America Needs an Industrial Policy

Ford Foundry in Dearborn, Michigan, 1973. Credit: National Archives

Republican vice presidential candidate Paul Ryan famously accused President Obama of failing to save a big General Motors plant in Janesville, Wis., after promising to keep it open for "another hundred years." Candidate Obama actually said the plant would prosper for another century if it were retooled for "green" production. GM stopped making light trucks and SUVs at the plant in December 2008 (while George W. Bush was still president), formally closed it in April 2009, and started making the same vehicles in China four months later.

Both sides are engaging in demagoguery. Obama argues that the auto industry can survive by making green cars, but his notion of retooling seems rhetorical and oblivious to the market. Republicans, meanwhile, give Obama no credit for preserving many auto jobs, and they ignore the fact that GM started investing in China in the 1990s. Since GM emerged from bankruptcy, its manufacturing capacity in China has increased 55 percent.

Both parties are also overlooking some truths about the auto industry. Despite international agreements, nations that wanted to foster auto manufacturing and jobs have prohibited imports, as Japan did after World War II; required domestic production, as Canada did in 1965; or limited imports, as South Korea does today. The United States didn't begin to encourage domestic production of foreign cars until the 1980s, and the number imported still exceeds the number produced domestically.

Neither party has a plan to create jobs. The GOP claims that cutting "big government" will do so. But how? Austere budgets have not revived Great Britain or southern Europe. When pressed, Republicans say cutting government will renew confidence or reduce inflation fears. This is not an argument; it's a creed.

Democrats profess another faith, but it's no more credible. They argue that government spending will jump-start the economy and create good jobs. But how? If they are right, even the insufficient stimulus of 2009 should have produced some hint of what a more robust stimulus would yield. It did not.

Middle-income jobs, like those in construction and manufacturing, accounted for 60 percent of job losses from 2008 to 2010, according to a study by the National Employment Law Project. But such work has accounted for only 22 percent of job growth since the recession. Low-wage employment accounted for 21 percent of job loss during the downturn, but 58 percent of all job growth since. Retail sales and food preparation, which typically pay between $9 and $11 an hour, have been the fastest-growing occupations.

So the nation suffers from not just a jobs deficit, but a good-jobs deficit. The question for Democrats is: How would more of the same -- that is, a larger stimulus -- produce more middle-class jobs?

Both parties are too focused on government spending and taxation. Democrats celebrate high-tax successes like Germany and Sweden; Republicans, low-tax Singapore and Switzerland. But what all four countries have in common is that they don't rely solely on such policies to produce jobs. They have industrial policies that reflect national economic interests.

Asian nations have five-year plans. Europeans have planning institutions or consultative mechanisms, such as Germany's tripartite arrangements to create consensus among labor, business, and government.

The U.S. government offers financing but then steps aside. The Obama administration and its predecessors provided loans for green energy projects, but they didn't match what foreign countries like Germany and China were offering.

China required 80 percent of the needed technology to be Chinese and set standards that disqualified many foreign companies. When Chinese overproduction slashed the price of solar panels, many U.S companies, including the well-pedigreed Solyndra, went bankrupt. China's firms, generously funded by state banks, did not.

Recently, Massachusetts-based A123 Systems, which received government loans to make advanced lithium-ion batteries, was bought by China's Wanxiang Group, a large auto-parts maker. The sale may benefit A123, but is it in the interest of the United States -- especially considering that the president made the manufacture of advanced batteries a national priority?

In today's globalized world, nations act to shape markets to enhance their growth and employment. Countries like the United States, which allow the fate of critical industries to be determined by markets molded by other states, will inevitably lose their businesses -- and with them the jobs that create prosperity.