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What If?

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Quite by accident I ran across this on-line version of the Cato Institute’s Policy Report from June 1981 [2]. On page 2 is an unsigned editorial titled “Felix Rohatyn Reconstructs America.” Reading this short, excellent essay from nearly 40 years ago prompted me to wonder: What if the U.S. government had then adopted industrial policy of the sort that the (now-late) Mr. Rohatyn endorsed?

Of course, it’s impossible to know the answer to this question for certain. The ghost of Mr. Rohatyn would likely insist that the American economy’s performance over the past 39-plus years would have been even more spectacular than it actually was. (This actual performance, let us not forget, has indeed been rather impressive [3]. Really [4].) Agreeing with Rohatyn’s ghost, in spirit if not in all details, would be today’s proponents of industrial policy – conservatives such as Marco Rubio and Progressives such as Elizabeth Warren.

But what particular firms and projects would an early 1980s industrial-policy bureaucracy have supported? It’s likely that subsidies and tariffs would have been used to artificially expand America’s information-technology sector. That sector was then, as it is today, politically sexy.

Yet “information-technology sector” is merely a term, and it doesn’t refer to a single and distinct thing. Suppose that government in 1981 had artificially directed resources to one part of it (to, say, semiconductor manufacturing). It’s possible that the bulk of these resources would have come from unsexy uses such as tobacco farming and bicycle manufacturing. But it’s also possible that the bulk of these resources would have come instead from another part of the IT sector (from, say, software development). How would the industrial-policy pooh-bahs of the day have known?

Keep in mind that special privileges – especially in the form of tariffs – for one part of the IT sector might well damage other parts of this sector. For example, tariffs on semiconductors make the domestic manufacture of computers more costly.

It’s tempting to respond to my noting these complications by saying “Government would have encouraged all parts of the IT sector.” But again, these are words – words that convey a false impression of concreteness and distinctness. Who decides what is and what is not part of “the” IT sector? Was manufacturing desk telephones back then part of this sector? (Such telephones were still widely used.) How about the training of directory-assistance operators and support for their efforts?

Forty years ago it was commonplace for Americans to dial 411, get a live voice on the other end of the line, and ask the helpful person for the telephone number of John Doe who lives on Elm St. in the town of Springfield in a neighboring state. Directory assistance was a technology that dispensed useful information.

Perhaps the industrial-policy boys and girls would have directed resources to develop the then-cutting-edge technology that gave us telephone-connected fax machines. How have we Americans suffered as a result of no such strong government effort to make America great at telefax technology!

Or what about the production of cathode-ray tubes? In the early 1980s, nearly all monitors on personal computers were CRTs. Would the mandarins charged with directing resources toward “the industries of the future” have directed resources to CRT production? Should they have done so? And if so, from where would these resources have come? Not from out of the blue.

Oh – and what about the petroleum industry? It’s part of the IT sector, isn’t it? I mean, so many parts of computers, then as now, were made of plastic. Without wise government support for the likes of Exxon and Texaco, who knows what calamities might have been visited on America’s IT sector had there been a global disruption in petroleum supplies? And even apart from the use of petroleum as an input in IT products, the petroleum industry is such a large user of IT that – surely – subsidies to Big Oil would add beneficial stimulation to other segments of America’s IT sector.

Determining what is and isn’t part of America’s IT sector is a real challenge. But I reckon that the appropriate stance is to trust that no one is better able and willing to make this determination in a publicly spirited way than are politicians and their hirelings. Or, at least, it would be crass and ideological of me to oppose industrial policy simply because I have doubts that such a determination would be made sensibly.

…..

And what are the chances that the officials charged in the early 1980s with using industrial-policy to make America more “competitive,” to “support the industries of the future,” and to protect ordinary Americans from economic stagnation would have supported, say, Google? Would they have foreseen the emergence and evolution of this marvel? What about YouTube? Music and movie streaming? What about the smartphone and any of its countless apps? Would these officials – brilliant though they would no doubt have been – have anticipated the emergence of deep learning? How about of private-key encryption?

…..

It’s appalling that today’s proponents of industrial policy are silent about these realities. Their case for industrial policy amounts to nothing more than a naive prayer to the god-state to use its powers to make us happier.

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