The Naked Truth About 'Industrial Policy' and Its Adherents


July 16, 1992|By TRB

Washington -- A new phrase is rapidly joining ''liberal'' and ''tax and spend'' in the Republican lexicon of vilification. That phrase is ''industrial policy.''

Both Bill Clinton and Ross Perot stand accused. Enunciated with the proper curled lip, it's a handy way of implying that Mr. Clinton is a closet socialist and Mr. Perot is a closet fascist.

There are good reasons to be skeptical about industrial policy. But it's not a good reason merely to note that various proposals for modest government intervention in the economy come at a time when communism has collapsed around the world.

Comparing industrial policy to communism is like saying, ''Why summer in Maine when it's freezing at the North Pole?'' George Bush should be able to grasp the flaw in that logic.

Anyway, if industrial policy is a disease, it is one to which Mr. Bush himself is far from immune. His ''economic recovery program'' -- the one that would solve all our problems if only Congress would enact it -- is industrial-strength industrial policy.

A general definition of industrial policy is anything the government does to redirect the invisible hand of the free market.

This does not include traditional government activities, such as national defense. It also does not include the use of fiscal and monetary policy to nurture the economy in general. Industrial policy means giving a push to particular economic activities.

That covers a variety of sins. Trade protection is industrial policy. But pure industrial policy would be something resembling Japan's notorious MITI: a government agency directing capital investment where it otherwise wouldn't go.

Mr. Clinton isn't proposing anything like this, though Ross Perot may be (it isn't yet clear). Enthusiasm for an American MITI peaked about a decade ago. No one had a very good answer to the question why some government agency should have a better idea of what investments will pay off than people who are betting their own money.

The nearest equivalent these days to those pure industrial policy visions is not Bill Clinton's set of proposals but George Bush's. Mr. Bush's chosen instrument is tax breaks, but the principle is the same. It is the use of government policy to direct investment capital where it would not otherwise go.

A tax break has the same effect on the government deficit as a direct subsidy. And it has the same distorting effect on the

market, for better or worse.

Mr. Bush's treasured capital gains tax cut would artificially favor one form of investment. His treasured ''enterprise zones'' would direct capital into certain geographical areas when the invisible hand would direct it into others. The 1988 Republican platform promises special tax breaks to farmers, small oil drillers, and so on.

The market distortion caused by each break like this is bigger than the break itself. The point of these breaks is leverage: a million-dollar tax saving may tip the balance in favor of a $100 million investment. But that's $100 million that isn't invested somewhere else.

Does George Bush have some reason to suppose he knows better than the free market how much capital should go to different sorts of businesses?

Sophisticated economists have developed some respectable (if not entirely convincing) answers to that basic industrial policy conundrum. Mr. Bush can hardly avail himself of them, though, if he dismisses the concept of industrial policy as socialism in disguise except when practiced by him.

What Bill Clinton proposes is less like hard-core industrial policy than the George Bush approach. Mr. Clinton's emphasis is on areas that nearly everyone agrees are within the proper sphere of government, such as public infrastructure, education and scientific research. He simply broadens the definitions a bit and re-labels such government spending as ''investment.''

Mr. Clinton's model is the Interstate Highway System of the 1950s, a public investment with a huge payoff for the private sector. Mr. Clinton wants to spend $200 billion, not just fixing roads and bridges but creating high-speed rail and a fiber-optic network ''to link every home, business, lab, classroom and library by the year 2015.''

Just calling something an ''investment'' doesn't make it one. The opportunities for boondoggles are plentiful. It's always worth asking why private enterprise won't link every home, lab, etc., by the year 2015 if that's such a good idea.

Nevertheless, anyone who flew into New York for the Democratic convention will not need convincing that we have allowed our airports and highways to deteriorate disgracefully. Public investment is not a nonsense concept, and there hasn't been tTC enough of it recently for the private sector's own good.

Republicans have been brilliant at quietly embracing the popular monuments of postwar liberalism -- civil rights, Medicare and so on -- while re-attaching the labels ''Great Society,'' ''war on poverty,'' ''liberal'' itself to ugly fantasies of their own creation.

The term ''liberal'' is worth fighting for. The term ''industrial policy'' probably isn't. But it's worth pointing out that George Bush, as usual, is trying to have it both ways.

TRB is a column in the New Republic by Michael Kinsley.

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