Economies are like bicycles. The faster they move, the better they maintain their balance unaided. An economy experiencing rapid growth can adjust with relative ease to changes in supply, demand and technology. Workers whose jobs are threatened because of new products, shifts in consumer tastes, or automation can find new jobs; communities whose major industries are failing can attract new industry; and firms whose products are becoming less competitive can diversify into more competitive lines of business. All these adjustments, in turn, help ensure continued growth.

Adjustment is less automatic, however, in an economy growing slowly. Under these circumstances, workers, communities, and firms facing economic changes that erode their competitive position often have no profitable alternative toward which to shift their resources. Because the process of economic change may seriously threaten their future well-being, they turn to political devices designed to stem the tide, at least temporarily: legislation to stop runaway plants, regulations to prohibit the introduction of new technologies, government-financed bailouts. But protections like these retard future economic growth by encumbering the movement of resources toward more productive uses, and the downward cycle perpetuates itself.

Foreign trade intensifies both alternatives. It can make a growing economy even more dynamic-providing domestic firms with a wider range of resources and technologies with which to produce, and a larger market in which to trade, than they could enjoy in a single national economy. The international arena thereby offers opportunities to reduce unit costs far more rapidly than they could be reduced in a single economy, and thus contributes to faster economic growth.

On the other hand, foreign trade can exacerbate the problems of adjustment within a slow economy. Under these circumstances, more rapid growth often takes place in a different nation, to which domestic capital is attracted. Domestic labor is left behind within vast regional pockets of unemployment from which escape is costly and psychologically difficult, while domestic industries that have high fixed costs gradually lose their market share to their foreign rivals.

In this situation, political demands for protection are apt to result in tariffs, quotas, orderly marketing agreements, or the ever more popular "understandings" by which competitive exporters "voluntarily" hold back their wares. Restrictions may also be placed on the international flow of capital-limiting foreign ownership or foreign investment by domestic firms. Protectionism of these sorts is likely to be far more potent than regional protectionism; while local rivalries can be superseded by a strong national government and by constitutional provisions that prohibit trade barriers within the nation, coalitions against foreign imports cannot be so easily overridden.

During the 1970s, the economies of the United States and its major industrial trading partners-West Germany, Britain, France and Japan-shifted toward both slower growth and greater exposure to international trade. In the period 1960 to 1973, annual growth in America's real gross national product per employed person averaged 1.8 percent; between 1974 and 1978 average annual growth dropped to 0.1 percent. Over the latter interval, West Germany's growth fell from 4.7 to 3 percent; France's from 4.5 to 3 percent; Britain's from 3.2 to 0.8 percent; and Japan's from 8.9 to 3.2 percent.1 Meanwhile, U.S. exports, measured as a percentage of the final sale of goods in the United States, steadily increased from 8 percent in 1969 to 17.3 percent in 1979; imports, measured similarly, increased from 8 to 21.2 percent.2 For all developed countries, exports of goods and services over this period rose from 13.2 percent of gross domestic product to 17.6 percent.3

There are many explanations for these two phenomena. The decline in world productivity has been attributed variously to the sudden surge in oil prices and the gradual depletion of global resources, the end of labor migration from the farm, the entry of a greater number of young people and women into work forces, and government policies designed to curb inflation and protect public health, safety and the environment.4 The simultaneous internationalization of trade is due to technological advances in world transportation and communication, such as container ships and communications satellite technology; to the diffusion of new productive capacity to developing nations with lower real wage rates than those of industrialized countries; and to a set of international agreements, beginning in the late 1940s and culminating in the 1960s and early 1970s, which progressively reduced world tariff levels.

Predictably, problems of adjustment have grown in tandem. The United States and several of its major trading partners have suffered declining world market shares in basic steel, shipbuilding, natural-fiber textiles and apparel, and more recently, petrochemicals and aluminum. In the United States alone, auto imports now claim 27 percent of the domestic market, up from 4.1 percent 20 years ago; imports of consumer electronic products like television receivers and stereos now constitute 50.6 percent of the market, up from 5.6 percent in 1960; cutlery is now at 90 percent, from 8.2 percent; steel now at 14 percent, from 4.2 percent; metal-forming machine tools now at 28 percent, from 3.2 percent; textile machinery now at 45.5 percent, from 6.6 percent. The list goes on, growing longer year by year: calculators, typewriters, photocopiers, cameras, footwear, food processors, tires, industrial and organic chemicals.5

The problem is not that domestic industries are declining, although that is how the problem is often characterized. To the contrary, industrial declines are to be expected, even encouraged, as an economy shifts to new industries that generate higher real incomes for its citizens. The problem is that these shifts are not occurring automatically. Due to slow growth, new industries are not springing up of their own accord to replace the old. Instead, many industrialized countries faced with competitive declines in key industries are now experiencing increasing unemployment and underutilized industrial capacity, made worse by fiscal and monetary policies designed to curb inflation.

Calls for protection, therefore, are growing louder. In the United States certain key industries already have achieved a measure of relief. Since 1969, the U.S. steel industry has been protected from foreign competition; it is now demanding even higher levels of protection. So too with American textiles, apparel, and footwear. Last spring the Reagan Administration, ostensibly committed to free trade, negotiated an agreement by which Japanese automakers would "voluntarily" restrain their exports to the United States. Many European steel, textile, and auto manufacturers are demanding similar or greater protection. France has recently launched a $1.4-billion program to "recapture the domestic market" in machine tools, textiles, leather goods and furniture by providing subsidies to French purchasers that buy them from French producers.6

But protection is not inevitable. Economies which, due to slow growth, cannot adjust automatically to competitive declines in key industrial sectors have an alternative to protection-managed adjustment. Government, working hand in hand with business and labor, can ease the transition out of declining industries and into emerging ones. Workers can be given assistance in retraining and relocation; outmoded infrastructure can be modernized; and businesses can be encouraged to divest themselves of their least competitive parts and to reinvest in new, more competitive industries-particularly in regions of potentially high unemployment and underused infrastructure. Through managed adjustment, government can compensate economic actors who otherwise would be threatened with a disproportionate share of the burden of economic change, and who therefore would seek protection.

Conceptually, the choice between protection and managed adjustment is relatively clear-cut. In practice, distinctions become blurred. A subsidy designed to aid a firm or industry in restructuring itself to be more competitive internationally may simply prolong the agony, while eroding the competitive position of other firms in closely allied industries whose production would otherwise have expanded to fill the gap. An assistance program designed to aid workers in gaining new skills or finding new jobs may function as a prolonged type of unemployment compensation, discouraging workers from making hard choices and shifting to new lines of work. A program of community assistance intended to upgrade local infrastructure and attract new industry may be used simply to prop up ailing businesses or to bid firms away from other communities that are in equally dire straits. And an import quota designed as a temporary measure to give a declining industry time in which to restructure may be nothing more than a weakly disguised form of ongoing protection. In short, protection often masquerades as managed adjustment, in a disguise so clever that its true identity cannot be discerned until the costs of protection already have been incurred.

How, then, can a nation genuinely achieve managed adjustment? It can achieve it only by means of an explicit bargaining relationship between government, business, and labor-visible to the public at large-in which adjustment is made an express object. Government must, in effect, enter into contracts through which its assistance is exchanged for specifically agreed-upon shifts in private sector resources.

As we shall see, some of our trading partners-most notably Japan and West Germany-have developed mechanisms for entering into such public contracts. These mechanisms exist in sharp contrast to the various protectionist guises through which the United States has dealt with its declining and emerging industries.


During the past 15 years, U.S. government programs to assist declining industries have mounted-in the form of loans, loan guarantees, direct aid, tax expenditures, and various forms of tariffs, quotas, and import relief-but none has been conditioned on an industry's express willingness to restructure itself toward greater productivity and competitiveness. Typically the assistance has been used to maintain existing price-earnings ratios rather than to build new plants, upgrade equipment, undertake new research and product development, or upgrade the work force.

Major steel producers in the United States, for example, failed to invest in new plant and equipment during the "breathing space" they enjoyed after voluntary restrictions on imported steel first went into effect in 1969. In fact, the industry's capital expenditures for each of the six subsequent years were below the 1968 level. Nor did the steel industry undertake any major restructuring after the "trigger-price" system was initiated in 1978. The same failure to retool during periods of protection has characterized most of the U.S. apparel, textile, footwear, and color television industries. Indeed, the recent "voluntary" restriction on the export of Japanese automobiles to the United States was premised on the U.S. automobile industry's tacit agreement to use the opportunity to retool; but because that agreement was never formalized, the government and the public have no recourse now that these investment plans are falling short of their original targets.

To be sure, government programs to encourage new investment often have been inadequate to the task. Industries in dire straits typically have difficulty raising the capital necessary for restructuring, since banks and investors are understandably reluctant to sink money into enterprises that show so little promise of profitability in the short run. But the quotas, trigger-price systems, and other forms of import protection have, at most, provided declining industries with a respite from further erosion of their profits rather than with a surge of new cash.

Tax credits or depreciation allowances have rarely helped, since there are no profits to deduct them from. (Provisions adopted in 1981 to allow leasing of such tax benefits to other firms solved this problem for some companies, but those provisions have proved to be so politically unpopular that they seem doomed.) The Trade Act of 1974 authorized the government to provide limited loans and loan guarantees to companies injured by foreign competition, but it restricted eligibility to companies that already had experienced an absolute decrease in sales or production. As a result, these funds have come too late, after companies already have been seriously weakened, and the help has gone to the poorest companies in the industry rather than to those with the best chance of regaining a share of the world market. In any event, the funding has been too limited. In the apparel industry, for example, the average grant has been approximately one million dollars-not nearly enough to permit major retooling.

Government subsidies typically have come in the form of ad hoc bailouts to particular near-bankrupt firms, like Lockheed and Chrysler, upon which the government has imposed an ongoing, cumbersome form of review. Indeed, there are strong parallels between the government's role in these programs and the roles assumed by creditors and judges under the reorganization provisions of the bankruptcy code. But once again, the government's involvement has been too little, too late: Lockheed has never recovered its commercial competitiveness, and Chrysler's fate, while not yet sealed, seems dubious. More important, this process of reorganization is far too particularized and administratively cumbersome to form the basis of a broad adjustment program.

The other type of industry restructuring to which the U.S. government has contributed in recent years has been the negative one of rolling back health, safety and environmental regulations. In response to claims by the auto, steel, and textile industries that such rollbacks were necessary for their competitive survival, recent Administrations have trimmed, rescinded or extended timetables for complying with various regulations. The Reagan Administration has taken on this task with a vengeance. In conjunction with its push for Japanese restraint on auto exports, for example, the Reagan Administration decided to relax or rescind 34 environmental and safety regulations upon automobiles.

These sorts of regulatory requirements are not responsible for the competitive decline of U.S. industry, and regulatory rollbacks are unlikely to result in industry revitalization. During the 1970s the U.S. steel industry spent an average of $365 million annually to reduce pollution and improve worker safety-about 17 percent of its total capital investment during the decade. Of this cost, 48 percent was underwritten by state and local governments through industrial development bonds.7 During the same period Japanese steel manufacturers spent more than twice that amount for the same purposes.8 Even if Detroit retains all the money it hopes to save by avoiding regulations-an estimated $1.4 billion over the next five years-it will not come close to raising the $80 billion it needs to retool sufficiently to regain competitiveness with Japan.

Industry savings from regulatory rollbacks rarely have been translated into new plant and equipment or new research and development. When U.S. Steel entered into consent decrees with the Environmental Protection Agency in 1979, giving the company extra time in which to comply with pollution requirements, for example, U.S. Steel's Chairman noted that the company could "now act aggressively to revitalize [its] Pittsburgh area operations." But the company has made no major investments in Pittsburgh since then. Similarly, the Steel Compliance Act of 1981, amending the Clean Air Act to allow steel companies to defer compliance for three years, failed to require that the companies use their newfound savings to restructure their operations; not surprisingly, little restructuring has followed. Steel industry investment in new plant and equipment is now running more than one billion dollars short of what industry spokesmen themselves say they need to modernize.9

Indeed, notwithstanding substantial import barriers to protect domestic steel producers, tax incentives, and assorted regulatory rollbacks, all designed to encourage new steel investment, the U.S. steel industry has been diversifying out of steel at a rapid clip. In 1980, for example, steel operations accounted for only 11 percent of U.S. Steel's operating income; the rest came from chemicals, manufacturing, transportation, utilities, and resource development.10 U.S. Steel, Armco, and National Steel Corporation all have been moving out of steel since the mid-1960s. The pace of diversification slowed only after 1973, when the industry found itself in need of additional cash. The Reagan Administration's recent tax and regulatory reductions may have spurred a new round of diversification, as demonstrated by U.S. Steel's recent $6.4-billion offer to purchase Marathon Oil Company.

This is not to suggest that steel, or any other industry in distress, should necessarily reinvest in its original product. Diversification into a more competitive industry may be a far superior adjustment strategy. But adjustment assistance is often provided to distressed industries on the assumption that they need it to regain competitiveness rather than simply to maintain overall corporate profitability. At the very least, companies receiving such assistance should be required to specify the investment strategy they will pursue, and the public should have an opportunity to decide whether that strategy merits public support.

The problem of industrial decline is compounded by the fact that firms, workers and communities typically adapt to changing economic circumstances at different rates. While firms often are capable of divesting themselves of their least competitive parts and diversifying in more promising directions, a large part of the labor force is relatively immobile both in terms of geography and skills. Workers are often unwilling to leave family, friends and familiar territory; unable to finance their own retraining; and ignorant about where new jobs are located and for what jobs retraining should be sought.

By the same token, the community's infrastructure of roads, sewers, educational institutions, and other public goods often depends on a steady stream of tax revenue; the sudden departure of industry thus may leave the community without any alternative means of support-and just when demands on public services by the newly unemployed are at their peak. The management of industrial decline thus requires not only that resources be moved to more productive and competitive uses, but also that the movement be coordinated so that all resources can be fully utilized.

One means of ensuring coordination would be for government to condition its adjustment assistance to industry on the industry's willingness to take responsibility for the adjustment problems of its workers and communities. But U.S. government programs for declining industries have not been so conditioned. On the contrary, adjustment assistance to industry has often had the opposite effect-providing firms with just enough capital to diversify out of declining businesses and simultaneously relocate their operations, while leaving their workers and communities behind.

Rather than incorporate worker and community adjustment into its industrial adjustment programs, the U.S. government has treated these problems separately. Special programs have been designed for workers and communities-to provide relocation, retraining, and extended unemployment insurance to workers whose jobs have been eliminated because of imports, and aid to communities facing economic decline. But the disassociation of these programs from industry adjustment has rendered them irrelevant to the process of industrial change.

Administered by the Department of Labor, and far removed from the forums like Treasury, Commerce, and the Special Trade Representative where adjustment assistance programs for industry are formulated, worker adjustment programs have been encumbered by administrative problems of determining whether imports are to blame for job loss, and of deciding where workers should relocate and for what jobs they should seek retraining. In practice, these programs have provided workers with little more than extended unemployment compensation.11 It is not surprising, therefore, that the Reagan Administration has targeted them for substantial reductions.

Community assistance programs intended to spur economic development have been plagued by similar problems of irrelevancy. Firms seeking to diversify or develop new products in an effort to regain competitiveness seldom, if ever, base their location decisions on financial lures offered them by needy communities-lures such as tax abatements, low-interest financing, or transportation facilities, most of which are made possible by federal grants. For one thing, the real value of these offerings comprises, at most, a very small fraction of the costs of starting and operating a new enterprise in the area, particularly when compared to factors such as prevailing wage rates, the availability of particular skills, access to raw materials and suppliers, and local energy costs. Perhaps more significantly, so many jurisdictions now offer these inducements that they largely offset one another. For example, program eligibility standards have been drawn so loosely for grants from the Economic Development Administration of the Commerce Department that 80 percent of the communities in the United States are now eligible; over half of the nation's locales have been deemed eligible for Urban Development Action Grant programs administered by the Department of Housing and Urban Development; and, as a practical matter, every community in America can offer low-interest loans financed by industrial development bonds.

The problem of industrial adjustment outpacing worker and community adjustment is made worse by other public policies. The tax code, for example, promotes the mobility of capital but not the utilization of unemployed labor or underused public infrastructure. Firms in declining industries typically can take a tax loss on plant and equipment that they leave behind, treat the cost of moving their headquarters as a deductible business expense, and take advantage of accelerated depreciation and tax credits for their investments in new plant and equipment elsewhere. But they reap no advantage from keeping their former employees or from utilizing the infrastructure of their former communities. At the very least, adjustment policies should ensure that tax deductions, accelerated depreciation, and tax credits not retard worker and community adjustment. Perhaps tax benefits should be provided for reinvestments in "human capital" and renewed contributions to local tax bases.

Similarly, our antitrust laws recognize that restrictions on mergers should be relaxed with regard to failing firms, which otherwise might be deprived of the capital they need to regain competitive strength.12 But failing firms that have been exempted from normal antitrust rules on this ground have not been required to take responsibility for their workers or communities. On the contrary, the mergers have often resulted in the relocation or closing of the failing firm's facilities. Perhaps government antitrust officials should condition their permission for such mergers upon agreement by the merging companies to maintain local employment or to provide retraining and relocation assistance. In addition, antitrust law and its administration might recognize a "failing work force" and a "failing community" as a justification for mergers that could speed the pace of worker and community adjustment but might otherwise be deemed illegal.


In respect to both problems-accelerating the overall pace of adjustment within a national economy, and coordinating the paces at which a nation's firms, workers and communities adjust relative to one another-the policies of West Germany and Japan have been more successful than those of the United States. Perhaps the organization of economic adjustment comes easier to nations that have been substantially dependent on international trade for a long period of time, or have been forced to rebuild their economies from the ground up. Whatever the cause, Japan and West Germany have made adjustment a centerpiece of their national economic strategies.

Since the 1973 oil crisis and subsequent recession, both West Germany and Japan have moved capital and labor out of industries with little promise of long-term competitiveness, leaving behind smaller, more streamlined industry segments better able to compete. For example, while other governments were busy promoting investment in basic steel in the mid-1970s, both West Germany and Japan anticipated the competitive decline of their basic steel industries and facilitated the movement of resources out of steel.13 They have undertaken similar, although not uniformly successful, efforts in shipbuilding, fibers, aluminum and petrochemicals.

Under Japan's Structurally Depressed Industries Law, the Ministry of International Trade and Industry (MITI) can form so-called recession cartels within depressed industries, temporarily restricting output and thereby driving up prices. The key to the success of the program, which differentiates it from America's notoriously unsuccessful experiments in cartel management, such as that administered in 1933 by the National Recovery Administration, lies in the explicit subsidies given to firms that agree to scrap what they deem to be excess capacity, and the utilization of these subsidies by the firms to retrain and relocate their workers for more profitable endeavors. The subsidies for scrapping thereby accomplish two related objectives: they induce the least competitive firms to exit from the industry, thereby improving the profitability of more competitive firms; and they provide workers with adjustment assistance that is directly related to the shift occurring in the industry.14

West Germany has instituted a similar program, but one which is somewhat less explicit and administered primarily through banks and regional labor boards rather than subsidized cartels. Industries in distress receive bank loans and regional subsidies in exchange for their willingness to reduce capacity. The loans and subsidies are used expressly to shift resources into growing industries within the same locales. Germany's regional programs are substantial, averaging four billion dollars annually since 1970 (in 1980 dollars), or 15 percent of total German industrial investment. At the same time, the government provides displaced workers with vouchers that can be cashed by firms that agree to employ them. Each voucher's cash value typically equals the difference between the worker's contribution to the new firm and the cost to the firm of retraining him or her and matching his or her former salary.15

These adjustment programs have worked for two reasons. First, they are based on contracts among government, business and labor, in which all parties agree in advance to certain shifts of industrial resources. Secondly, these programs tie industry adjustment to worker and community adjustment. They thereby "internalize" the social costs of economic change.


The adjustment problems of emerging industries mirror those of declining industries. Often presenting risky investment opportunities, emerging industries nonetheless can substantially benefit an economy by spawning new technologies, products, skills and jobs. Emerging industries thereby ease the problems of adjustment out of declining industries. But because these benefits seldom redound entirely to private investors, the amount of capital privately invested in emerging industries, and the allocation of that capital among such industries, will seldom match public needs. Thus, just as a strong case can be made for policies designed to ease the movement of capital, labor and public resources out of industries in long-term decline, an equally strong case exists for policies that accelerate the movement of these resources into industries that can become highly competitive in the world economy, and which are critical to the future competitiveness of the national economy.

The U.S. government has responded to emerging industries primarily through its national defense and aerospace programs. Notwithstanding that the goal of economic adjustment has not been an objective of these programs, they have contributed to U.S. leadership in world sales of aircraft, communication satellite technology, hard plastics, synthetic rubber, computers, semiconductors, lasers, fiber optics, radio and television communication equipment, robotics, optical instruments, scientific instruments and many other products.

The Pentagon now funds approximately 30 percent of U.S. research and development; for basic research, concerned with broad-based and theoretical experimentation that may have few immediate commercial applications, government funding exceeds two-thirds of the total.16 In some industries, government support reaches particularly high levels. In 1977, for example, the government funded 70 percent of research and development in the aircraft industry and 48 percent in the communications equipment industry.17 Other industries have enjoyed very little direct government support, and this differential undoubtedly has affected the relative speed of their commercial development. For example, only one percent of the research budget of the pharmaceutical industry is funded by the government.18 It is interesting to note that the governments of our trading partners fund a much smaller percentage of their national research and development. Even the Japanese government, which is expressly committed to promoting Japan's emerging industries, funds only 16 percent of Japan's research and development.19

Large-scale defense and aerospace contracts also have provided emerging industries in the United States with a ready market for which they have expanded production and thereby gained valuable experience, know-how and scale economies. The Pentagon's willingness to pay a high premium for quality and reliability, moreover, has helped emerging industries bear the cost of refining and "debugging" their products. Largely as a result of government contracts, for example, the U.S. semiconductor industry was able to reduce its unit costs quickly during the 1960s and emerge as a commercial leader in the world market. As the arms race and the moon race both demanded smaller, faster, and more reliable memory units, the Defense Department and the National Aeronautics and Space Administration (NASA) became the largest purchasers of semiconductors-together accounting for almost one-third of the market by 1967. Integrated circuits which cost $50 in 1962 cost only $2.33 by 1968, making them attractive for use in many commercial products. Over the same period the size of the semiconductor market increased from $4 million to $31 million.20

Many other emerging industries in the United States have followed the same pattern. In 1950, government purchases accounted for 92 percent of aerospace sales. Military aircraft thereafter were adapted to civilian uses-the Boeing B-47 and B-52 bombers became the Boeing 707; the Douglas A-3D, A-4D, and B-66 military aircraft became the DC-8. The nascent American computer industry also relied on government support. In 1954, the government was the only major purchaser of computers; by 1962, the government market still represented almost one-half of total computer sales. The U.S. government continues, moreover, to provide a substantial market for several U.S. industries: in 1977, government purchases accounted for 56 percent of all U.S. aircraft shipments, 57 percent of the sales of radio and communications equipment, 12 percent of engineering and scientific instruments, and 12 percent of transmitting electron tubes.21

To a significant extent this government-created market has been open only to U.S. firms. Although the "Buy American" provisions of the government procurement laws were relaxed somewhat in 1979, government contracts involving national security are still awarded solely to domestic firms.

U.S. defense and aerospace programs have accelerated the emergence of new industries in other ways as well. Large government contracts often have required that private manufacturers cooperate on research projects, parceling out tasks to one another in a manner that the U.S. antitrust laws might otherwise prohibit. Military and NASA training has also spawned several generations of advanced engineers and skilled machinists whose training has been critical to the development and production of commercial high technology.

Viewed in this light, there is a striking similarity between America's defense-related and aerospace programs, and other nations' industrial policies that are expressly designed to accelerate the development of emerging industries. For example, Japan's MITI has sought to hasten the development of high-technology products through its direct support of research, joint research projects involving several companies simultaneously, and leasing arrangements and (at least until the mid-1970s) import controls designed to give Japanese producers a large and captive home market and thereby enable them to gain the experience and scale necessary to reduce their unit costs and compete internationally.

Even the technologies on which MITI and the Pentagon are focusing are similar. Since 1975, for example, MITI has financed one-third of the development costs of very-large-scale integrated circuits-the next major stage in the evolution of semiconductors; the project involves four leading Japanese semiconductor and computer manufacturers.22 In 1979, the Defense Department launched its own very-large-scale integrated circuit project, involving nine American semiconductor and computer manufacturers; the Pentagon has budgeted $300 million for the project over a ten-year period.23 Similarly, MITI has embarked on a program to spur the Japanese robotics industry, entailing an expenditure of $140 million over the next seven years.24 The U.S. Air Force and NASA have their own version of the same project-a $75-million program to develop an automated "factory of the future," based on integrated computer-aided manufacturing technology.25

MITI and the Defense Department also are squaring off in fiber optic communications (MITI is devoting approximately $30 million over the next few years, and Nippon Telephone and Telegraph, the large Japanese public corporation, is providing a major market; the Pentagon, meanwhile, is spending about $40 million annually on this technology);26 lasers (MITI is coordinating and subsidizing research; the Pentagon is providing $243 million in research funds in 1981 and accounting for over 50 percent of U.S. laser sales);27 computer software (MITI has launched a three-year, $180-million program for new applications software packages; the Pentagon is about to launch a $20-million software program applicable to missile guidance and radar);28 and a host of other technologies.

Although further behind in the development of many of these technologies, France, Great Britain and West Germany are also assisting their emerging industries to become internationally competitive. The French government, for example, is supporting the development of very-large-scale integrated circuits by encouraging joint ventures with American companies and simultaneously providing $140 million in direct subsidies. West Germany is taking a similar approach, with subsidies of approximately $150 million. And Great Britain is providing its emerging integrated circuit industry with $110 million.29


Here, however, the similarities with the United States end. While U.S. defense and aerospace programs have spurred industrial development, they have not always spurred it in the direction of commercial success. Apart from the Pentagon's broad concern for the economic health of U. S. defense contractors and NASA's recent flirtation with commercial applications for its space shuttle, the Department of Defense and NASA have no interest in the successful marketing of new products. Indeed, defense and aerospace programs actually may have jeopardized the international competitiveness of American manufacturers. By contrast, the efforts of our trading partners, particularly Japan, have been focused directly on world competition for commercial markets.

The marketing of new commercial products is stimulated by domestic competition, which forces firms to improve their performance and aggressively seek foreign outlets. Although MITI allows firms to cooperate on specific basic research projects, it ensures that they are fiercely competitive in marketing. For example, 32 Japanese companies now produce semiconductors, and the competition is intense. The competition is equally strong in the computer industry, with Nippon Electric, Hitachi, and Fujitsu each trying to gain the lead.

The U.S. Defense Department, however, has been unconcerned about competition within American industry. Over 65 percent of the dollar volume of U.S. defense contracts is awarded without competitive bidding.30 And even where competitive bidding has occurred, the bids are often rendered meaningless by substantial cost overruns. The Pentagon seems most comfortable with large, stable contractors who are relatively immune to the uncertainties of competition. Most of the early defense contracts for integrated circuits, for example, went to large, well-established manufacturers that were producing soon-to-be-outmoded vacuum tubes, like Western Electric, General Electric, Raytheon, Sylvania and R.C.A., instead of innovators like Texas Instruments, Motorola and Transitron. Even as late as 1959, the old-line vacuum tube companies were awarded 78 percent of the federal research and development funds devoted to improving the performance and reducing the cost of the transistor, although they then accounted for only 37 percent of the commercial market.31 The innovators eventually penetrated and then dominated the market, despite the Department of Defense. On occasion, the Pentagon actually seems averse to competition, particularly when competition threatens the stability of a prime contractor. Secretary of Defense Caspar Weinberger recently argued that the government's antitrust suit against the American Telephone and Telegraph Company should be dropped on the ground that, if successful, it would threaten the viability of AT&T, and hence jeopardize national security.

