I've wondered this since the get-go of this administration. No one seems to be thinking broader than how to please a few long-neglected interest groups. Consider the stimulus package, where almost all of the "programs" come in the form of tax cuts or long-underfunded transportation spending. Neither is remotely innovative.

With respect to industrial policy, again, I see that we're bailing out auto companies by forcing them to lay off workers. There is no question that we cannot have the workers produce cars for which there are no consumers. I don't know about you folks, but I would take a three thousand dollar repair bill over a $20,000 car loan any day. And, I have a full-time job (so far) that pays a fairly decent wage. But, I digress.

I like the general idea of keeping Chrysler and/or GM around -- and using government loans to ensure these companies make it. But, simultaneously, the government needs to do a much, much better job of getting people back to work. There is no doubt that infrastructure improvements are needed. We had a bridge collapse here two years ago - you may have caught it on the news - and we have a GOP governor insistent on cutting all forms of government spending. So, the federal government needs a separate incentive plan that actually stimulates the economy -- and doesn't just reward certain interest groups. I am not sure if we need one bill to accomplish this, or if we need separate investments in promising sectors of the economy (i.e. seed investments).

I like the idea of rail. I love the idea of wind and solar energy investments. . . .

There is no reason to keep GM or Chrysler around other than they still hold power over Congress. Divvy up the facilities among new and innovative manufacturers, maybe mass transit companies, add incentives to create the 21st century cars, keep or re-train existing workers, help suppliers... pretty cheap relatively speaking.
Don't forget, CAFE standards were stagnant during 30 years of intense lobbying. Congress has been complicit in this debacle.
The problem of creating a viable industrial policy in this critical period is rooted in a corrupt system controlled by corporations.
We have a very immature democracy. It is not geared towards solving important national problems. We just had an election in CA were roughly 20% voted. Most citizens are ignorant of the issues and don't participate. In that environment, the big-boys win.
I watched as Sander's bill to limit credit card interest rates to 15% went down to defeat in a Democratically controlled Congress (33 votes).
It is just plain scary that at this critical junction we don't have the system in place to make sound choices on how to move forward. I wouldn't call it an industrial policy it is more like the new corporate policy. Reich was there, he knows better than most how these things get done. Industrial policy? You have got to be kidding.

What if the industrial policy was?

Let the Chinese and others produce the cars.
Let the other countries purchase the oil.
Let the other countries deal with pollution spewed by industry.

We get to import more steel from them, at a price were willing to pay, without the downside.
We have our own oil and gas, so let the other Nations fight over the rest.
No more need to import oil, reducing our dependence and controlling our trade deficit.

With wage and price controls in place, we’d do better than President Gerald Fords WIN program, Whip Inflation Now. Everyone knows were going to have to do something about the effect of high deficits.

It sounds like a Perfect environment for someone. Just not autoworkers or others dependent on energy and government assistance, to run heavy manufacturing, with it’s ill’s.

Do you think the cost of living will go down?
No more COLA increases for Social Security recipients?

Sounds like they took the shotgun approach, killing more than one bird

Mr Reich:

I am in agreement with Jzap. I can understand if you do not own an anutomobile or don't do much driving since you probably live and work in the DC and/or NYC area.

But last year's run up of gasoline prices by Big Oil was, obvious to most of us out here in the heartland, Repubs included, a "get while the gettin is good" play.

Most of us never want to be so vulnerable to Big Oil again and will not be buying gas hogs in the future, even if we feel we can afford it. Personally, my driving habits were markedly changed last year, and I am not going back to the good old days. I have no problem with the Obama administration dragging Detroit into the 21st century.

Ford Motor Co. seems to have figured it out already.

I spent the bulk of my 'free study' in law school on Japanese Industrial Policy and the Japanese Corporation (my Japanese law professor thought that I was wasting my time, but my history of property rights professor, a Nobel Laureate, gave me an A on my paper - that a 2 bucks buys me coffee so the Japanese law professor was right). Moreover, my interest in industrial policy goes back to the mid 1980s when I worked at GM and my bosses were commuting between our GM plant and the joint venture with Toyota. These days I approach the subject from the stand point of observing similar policy function in Korea where I presently live.

As an introductory thought, let me first say that the decline of the domestic auto industry is by design - the design of foreign industrial policy makers and by the lack of coherent, cohesive and strategic industrial policy. More on that later.

Generally speaking, industrial policy would first and for most do the things that Mr. Riech speaks about here:

(1) Help sunset industries ease out in a graceful manner so as to cause the least amount of disruption to individual lives - an always maintain at least a boutique residue of that industry as domestic incase it takes on an unforeseen strategic importance (during WWII, DeHaviland built one of the most effective bombers, the Mosquito, made with innovative use of plywood, by organizing and marshaling Britain's paino hand crafted piano builders to build parts and subassemblies - the mesquito, a small but long range bomber was faster than German fighters.);
(2) scan the horizons for budding new possibilities and provide artificially high investment levels for areas where the United States seems to have a competitive advantage on the other imput levels;
(3) Audit the educational system to make sure that it is providing the proper inputs for keeping American industries competitive in industries that it does compete in.
(4) Make sure that American industry, science and education is moving in the right direction for providing the pentagon with the needs that it projects out for the future. In other words, coordinating policy with other federal departments.
(4) Ensure , especially strategic and important industries, that they don't get structurally upside down so that they become unnecessarily competitive.
(5) Ensure that individual firms don't become to big to fail. Worse yet, become too powerful in their market place. The anti-competitiveness in the American auto industry today is a direct result of lethargic structure it took on during the 1950s.

