Industrial Policy – It Actually Works!

In Economic Planning, Economics, Full Employment, History and Politics, Industrial Policy, Liberalism, Living Wage, Political Ideology, Political Parties, Politics, Politics of Policy, Progressivism, Public Policy, Public Sector, Regulation, Social Democracy, Unions on November 29, 2010 at 9:31 pm

How NOT to do it


When the first generation of historians begin their work on the Obama Administration, one of the more puzzling chapters will be the winter of 2010, when a major sea-change occurred in public policy that neither the administration nor the media were particularly eager to spend that much time trumpeting – namely, the revival of industrial policy after forty years or more beyond the pale of the Conventional Wisdom, as demonstrated by the success of the American automotive industry rescue.

While we wait for that generation of historians to get started being born, we can at least begin to learn some lessons about how and why the Big Three rescue worked when other industry bailouts have been such miserable failures.

What Makes This Bailout Different From All Other Bailouts:

In the last three months, three things happened that many commentators had said would never happen: GM emerged from bankruptcy to an enormous initial public offering that saw its stock soar to $33 a share, up from $1 a share during the bankruptcy crisis of 2009, earning the U.S Treasury some  $10 billion, all of the Big Three announced a return to profitability in the third quarter, and the Chevy Volt’s stunning debut as the twice-awarded motor vehicle of the year marked the first U.S- and UAW-made electric car readied for mass production.

More importantly for American workers, the Big Three announced a series of investments in the Midwest, expanding factories, adding on shifts, and rebuilding some of the damage done by the Great Recession. Michigan alone will see a $2 billion investment, creating 2,250 new jobs in building hybrid cars, battery packs for the new electric Chevy Volt; Illinois will see a $600 million investment from Chrysler; Ford has announced that it will repatriate 2,000 union jobs from overseas.

And one further tid-bit that you won’t see in the newspapers – because of GM”s IPO and the resurgence of the Big Three, the UAW’s VEBA health care and pension fund is up $3 billion, and looking like it will hit the break-even point from where it would have been fully funded under the pre-bankruptcy agreements with management. So health care plans and retirement accounts are protected and the UAW now has the liquidity needed to begin organizing the non-union “runaway” and foreign auto plants that sprang up in the South. So from the point of oblivion, it now looks like the UAW under the leadership of newly-elected President Bob King might actually beginning to return phoenix-like to renewed growth.

There are 50,000 more jobs in the automobile industry than there were a year ago, and economists expect that by 2012, the industry will be up 182,000 jobs. Taking all these factors together, the combination 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 case, reducing CO2 emissions and fossil fuel use).

That being said, the auto bailouts were far from perfect and there are many negative lessons we can learn about how to do things better next time. First, far too much of a sacrifice was asked of UAW workers both in terms of lost jobs, lower wages and pension benefits, and the supreme risk taken by the replacement of cash payments into the union’s health care and pension plans with what could have been useless company stock. While this was in no small part driven by Congressional Republicans exercising their hatred of unions, it was also the case that the Obama Administration was far too willing to buy into the “shared sacrifice” narrative without thinking about what the consequences of lost jobs and lower wages would mean for economic recovery. In the future, it must be both union and public policy that worker concessions are explicitly time-limited rather than permanent, and contingent on an agreement by management to open the books and work out a binding plan for profit-sharing that compensates both for the losses incurred by workers and a fair share of the rewards of their sacrifice. Second, both to ground future industrial rescues in the reality of the labor market and to do a better job of “animal spirits” management, industrial rescues must come with explicit and accountable job retention and creation goals attached. Third, all future industrial rescues should be undertaken by the Department of Labour – not the Department of the Treasury, which is too deferential to the interests of the financial sector (for example, the Treasury wanted a lower GM IPO price that would have meant less money for new investment and less money for the U.S taxpayer).

But in terms of positive lessons, here’s what we’ve learned:

