Will Barack Obama Commit Industrial Policy?

Barack Obama may soon find that he is committing a big sin against one of the major premises of the reigning ideology. As part of his plan to restructure the auto industry, rebuild infrastructure, and create new green industries and jobs, he will be committing industrial policy. And this will create a head-on collision with one of the cherished dogmas of market fundamentalism -- "free trade."

This clash is long overdue. For several decades, American elites of both parties have been preaching the same gospel of free trade. Supposedly, if we just leave markets alone, different countries will produce and export what they naturally do best, and import products at which their partners excel. In the tidy and oversimplified textbook world, there is no room for questions about pollution, labor standards, product safety, financial engineering, or industrial policy.

But the real world doesn't work like the Econ. 101 fable. In much of the rest of the world, governments help their industries develop.

However, in the hierarchy of America's diplomatic priorities, countries like China that subsidize industries (and violate human rights) get a free pass. Other nations like Japan, that basically closed their borders to most imports for several decades while they became industrial powerhouses, got a seal of approval, too. Supposedly, what we lose in jobs and industries, we make up in cheap imports.

While other nations care about what they produce, the United States disdains having industrial policies, in order to set a good example. Indeed, we have been the principal architect of the World Trade Organization, which discourages government involvement in economic development as an illicit thumb on the free-trade scale.

Now, with the crash of 2008, it is clear that the US economy was built on a financial mirage. Our reliance on asset bubbles - inflated stock and real estate prices - disguised the fact that we were not paying our way. Much of our prosperity was simply borrowed.

Having let so many industries and jobs just go offshore, we don't make enough to pay for our imports. Instead, we have been relying on loans from foreign central banks to finance our trade imbalance.

Looking at this economic calamity, President-elect Obama has proposed several sensible policies. He wants the U.S. auto industry to reinvent itself, with government aid and government standards. He wants to incubate other domestic industries around the goal of clean energy. And he wants to spend serious money on all of this, to help avoid a depression. The only historical counterpart is the vast industrial mobilization of World War II, which finally cured the Great Depression.

But these ideas about government involvement in the economy violate the sacred dogma of free trade. If the Obama administration is serious about reviving American manufacturing industry, it is only a matter of time before a foreign government hauls the U.S. before the World Trade Organization and charges us with the crime of industrial policy.

To quote our beloved leader George W. Bush in a different context, bring it on. The current version of the W.T.O., designed by and for US multinational corporations to make it easier to outsource jobs and production, has not served the national interest. It is indeed time to use industrial policy to rebuild long neglected domestic industries; and if something has to give, let it be the W.T.O.

As a mark of the total intellectual muddle in how policymakers have thought about these issues, the fact is that we have several implicit industrial policies. For instance, American commercial leadership in aerospace is no naturally occurring phenomenon. It reflects trillions of dollars of subsidy from the Pentagon and from NASA. Likewise, U.S. dominance in pharmaceuticals is the result of government subsidy of basic research, favorable patent treatment, and the fact that the American consumer of prescription drugs is made to overpay, giving the industry exorbitant profits to plow back into research. Throwing $700 billion at America's wounded banks is also an industrial policy

So if we can have implicit industrial policies for these industries, why not explicit policies to rebuild our auto industry, our steel industry, our machine tool industry, and the industries of the next century such as green energy and high-speed rail? And why not devise some clear standards for which industries deserve help, and why, and what they owe America in return?

The new administration is already a bit schizophrenic on the subject. On the one hand, President-elect Obama has been saying bold things about building the industries of the future. On the other hand, he just appointed as America's top trade official Dallas Mayor Ron Kirk, a man with no serious diplomatic experience and one whose main claim to fame on the trade issue is that he has been a big booster of NAFTA, a badly flawed deal that Obama has pledged to reopen.

Kirk's appointment was meant to signal that Obama will not challenge the current orthodoxy on trade policy. It was cheered by the U.S. business establishment. What is truly bizarre is that Obama's reported first choice for the job was California Congressman Xavier Becerra, a critic of NAFTA and other recent trade deals. Kirk will also vehemently disagree on trade and industry with Obama's new labor secretary-designate, Rep. Hilda Solis, another NAFTA critic.

