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Wednesday, May 20, 2009

"What Industrial Policy Should Be"

Fighting rather than facilitating structural change is counterproductive:

What Industrial Policy Should Be, by Robert Reich:  ...Much of the industrial Midwest desperately needs new technologies and industries to take the place of the shrinking U.S. auto industry, and workers who have been (or are about to be) laid off need help transitioning to those new jobs. Could chunks of the old auto industry be adapted to producing high-speed rail or, more generally, highly-efficient people-moving systems of the future or, even more generally, green technologies that support such systems? Could some of the billions now slated to fund new non-carbon based energy sources be targeted to this?

I don't know the answers but I worry no one is asking these questions. Bailing out the auto companies while forcing them to lay off tens of thousands of their workers, imposing higher fuel-economy targets on them, and lending them billions more to meet those new targets seems oddly unrelated to the large structural transformation the economy must go through. We need a broader and more imaginative approach to industrial policy -- one that integrates all the different ways government influences industry, and achieves overarching public goals.

I find myself uncomfortable with all the talk of industrial policy recently, partly because I'm not always sure the degree to which people foresee the government actually directing industrial activity. The government should step in when there are significant market failures to overcome, and much of the work to combat climate change falls under this heading, including the research and development that is needed to set the stage for the needed transitions. To accomplish this, however, I prefer that the use of incentives to the use of government dictates about precisely how those goals should be attained and by whom. That is, I favor market-based interventions that use incentives to move behavior in the desired direction over the use of government dictates.

But in general - when there are no substantial market failures to worry about - the question is how best to facilitate structural change so as to minimize the cost of the transition without distorting the outcome. What makes it particularly hard this time is that the cyclical unemployment rate is extraordinarily high at the same time substantial structural change is occurring in some industries. That means that finding alternative jobs for workers displaced by the structural change - whether you move the workers to the jobs or the jobs to the workers - is much more difficult than it would be otherwise. I believe the government could do more than it has done in the past to insulate workers from the effects of structural change and to speed the transition, and that it shoul ddo more, but again I would be uncomfortable with the government intervening in a way that distorts the private sector outcome.

    Posted by on Wednesday, May 20, 2009 at 08:42 PM in Economics | Permalink  TrackBack (0)  Comments (33)

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