Can Obama's Manufacturing Initiative Really Work?
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The Fiscal Times
February 17, 2012

For three years, we really have not had a clear idea of Barack Obama’s economic philosophy. Contrary to his Republican critics, he is not a socialist or a mindless big spender and regulator, but neither is he a pure free market kind of guy. In recent months, we have started to get an idea of what Obama actually is: a believer in what used to be called “industrial policy.” In particular, he believes that manufacturing is something special and deserving of explicit government support.

This is not a new idea. In the 1980s, industrial policy or reindustrialization was the Democrats’ response to supply-side economics, which underlay Ronald Reagan’s economic program. Much of the Democrats’ argument was based on the idea that industrial policy was the reason for Japan’s fabulous postwar economic success, which was then at its pinnacle.

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Industrial policy advocates argued that Japan showed that pure free market policies don’t work, that government must actively intervene to humanely kill off dying industries and provide targeted support to cutting edge industries. Japan’s powerful Ministry of International Trade and Industry (MITI) was the central agency that managed this process with high-skilled bureaucrats utilizing a toolbox of trade restrictions, subsidies, regulations, and economic espionage.

American businesses were said to be at a disadvantage and there were lots of best-selling books in the 1980s predicting that Japan would soon eclipse America as the world’s economic super power. There was even a silly Hollywood film, “Rising Sun,” that carried the idea of a Japanese conspiracy to rule the world to a ridiculous extreme.

Even among Republicans there was admiration for the Japanese model. During the George H.W. Bush administration, where I worked in the Treasury Department, it had strong supporters at the Commerce and Defense departments. One of the key battlegrounds was high-definition television (HDTV), which was just in its infancy. Commerce was very keen to support American manufacturers of HD televisions and DOD agreed in order to support the American semiconductor industry. (Semiconductors are a major component of HDTV.)

Treasury, along with the Council of Economic Advisers, took the free market view. We were concerned that whichever technology the government chose to support would become dominant and potentially foreclose superior alternatives. We also doubted that American bureaucrats knew enough about HDTV to act as venture capitalists. In the end, we succeeded in derailing the initiative.

Years later, one of the people at Commerce who supported subsidies for HDTV admitted to me that the technology that it wanted to support turned out to be inferior to that which ended up being the standard. It also turned out that the real money was not to be made manufacturing HDTV’s, but in producing the programming, an area where the U.S. remains dominant.

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.