America has an industrial policy. Should we change it?

US "industrial policy" is back in the news after a long, long absence. Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, wrote about getting beyond the false growth vs austerity debate in the Financial Times, which I discussed here. Andy Grove (retired CEO and chairman of Intel) says in How to Make an American Job Before It's Too Late that we have to emulate the successes of our Asian competitors by adopting policies that create millions of domestic jobs, which I discussed here. Michael Spence, winner of the 2001 Nobel memorial prize in economics and chair of the Commission on Growth and Development, says America needs a growth strategy. Mark Thoma reacts with this observation:

There appears to be a change in thinking underway among economists on these issues, particularly industrial policy. There are some who will oppose this change with all the shrillness they can muster. If this trend continues, and it looks like it will, there will be big fight within the [economist] profession -- more so than now -- about these ideas.

No doubt, shrill defenders of the status quo will say we have no "industrial policy" now and should never have one because, for a variety of reasons, "governments should not pick winners and losers." In fact, however, economic activity is a game that requires rules. Most of the rules need to be, and are, made and enforced by governments. Rules cannot be neutral but always confer advantages on some participants and disadvantages on others. We may not wish to call it industrial policy but, whatever we call it, we have one now—and it's very different from America before the Reagan Revolution.

Today's industrial policy favors capital over labor, the financial economy over the real economy, multinational firms over domestic firms, exploitation of the environment and the commons over conservation and protection, sellers over buyers, oligopolies and big firms with market power over multiple small participants, short term results over long term, speculation over investment, lower incomes and benefits for sole performers instead of higher, entrenched interests over innovators, open borders instead of tariffs and immigration controls, redistribution upward instead of downward, putting elected officials more in the thrall of the highest bidders instead of less. All that has happened in the last 30 years not just because governments have abdicated some fields but because government policies structure and enforce these outcomes.

We have a definite industrial policy. The question is whether we want a different one.

Update on Tuesday, July 13, 2010 at 09:29AM by Skeptic

Another feature of the current industrial policy, it favors M&A and other balance sheet transactions over operational excellence and organic growth. UPDATED 7/19/10: Starting in about the 1970s, the euphemism for this was "creating shareholder value."