The successful marketing of new products also requires long lead times, during which firms can apply new technologies and make sure they have adequate capital, labor and productive capacity to meet anticipated demand. Many MITI projects span a decade or more. But Pentagon and NASA programs are subject to relatively sudden changes in national security needs and prevailing politics. Between 1967 and 1974, in the wake of Vietnam, defense-related research and development declined by $3.7 billion (in constant 1972 dollars), drastically reducing the nation's demand for scientists and engineers and retarding the development of various defense spin-offs. Because this contraction came during a recession, when the economy was trying to adjust to the oil-price rise, emerging industries that had relied in part on defense contracts were doubly hit. American semiconductor manufacturers, for example, cut their capital equipment purchases by half and laid off thousands of skilled workers. By contrast, the Japanese chip makers-with their tax privileges, loans, subsidies and tariffs in place-could afford to expand their production and improve their technology in anticipation of the next economic upturn.32

The precipitous rise in U.S. defense spending planned for the next five years is likely to create bottlenecks in the production of key subcomponents and capital goods, and shortages of engineers and scientists in advanced electronics and machinery. Unfulfilled defense orders already totaled $63 billion in early 1981, up 30 percent from 1980 and 80 percent since 1978,33 and there is already a shortage of an estimated 60,000 skilled machinists.34

Finally, and most important of all, commercialization requires that new technology be transferable to commercial uses at relatively low cost. MITI sees to it that new technologies are diffused rapidly into the economy, and incorporated into countless commercial products. Japanese firms bid to participate in MITI projects, offering to absorb some of the cost of the research projects. Not only does this competitive bidding process help ensure that government subsidies are as low as are necessary to spur the private sector into action, but it also helps guarantee that Japanese companies will utilize the new technologies, because they already have a financial stake in them.

The advanced designs required by tomorrow's elaborate military hardware-designs incorporated into precision-guided munitions, air-to-air missiles, cruise missiles, night-vision equipment, and missile-tracking devices-will not be as easily applicable to commercial uses as were the more primitive technologies produced during the defense and aerospace programs of the late 1950s and early 1960s. Precisely because America's commercial semiconductor industry is not likely to be adaptable to defense needs in the years ahead, for example, the defense department has launched its own research and development program for the "chip of the future." In explaining the program, William J. Perry, then Under Secretary of Defense for Research and Engineering, told the Senate last year that while the Department has "an outstanding ability to direct technology resident in the defense industry to high priority programs . . . [it has] little ability to influence those companies whose sales are predominantly commercial. This is a serious limitation in the case of the semiconductor industry, whose products play a crucial role in nearly all of our advanced weapons systems." Mr. Perry went on to say:

Therefore we have initiated a new technology program intended to direct the next generation of large-scale circuits to those characteristics most significant to Defense applications . . . . This program will ensure that the U.S. maintains a commanding lead in semiconductor technology and that this technology will achieve its full potential in our next full generation of weapon systems.35

Rather than encourage American commercial development, defense spending on emerging high technologies may therefore have the opposite effect over the long term, diverting U.S. scientists and engineers away from commercial applications.

The problems posed by the disjuncture between defense policies and economic needs are likely to loom larger in the next few years, as the defense buildup proceeds apace. Pursuant to President Reagan's vow to rearm America, defense spending is slated to jump nearly 15 percent, to $182 billion in Fiscal Year 1982 and $215 billion in FY 1983. In total, planned military spending will exceed $1.5 trillion over the next six years. This will profoundly affect several emerging industries. Between now and 1987, for example, defense spending for semiconductors is expected to increase by 18.3 percent, while commercial semiconductor purchases will increase by only 11.8 percent. A similarly divergent growth pattern is expected for computer sales (16.4 percent for defense, 11.8 percent for commercial purposes), engineering and scientific equipment sales (9 percent for defense, 5.6 percent for commercial purposes), and sales of communications technologies (11.6 percent for defense, 5.3 percent for commercial purposes).36 Meanwhile, the Defense Department's share of government research and development outlays is expected to rise to over 60 percent in FY 1983.

In short, the United States has responded to the problem of its emerging industries-but inadvertently, and to the wrong end. Programs for emerging industries have suffered from the same inadequacy as programs for declining industries: because they have not been based on an agreement between industry and government to achieve positive economic adjustment, the programs have tended to be disconnected from the commercial strategies of competitive firms within the international economy. Thus, although the programs have profoundly affected industrial development, they have failed to promote economic adjustment. Indeed, they have often retarded it.

This is not to suggest that the goal of economic adjustment should have precedence over other realms of policy, such as national defense, which are oriented to different objectives. But other policies should at least be congruent with adjustment, and we should have the ability to recognize trade-offs and relationships among policies. It could be argued, for example, that national security depends as much on the health of the national economy as it does on defense expenditures, if not more so. To divorce these two sets of policies from one another therefore seems wrongheaded.

Why does the United States seem incapable of fashioning public policies that enable the domestic economy to adapt to changes in the world economy? Why do certain other nations seem better able to do so? The answer is complicated of course, and it is well to understand that a nation's relative economic adaptability depends on the interplay of many factors. But two factors seem to bear most directly upon a government's capacity to support rather than retard economic change. The first concerns the institutions through which adjustment policies are developed and executed. The second, the ideologies upon which the business-government relationship is based.


The management of economic adjustment in all industrialized countries is complicated by the fact that declining industries typically have far greater political power than emerging ones. By virtue of the declining industries' size and age, whole cities or entire regions often have grown dependent on them-including a large number of suppliers, distributors, independent contractors, and service businesses, in addition to the industries' own employees and shareholders. These dependents represent a powerful force with well-established political connections. By contrast, emerging industries, almost by definition, are small and new. Although they may offer great potential for future jobs in the region, few people are now dependent on them for their livelihood. In political terms, a job lost is far more potent than a job not gained. Because of this, and also because many firms in emerging industries typically are so busy developing their products and markets that they have no time for politics, emerging industries are apt to have very little political clout.

This disparity in the political power of declining and emerging industries often makes it difficult for politicians to formulate policies to achieve adjustment rather than protection. Declining industries and their dependents are apt to prefer protection for the simple reason that adjustment subjects them to an uncertain future, while protection at least maintains the status quo for a time. Emerging industries rarely are able to counter this political preference.

Adjustment policies theoretically could be designed in such a way as to fully compensate declining industries and their dependents for the risks to which economic change would subject them, and thereby gain their political assent. But to execute such policies, government must be capable of marshalling information about the precise needs of the declining industries and their dependents, of negotiating an agreement with them in which the interests of emerging industries are preserved, and of delivering on that agreement. In all these aspects of industrial policymaking-acquiring strategic business information, negotiating adjustment agreements, and coordinating policies-the United States is sorely lacking.

Information. No agency of the U.S. government has overall responsibility for gathering detailed information about world market trends, the competitive strategies of our trading partners, and the long-term outlook for particular U.S. industries, segments and firms within world markets. Instead, the information is gathered piecemeal within the Commerce Department, the State Department, the Treasury, the Internal Revenue Service, the Securities and Exchange Commission, and the Federal Trade Commission, and in such broad generalities or irrelevant detail that the information is relatively useless for making industrial policy. For example, when the U.S. government was faced with pleas from the Chrysler Corporation to enact loan guarantees, there was no government agency to which the government could turn in order to evaluate Chrysler's position. Congress was forced to rely on a perfunctory study of the industry supplied by a private consulting firm.

American business managers have been reluctant to provide the government (or any other outsider, for that matter) with data about the overall competitive position of their firms. This reluctance has been due, in part, to their concern that inadvertent public disclosure of these data might forewarn competitors, suppliers, employees, creditors or investors about pending changes in the firm, and thereby jeopardize the firm's strategies. Managers of declining firms rarely want to admit that their businesses are in trouble for fear that they will thereby create a self-fulfilling prophecy; managers of growing firms rarely want to reveal their plans for fear that others will rush in to take advantage of the opportunities first. Thus, to the extent that the strategies of American firms are dependent on the tactic of surprise, information will not be forthcoming-except in extreme circumstances where a declining firm faces imminent collapse (as with Chrysler), or an emerging firm faces imminent loss of a large share of the market to foreign competitors (as with many semiconductor manufacturers). As we have seen, however, by that time protection in one form or another is typically the only public policy that can be invoked. Adjustment simply takes too long.

What are the alternatives? Short of altering the competitive strategies of American firms to be less dependent on surprise, there seems little hope of eliciting from the private sector the quality of information that industrial policymakers would need. One is struck, for example, by how readily Japanese, West German and French officials gain access to data from their domestic firms. Apart from the possibility that these governments are better able to maintain the confidentiality of the data they receive than is the U.S. government, and have thereby earned a greater degree of business confidence (a possibility that should not be too quickly dismissed), the only explanation for the far greater openness of foreign firms seems to lie in their business strategies, which depend less on tactical surprise and more on long-term investment and marketing than do the strategies of many U.S. firms.

But detailed information about business strategies and world market trends can also be generated through exhaustive investigation-relying on public documents, extensive interviews, and sophisticated interpolations and inductions based upon observable changes in the market. Top investment analysts in Wall Street's largest brokerage houses have used these techniques to become the business sleuths of America; they collectively influence the allocation of a substantial portion of private capital in this country on the basis of their knowledge of particular firms and industries. Their sophistication is unmatched anywhere in the U.S. government. But their equals are found in certain foreign bureaucracies, such as MITI and the West German Ministries of Economics and Technology. Even if the United States cannot generate data directly from its businesses adequate to support rational industrial policymaking, it could at least seek to develop a cadre of business analysts who would monitor the public consequences of declining and emerging industries.

Consensus. The United States does not have institutions designed to negotiate adjustment policies among those who may be affected by them. Instead, industries and large firms maintain trade associations and specialized offices in Washington, which are staffed by public relations professionals, lobbyists, and lawyers. These people bargain on behalf of their clients in many public arenas-congressional committees and subcommittees, independent regulatory agencies, grant-making agencies in the executive branch, executive agencies that are responsible for fiscal and monetary policies, the federal courts, and the media. Although they implicitly trade upon past votes or campaign contributions, or the veiled threat to withhold these benefits in the future, they typically base their arguments for government assistance on the importance to the economy of maintaining the profitability of their industry or firm.

This bargaining has resulted in a hodgepodge of public policies bearing no direct relation to overall industrial health. For example, in 1980 the government spent five times more money on research and development for commercial fisheries than it did for research on steel; it provided over $6 billion in loans and loan guarantees to the shipbuilding industry and $940 million in loans and loan guarantees to the automobile industry; it gave $455 million in tax breaks to the timber industry but none to the semiconductor industry; and it provided over $5 billion in research and development subsidies for the nuclear power industry, but only $942 million for coal.37 Thus far, the Reagan Administration has shown itself to be no less susceptible to special pleadings than its predecessors-providing the auto industry with a "voluntary" quota on Japanese imports, the savings and loan industry with a special tax break for "All Savers," and the cable television, railroad, and oil and gas drilling industries with highly preferential tax depreciations.38

In so vastly decentralized a system of bargaining it is relatively easy for industries and firms to impose costs on those who are unrepresented in the particular bargains-typically consumers, emerging industries, employees or communities. But it is also relatively easy to impose costs on other major industries that are apt to be bargaining in other forums. For example, the U.S. steel industry's protectionist "trigger price" system not only has cost American consumers over one billion dollars annually in the form of higher prices for U.S. products that contain steel, but it has also penalized all the U.S. industrial purchasers of steel-manufacturers of automobiles, farm machinery, appliances and machine tools-who must now pay 25 to 35 percent more for the steel they use than their European and Japanese competitors. To some extent their plight is more serious than that of the American consumer, who can still purchase many foreign products made with cheaper foreign steel. The U.S. industrial purchasers of steel are rapidly losing ground in world markets to foreign competitors whose costs are lower, and at this point the decline may be irrevocable.

Rather than fight such protectionist measures directly, however, industries that bear the costs often find it politically easier to use a different bargaining forum in order to impose additional costs elsewhere in the economy. Thus, instead of seeking to reduce or eliminate the "trigger price" system-a strategy that would entail a direct confrontation with the U.S. steel industry-U.S. automakers have sought to improve their competitive position by gaining import quotas on Japanese automobiles. Similarly, the "trigger price" system has injured U.S. specialty steel makers-who produce stainless steel, steel pipes, and other custom steel items that are not included within the import protection-by inducing foreign producers of basic steel to switch to specialty steel production in order to maintain their foreign earnings. Instead of fighting the "trigger price" system directly, specialty steel makers are now lobbying to extend the system to specialty steel as well. In precisely the same manner, the U.S. semiconductor industry is now lobbying Congress for import restrictions on Japanese semiconductors; but American computer manufacturers, whose competitive position will be hurt by any such restriction, are reluctant to lobby against their sister industry.

The same "multiplier" effect can be seen across the U.S. economy: price supports or import restraints are imposed on basic commodities (say, cotton fibers); this protection increases the costs and reduces the competitiveness of industries that are dependent on the basic commodities (textile manufacturers); rather than fight the protectionist measure, these purchasers seek their own protection; this added protection in turn increases the costs and reduces the competitiveness of their industrial purchasers (apparel manufacturers), who in turn find it easier to gain additional protection for themselves than to fight the protection accorded their suppliers.

The creation of a single bargaining arena for allocating the costs and benefits of adjustment would not remedy these problems entirely, but would at least provide government with the institutional capability of achieving a broad-based consensus about adjustment policies. Protectionist measures would probably be more difficult to elicit from government in the presence of industrial purchasers, emerging industries, and other groups on whom the costs of such measures initially would fall. By the same token, labor and management facing industrial decline would be in a position to negotiate with government a package of adjustment assistance designed explicitly to salvage their most competitive resources and to shift the rest to more profitable uses. Perhaps most important, the single arena could provide a focus for an ongoing national debate about economic change, and the appropriate allocation of the burdens and advantages of such change.

