What Kind of "Reindustrialization"?


Advocates of the corporate state—the notion that a technocratic elite must make the basic decisions about our economy—appeared to be biding their time after the failure of Richard Nixon's wage and price controls. But today, when even assembly-line workers can see that something is terribly wrong, the corporate statists have come forward once more.

Their new game plan is called "reindustrialization" or "industrial policy." In various versions, its basic idea is that the United States must become more like Japan, where—claim its advocates—the economy prospers because government and industry work hand-in-hand, deciding which sectors will expand, which will contract, which will export, etc.

One of the architects of reindustrialization is investment banker Felix Rohatyn, an ardent supporter of the federal bailouts of Lockheed, New York City, and Chrysler. Since 1974 he has been urging the resurrection of the New Deal's Reconstruction Finance Corporation as the vehicle for reindustrialization. Rohatyn's born-again RFC would rescue such faltering industries as autos and steel, using its leverage to restructure them in accordance with its own grand design for improved productivity. It would also support the development of government-selected technologies such as synthetic fuels.

For several years the concept has been picking up supporters. The Trilateral Commission favors more government R&D support, coupled with protection for declining industries. The National Association of Manufacturers and the AFL-CIO have weighed in with their own plans along these lines. Sociologist Amitai Etzioni, credited with actually coining the term, cautions that groups like these focus too much on the rescue side (which he terms "lemon socialism") and not enough on tax incentives for investment. But Etzioni himself has endorsed a government/industry commission armed with a $5 billion loan fund to help "selected industries."

The media have hastened to climb aboard the bandwagon. Business Week did an entire issue on reindustrialization (June), the New York Times ran a five-part series (August), and The Atlantic ran a cover story (September). Politicians, too, can scarcely contain themselves, with Anderson, Carter, and Reagan all using the word (though differing somewhat in the meaning they attach to it).

Anderson explicitly favors government loans and loan guarantees for ailing industries, together with economic planning. Carter's "revitalization" plan puts government in the driver's seat and expands by $3 billion the Economic Development Administration—the prototype of an RFC-style agency. And even Reagan, whose emphasis has been mostly on increased incentives via cuts in taxes and regulations, has begun talking approvingly of the Chrysler bailout and hinting at auto import restrictions.

The common thread in all of these schemes is the idea that—somehow—government knows best. For reasons which are never stated it is assumed that planners ensconced in Washington can identify those industries which "should" be expanded and those which "should" be allowed to die. The alternative, of course, is for the marketplace to decide—in other words, for individual consumers to determine, by their purchases, which firms are doing a good job and which are not. There is no evidence whatever that government can do this better than consumers, and there are sound moral reasons (like individual freedom) for keeping it from doing so.

The tragedy of the whole debate is that the battles over who gets to wield what kind of power tend to obscure the underlying reality that the American economy is sick unto death. Americans now save only 3.4 percent of their disposable income—compared with 14 percent in Germany and 20 percent in Japan. Output per hour worked in this country used to increase each year—by 3.2 percent annually in the '50s and '60s, by 0.7 percent a year in the '70s—but last year it actually decreased. Industrial R&D as a fraction of GNP has fallen by nearly 25 percent since 1964. The number of patents granted to US investors has been declining steadily since 1970.

If the advocates of reindustrialization could put aside their schemes for power long enough to ask why, they might realize the underlying cause of much of this malaise: inflation. Because companies' depreciation charges are based (by law) only on what they paid long ago to buy their equipment, the profits they report (and are taxed on) are fictitiously high, and they end up not having enough money left over to replace worn-out equipment. Some industries, like steel, are literally consuming their capital each year. Moreover, persistent inflation leads managers to think short-term, seriously reducing the viability of making long-term investments in new productive capacity. On a personal basis, inflation leads people to put their money into real estate or precious metals rather than investing in the stocks and bonds that finance industrial growth.

We can learn some lessons from Germany and Japan, but they are not the lessons the corporate statists hope to teach. Both governments exempt from taxation nearly all personal savings. Neither taxes capital gains at all. Their tax structures are far less "progressive" (i.e., incentive-killing) than ours, their inflation rates far lower. And their overall tax burden is considerably less. As for government direction, it is interesting to note that neither steel nor autos have been encouraged by the Japanese government.

This country desperately needs to restore vitality to its industries. But turning the country into a corporate state is hardly the way to do it. What is needed is a threefold policy that attacks the causes of our industrial stagnation. Such a policy would:

• end inflation by restoring sound money and prohibiting federal deficits, by constitutional amendment;

• restore individual incentive by abolishing all taxes on saving and investment income and eliminating the steeply progressive nature of the income tax;

• reestablish free competition as the best way to weed out unproductive industries, via the acid test of consumer choice. That means no tariffs or import quotas, no restraints on corporate closings or relocations, and above all a guarantee of no government bailouts of any kind.

Under such conditions the marketplace will redirect resources, individuals and managers will learn once again to think long-range, and America's genius at creating wealth will once again begin to flourish.

And one more thing: we'll keep our liberty, too.