  1. Industrial policy can work. It’s not a sure thing by any means, but it’s an important point to reiterate: the public sector can intervene in the economy to save vulnerable industries, prevent layoffs, increase investment into new and innovative production, and create new jobs. This sounds rather obvious, but one has to keep in mind that neoclassical economists and neoconservative politicians have spent the last forty years shouting at the top of their lungs that this is impossible. In their eyes, the market is the pinnacle of efficiency and government can never better it; despite the fact that economic powerhouses like China and India do nothing but industrial policy, they would have you believe that the model is everything, the reality nothing.
  2. The government actually does have to take charge (which doesn’t require micro-managing). Unlike in other cases we’ll discuss below where the U.S avoided having any say in how the corporations they invested in were run, here, the U.S fired management, brought in new executives, made specific policy demands, and put pressure on executives to succeed. What that meant was  that, instead of the usual market failure in which CEOs and top executives profit whether their companies grow or collapse due to crooked boards of directors and impotent shareholders, there was actual incentives brought to bear that made management need to succeed.
  3. The government has to focus on underlying issues of product quality and levels and direction of investment in the industry in question, not just on stock values and balance sheets. Prior to the Great Recession, the Big Three had been losing market share to foreign rivals like Toyota due to public preference for higher quality and higher fuel efficiency (and price competition from lower labor costs from overseas and non-union plants). They had foolishly responded by slashing their prices (through greatly expanding the amount of credit they offered to consumers) that had cut profit margins to the bone, which left them vulnerable to demand shocks and the entirely foreseeable costs of a growing retiree base. This, not the supposed greed of the UAW, was the major source of the Big Three’s weakness. Thanks to Toyota’s quality control scandals and the pressure from the Obama Administration to raise CAFE standards and thus produce more fuel-efficient, hybrid, and electric cars (with the added incentive of Cash for Clunkers) the Big Three have finally gotten their act together and out-competed Toyota on both quality and innovation, allowing them to return to profitability even when total sales of cars are down off their peak.
  4. What this leads us to is the all-important maxim that the government has to force dramatic changes that correct the problematic behavior of an industry.

The Road Not Taken – FIRE (Finance, Insurance, and Real Estate):

By contrast, we did none of these things when it came to the bailout of the financial sector, AIG, or our attempts to deal with the foreclosure crisis. The U.S government, by deliberately opting for non-voting stock and publicly decrying any intention of meddling with the management of the financial sector, by buying toxic assets from financial corporations at face value and allowing corporations to cook their balance sheets by waving mark-to-market requirements (rules that require that an asset be listed at the value it could actually be sold for, which in the case of toxic assets is somewhere south of zero), we have failed to establish a stable modus vivendi in the financial sector.

Largely driven by neoliberal thinkers within the Treasury, SEC, and Council of Economic Advisors, we made ourselves unable to use our position as a massive shareholder and outright owner of financial corporations to change the management of mismanaged firms (as we did in the auto industry), or to curb runaway executive compensation that could have restored real accountability for failure and recklessness, or in any way to redirect capital investment away from high-risk speculative ventures and back into industry, research and development, and genuine innovation. As a result, the derivatives and swap casino has returned.

Most critically, our unilateral disarmament meant that rather than conclusively dealing with the foreclosure crisis or the financial insolvencies it brought – as we did in the 1930s through the establishment of HOLC, FHA, and the Emergency and Glass-Steagall Banking Acts – we did not force a mass cramdown of mortgage prices or a writeoff of toxic assets and debts that could have settled our housing and financial crisis with certainty. Instead, we made the same mistake that Ireland made when it guaranteed bad debts at face value – we’re better able to bear the cost, due to our stronger economy and independent currency and central bank, but essentially we made the same error.

The point here is that you cannot reform sick industries if you decide to leave management prerogatives untouched.


The first thing that has to happen is that progressives need to trumpet the success of industrial policy and win the intellectual battle for the conventional wisdom. Once this is done, then we can begin to apply our hard-won lessons, not merely in rescuing declining industries, but in establishing national initiatives to foster new domestic industries that can provide a firm foundation for our economy.

It is so rare that we get a lost policy tool handed back to us – let’s not drop it now.

  1. Have you ever heard of Nick Taleb? I’ll bet you don’t like him very much!!
    How do bureaucrats become omniscient? They become that way by creating self fulfilling prophecies. They unashamedly changed creditor rights law to disfavor current bondholders (might be a little difficult to obtain cheap bond financing in the future). Have you checked out how many of GM’s new cars have been purchased by the government? Have you ever wondered why Toyota’s “unexplained acceleration” scandal came out just when and how it did?
    Crony capitalism is just as much a problem when it is pushed by the unions as when it is pushed by the bankers. I would disempower both of these special interest groups in favor of the interests of the general public.

    • Actually, I like Nick Taleb’s work; especially his work criticizing grand theory models.

      GM’s sales figures are not being driven by direct purchase from the government; there was a limited fleet renewal program in the original stimulus, but that’s been spent.

      Toyota’s scandal broke because people started accelerating out of control, and died. Are you claiming some kind of conspiracy.

      What you call crony capitalism I call industrial policy. It’s one of the reasons why EU countries and Japan maintained their manufacturing sectors, while the U.S let its die from the 1970s-2000s.

      And I would question on what grounds you argue unions are special interests, or how you distinguish the general public from the groups that make it up.

      • Steve:

        Sorry I was out of the conversation for a while.