Maybe, like Lincoln, Obama has the genius to fuse this "team of rivals" into an effective administration; perhaps he will listen to the divergent advice and forge the best course. When the historian Doris Kearns Goodwin coined that phrase to describe Lincoln's manner of governing, she was referring to the fact that Lincoln literally brought into his cabinet men who had been Lincoln's rivals for the Republican presidential nomination in 1860. These were people of real stature and of fierce differences, representing a party that was badly fractured on the key issues of how to save the union and whether to free the slaves.

Obama has prided himself building bridges and transcending ideology. We are now beginning to see what that means in practice--a cabinet that represents people of thoroughly contradictory views, with some members who are public figures of real consequence and others who are surprisingly weak. This pattern puts all the more pressure on Obama himself to create coherence out of the stew.

Despite these gestures of broad inclusion, there is no escaping the fact that Obama must quickly make some difficult decisions about which path to follow. And one path precludes another. He can't have both his industrial policies and his free trade.

Robert Kuttner's new bestselling book is "Obama's Challenge: America's Economic Policy and the Power of a Transformative Presidency."

Comments

[charlesrfd2003]

It is about time the USA decides how it will earn a living.

If you want a first class nation, we cannot buy our tanks and trucks from China.

As we develop a large class of underemployed and low paid citizens, who will be the consumers.

History shows us that we had an industrial policy early in the republic. It worked.

You need always to be able to export and trade. Remember Econ 101 wealth is not money but goods and services produced in the economy.

I am 66. When I was in college, the econ professors spoke of a mixed economy. Today, I see a looted economy.

[daddysboy]

I found this very interesting. Thank you. I find that I disagree with your premise slightly however, in that I don't believe we ever have to have all of one and not the other of anything. What may not seem so obvious to most people is that the government of course should work in the best overall interest of the people, the country, and our future prosperity. That is not to say that we can't have BOTH effective domestic policies that circle our most lucrative and precious areas of business while taking an entirely lax position on others. No one except for the pure deregulation proponents ever said everything has to be equal and fair in the business community. If that were the case, I can think of THOUSANDS of areas where industry is regulated for the best interests of the people despite profits and feasibility. Government itself is policy and where those policies operate to the detriment of the people, they need to be rectified. Where there is benefit in leaving things alone; that should be the course for now.

[dianhow]

I have learned over the years: That the Madoff's of the world will always make tons of money..since they have little or no morals or conscience. Let us all remember this : Those are the types of people we have to guard against. And there are a good many of them. However..I do believe that most people try to do the right thing..but those are not the ones in POWER and likley will not be.. GW Bush's pick for Sec of Treasury - Henry Paulson and his ilk - control VAST amounts of money and power. He is the former CEO of Goldman Sachs..now whose interests do you think he has been looking out for ? One guess...Its not us. These are the things we need to keep in mind when we vote in the next election. For myself..I hope the Sen Phil Gramm' types' are all out of office soon..Hey..I can dream can't I ?

[mioffe]

GE great manager Jack Welch is great. He knows how treat smart people. He always made Inventors happy.
In one of his Company I saw work of his weak followers. They didn’t understand spirits of inventions, but want to receive the same honor and privileges as Jack Welch. This is became problems for many others Companies in USA. Managers, who create bubbles, became disaster for our Economy. Government makes businesses worst supporting this kind of management.
If our auto industry will follow the best Japanese, or EU companies, they will loose because they will follow yesterday solutions.
The same is true in steel, machine tool, high-speed rail, etc.
Green energy is disaster for environment, only Al Gore and members of new Gov. can’t understand that.
NAFTA is good, but only when CEO like Welch in power. We need more Inventors for 21-century vision. I do not see movement in that direction. That is huge problem.

[daddysboy]

Please explain why you think that green energy is a "disaster for the environment". Thanks.