In general, the older the industry, the more likely it is subject to policy. That also means the older the industry the more political it is. Conversely the new the industry the more freely it is traded on a global market. This is one reason why countries with an industrial policy apparatus put a lot of emphasis on new technology industries - if they get there early enough they can sell the products globally. Some country might foolishly be protecting its low value textile industry, while being totally open to importing high value eletrical devices. This is one reason why Korea has focused on cell phones.

It's also why Obama has talked about trying to push the nation into green industries. The green industries revolution is a big opportunity for countries to get ahead and establish a strong position in an industrial area that is likely to be important. Unfortunately unless Obama creates a Department of Industry, its nothing more than talk - because the well organized, practiced and prepared nations in the art of industrial policy are way out in front of us in pulling something like this off.

Obama has keyed on the Lincoln presidency as a model for him to follow. It was Lincoln who created the Department of Agriculture at the cabinet level. Perhaps it will be to Obama to create a new Department of Industry for implementing sound, long term, well thought out, strategic, industrial policy.

The Japaneses developed a sophisticated yet sure-fire industrial policy technique (which I explain below) for developing their domestic industry. To a great extent, the Koreans have copied the Japanese technique. Eventually, the success of the Koreans in using the Japanese technique awoke the Chinese. The most significant event of our time is the East Asian rennaisance, and it is largely the result of pragmatic industrial policy. In order to understand the Magic of this policy, keep in mind that Japan has no raw materials. Korea was even poorer still - at one time one of their most important exports was human hair for wigs.

In the 1940s, the State Department asked the American auto industries to leave the Japanese market so that an indigenous one could emerge. The Ministry of International Trade and Industry (MITI) then imposed a policy solution that they developed in Manchuria during the last half of the 1930s and early 1940s.

(Recall, that, beginning in the early 1930s the Japanese Military came to dominate civilian bureaucracies through coercion and assassination - many of these civilian bureaucrats ended up finding refuge in Manchuria. After the war, MacArthur enlisted those civilian bureaucrats and though there's no evidence, it seems they used probably used their influence to exact revenge on the military bureaucracy by constitutionally having them written out of existence)

MITI developed a simple technique: Industry Protection combined with Export Promotion.

Moreover, MITI, in order to protect their own power, prestige and perqs, didn't want any one entity becoming too powerful, so in promoting some specific industry, MITI generally like to ensure that there were an excessive number of firms competing in a given segment. Additionally, it didn't want industry wide trade unions. It did, however, want to give workers effective bargaining power - to help curb the companies power. MITI therefor imposed a labor solution upon Japan's economy that included company unions. Company unions are weak in the United States - but this weakness is compensated for by giving employees tenure. As a result employees have more power over their corporations than their counterparts in the U.S. And Japan still has the broadest distribution of wealth in the first world, Scandinavia not set aside.

MITI could also reasonably guess the order of goods, in progression, that could or ought to be promoted, (based, in part, upon the inputs available). The order of goods is a simple hierarchy of sophistication: bycicles, motorized bikes, skooters, motor cycles, and then automobiles (this is almost exactly the path taken by Honda - starting with motors for bicycles). Quite often MITI might guess wrong in which industry to protect, but as most successful Oil companies will tell you, you have to drill a lot of dry holes in order to find a wet one. And one good wet hole more than makes up for a score of dry holes. They'll also tell you that you can hedge things by developing your techniques over time.

Here's how MITI's policy execution worked:
(1) MITI would target a sector (say Twidgets). (a) MITI would do a study on the importance and praticality of a domestic Twidget industry. (b) Miti would announce in a policy statement that it was targeting the development of a Twidget industry. (c) MITI would then prop up tarif and non-tarif barriers to protect the domestic Twidget industry and (d) MITI would have the government guarantee all capital loans made toward the development of this sector. (e) (Normally other packages of policies and incentives were included - this is just a broad conceptual illustration).

The results of this policy were amazing.

(1) All the nations banks were in a hurry to get involved in lending to this industry because it provided risk free investments. A bank would find the most capable company it could find (or create one), buy a chunk of that company's stock in order to create a captive customer for the loans the bank wanted to make. The bank might even provide key professional and managerial expertise.

This is exactly the way Mazda got its start. Sumitomo Bank formed an alliance with Mazda, which had been only a machine tool manufacturer that had limited experience making vehicles for the military during the war.

