A New Industrial Policy

If you want to understand U.S. industrial policy, walk past the Federal Trade Commission's building in Washington. Right in front is a statue, done in Socialist Realist style, of a brawny man taming a wild horse. This is the vision behind countless laws and regulations: business as a powerful but dangerous animal, to be broken and ridden by government.

It is an outmoded vision, though certainly not yet out of style in Washington. It is utterly at odds with the quest for economic efficiency and international competitiveness, because it treats economic dynamism—the necessary condition for innovation and resilience—as an evil to be overcome rather than a source of strength.

Those who argue that government ought to take a more active role in directing industry claim the United States has always had an industrial policy. If we define "industrial policy" as all public policies that affect industry, they're right.

Unfortunately, the policy they offer in place of horse-breaking amounts to no more than old-fashioned mercantilism: government favors for a privileged few companies or industries. Those with the best connections would get the best deal. Dynamism would be destroyed not by regulation but by favoritism.

There is an alternative. We can dump the wild-horse model of business and adopt industrial policies designed to take politics out of the marketplace. That means deregulating. Despite the relentless carping of those who never liked the reforms of the 1970s and '80s, we need to do still more to restore flexibility and efficiency to American industry.

What might a deregulatory industrial policy look like? Consider the following areas of the economy:

• Infrastructure. This favorite buzzword generally refers to the networks that link us together: highways, communications systems, airports, power grids, postal service. The strange thing about infrastructure is that everybody thinks ours is in bad shape, yet there are lots of companies that want to make money improving or providing it. If everything were operating according to theory, Bechtel would be putting up private tollroads, Lockheed Air Terminal would be building airports, and somebody—most likely the local phone company—would be running fiber-optic cable into every home and business, carrying every communication service known to man.

In most cases, however, companies can't act because the government has designated such operations off limits either to profit-seeking enterprises or, as in the case of telecommunications, to the most logical providers. Some cash-strapped cities and states are looking to the private sector for new airports and highways. But a company still can't just acquire land and put in a tollroad; it has to get government permission.

Similarly, the United States runs the risk of falling way behind other industrial nations in developing a modern telecommunications network. Thanks to deregulation, long-distance telephone companies have built first-class fiber-optic networks and plenty of capacity. But government has divvied up the telecommunications market—assigning separate pieces to local phone companies, long-distance carriers, cable operators, broadcast networks, and so forth. As a result, we have neither as much competition nor the range of services we might have. We know we're missing out on some services—such as easy linkups to information databases via telephone/television. The real question is what services haven't even been conceived of because the way to deliver them doesn't exist.

• The workplace. Social engineers increasingly seek to impose on the American workplace the kinds of regulations that have made European companies sluggish, inflexible, and reluctant to hire new employees. Left to their own devices, companies often adopt generous practices. Rare is the law firm, for instance, now that half of law school graduates are women, that doesn't provide substantial leave after childbirth. But letting Congress specify exactly what contracts employees and employers can make with each other will lead neither to economic efficiency nor to fairness.

• Education. Everybody, especially everybody in business, complains about the lousy state of American public schools. But those schools manage to dodge both sensible minor reforms and fundamental changes. The former include an end to the ridiculous requirement that would-be teachers spend time in mind-numbing education classes. Let each school decide whom to hire, with more emphasis on real qualifications and less on paper credentials.

And, should we ever get real competition—in the form of vouchers or tuition tax credits—we should encourage a wide range of schools to open and to participate: for-profit schools; schools run by companies or office parks for employees' children; schools that run half-day schedules but meet all year. We enforce standards now largely because students are stuck with what they get. If they could switch schools easily, centralized standard-setting would be less important.

These are merely places to start. A deregulatory approach to industrial policy would encompass others: immigration, capital markets, liability law, occupational licensing, and so forth. Such an approach would be guided by a new vision of business—as a human enterprise, not as a dangerous force of nature.