A Fresh Challenge to Reaganomics

By Charles P. Alexander

Robert Reich provides intellectual firepower for the Democrats

Presidential Candidate Walter Mondale calls it "one of the most important works of the decade." Says Senator Gary Hart, another Democratic hopeful: "Few books on economics are bold enough to capture one's imagination. This is one." The object of the praise is The Next American Frontier (Times Books; $16.60), a provocative new analysis of America's economic ills by Robert Reich, 36, professor of business and public policy at Harvard's Kennedy School of Government. Searching for alternatives to laissez-faire Reaganomics, the activist Democrats have found an intellectual mentor in Reich, who argues that Government must forge a partnership with business and labor to reduce unemployment and meet foreign competition. Reich (pronounced Rysh) believes the Administration's goal of reducing the role of Government in the economy is doomed. Says he: "Every industry in America is deeply involved with and dependent on Government." While preaching nonintervention, Reich notes, the White House has been unable to resist demands for subsidies and import relief made by such industries as steel and autos. This protection, he says, keeps businesses from adapting to the rigors of worldwide competition. Reich would replace capricious protectionist measures with an explicit industrial policy aimed at retraining unemployed workers for new jobs and channeling investment into technologically advanced products that would enable U.S. companies to keep pace in the growth race.

A Rhodes scholar and a graduate of Yale Law School, Reich is a relative newcomer to economic debates. Despite his growing professional stature, he is self-effacing and unimposing. Standing only 4 ft. 11 in. tall, he jokes, "When I started studying economics, I was 6 ft. 2." During the Carter Administration, Reich was policy planning director at the Federal Trade Commission, an agency often criticized for imposing oppressive rules on businesses. He rejects the Reaganomic notion that Government regulation and high taxation are the root causes of U.S. economic problems. Instead, Reich heaps most of the blame on the executives who run American corporations. Since the days of Henry Ford and the Model T, Reich points out, American managers have relied on mass production. Relatively unskilled workers on long assembly lines put together standardized products. That strategy, which served the U.S. so well for more than a half-century, is no longer viable, Reich argues. Standard goods, from shoes to steel beams, can now be mass-produced more cheaply in developing nations such as South Korea and Malaysia, where the cost of labor is lower than in the U.S. To remain prosperous, Reich says, American industry must concentrate on high-priced, low-volume customized products. Examples: computer-controlled machine tools and high-tensile-strength steel. But rather than retool factories to make such advanced products, Reich charges, many companies have stayed with low-cost goods and petitioned the Government for protection from imports.

To succeed at selling customized products, firms need skilled work forces able to adapt rapidly to changing customer needs. Instead of sharpening workers' skills, Reich says, many big companies have laid off employees in the U.S. and set up assembly lines overseas. Rather than push hard for retraining, most blue-collar unions have clung to rigid job classifications and inefficient work rules.

Reich charges that too many American managers have become "paper entrepreneurs," more concerned with manipulating short-term profits than with developing new products. He laments the rush of conglomerate building through mergers and acquisitions. U.S. Steel paid about $6 billion to buy Marathon Oil last year, Reich notes, even as the steel company's own plants were becoming increasingly obsolete. Says Reich: "Ours is becoming an economy in which resources circulate endlessly among giant corporations, investment bankers and their lawyers, but little new is produced."

The Harvard professor offers several prescriptions for the problems he sees. The Government, he says, should give tax breaks and subsidies to companies that upgrade their workers' skills and offer training to the unemployed. Reich would discourage takeovers by disqualifying from normal tax deductions any interest on loans to finance mergers. He would replace the personal income tax with a consumption tax to enlarge the pool of capital for investment. Under this scheme, all earnings that individuals save or invest, rather than spend, would be taxexempt.

Aside from these specific proposals, Reich's outline for a national industrial policy is vague. He calls for the establishment of Government-financed "regional development banks" that would offer low-interest loans to companies promising to retool their factories.

Reich also envisions some sort of national "political forum" in which representatives from Government, business and labor would fashion joint strategies for revamping American industries. Such tripartite planning sessions have been successful in several other countries, including West Germany.

Reich's industrial policy is attractive in the abstract, but critics charge that it would face pitfalls in practice. For one thing, the bulk of Government aid is likely to go to old industries with great political clout (steel or autos) rather than to emerging ones (computers and robotics). This has often been the experience in Europe. Says Michael Wachter, an economic adviser to President Carter: "France and Germany have made their hi-tech sectors weaker with government help. Those industries become more dependent on their governments for support, and the help proves to be something negative, not positive." Adds Donald Carroll, dean of the Wharton business school: "We should not look to France as an example for what this country should do. Industrial policy in France is a disaster."

Nonetheless, a national industrial policy has considerable appeal to Democrats groping for new economic ideas. Reich's alternative to Reaganomics is likely to provide part of the agenda for the Democrat who will challenge Reagan or some other Republican presidential candidate next year. -- By Charles P. Alexander This file is automatically generated by a robot program, so viewer discretion is required.