[mioffe]

Tim Flannery “The Weather Makers,” 2006:
“Mature forests don’t take in much CO2 they are in balance, releasing CO2 as old vegetation rots, then absorbing it as new grows. For these reasons the world largest forests-the coniferous forests of Siberia and Canada, and the tropical rainforests are not good carbon sinks, but new vigorously forests are.”
If we will grow corn, grass, etc. for ethanol or others “green sources of energy” we will bring to ethanol production place every year increasing amount of plants from which we extracting ethanol. All waste will be decayed very soon increasing amount of carbon dioxide in the air.”
Most car engines have 25-30% thermal efficiency range. Because this efficiency apply to move not only passenger but and heavy cars, real efficiency of cars where we are mostly alone moving to job and back will be less than one percent. Cars are relict of previous century. Biofuel feeds these cars.

[Ponovision]

The old view of "that's business", of viewing business and making money in an amoral bent, is the main problem. Morality and ethics have to be paramount in every transaction. It has got to go there because look what happened. Gandhi said "commerce without morality" is a deadly sin. He also said "wealth without work" is also a deadly sin. And those "sins" are what has guided our economic path for the last 40 years. The aspiration to get rich by putting your hand in another persons pocket or outsourcing for quasi slave labor is low on the moral scale.. Before it was me, me, me. Now it is we, we, we, all the way home. The little piggies screaming for help. It is playing out like an Aesop fable with the irresponsible party people begging the honest, hard working chumps for help after they squandered everything for pleasure.

[bwiser]

I got my undergraduate degrees in Econ and PoliSci, but almost everything I learned seemed to contradict reality. I was fortunate enough to attend a state school with an outstanding faculty; UMASS-Boston. My professors were committed to presenting students with an unbiased view of economics and politics that make up history. It was tragic when I finally understood that the whole thing was a house of cards using a marked deck. The US leadership has tainted the ethical creed of this country and made a sadistic lie of our global prominence. The almost child-like trust of the public at large has been perverted by those who would sell America to the highest bidder.

aw school, my dream, was an even bigger disappointment. Fortunately, I had the opportunity to observe the system in action before I sold myself into student loan purgatory. I have no doubt that President Obama will have to make some concessions to the old school mentality, and I’m ok with that; my concern is that he may not be able to exercise the level of scrutiny necessary to keep everybody’s hands out of the cookie jar.
I recently earned a graduate teaching degree in History and for the first time students are excited by the possibilities for change the Obama presidency represents for them. We all have a chance to do things differently, to improve on what works and change what won’t. I pray we don’t let them down.

[groland]

The underlying assumption by all the disciples of the free market is that we can compete because everything is better in the good old USA. Well most of these morons have never worked or lived anywhere else. The facts are that we can not compete in manufacturing consumer goods like electronics, appliances, textiles, even automobiles. So where does that leave us? The US economy was robust when it was insular. Global markets have devastated this country and enriched only the investor class.

[dianhow]

You made excellent points. Thanks

[Outlier]

Will he "commit industrial policy"? This MBA from the free market bastion that is the University of Chicago sure as hell hopes he does! And this Chicago MBA agrees with Kuttner.

Yeah, I was a free trader once. And I remember my first beer too.

[oni baba]

From Hawaii's perspective, it may just be part of the post-election cycle and the economy, but the experience of sitting inside out of the rain with one’s family, eating in the presence of gale force winds discussing the economy and the political state of world affairs feels unususal to me. In our family, usually discussions erupt around the local issues like the rail debate, or Hawaiian sovereignty or development issues, now we speak about world issues as if we were relevant. Is the feeling of Hawaii’s relevance in the world one of the Obama effects? Or is this simply the moment before Christmas when we are full of hope and wishes.

http://www.statehoodhawaii.org/txt/Milton_Marx.html
a milton friedman/marx mash-up-- new free-marxist economy

[Happyashell]

I am a retired Economic Analyst, and Author I have forty years in the financial and business world.

I wrote a book and several articles outlining new policies to cure economic crisis, now and in the future. A guide to correct a major flaw in our economic theories. John Maynard Keynes the British economist gave us a guide to help the economy out of the recession economic cycle. The problem is, he did not leave a handbook on how to correctly slow down the economy when it is so strong that it is creating an economic crisis.With the correct policies enacted the stock market should go up, replacing some of the value that has been lost!

People are losing their jobs and homes. Business large and small are going bankrupt.
We have been treating the symptoms of the economic crisis, not the disease. What we are doing is not working!

