The Key Questions That Should Be Asked About "Industrial Policy"

One of the recurring themes in the debate about what we should do to improve the U.S. economy is “industrial policy,” and whether government should
“pick winners and losers.” The fact of the matter is that the United States
already has an industrial policy that favors some sectors: petroleum and coal,
large corporate agriculture, and military programs and bases, including ones
that the Pentagon does not want. But this industrial policy is old. The
government is not organizationally focused on creating the high-value added
manufacturing, export-oriented model that Germany, Japan, South Korea, China
and Singapore have built. It does not possess a unifying vision of the future.

The Obama Administration has sought to roll out its version of an industrial policy but
it was humiliated by the bankruptcy of the California solar firm, Solyndra,
which had received a $535 million government loan. Republicans and Tea Party
activists have sought to portray this bankruptcy, and the struggles of other
clean energy firms, as clear evidence that any form of new industrial policy is
doomed.

But the real debate ought to be about how can the government learn to do a better job at
creating the industries of the future, not just in energy but also in
nanotechnology, genomics, advanced robotics and other industries that are
struggling to be born around the country. Here are five crucial issues, the
answers to which could shape a more effective industrial policy :

--At what stage of commercialization of a technology is it effective for the federal government to offer funding? The critical stages for entrepreneurs are seed funding and early rounds of capital raising, and the Small Business Administration is active at
those stages. But as a technology nears full commercialization, shouldn’t the government
step back to allow the private sector to absorb the risks?

--Should the government support finished products, such as automobiles, or should it limit its funding activities to component technologies, such as lithium ion batteries? The government does not possess adequate expertise to understand what final market demand will be for a specific product, but it can be effective in supporting building block
technologies. If this principle were adopted, the government would not support
Tesla and Fisker car companies, each of which has won more than $500 million in
support, as much as it would support the underlying technologies.

--What should be the limit on the size of loans or loan guarantees? The evidence suggests that $500 million loans are too big. They may distort decision-making by the private
sector, and they obviously create political problems if they fail. It may be that the government should accept a threshold of $50 million or $100 million.

--How far can the government go in specifying private sector outcomes? The Department of Energy required that the recipients of its funding in lithium ion batteries accept
ambitious targets for hiring workers and building factories. Those requirements
skewed management decisions and may have created problems that private sector
managers, left to their own devices, could have avoided.

--Who makes the funding decisions? So far, the administration has not involved the private sector in analyzing what technologies should be supported and how. Surely, some sort of
mechanism that tapped private sector expertise would improve the quality of
decision-making. A Republican president created Sematech, which was widely
praised for helping save the American semiconductor industry. Why could there
not be a Sematech for the solar industry, for example, a government-business consortium
that charts a clear strategy?

Elsewhere, we need to ask how effective the government is in how it spends nearly $150 billion on research and development each year, how it supports the emergence of technology
clusters around the country, how its agencies support exports by small and
medium-sized companies, and how it supports training and retraining of workers.
The answer on each count is, not well enough. There is huge overlap among
competing agencies. There are more than a dozen federal programs in the
departments of Labor and Education for retraining workers who are displaced, but
they have been spectacularly ineffective. Export promotion and licensing efforts
are similarly fractured among half a dozen agencies. The government clearly needs
reorganization and streamlining to do a better job while spending less money.

The debate, in short, should be about what works and what doesn’t. It should be about
pragmatism, not ideology. Solyndra didn’t work, but there are other very real successes
around the country. The federal role must be carefully calibrated. If the
government can absorb the lessons from its failures, it could play a critical
role in sparking a real and enduring economic recovery.