        One of Taleb’s ideas, the idea that active management may lead to creating fragile systems is particularly applicable concerning industrial policy. Please remember that it took the joint efforts of Bill Clinton, the Democratic majority followed by the Republican majority, the Democratic Minority and the blindness of virtually all federal policy makers to create the subprime mess. And this is only one example of why it makes little sense to have the federal government involved in industrial policy. By definition they manage politically, not economically. Therefore, what may even work in the short term can have devastating long term consequences. You don’t know if you’ve been successful for years and maybe decades. You do know, however, whether you’ve accomplished your political ends.

        As to your observation, “Taking all these factors together, the combination 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 case, reducing CO2 emissions and fossil fuel use).”
        According to a recent Bloomberg report 25% of all of the hybrids sold by GM in 2009 and 2010 were to the government. We’ll see whether the public likes them and whether they successfully compete with Honda, Toyota and Nissan over the intermediate term. The Nissan Leaf is being built in Mississippi but I have heard no one in government touting it. I hope they will succeed, but I am skeptical that this can be accomplished without substantial intervention from ‘industrial policy.’ And if it is not driven by consumer demand and preference, then it is being accomplished through robbing Peter to pay Paul.

        As to the Toyota episode. I do not think that anything in the nature of a conspiracy is necessary. Intelligent people acting in the way they think best for themselves and their allies can often cooperate without ever having a conversation., I have some knowledge of how NHTSA responds to consumer complaints. It is a long and drawn out process and NHTSA has a lot of requests for action on it’s docket at any one time. It often takes something unusual to get them to move. It may be a fortuitous coincidence that this huge NHTSA driven media storm occurred at just the right time for GM but it makes me very suspicious.

        Crony capitalism is just as wrong when Goldman Sachs does it as when team UAW/GM does it. This is because crony capitalism creates special interests which seek to advantage themselves at the expense of everyone else. By the way, if you define manufacturing sector in terms of output as opposed to employment, I believe you’ll find that manufacturing output in the US has not declined as you suggest vis-a-vis Japan and the EU, at least not as of 2007. (See chart at

        As far as unions being special interests and how I would distinguish the general public from the groups that make it up, I think the general public is made up of those who buy things in the US – – typically called consumers. That includes, according the SBA, 50% of all privately employed persons in the US who work for small business. It also includes those consumers who work in big businesses which are non unionized as well as unionized workers and government workers. Only 7% of privately employed persons in the US belong to labor unions. About 37% of government workers are unionized. Therefore, the vast majority of all consumers are not in the union and their interests should be defined as the interests of the general public, in my opinion. Unions, those organized on industry wide or multiple industry wide bases, are seeking advantages against the non-unionized work force members. They use their industry-wide and political clout to advantage workers in particular industries vis-a-vis the work force in other industries. The prices they pay as consumers go up very little by reason of the advantages they obtain in comparison to the benefits they are able to negotiate through their unions.

        Don’t get me wrong. I am in favor of unions which seek advantages for their members vis-a-vis the management of particular companies when they seek to increase their sliver of the pie vis-a-vis the capitalist’s sliver. This, however, isn’t industry-wide which use monopoly power to raise prices or political action which use government force to raise prices. When they seek advantage on an industry-wide or economy-wide basis through monopoly or political action, however, they become special interests in that they are seeking to increase their sliver of the pie at the expense of all members of the general public – – consumers.

        Steve, I don’t want to get in a tit for tat statistics debate with you. There are, however, in my opinion usually two reasonable sides to economic stories. As in most things, it is in the point of view that people usually disagree even though they end up debating the “facts” as stalking horses for their “ideas.” I will admit to a “point of view” or “bias” against government involvement on many economic matters because politicians are too good at talking and not good enough at thinking or predicting the future (see the above mentioned Taleb).


      • Will reply in full shortly. In the mean time, this space is reserved.

  2. You do know that the CAFE standards were designed to discriminate against more fuel efficient foreign cars and that they pulled the same baseless aceoleration problem claims against Audi a few decades before?

    • CAFE standards are imperfect, no doubt, but it used to be that Toyota was riding high on the Prius, and then it got beat.
      As for acceleration problems – people died, this was real, Japanese workers were noting quality control problems and got ignored by management.

  3. […] of income (job insurance, labor market policy, and an improved social insurance system), but also long-term measures for building […]

  4. […] I recommend Steve to anyone who reads this blog as a balance to my own ideas. Incidentally, I admit to being McCurious, Steve’s interlocutor in the comments section of his Magical Thinking post. I also appear in the comments section of his post on GM’s ‘recovery’ as being indicative of the success of “Industrial Policy.” […]

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