Industrial Policy: The Road Not Taken: In the 1970s, Wall Street and Its Economists Defeated Manufacturing

By Faux, Jeff | The American Prospect, January-February 2010 | Go to article overview

Industrial Policy: The Road Not Taken: In the 1970s, Wall Street and Its Economists Defeated Manufacturing


Faux, Jeff, The American Prospect


By the mid-1970s, cracks in the American industrial base were already visible. For the first time in the 20th century, the United States began running trade deficits. Factory closings that had earlier been limited to apparel, shoes, and plastic toys spread to steel, small appliances, and auto parts. And the decision by the Arab states to control oil prices signaled that the era of cheap energy that had fueled American manufacturing was coming to an end.

These early signs of trouble set off this country's last serious debate over the question of whether the government should have a policy for supporting a healthy manufacturing industry--that is, an "industrial policy."

For its advocates, industrial policy seemed a no-brainer. The manufacturing sector was the generator of productivity and innovation. It had been the engine of America's rising prosperity and the bedrock of its political as well as economic power. Without America's capacity to become the "arsenal of democracy"--churning out the tanks, ships, planes, and ordnance that overwhelmed its enemies across two oceans--World War II might well have ended differently.

The war's end left the U.S. as the dominant manufacturing power in the world for some three decades. But with large-scale U.S. government help, Europe and Japan reindustrialized and quite naturally began to regain their old markets and compete with U.S. companies at home.

So if our government could help rebuild the manufacturing capacity of Germany and Japan, why would helping U.S. manufacturing stay competitive be beyond the pale? Moreover, aid to economic sectors deemed critical for our future was an American tradition. The early debates between Hamilton and Jefferson were over which sector--manufacturing or agriculture--should have priority. In the 19th and 20th centuries, tariffs, taxes, procurement, and even public ownership had been employed to pick such industrial winners as clipper ships, railroads, airplanes, telephones, long-distance radio, and television.

In fact, went the argument, government policies were constantly affecting the allocation of investment to private enterprise, but with little regard to the longer-run development needs of the country. Much of it came as a by-product of military spending. Conscious, direct aid--such as the 1970s bailouts of the Penn Central Railroad, Lockheed, the Franklin National Bank, and the Chrysler Corporation--was ad hoc, panic-driven, and crudely political. While this might not have mattered when the U.S. was the industrial king of the global mountain, it was now time to get our act together.

Specific proposals for carrying out an American version of industrial policy included:

* a national development bank, inspired by the Depression-era Reconstruction Finance Corporation, which had provided investment funds to manufacturers when private banks were not lending;

* tax-code revisions, such as ending the favorable treatment of foreign over domestic investment, and the introduction of a "border adjustable" value-added tax that other countries used to give an advantage to domestic production;

* civilian adaptations of the Department of Defense's use of procurement contracts to spur technological innovation;

* generous government financing of technical education and training and lifetime learning to upgrade skills.

The idea of a purposeful industrial policy was also connected to a growing interest in how the nation should think about its long-term future. Toward the end of his presidency, Dwight Eisenhower had established a Commission on National Goals. John Kennedy had given the country an example of how modern goal-setting could work in his pledge to go to the moon. Richard Nixon in 1970 had proposed a national growth policy that would guide public and private investments. Later that decade, Sens. Hubert Humphrey (Democrat) and Jacob Javits (Republican) introduced legislation for a national economic policy commission to counterbalance Washington's penchant for short-term economic fixes with a longer-term perspective. …

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