The Democrats Tout a New Tonic

By Charles P. Alexander

Industrial policy becomes a hot presidential campaign issue

Industrial policy. The term sounds as if it might be the title of a dense academic tome, of interest to only the most diligent of scholars. To the contrary, industrial policy has suddenly become a centerpiece for ringing political speeches and a lightning rod for public debate. It is extolled as a salvation for the U.S. economy and denounced as a step toward socialism. Most Democratic presidential candidates have endorsed some form of industrial policy, hoping to use it as a springboard to the White House. Critics call it "Democratic supply-side economics."

But while President Reagan's supply-side strategy revolved around a simple program of tax cuts, calls for industrial policy are a collage of complex ideas that have yet to take a definite, agreed-upon shape. "It is like modern art. It means something different to everyone," admits Felix Rohatyn, a New York City investment banker and one of the early prophets of industrial policy. Rohatyn proposes a new Reconstruction Finance Corporation, patterned on the agency created during the Depression to make loans to industries. Politicians have many things in mind when they advocate industrial policy. Former Vice President Walter Mondale talks vaguely of cooperation among Government, business and labor to "restructure whole industries." Senator Gary Hart favors tax credits to help companies retrain workers, while Senator Alan Cranston supports a Government development bank that would give loans to basic industries like steel. The common theme of all the industrial-policy advocates is that the Government must play a more active role in helping industries meet the challenge of foreign competition.

Some 30 industrial-policy bills are percolating in Congress. Democratic Congressman Stanley Lundine of New York has introduced legislation to set up a national industrial-development bank and a council composed of representatives from Government, business, labor and the public that would, among other things, suggest a strategy for targeting federal aid. Senator Edward Kennedy heads a task force of Senate Democrats that is expected to unveil its proposals by November.

Labor unions are pushing industrial policy with all their political power. Says Howard Samuel, president of the industrial-union department of the AFL-CIO: "The high unemployment rates rocking this nation and the staggering inroads that imports continue to make in our domestic markets have created a sense of great urgency for a national industrial policy." Growing numbers of business executives, particularly those whose companies are most threatened by foreign competitors, are taking up the cause. Says Chrysler Chairman Lee Iacocca: "Industrial policy is not just a Democratic ploy."

Many businessmen and economists, however, are skeptical. They fear that a Government development bank might become a bottomless Santa's bag that would provide goodies for those with political clout. Federal aid might prop up inefficient companies and prevent the shift of resources to more dynamic firms. Instead of strengthening the economy, opponents charge, industrial policy would preserve the status quo. Says Harvard Economist Lawrence Summers: "Industrial policy is chiropractic economics. At best, it would be ineffectual. At worst, it would be a wrenching experience."

Some economists, including Lawrence Klein of the University of Pennsylvania and Lester Thurow of M.I.T, cite Japan as a nation that has used industrial policy effectively. The Japanese government singles out promising companies for special aid and allows failing industries to shrink. Says George Lodge of the Harvard Business School: "The Japanese have achieved a consensus on a national strategy." Other experts, like Arthur Denzau, an economics professor at Washington University in St. Louis, argue that industrial policy has been much less important to Japan's success than the country's vigorous domestic competition, its educational emphasis on industrial engineering and its low tax rates.

Outside Japan, industrial policy has often had dismal results. For many years, West European nations have poured vast amounts of aid into their steel industries, which yet remain weak and inefficient. Says Economist Melvyn Krauss of New York University: "Subsidies encourage stagnation and retard adjustment."

Robert Reich, a lecturer at Harvard's Kennedy School of Government and the author of the leading book on industrial policy, The Next American Frontier, contends that critics are missing the point. The U.S. already has policies that favor some industries over others, he says, but the programs are unplanned, haphazard and incoherent. The aerospace industry, for example, receives 70% of its research and development money from the Government, but pharmaceutical companies get less than 2%. Observes John Ong, chairman of B.F Goodrich: "Right now, U.S. industrial policy is arrived at by adversary special-interest bargaining on Capitol Hill. There may be a better way."

Rather than dispense financial favors in an almost random fashion with no strings attached, Reich says, the Government should use aid as a lever to make industries more competitive. A steel company might qualify for help only if workers took pay cuts and managers agreed to modernize plants. In that way, Reich maintains, industrial policy would not encourage companies to be complacent but could instead force them to change.

Reich's critics concede that the Government has a raft of politically motivated policies that distort the workings of the economy. But they fear a formal industrial strategy would only make a bad situation worse. Says Kenneth McLennan, a vice president of the Committee for Economic Development, a private research group: "The present hodgepodge of intervention doesn't justify more intervention."

Industrial-policy advocates admit that it will go nowhere unless the Democrats win the White House. President Reagan staunchly opposes increased Government intervention in the economy. Administration political strategists are hoping that the economic recovery will stay strong and that industrial policy will soon again be an issue for academics rather than politicians . -- By Charles P. Alexander. Reported by Frederick Ungeheuer/New York with other bureaus

With reporting by Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.