Curing Ailing Industries

By Alexander Taylor

The air is full of suggestions for rebuilding the U.S. 's basic enterprises

Key segments of U.S. industry are critically ill, and their problems extend far beyond the current economic downturn. Washington agencies last week published reports on two of the nation's most basic businesses, and their conclusions were profoundly pessimistic. Items:

STEEL. After a three-year study, Congress's Office of Technology Assessment declared that unless domestic steel manufacturers receive federal aid, the U.S. will soon become as dependent on imported steel as it now is on OPEC oil. It recommended that steelmakers increase capital spending 50% over the next ten years to about $3 billion annually.

AUTOS. One day later Transportation Secretary Neil Goldschmidt sent President Carter an options paper on the ailing auto industry, which this year has built an astonishing 30% fewer cars than in 1979. Among the recommendations: easing of safety and pollution rules, tax credits to help automen make the transition to smaller models and credit relief for dealers.

These proposed Government initiatives heightened the growing public debate over the decline of U.S. industry and the changes that will be needed to reverse the slide. In the past few months economists, academic study groups and politicians from nearly every point on the political spectrum have launched proposals for a national industrial plan or, as some analysts term it, a "reindustrialization" of America. The recommendations include massive federal tax cuts to stimulate economic redevelopment, establishment of new Government agencies for the reconstruction of industry and "social contracts" calling for a consensus on goals and rewards among Government, business and labor.

The debate has been given added urgency, of course, by the economy's distressing slump. Though figures released last week showed that the unemployment rate dropped in June, the decline was an insignificant .1%. The level remained high at 7.7%, and, perhaps most disturbing, the total number of working Americans went down by 450,000 for the month. Administration officials admitted that the recession was still spreading throughout the economy. New factory orders tumbled 2.6% in May, their fourth straight month of decline. The index of leading economic indicators, a barometer of future business trends, fell another 2.4% in May. But the decline was not as steep as April's appalling 4.1%, hinting that the economy's free fall of the past several months may be slowing.

Even so, the Carter Administration's priority, four months before the election, is now to slow the steep decline rather than to fight inflation. The Federal Reserve last week announced the end of the short-lived credit restraints imposed in March. The President plainly wants the public to perk up spending.

Even a future return to better economic times, however, will not solve the deep-seated problem of declining key U.S. industries. Automobiles, steel and rubber are all operating at Depression levels, plagued by aging plants, declining productivity, entrenched labor unions, restrictive Government regulations and fierce foreign competition. Highways and railroads, the vital infrastructure needed to transport goods, are badly deteriorated. In major industries like farm machinery and consumer electronics, foreign manufacturers have captured increasingly large shares of the U.S. market. America has fallen behind important world competitors, such as Japan and West Germany, in capital formation, saving and investment, spending on research and development, and growth in worker productivity.

Partly because the concept of industrial policy is rather vague, it is collecting an eclectic band of supporters. The Trilateral Commission, a high-powered group of American, European and Japanese leaders, has called for Government action to promote innovation and research, while at the same time protecting declining industries. The National Association of Manufacturers, representing bosses, and the AFL-CIO, representing workers, have both endorsed versions of the plan.

Industrial policy means very different things to its different supporters. For business leaders, it is an irresistible opportunity to preach yet again the virtues of investment tax incentives, an end to the double taxation of both corporate profits and dividends and elimination of burdensome Government regulations. For labor, industrial policy provides a rationale for job protection in declining industries and training programs in growing ones.

Industrial policy, though, contains a danger: far greater Government involvement in the economy. A key tenet for many supporters is that Government should foster those companies or industries that show the most potential. The idea is that Washington would pick out the most promising industrial sectors for the late '80s and '90s, such as microprocessors and telecommunications, and then, by means of tax policy and trade measures, encourage or cajole companies into those areas and away from declining industries like textiles.

The theory does not always work out, however, in practice. In Europe, it has led to projects like the British-French Concorde, the money-losing supersonic transport that has never found a viable market. Says Otto Eckstein, president of Data Resources Inc. and a member of TIME'S Board of Economists: "It's pretty clear that if we are going to have industrial policy in the U.S., it will back losers, not winners. The whole subject of industrial policy in Washington quickly degenerates into steel and oil."

To de-emphasize the Government's role in industrial policy, former White House Adviser Amitai Etzioni, a renowned sociologist, coined the word reindustrialization. That jawbreaker was given cachet by Syndicated Columnist Joseph Kraft and quickly became a favorite of Capitol Hill trendmakers.

Unlike most versions of industrial policy, reindustrialization requires little national economic planning. Instead, it would stimulate development of capital goods, transportation networks and defense industries through broad Government incentives, such as accelerated depreciation on business investment, tax laws to encourage savings and investment and capital for special national priority projects like synfuel development.

Etzioni's miracle drug has some painful side effects. He is calling for a decade of restraint in personal consumption and the redirection of national resources to halt productivity declines and reduce inflation. The ten-year cost: a stunning $6 trillion, or more than twice the current annual production of all goods and services in the U.S.

The provocative idea, nonetheless, has spawned a raft of strategies for reversing the nation's economic decay. Senator Edward Kennedy has called for an American Reindustrialization Corporation to promote new investment in business and technology. Felix Rohatyn, a partner in the Lazard Freres investment bank and chairman of New York's Municipal Assistance Corporation, advocates creation of a new Reconstruction Finance Corporation, with $5 billion for loans to failing cities like New York or slumping companies like Lockheed or Chrysler. Management Expert Peter Drucker wants to accelerate the change to computer-age companies and shrink traditional blue-collar employment.

The idea of either industrialization or a new industrial policy infuriates some observers. Says Yale Professor William Nordhaus, a former member of President Carter's Council of Economic Advisers: "Reindustrialization is a Hula Hoop. On a deeper level, it is a pernicious idea that basically calls for re-enforcing sick indus tries." Charles Willson, vice president for area development at Chicago's Continen tal Bank, says that Government-sponsored cures "don't address the question of capital formation in a really productive way."

Reindustrialization at present is "a slogan searching for substance," says Jerry Jasinowski, co-chairman of a Carter Administration task force examining ways to help American industry. He has a point. And in their search, policymakers should remember that the most important way to strengthen the nation's industry is to pursue fiscal and monetary policies that will create the stable, predictable and noninflationary climate in which busi nesses can flourish.

Reported by Gisela Bolte/Washington

With reporting by Gisela Bolte

This file is automatically generated by a robot program, so viewer discretion is required.