John Maynard Keynes (1893-1946) was the British economist who revolutionized economic theories of the 1930s. Keynesian economics works well. The trouble is he did not leave a handbook on how to correctly slow down the economy when it is so strong, that it is creating an economic crisis.

We had the housing bubble and the oil bubble in the commodities market. The Fed couldn't anything about them, without killing our economy. Find out why!
The book INFLATION THE ECONOMY KILLER by Leonard Tekaat is available at Amazon.com more free info. www.American Solutions.com articles by happyashell
.

[Happyashell]

Let me introduce myself. I am a retired Economic Analyst, and Author I have forty years in the financial and business world.

There is a major flaw in our economic theories!

I wrote a book and several articles outlining new policies to cure economic crisis, now and in the future. John Maynard Keynes the British economist gave us a guide to help the economy out of the recession economic cycle. The problem is, he did not leave a handbook on how to correctly slow down the economy when it is so strong that it is creating an economic crisis.With the correct policies enacted the stock market should go up, replacing some of the value that has been lost.

We had the housing bubble and the oil bubble in the commodities market. The Fed couldn't anything about them, without killing our economy. Find out why! The book INFLATION THE ECONOMY KILLER by Leonard Tekaat is available at Amazon.com more info. www.American Solutions.com articles by happyashell.

People are losing their jobs and homes. Business large and small are going bankrupt.
We are treating the symptoms of the economic crisis, not the disease. What we are doing is not working!

John Maynard Keynes (1893-1946) was the British economist who revolutionized economic theories of the 1930s. Keynesian economics works well. The trouble is he did not leave a handbook on how to correctly slow down the economy when it is so strong, that it is creating an economic crisis.

[JanP]

Governments have a wonderful record of promoting growth and prosperity , don't they?

Look at the Communist countries? does anyone remember seeing Ladas and Trabants on the streets of America, Europe or anywhere else except communist countries? Well, how about Socialist countries like France? When was the last time you saw a Renault, Peugeot or Citroen dealer? let's try Italy? Have you gone to an Alfa, Fiat or Lancia dealer lately? Nope: all the cars that Italy can sell here bear brand names like Ferrari, Lamborghini and Maserati.

Look what the government did to the British Auto Industry? survived because it was owned by Ford (and now Tata of India), Vauxhall survived becuase it is General Motors and Fod of England survived because it is owned by Ford. Once upon a time, the Brits ruled the sports car industry. So what happened to MG, Triumph and Austin-Healy?

So, what goods do you typically buy made in Socialist Europe?

And let us not forget how well Congress did with the mortgage industry and energy policy?

Government running industry is a disaster.

[CalvinistHobbesian]

Last time I visited a Wal-Mart, almost everything on the shelves was made in a communist country.

[dianhow]

Calvin..Yep - the same folks who send us toxic foods, lead in toys, chemicals in some products. SO why do we still accept their goods? Because its all about cheap cheap labor. Corporate america has sold us out. UAW NEW hires now make about $15.00 per hour. How can they afford to feed and clothe their family, buy gasoline, buy goods and services from area business's or heaven forbid..ever buy a home ?
GM has over 1 million retirees that are being paid 100's of millions worth of benefits / health care. If GM goes bankrupt...the bankrupsy judge will likely wipe out all of those benefits & pensions. Result..More job loss and folks on medicaid,unemployment or even homeless. Bottom line: Businesss can not do well if average people don't have money to spend. Let's face this fact : This is what rampant greed and too much deregualtion has gotten us. But..even with all the gloom and doom..we will get out of this mess. It will just take time and yes..even some sacrifice.

[CalvinistHobbesian]

Oh, and "Have you gone to an Alfa, Fiat or Lancia dealer lately? Nope: all the cars that Italy can sell here bear brand names like Ferrari, Lamborghini and Maserati."

Ferrari and Maserati ARE Fiat. And Lamborghini is owned by Volkswagen/Audi, a company from Germany (a European socialist country you overlooked); that, like other German companies, benefits from "industrial policy" in spades.

The Europeans, along with Japan and Canada also give their industries an advantage by providing health insurance, the cost of which is strangling much of our remaining industries.