To some extent, this was the idea behind the establishment of a Special Trade Representative in the White House. But the jurisdiction of that office is far too limited, its powers too circumscribed and advisory, and the bargaining over which it presides too covert for the STR to become a forum for building a consensus about industrial policy. One has only to compare it with the well-developed bargaining arena in which West German industrial policy is formulated-involving industry, labor, financial institutions, and government at many levels of policymaking, and culminating in national bargaining over wage rates, selective credit policies, and adjustment-or with the broadly encompassing committee structure of MITI, to comprehend the scale, effort and visibility that is implied.

This is not to suggest that either West Germany or Japan provides the United States with an appropriate model. The relative ease with which a consensus about industrial policy has been achieved in both countries may have more to do with their recently feudal, and more recently totalitarian, histories than with any particular institutional design.39 The United States is blessed with a highly contentious political system in which disorder, opportunism, and ad hoc arrangements abound, and in which hierarchical, mass organizations have never taken firm root. But this does not rule out the possibility of a more open, more public debate about industrial policy, in which certain bargains might be struck "wholesale" in place of the extensive, covert "retailing" that now predominates.

Coordination. The third institutional failing has much in common with the other two. Just as economic information is gathered piecemeal, and industrial policies are formulated in countless private bargaining arenas, U.S. policies that affect industrial development are administered haphazardly, with little or no coordination among them. Tariffs, quotas, marketing orders, price supports, loans and loan guarantees, special tax rulings, antitrust actions, direct subsidies, health and safety regulations, price and entry regulations, government contracts, government research programs, public works programs-each is undertaken in blissful disregard for the others, without any understanding of the aggregate effects of all programs on a particular firm or industry.

Coordination is imposed only when programs directly conflict. But the institutions that are called upon to reconcile these conflicts are 94 federal district courts, ten appellate courts, and one Supreme Court, which are ill equipped to understand or respond to the dynamics of international competition. Nor is this perceived to be their role.

Coordination need not imply control. Government administrators should have a degree of discretion in how they fulfill their disparate mandates. But at least they should be aware of other government policies that affect and interact with their own. How can those who administer the federal antitrust laws, those who administer import restraints, and those who administer export subsidies fail to consider the critical relationships among their programs? How can administrators of defense contracts and administrators of labor retraining and relocation programs fail to consider how their activities affect each other? The U.S. government must gain an institutional capacity to view industries as a whole, and to fashion policies that complement and support one another. Regardless of whether this capacity is lodged in the Office of Management and Budget, in the Congressional Budget Office, in the Treasury, or in a separate entity, it is critical to the formulation of an intelligent overall industrial policy.


Before we can achieve the political consensus needed to institutionalize such an industrial policy in America, we must change the way we view the problem. Our collective inability to organize ourselves for economic change stems largely from ideological blinders which severely limit our vision, forcing us to engage in an endless debate over the relative merits of two artificial categories: the "free" market, or centralized national "planning." The real choice is between adjustment or protection.

Many Americans cling to the notion that government should refrain from interfering with the market. They may acknowledge that the market is itself dependent upon government institutions that establish property rights and liability rules and determine what contractual provisions are to be enforced. But they argue that these are merely neutral "rules of the game" which do not selectively distort price signals, and are therefore distinguishable from more active intervention.

This preference for free markets may be justifiable, but it is hardly realistic in a democratic system within which economic policies are the products of political compromise. Every industry in America is deeply involved with, and dependent upon, government. The competitive position of every firm in America is affected by government policy. No clear distinction exists between private and public sectors within this or any other advanced industrialized country; the two sectors are completely intertwined. Adjustment and protection are the choices simply because they are the only ones that are politically acceptable.

The tenacity with which the free market ideal is maintained illustrates the power of ideology over political reality. The vast numbers of tariffs, quotas, "voluntary" export agreements, and bailouts for declining businesses that pervade our economic system are viewed as isolated exceptions to the government's preferred role of neutrality, while our defense-related contracts, targeted tax breaks, and assorted subsidies for particular industries are regarded as somehow unrelated to industrial development or to the dynamics of the market. We rail against subsidies offered by foreign governments to their emerging industries but then fail to acknowledge the overarching importance of U.S. defense and aerospace projects to the development of our emerging industries. We demand that foreign governments reduce the procurement preferences they give to certain of their domestic industries, but we then demand that our own large, regulated manufacturers-like AT&T-purchase from U.S. producers.40

This disjuncture between the ideology and politics of industrial policy makes it doubly difficult for policy makers to choose adjustment over protection. So long as government assistance to business is perceived as being somehow illegitimate, regardless of its purpose or outcome, the government is forced to respond to each request for assistance as if it were a special case. Industry participates in the charade, disguising its long-term government strategies within a series of discrete proposals embedded within particular tax laws, appropriations, agency regulations, court rulings, and executive orders. Because neither government nor business can admit to the intimacy of their relationship, both sides treat it as an illicit affair, hiding it from public view and thereby thwarting any attempt to give institutional legitimacy to those aspects of the relationship that promote adjustment. As we have seen, absent an institutional capacity for making explicit adjustment policies, protection will be the most common outcome.

Lacking any clear idea about the nature of adjustment or the need for government policies to facilitate it, public discussion of these issues is prone to caricature. The specter is conjured up of national planning in which bureaucrats substitute their judgment for that of the market, directing the flows of capital to what they perceive to be the future "winners" of industry and away from the "losers." Our collective inability to differentiate between this vision and the realities of adjustment-through which government seeks to promote market forces rather than to retard or supplant them-has stymied political dialogue.

Our economists meanwhile comfort themselves with the assumption that any inefficient allocation of human or capital resources will eventually be corrected as the economy moves toward a new "equilibrium." They fail to recognize that "equilibrium" is a vanishing mirage on a constantly shifting horizon. The process of adjustment is the stuff of economic and political history. There are many routes that the adjustment can take-some far easier, more socially equitable, and more efficient than others.

For all these reasons, it is difficult for America to think strategically about its economic development. The only model of a national strategy which we possess derives from national defense. It is hardly surprising that many adjustment policies over the years have been presented as aspects of national security. The Eisenhower Administration's highway building program-called the National Defense Highway Act of 1956 and justified on national security grounds-provided an infrastructure that shaped postwar industrial development, particularly for the automobile and housing industries. Similarly, educational programs and loans embodied within the National Defense Education Act spurred great advances in our store of "human capital," which in turn contributed to our economic development well into the 1960s; once again, the effort was justified by the rhetoric of national security.

Our assorted programs-providing, at various times, price supports, loan guarantees, tax breaks, and direct subsidies to oil, coal, nuclear and synthetic fuels-have also been perceived as necessary to our national security. And our bulwark of tariffs and orderly marketing agreements has been justified as being necessary to national security, lest we grow dependent on foreign sources of "key" supplies, like steel, which would be critical to a war mobilization.41

This reasoning has impoverished the political dialogue, blinding us to long-term economic issues that require strategic thinking. It also has distorted industrial policy by giving disproportionate weight to mercantilist goals, such as gaining "independence" in energy and strategic materials, and inadequate attention to the problems of coordinating our industrial policies with those of other nations so as to best contribute to world economic development.

What of the future? There is reason to think that we will overcome these ideological traps, largely because the American business community is beginning to understand that it desperately needs the government's aid in helping it to adjust to the new demands of the world market. Protection does not work for long, and the American public will not tolerate the higher and higher levels of protection that would be required to maintain the status quo.

