After Detroit: Rethinking Industrial Policy for a New Era

In Economics, Full Employment, Politics of Policy, Public Policy, Unions on June 21, 2009 at 11:25 am

It may be the fastest and most unexpected revolution in political economy since the fall of the Soviet Union, but it is still startling to realize that the United States government currently owns the largest insurer (AIG), mortgage provider (Fannie Mae/Freddie Mac), multiple banks (Citigroup and Bank of America), as well as a majority stake in GM and a significant share in Chrysler. Contrary to some, I don’t think this heralds the emergence of American socialism – although it might begin to shift the Overton window in regards to the public/private divide. What I do think it does herald is the re-emergence of industrial policy in America. (For those who’ve never heard of this rather wonkish term, industrial policy refers to government intervention into the economy to promote or encourage not just industrial development, but particular industries: steel, railroads, textiles, or automobiles, and so forth.)

As Robert Reich notes, the U. S is now, despite the widespread mockery of industrial policy by neoclassical economists and neoliberal politicians in the 1970s and 1980s, engaged in a program of industrial policy – but in a weird and rather piecemeal way.  Policy is being driven by response to crises – AIG’s going to take the economy down with it! The Big Three are going to wipe out the Midwest! – trying to stave off losses. And I agree with Prof. Reich that the major mistake we’re making is that we’re trying to save firms, not jobs (or industrial capacity), so that we’re still facing thousands of layoffs and ripple effects (the big three lay off and shrink production, which means auto dealers and suppliers take it in the neck, which ripples outwards, etc.).

However, I do take issue with Reich in that I don’t think it’s an error to proceed with higher fuel economy standards  – I think that’s exactly part of the process of achieving “overarching public goals” while achieving “large structural transformations.” The combined problems of ever-increasing fuel consumption, the rising price of oil and its effects on the U.S economy, our large and increasing CO2 emissions can be addressed by moving our automotive industry and the American people’s cars to more fuel-efficient and ultimately carbon-free cars; moreover, one of the major reasons why the Big Three faced such a startling erosion of market share and consumer demands was that they weren’t building and selling hybrid, high-mileage cars when other companies were. The only problem I have with pushing higher fuel standards is that it’s not being predicated on building the new cars in the United States; we’re still focused on having the U.S firms be making more efficient cars, instead of U.S plants. (And as Prof. Reich has pointed out in the past, U.S companies don’t necessarily mean U.S-based production and employment any more)

Indeed, I would argue that one of the reasons why our current system of haphazard industrial policy is lacking in public legitimacy, it is precisely because we have not been thorough enough in insisting on public goals. We bailed out the mortgage companies and the banks, but we didn’t solve the problem of “underwater mortgages,” we got stuffed on “cram down,” we didn’t deal with the pirate behavior of the credit card industry, we haven’t re-regulated the banks or the shadow banks or the various financiers or the sub-prime artists, we didn’t deal with executive compensation, and we just barely got the credit flowing again. So what the public sees is a lot of public money going out the door with not much in the way of public goals achieved.

The question before us is how to re-think industrial policy for a new economic era in which the United States needs to not only achieve steady economic growth, but dramatically boost the rate of job growth. As we have seen in the past decade, even in recovery, we’re not producing enough job to get over the job losses in previous recessions, and we’re certainly not producing enough jobs that provide a living wage or that lower unemployment enough to produce steady wage growth. And if industrial policy is to have a broader, over-arching legitimizing purpose (beyond the industry-specific public policy objectives), it must be to keep unemployment low, to increase the proportion of jobs that are living wage jobs, and to raise median wages.

However, if we’re going to make industrial policy a going concern, it’s not just enough to say, let’s preserve jobs, skills, capacity, and focus on developing new industries. And I don’t think it’s enough to  provide laid-off auto workers with “help transitioning to those new jobs.” Bruce Selcraig’s idea for making Detroit the high-speed train producing center of the world is great; I happen to like the work of the Apollo Alliance a great deal as well; but they’re not good enough either.

As I said above, industrial policy has to be embedded in a framework of low unemployment, more better jobs, and raising median wages. What this means in concrete policy terms is:

