now paying $400 more for a new car because of this protection. A large part of that money goes right into auto company profits, allowing the UAW to keep members' wages puffed up above those of the average manufacturing worker. Auto industry executives and shareholders and union workers are doing pretty well, precisely because the government is protecting them - at the expense of the consumer. The same thing is happening to a lesser extent in the steel industry. Look at some of the major industries that are in particularly serious trouble - autos, steel, aluminum can, trucking, airlines. In all these industries, strong unions and oligopoly management combined during the 1970s to increase workers' wages until they were way out of line with those of other manufacturing workers. That is one reason these industries are in such trouble. Of course, there are other reasons as well. In the trucking and airlines industries, wages and rates were artificially propped up by government regulation, and both industries are now making some painful adjustments.

In general, when government extends its control over the allocation of resources, monopoly and oligopoly interests are protected, prices are driven up, natural industrial change is impeded, and the consumer suffers. This process is not catastrophic in anyone situation, but repeated year after year, in industry after industry, it slows the pace of economic progress and lowers the standards of living in this country.

BLUESTONE: Ben and I have never advocated putting up massive permanent trade barriers. Instead, we argue that the United States should begin to experiment with different kinds of relationships among government, labor, and business. Sure, we may need temporary trade restrictions in some industries. But the government must make sure that industries take advantage of protection to resrructure themselves and that profits are shared fairly. I think the Chrysler loan guarantee of 1980 was a good example of such an arrangement. The Senate insisted on very tough language to ensure that there would be changes in management, and that all the groups involved would make concessions: workers agreed to lower their wages, suppliers agreed not to raise prices of the components they sold to Chrysler, and the banks agreed to give the company more time to pay back its loans. This experiment in industrial policy has worked. The company was saved from bankruptcy and the federal government even made a profit when it cashed in the stock warrants it received for its loans. We have to experiment with similar policies that will allow us to develop a more socially productive relationship among government, business, and labor.

FRIEDMAN: Many industrial policy advocates point to Japan's success in coordinating trade policies and encouraging such profitable relationships. Their prime example is the role the Ministry of International Trade and Industry (MITI) is said to play in developing trade policies. Charlie, does the Japanese success with such policies suggest that governments can indeed profitably manage such supposedly market decisions?

SCHULTZE: I see three reasons for the Japanese success, none of them involving industrial policy. First, during the sixties and most of the seventies the Japanese invested some 30 percent of their GNP, while Americans invested only 17 to 19 percent. Second, after World War II, Japanese technology was far behind that of the rest of the industrial world, so the Japanese were able to invest huge sums to improve and modify the newest existing techniques at relatively low risk and at a very high return. Third, the Japanese have a unique set of labor-management relationships, which no other nation has and which I can't fully explain. I don't think MITI really has much to do with Japan's success. MITI, you know, tried to keep Honda out of automobiles. People seem to think that without an indusrrial policy most of Japan's huge investment would have gone into indusrries like plastic toys, souvenirs, fisheries, and kites. Well, it wouldn't have. It would have been invested pretty much where it has been.

I have not been trying to suggest that the market will miraculously cure all our ills. I am quite aware that America has serious economic problems. We have huge budget deficits and the high interest rates they bring with them. We have a vastly overvalued dollar and a frightening trade deficit. There are structural problems as well: poverty is increasing; unemployment among minority youth is scandalous; health care costs are soaring; and long-term productivity growth has slowed. But one structural problem the nation doesn't have is a systemic misallocation of private investment or other resources among industries. And one set of policies we dun't need is some governmental industrial board - whether it's modeled after MITI or not - that tries to substitute its decisions about allocation for those of the market.

BLUESTONE: Charlie, despite what you have just said, both you and Bob have advocated various kinds of government intervention. Bob has argued for what we might call a regional policy. Good. To our way of thinking, you really do advocate industrial policy. You just don't want to call it that.

Indeed, there are some lessons to be learned from Japan. MITI isn't an all-powerful central planning agency. It has, however, made some important improvements in the Japanese economy. Consider the steel industry. In general, Japan's steel companies make a smaller profit than ours because in the 1950s, the Japanese government decided to use steel as a basic element in rebuilding its industrial infrastructure, very much the way we use our highway system to transport all kinds of commodities and open up new markets. The Japanese reasoned that if they could build up certain key industries with government help, these industries would make it possible to develop other industries that would be very profitable. And they were right: based on cheap steel, the Japanese were able to establish a strong automobile industry and a very strong consumer durables industry. Travel in the Third World today and you'll find that every air conditioner and refrigerator is Japanese-made. And, of course, their shipbuilding industry was based on steel as well. Now I concede that industrial policy isn't the only reason for Japan's success. But it is certainly one of the reasons. That's a lesson we need to learn.

Ironically, we need not learn it from the Japanese. For much of this century the United States has had its own brand of industrial policy, especially for agriculture and aircraft. Through direct purchases and procurement, through research and development subsidies, and even through direct investment, the government has ensured that these two sectors remained America's premier examples of' internationally competitive industries. What has worked here could conceivably work in other sectors. That is why some well-designed industrial policy experiments are worth a try.

© 2021 Mark Danner