America's high-technology companies will be the first to propose major reforms, since they collectively have most to gain from adjustment and most to lose from protection. They are also the most intimately aware of the importance of public policies which promote adjustment, because they compete directly with firms that are the beneficiaries of such policies. Under their leadership the rest of the American business community will move toward a constructive dialogue about these issues with government, labor and the general public.

Several state governments also will take the lead in designing adjustment policies that match the needs of high-technology industries. California is now launching a $22-million package of subsidies aimed at invigorating the state's high-technology firms, including a $7.6-million research program at the University of California;42 both Minnesota and North Carolina are financing large microelectronics research centers; Ohio is establishing a $5-million fund to aid high-technology companies.

The danger, of course, is that all this will come too late, by which time America's emerging industries will have lost the opportunity to compete actively in the world market, and America's declining industries will have become so dependent upon protection that adjustment will be exceedingly painful for many of our citizens. The delay will not be attributable to failures of implementation; adjustment policies could be effectuated relatively quickly. The delay will be due rather to failures in our politics and ideologies. It will take time to reformulate political institutions and bring them into conformance with reality. But do we have the time?

1 National Accounts: U.S., Paris: Organization for Economic Cooperation and Development, 1960-1979.

2 U.S. Department of Commerce, International Economic Indicators, Washington: GPO, 1969-1980.

3 Telephone interview, U.S. Chamber of Commerce, Forecast Center, Washington, D.C., March 1980.

4 Edward F. Denison, Accounting for Slower Economic Growth: The United States in the 1970s, Washington: The Brookings Institution, 1979, Table 7-3.

5 U.S. Department of Commerce, United States Industrial Outlook, Washington: GPO, 1960-1981; U.S. Department of Commerce, Bureau of the Census, Statistical Trade Series FT210 and FT610.

6 The specific mechanisms by which France plans to revive these industries are obscure, but interviews undertaken by the author in January 1982 within various French ministries left little doubt that they are protectionist in design and intended effect.

9 The New York Times, January 31, 1982, p. 26F.

10 The New York Times, November 20, 1981, p. D4.

11 See General Accounting Office, Comptroller General of the United States, Considerations for Adjustment under the 1974 Trade Act: A Summary of Techniques Used in Other Countries, Washington: GPO, January 18, 1979.

12 International Shoe v. FTC, 280 U.S. 291 (1930); U.S. Steel Corp., 74 FTC 1270 (1968), aff'd, U.S. Steel Corp. v. FTC, 426 F. 2d 592 (C.A. 6, 1970).

14 Interview with Takeshi Isayama, Deputy Special Representative, Japanese Ministry of International Trade and Industry, December 9, 1981.

15 For a more detailed discussion of these and other adjustment policies, see Ira Magaziner and Robert B. Reich, Minding America's Business, New York: Harcourt, Brace, Jovanovich, 1982.

16 National Patterns of R and D Resources, 1953-1972, Washington: National Science Foundation, 1972.

17 National Science Board, Science Indicators 1978, Washington: GPO, 1979.

18 Ibid.

19 Japan Institute for Social and Economic Affairs, Research and Development Funding, Tokyo, 1981, p. 66.

20 See generally, Federal Trade Commission, Staff Report on the Semiconductor Industry, Washington: GPO, 1977.

21 E. Ginzberg et al., The Economic Impact of Large Public Programs, Salt Lake City: Olympus, 1976; U.S. Department of Commerce, Bureau of the Census, Shipments to Federal Government Agencies, Washington: GPO, 1978.

22 Japanese Ministry of International Trade and Industry, The Vision of MITI Policies in the 1980s, Tokyo, March 17, 1980.

24 Japanese Ministry of International Trade and Industry, The Vision of MITI Policies in the 1980s, loc. cit.

27 Laser Report, August 10, 1981, p. 2.

30 Baldwin, op. cit., p. 13, Table II-1.

31 Ibid., p. 53.

32 James R. Capra, "The National Defense Budget and its Economic Effects," The Federal Reserve Bank of New York Quarterly Review, Summer 1981.

33 Henry Kaufman, The Potential for Conflict in National Policies and Financial Markets, New York: Salomon Brothers, April 1981, p. 41.

34 Hans Weiss, National Tooling and Machinery Association, remarks before the U.S. Senate Small Business Committee, July 1981, p. 2.

35 William J. Perry, Under Secretary of Defense for Research and Engineering, testimony in Department of Defense Authorization for Appropriations for Fiscal Year 1980, Hearings before the Committee on Armed Services, U.S. Senate, 96th Cong., 1st sess., April 6, 9, 10, 11 and 23, 1979, Washington: GPO, 1979, p. 2292.

36 Estimates from Data Resources, Inc., reported in Business Week, February 8, 1982, p. 94.

37 See Magaziner and Reich, op. cit., chapter 9.

38 On the preference built into the 1981 Economic Recovery Tax Act, see R. Eisner and S. Bender, "Differential Impacts of Tax Incentives for Investment," presented at a meeting of the American Economic Association, Washington, D.C., Dec. 29, 1981.

39 Even Japan is not always successful in managing positive adjustment by means of "wholesale" bargains. To be sure, both Japan's Ministry of International Trade and Industry and its Economic Council, located in the Prime Minister's office, serve as forums for broad-based bargaining. But ministries that oversee particular industries, such as Post and Telecommunications, Health, or Fisheries, are as prone to the sort of protectionist policies that retard adjustment as is any U.S. congressional committee or agency that similarly has responsibility for a single industry. The simple lesson may be that, regardless of culture or overall government and business organization, government units that oversee only one industry inevitably are subject to "capture."

40 Soon after Nippon Telegraph and Telephone recently agreed to reduce its non-tariff barriers to foreign suppliers, AT&T announced, to much congressional acclaim, that it would not award a large fiber-optics contract to Fujitsu, the lowest bidder, but it would choose Western Electric instead. An AT&T spokesman explained that "[w]hen a finalist turned out to be a foreign company, we and others became worried about the national interest and national security because such a vital communications link was involved." The New York Times, December 12, 1981, p. 33.

41 At this writing, senior officials in the Reagan Administration are considering the imposition of a quota on imports of 64K RAM chips from Japan. The move is being proposed by the Defense Department, on grounds of national security; the Department fears that Japan's recent penetration of 70 percent of the U.S. market for 64K RAMs is threatening the U.S. semiconductor industry, and could leave the military vulnerable if war broke out. By this reasoning, significant import penetration into any U.S. market would justify a quota, since the military is dependent on everything from denim to shampoo. See The Wall Street Journal, February 5, 1982, p. 6.



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  • Robert B. Reich teaches business and public policy at the John F. Kennedy School of Government, Harvard University. He was Director of Policy Planning for the Federal Trade Commission from 1977 to 1981 and is coauthor with Ira Magaziner of the recently published book, Minding America's Business. The present article was originally presented at the Conference on Industrial Policy, sponsored by the Democracy Project, in Washington, D.C., on January 14, 1982; research was supported by a grant from the Columbia University Center for Law and Economic Studies. The author wishes to thank William Diebold, Jr. for his helpful comments on an earlier draft.
  • More By Robert B. Reich