The history of industrial policy in America

Industrial policy has been practiced by the government of the United States to a greater or lesser extent since its inception. Tariffs, subsidies, intellectual property protection, industry regulation, labor regulation, and safeguards have all impacted the development and growth of industry. In fact, industrial policy may be politically inevitable because many people want the government to "do something" to improve the economy. Perhaps because of the lack of a nationwide discussion of the attributes of an effective policy, the government has failed to articulate a coherent framework within which its industrial policy choices should fit and a standard against which its industrial policies may be measured. Thus, industrial policy in the United States has included a mix of sectoral, general, and other approaches that have met with varying success.

As early as 1791, Alexander Hamilton advocated a form of infant industry protection and price distortions in order to encourage the development of a favored industry—manufacturing—in the United States. Since that time, the government has used price controls, trade restrictions, tariffs and taxes, and industry regulation to provide special advantages to certain firms in favored industries. These controls provide direct incentives to private firms in the form of increased profits. Advocates of such policies hope that these private firms enhance the welfare of the nation by investing the profits in research, development, and infrastructure that provide benefits to many individuals and firms outside the company. These approaches have been criticized because they involve “picking winners” and because the information and administrative costs associated with the government’s effective implementation and monitoring programs may outweigh the benefits from the policies. Another concern is that the effectiveness of the programs eventually becomes diminished by entrenched interests. For example, the benefited firms might keep the excess profits without reinvesting them or use the rents to create an effective political apparatus whose purpose is simply to perpetuate the policies advantageous to those firms.

In 1993, Steve Charnovitz published a paper that criticized sector approaches to industrial policy and advocated a “general” approach. He suggested that the focus of any policy should be at the national level rather than at the firm level. Providing subsidies for institutional infrastructure, such as public education, job training programs, and financial markets, may improve the welfare of the nation by correcting market failures. In other words, Charnovitz believed that, in some cases, social returns from certain investments were higher than private returns, and that the government could compensate for this by making appropriate investments and eliminating many impediments to private sector growth. Some ways in which a general industrial policy approach could be implemented are reducing the burden of regulation, developing better labor markets with unemployment insurance and information services, and developing venture capital funds for which small businesses must compete. One drawback to general approaches is that the effectiveness of the approaches may be very difficult to measure. Moreover, the effect of a general approach may be too long term to allow a rapid development cycle for the approach.

One effective and interesting industrial policy approach is illustrated in the U.S. Government's loan guarantees given to Chrysler Corporation in 1980. The agreement between the automaker and the government provided an opportunity for the private firm to continue operation, but the assistance was contingent on management and workers agreeing on several concessions. In effect, Chrysler and the government attempted to identify the causes of the problems that were plaguing the firm. Once the bottlenecks were identified, the government and the firm worked together to eliminate them by undoing several constraints to which management and workers had previously agreed. This example may suggest a third approach to industrial policy—one in which government incentives are conditioned on certain benchmarks set by the government. One difficulty of this model is that it is difficult to evaluate whether the continued existence of Chrysler was actually beneficial to the nation. Thus, the measurement difficulties presented by the general approach may also be present in this strategic approach to industrial policy.

I believe that law should seek to facilitate the identification and adoption or, alternatively, the rejection of an industrial policy based on the policy’s effectiveness at achieving benchmarks that are agreed to before the industrial policy is created. In this manner, the government can create more turnover and variety in its approaches, and academics can then develop better theories to describe what approaches work best using the new data. What the country needs are better independent institutions to measure and report progress that polices make towards their agreed-upon goals.