The current debate on a federal energy tax serves as a useful reminder that industrial policy comes in many forms, and that it almost inevitably leads to some form of protectionism. Unfortunately, what the debate hasn't revealed is the price of economic inefficiency and job loss that results.
The Reagan and Bush administrations were generally hostlle to tax preferences, industrial policy and protectionism, although in politics it is always difficult to be totally pure. The unifying theme was to rely as much as possible on the marketplace, as opposed to government intervention and distortion, to achieve economic growth and international competitiveness. The simplification was key to this strategy, since a plethora of tax preferences led increasingly to distortions of investment and trade.
In the Reagan-Bush era, the United States maintained its worldwide lead in manufacturing productivity. Total productivity increased by more than 40 percent in the 1980s. Unit labor costs rose by only 3 percent between 1985 and 1992, compared with 10 percent in Japan, 19 percent in Germany, and more in most of Europe and the newly industrialized countries. The US. cut a large trade deficit back to manageable proportions and created more than 20 million new jobs. Only Japan among industrial nations, including the newly industrialized nations of the Pacific Rim, could match this overall performance.
A recent study by the McKinsey Global Institute documents the U.S. lead in productivity in the service sector as well as in manufacturing. As reported in the New York Times, McKinsey attributes this performance to US. competition policy: "America's secret productivity weapon . . . is not bigger companies, more robots, or even brainier managers. Instead, it is Washington's reluctance to protect companies from the rigors of competition, domestic or foreign."
Led by a determined rush to increase the level of taxation and the use of tax preferences, the Clinton administration is threatening to reverse direction on industrial policy, tax preferences and protectionism. The administration has realized, though, that increased taxation on U.S. industry would diminish industry's competitive edge. For instance, the House bill on Clinton's economic program, apparently still supported in this respect by the White House, carved out important exemptions to the Btu tax. In so doing, it reinforced the drive for a new industrial policy and exposed the link between industrial policy and protectionism.
Alternative energy sources such as solar and wind power were to be exempted from the tax. Fuels used to produce aluminum and chlorine would have been taxed at half the rate than if put to other uses.
Farmers would have paid only a base rate for their fuel, as would steelmakers using coal in the production process. Fuels going into export markets and jet fuel used on international routes would have been exempt from tax. Apparently, the administration was also pushing for exemptions for the chemical, glass and paper industries.
When House and Senate conferees meet to hammer out a final bill, we can reasonably expect further use of tax preferences that reinforce the emerging industrial policy.
The policy choices suggested by these exemptions to the falled Btu tax fit logically with some of the more proactive industrial policy ideas floated by the administration. Sectors such as the automobile industry, commercial aviation and the transportation infrastructure all are mentioned as good candidates for assistance or subsidies in a February Clinton administration document titled "Technology for America's Economic Growth: A New Direction to Build Economic Strength:"
Are these industries singled out for tax preferences and other support the "leading edge" industries that we can rely on to create good jobs and cut the trade deficit? …