It is time to stop improvising our way out of trouble

By John Gapper

The failure of the Detroit bail-out bill in the Senate was caused by tensions between right and left, Republicans from the south and Democrats from the unionised rust belt, and purists and pragmatists. Above all, however, there is confusion about what governments should do.

Since the US government passed a $700bn bail-out package for banks and financial institutions in October, governments around the world have faced demands from other troubled industries to be rescued.

This week, biotechnology companies in the UK and US went to politicians to ask for aid. Sir Christopher Evans, a leading biotech entrepreneur, led a group calling for the UK government to compensate for the inadequacies of the stock market by investing £500m ($745m, €567m) in the struggling sector.

The biotech industry is not alone in holding out its cap. The car industry is in the forefront of aid demands – Volvo and Saab were promised Kr28bn ($3.4bn, €2.6bn, £2.3bn) by the Swedish government this week. Steelmakers, building companies and others are now eager not to be left behind.

But governments cannot give in to all of these demands without distorting competition and overstretching their budgets. By giving cash to companies that are in the worst trouble and have the most political clout they are in danger of investing their money badly.

It is time for them to stop trying to improvise their way out of trouble and adopt industrial policies.

At one level, this is an anathema to anyone who lived through postwar efforts at industrial policy in countries such as the UK and Japan. Britain’s efforts to shape its economy both through nationalisation and a bunch of tripartite bodies guiding industries was worse than useless.

Until Margaret Thatcher was elected in 1979 and braved protests to allow lossmaking industries to collapse, industrial policy meant in practice letting long-term industrial decline continue unabated.

For a time, some US observers envied Japan’s all-powerful Ministry of International Trade and Industry, which forged industrial groups by telling executives what to do.

Then came the US’s new economy boom of the late 1990s, created not by governments deciding which companies should get money, but by a wave of private sector investment, rapid innovation and a surge in the rate of productivity growth.

Compared with that, relying on government industrial policy seems like a second-best – and potentially harmful – idea.

But the reality is that governments already have de facto industrial policies, and have had since many bailed out their financial sectors. Having done so, they are being forced to make it up as they go along.

It was partly foreseen in 2001 by the economists Brad DeLong and Larry Summers, the next head of the White House National Economic Council: “The end of a period of high euphoria and extravagant boom will inevitably bring a reduction in investment in the economy’s leading sectors.”

Rather than waiting to deal with whoever is next in line for money, the US government and others might achieve more – and, as importantly, not waste as much money – by instead trying to help their economies adjust through a mixture of spending, regulation and tax incentives.

The key point is not merely to prop up old industries, Detroit being a prime example, but help new ones to flourish. There is a clear need for that in the UK because high-paying financial services jobs in the City of London will be in shorter supply.

The test for industrial policy is whether governments stand in the way of “creative destruction” – the phenomenon identified by Joseph Schumpeter of capitalism sweeping away old industries and making way for new ones – or help to ease the industrial transition.

Barack Obama, the US president-elect, has come closest among western leaders to articulating a new industrial policy. He has talked about creating “green energy” jobs and improving broadband access as part of a $700bn public works and stimulus package.

“Margaret Thatcher had a big story in the 1980s – that this was a catharsis and Britain would emerge more efficiently. Obama is the only politician with one at the moment,” says Charles Leadbeater, a former Financial Times journalist and co-author of a study on industrial policy.

There are signs that Lord Mandelson, the UK business secretary, is limbering up to tell his own story. He argued in a speech two weeks ago that: “Public policy, including a more active industrial policy, has, I believe, a role in ensuring that the market functions effectively.”

In practice, of course, any attempt at government guidance of industry is fraught with pitfalls.

Biotech, for example, sounds like it deserves encouragement: it can provide highly skilled jobs and has growth potential. But should any government step in to consolidate an industry and pick winners when the private sector has not already done so? It sounds like a bad idea.

Governments tend to be better at establishing broad frameworks of tax and regulatory incentives, and investing in public projects, than running companies or devising industrial master plans.

They must do something, however. The economic crisis has thrust them into deciding which companies live and which collapse. They will probably get better value for money if they approach the task with some degree of coherence.

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: