Back when people first started complaining about the imminent disappearance of manufacturing, the proposed solution -- especially popular among Democrats -- was an "industrial policy." The idea was that some government agency, modeled after Japan's Ministry of International Trade and Industry, would pick industrial winners and losers, nurturing the former with subsidies and trade protection, while humanely killing off the latter.
While popular on Capitol Hill for a time -- a big supporter was Democratic presidential candidate Dick Gephardt -- it died when liberal economists at the Brookings Institution took it apart. Among the leading opponents was Charles Schultze, chairman of the Council of Economic Advisers under President Carter. Indeed, he injected one of the most effective critiques of industrial policy ever written into the 1981 Economic Report of the President.
Said the Economic Report: "It is presumptuous to assume that successful identification of winning and losing industrial sectors is possible. ... Even within so-called 'losing' sectors, individual firms often outperform many of the firms in 'winning' sectors."
The effect of adopting an industrial policy would be to further politicize the economy and reduce economic efficiency, the Economic Report concluded. The net effect would be to reduce the competitiveness of the manufacturing sector, not increase it. The recent history of Japan is ample illustration of the wisdom of this analysis. Its economy has been in the tank for a decade and many economists blame MITI for the failure of Japanese companies to adapt and adjust to changing market conditions.
The irony is that the new Commerce report presents ample evidence that manufacturing in the United States is quite healthy. U.S. manufacturing productivity is rising relative to Germany, France and the United Kingdom, after falling for many years. Manufacturing output is strong and retains its historical share of private economic growth. It is true that employment is down, but manufacturing's share of total employment has fallen by a similar percentage in every industrialized country -- including those with active industrial policies.
Echoing a recent report from the National Association of Manufacturers, the Commerce Department study concludes that manufacturing's problems, such as they are, stem mainly from two factors. First is the general macroeconomic environment. When the economy as a whole grows faster, so does manufacturing. Hence, the economic recovery will powerfully aid manufacturing.
Second are the burdens that have been disproportionately imposed on manufacturing by an out-of-control tort liability system, government regulations and an international tax system that is woefully outdated. These are not problems that trade protection or government subsidies can fix.
The new Bush industrial policy may be nothing more than minor election year politicking. But it's still a bad idea.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
Be the first to read Bruce Bartlett's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Showdown in Jackson Hole: The Fed Challenged on its Own Turf in Wyoming by Group Likely to Finally Start Dismantling it | Rachel Alexander