Tuesday, November 18, 2008

US Industrial Policy

Steve Coll, writing for his blog on the New Yorker website, makes a good point. Various pundits have claimed the US doesn't have a planned industrial policy. Coll points out that we do, we just call it defense contracting.
Another fallacy of the current debate, often a theme of op-ed essays from the right, but an argument not limited to conservatives, is the notion that the American system is, and should be, fundamentally biased against industrial policy—that is, the use of the commanding heights of the federal government to pick winners and losers in the economy, whether these are whole industries or companies within industries. In fact, we already have a massive industrial policy, funded by the federal budget—it’s referred to as defense contracting.

Why does the United States have one of the most robust aircraft-manufacturing industries in the world? The answer is not that pure free markets have, through the workings of a natural law, granted us such a bounty. Yes, Boeing has been disciplined and strengthened by global-market competition, particularly with Airbus, but large-scale federal spending on defense contracts has crucially strengthened Boeing’s position as a locus of human capital, design experience, and innovation. In 2006, the federal government spent more than sixty billion dollars on aircraft manufacturers. Boeing received $20.8 billion, according to Government Executive magazine. (Lockheed-Martin received $27.3 billion, and Northrup-Grumman $16.7 billion.)

Why does the United States have one of the most sophisticated, innovative electronics industries in the world? Raytheon’s take from the Pentagon in 2006: $10.4 billion; Computer Sciences, $2.7 billion. And so on. General Motors received $806 million dollars that year, mostly from the Army, enough to make it the fortieth largest defense contractor on the list, just ahead, startlingly, of Johns Hopkins University, which received more than seven hundred million dollars, most of it from the U.S. Navy. (Note to self: Why?)

So we have an outsized industrial policy, centered on our national-defense strategy. General Motors receives a lot less than Boeing because our current strategy favors aviation over ground transportation. This strategy has shaped our patterns of employment and innovation—the subsidies do not remain only within the military, but spill across the civilian economy as well. Our industrial policy has also given us less inspirational national capabilities such as world-beating personal-security and mercenary services (Blackwater).

The larger argument Coll is making is that ultimately a bailout for the automakers is beneficial and necessary. James Surowiecki argues the same thing at his New Yorker blog.

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