  • First, that industrial policy has to be seen as one tool in the toolbox, a long-term version of “public initiative” oriented economic planning (as I discuss in my post about the Apollo Alliance linked to above), that is complementing an overall full employment policy, based around (social) Keynesian stimulus and a guarantee of the right to a job, backed by the government as employer of last resort. This is crucial for several reasons:
    • it provides immediate employment for workers who have lost their jobs now, which in addition to keeping aggregate demand up and prevents people from losing their skills, also prevents workers from falling into poverty through long-term unemployment.
    • it provides a backstop against the negative side-effects of productivity increases. The problem with the auto industry in the U.S isn’t that we can’t make cars anymore, it’s that we don’ t need as many people to do it as we used to. Making sure that everyone has a job waiting for them relieves us of the problem of producing ourselves out of a job.
    • it maintains and creates the potential demand for the products of new industries. Whether it’s high-speed rail, green housing, solar panels on your roof, or any other new industry that also satisfies a public goal, we’re going to need a large number of consumers with spending money in their pockets to consume the new products. This is especially true in the early stages of industrial policy, where new industries are especially vulnerable and need to grow rapidly to sustain themselves.
  • Second, that industrial policy must go hand-in-hand with minimum wage/EITC/welfare state expansion/increase in progressive taxation and a concreted effort to re-unionize the American workforce, as part of a broader mission to create a more economically egalitarian society and economy, to ensure that while we’re pushing forward into some bright new future of green technology and a “knowledge economy,” that we don’t forget the realities of class and race and gender inequality in America.
    • regarding wages, we don’t want to make the same mistake that we did when the U.S began transitioning from an industrial economy to a service-based economy that there were going to be “good jobs” for everybody. One of the realities is that the new service sector has shown a huge wage bifurcation, with a small number of a really high-paying jobs at the top, and a lot of really low-paying jobs at the bottom, and all the resulting social problems we inherited thereby. If we’re going to be investing public dollars in new industries, we should make the effort to push for what social democrats used to (and still do) call a solidaristic wage policy. And there’ s even the kicker that this would be better for the economy in terms of pushing more purchasing power towards those who have a higher marginal propensity to consume, keeping demand bubbling over nicely.
    • regarding unions, if we want to ensure that the rewards of this new economy will be shared broadly, there’s no better way than to do that then to insure that these new industries are unionized industries, so that we can let the unions do what they do best, in being “countervailing forces” against the drive to concentrate wealth at the top. Moreover, broadening the circle of the number of workers who have a union wage would further reinforce the broader full employment policies detailed above – there’s a reason why the Scandinavian countries have both high unionization and long histories of successful full-employment policies.  Finally, unions also have a vested interest in pushing these industries to maintain commitments to public goals, because they are both economic and political institutions, and hopefully given the transformations in the American labor movement in terms of race and gender, they’d also be good watchdogs in ensuring that “green job” doesn’t automatically translate into “middle class white guy.”

While obviously this is still early thinking regarding industrial policy, I think it’s important to keep our feet planted in the earthy realities as we imagine the future.

– Steven Attewell

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  1. How do you do this, though, and avoid the ideological blow back from the right and moderates? I keep feeling optimistic about the Obama proposals and some of the legislation proposed in Congress (check out Oberstar and Mica’s Surface Transportation Authorization Act of 2009, the possibilities will make your mouth water), but then I keep remembering what happened to Clinton in 1994. I would rather take a few baby steps and retain enough of a liberal element in our legislature to keep dreaming big ideas than lose the House and Senate to the party of failure again.

    • A good point. The only thing I’d say in mitigation is that the Congress and the electorate are substantially to the left of where they were in 1994. And I do take heart at the fact that we were able to pass a major Keynesian stimulus and an extremely progressive budget.

      I think this is also a matter of institutional habits – people get used to passing “big” legislation once they’ve done it a few times, then it’s not frightening. So I ultimately think that, if health care passes and if climate change passes, we can begin to change the institutional climate of Congress to be more friendly to systemic change.

      And it will be a matter of baby steps, and taking our time, and building strength over the 2010 and 2012 elections. But that’s the idea of this blog, is thinking ahead beyond the next election, dreaming some big dreams so that we have ideas on hand when the time is ripe.

      Thanks for commenting, btw.

  2. […] After Detroit: Rethinking Industrial Policy for a New Era […]

  3. […] my previous post on industrial policy, I talked about “how to re-think industrial policy for a new economic […]

  4. […] brief about this, because I’ve covered the issue of job insurance, labor market policies, and industrial policy elsewhere. The basic point is this: American economic security is entirely dependent on employment; […]

  5. […] of new jobs and new investments in fuel-efficient, hybrid, and electric vehicles, we can see that it actually is possible to do industrial policy in a way that both protects jobs and reorients industries to serve a general public good (in this […]

  6. […] As I’ve argued before in other contexts, one of the dangers of narrowly focusing on policy in terms of discussion to industries, goods traded, and shares of GDP  is that we lose focus on workers and employment levels. Trade can easily play this role – we talk about protecting American steel, not steelworkers (even when we don’t mean to). Indeed, in the 19th century, the Republican Party used its support for tariffs as a shield against demands for the eight-hour day, the minimum wage, or the right to unionize, on the grounds that trade policy would automatically result in a fair division of profit between capital and labor. Therefore, I think we have to start with the idea of nations adopting “labor market insurance” (their trading partners can think of this as “consumer base insurance”) in the sense of a suite of policies that ensure a high level of employment and consumption regardless of the balance of payments.  This suite of policies should include both immediate protections against unemployment and loss of income (job insurance, labor market policy, and an improved social insurance system), but also long-term measures for building industries. […]

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