I'm not saying we need to be like China, just the opposite. But a lot of other countries give advantages to their industries that can even tempt our companies to move our jobs there. We've got to level the playing field.

[Outlier]

If it's not zero, then it's infiniti, huh. Everything is extreme for the extremists.

[groland]

Have you ever been to or lived in socialist Europe? Actually the French auto industry is healthier than ours and exports to many other countries. The french abandoned the US market in the late 70s because of the catalytic converter issue. Also, quality was poor then but has rebounded dramatically. Alfa and Fiat build some of the most interesting cars today. The Alfa 156 was popular in the UK and Germany. The EEC is the most competitive auto market in the world, with many more products available than in the US. You really do not know what you are talking about

[groland]

Outside of Japan, Germany has the highest trade surplus in the western world. What goods to we buy? Besides the obvious BMWs, Mercedes, and VWs, try high tech medical devices from Siemens and Zeiss, appliances from Bosh, Braun, and Miele, printing presses from Heidelberg, all kinds of machine tools used in manufacturing. Germany and Japan have industrial policies that help industries thrive. You really do not know of what you speak.

[joedabear]

I have known these things for decades about the "Free Market Economy". It aint free, it aint a market, and it sure as the hell aint economical.

[berrycooda]

NAFTA.... actually means...

Not A Fair Trade Agreement.....

Never has been fair trade....Anytime a company can move to another country and bring
goods back into the U.S cheaper than they can make them here, something is not FAIR.

But, being the good and generous people we are, we just sit back and let it happen.

Avon moved, Hershey moved, Kellogg moved etc. I even heard that the chickens were shipped
overseas...processed and frozen there and then shipped back here.

I am wondering why we can't outsource the CRIME in this country. Then I wouldn't feel quite
as bad about good old NAFTA.

[oujiQualm]

I strongly recommend two books on the last president to try an industrial policy.

The new TOTAL MASTERPIECE JFK AND THE UNSPEAKABLE; WHY HE DIED AND WHY IT MATTERS HAS A GREAT DESCRIPTION OF JFK AND THE STEEL CRISIS OF 1962. THIS HAS not been forgotten, its been censored.

Another great one is Battling Wall Street: The Kennedy Presidency by Donald Gibson.

[doneright]

Part of the question we are trying to answer in this article is do we need a plan to grow the national economy or do we just leave it to chance? Whether you are talking about the national economy or the family budget I believe a plan is preferable to simply letting it happen. You need to know something about where you want to go and how you are going to get there. The notion that financial markets will self-regulate when each individual institution is left to their own devices seem to have produce a contradiction. Without an underlying structure that determines how these financial institutions interact and function as a unit there can be no economic security or system integrity.

A full-blown free market economy is a system without a plan. We simply assume on faith that each company and individual, following its own initiative and devices, will compete to produce the greatest wealth for all.

It is interesting to note in recent years how the tide has turned away from competition to cooperation among significant companies. Company managements have learned that in a number of ways there is more to be gained by cooperation with their so called competitors than there is to be gained through competition. This should be a good indication that as a nation, we need a cooperative spirit and a plan, not simply the drive to compete if we want to survive in the global economy.

[Bonobo]

Adam Smith actually discussed merchant cooperation in "Wealth of Nations", although he called it collaboration, and it was not a happy thing for the consumer. He noted that when merchant got together for trade fairs, the conversation inevitably turned to how they could conspire to raise prices together. The only reason this isn't obvious to the modern observer is that economic policy for several decades has been to specifically discourage cooperation to prevent this.

[doneright]

Adam Smith was an 18th century economist. This is the 21st century. Do you think some things might have changed or new insight gained in the mean time. It is time we filtered some of the findings of the these significant contributers to our way of life. My point was that the greatest national good is not served by a spirit of uncompromising competitiveness for personal gain. In order to serve the greater good companies need to develop plans that integrate with the overall objectives of the national economy.

Whether or not you like Walmart, the fact is that their success is attributable to the fact that they developed a business plan that integrates with the growth of the economy in general. They have lower prices because they work to satisfy the needs of todays consumer.