2) This created a compression effect in the Market place: The compression was the effect of high levels of investment, high numbers of competitors in a reletively small but growing market.

Suddenly an artificially large number of firms engaged in the manufacture of Twidgets, with an artificially exaggerated level of capital investment for a small, though growing market, creating an artificially exagerated, suddenly hyper-level of competition.

In this way, Japan might go quickly from being a back water in Twidget making to suddenly being the most competitive, in fact hyper competitive market for Twidget making.

MITI would do things to lower cost as much as they could and provide incentives and mechanisms for export - quickly taking advantage of the new level of competitiveness. These hyper competitive firms quickly found the going much easier overseas than they did at home. When the Japanese landed in a place like Britain or the United States, Toyota, Honda and Nissan did not see Ford, GM and Chrysler, so much as the competition but instead saw each other from the home country as the main competition.

The fact that none of the same firms shared the unions added to their flexibility and their competitiveness. The labor arrangement is very important aspect that contributed to their competitiveness.

In the United States company unions are seen as ineffective as promoting worker's interest. What's different in Japan is Employee Tenure (aka Lifetime employment). It changes the balance of power in corporate governance, giving the employees immense bargaining power.

Ostensibly, in both the United States and in Japan, corporations are run under the shareholder primacy rule. Shareholder primacy rule says that executives (officers of the corporation) and members of the board of directors must run the corporation with the interest of the shareholders coming first (thus shareholders have primacy).

Shareholder Primacy is the official rule. However, in the United States we know that effective primacy goes to executives of the corporation. You can tell by their levels of compensation which are unmatched outside the United States.

In Japan, despite the shareholder primacy rule, as it turns out, employees have effective primacy. In Japan the corporation is run with the interest of the employees coming first.

This appears to be a function of widespread employee tenure. I debated this with my Japanese Law professor in law school. He disagreed - there's also a cultural aspect to consider. But at the time we were having this debate, our Law school was going through a minor scandal/crisis that was getting a lot of ink in the local press. In interviews in the paper and on the radio, the Dean was quoted as "trying to confer with the faculty to determine how to resolve the matter." The Dean didn't confer with the 'shareholders' of the school. He conferred with the tenured employees. Widespread Tenure leads to employee primacy because it's so much easier to fire the head person than it is to fire a bunch of employees. The bargaining power is altered signficantly in the employees favor.

As Japan demonstrates - it turns out that the employees are better proxies for shareholder interests than American style board of directors: who's stock would you rather have - GM's or Toyotas?

Employees are better proxies for the (long term) shareholders because they want the same thing: the long term health and well being and growth of the company. Employees want the company to grow market share because it will secure their future and their retirement. Stockholders want to grow market share because the stockmarket places a premium value on market share.

There is one aspect where the employees are not good proxies to the shareholders - and that's in the area of corporate mergers and consolidation. But here, the employees are better proxy for society's interests. Shareholders love corporate mergers because when corporations merge, shareholders get a price spike on the value of their shares to induce them to sell to merging corporation - called a 'control premium'. However society benefits from corporations not merging because more firms me more choices and more companies competing which means more competitive products and more competitive prices. This is why Japan still has 6 to 8 car companies and the United States only has 1 and two halfs (pending bankruptcy).

Now, contrast the Japanese employee primacy model with the American Executive primacy model. Executives have supremacy. The average tenure of a CEO in the United States is less than four years. Thus their time horizons are very short term oriented. If you get to the executive level you have only one goal: make as much money as you can for your retirement and posterity before you check out. If you are a lucky executive, the firm you run becomes the target for a merger by another company - then you cash out really big. This is what happened to Chrysler in the 1990s. It had a string of good products - thanks in part to Bob Lutz - with it's 'cab forward' architecture and some other innovative products, but the CEO of Chrysler couldn't resist the payoff of selling out to Daimler-Benz.

Now take this explanation on American executive primacy and it's short term fixation and apply it to the history of the automotive industries. In the 1950s the American automotive industry was starting to earn monopoly (oligopoly) rents. There were two big companies and two smaller companies and they all had the same union. The union was thus, bigger than the companies from a bargaining stand point. The union would target the biggest, fattest company for contract bargaining, and use that as a patern to spread across the industry.

Profits were large - oligopolistic - in the 1950s. The union went on strike to get their share of those oligopoly rents for their members. The executives time horizons were short. The executives gave the unions everything they could, and then, running out of things to give the unions, they reached into the future and gave the unions lavish health benefits and pension benefits that would be payed out down the road, during the tenure of some future generation of executives. The oligopolistic arrangements made during the 1950s have hampered the automobile companies every since.

This arrangement might have been tollerable if the auto companies benefited from a growing market with growing market size. But in 1973, the energy crisis caused the market to change its focus. The American auto industry had become so bloated, lethargic, sclerotic that not only could it not change quick enough, it no longer knew how to be competitive. The American companies steadily lost market share to the Japanese.

I'm not sure how many attempts GM made at competing against the Honda Accord: the Chevy Citation, the Corsica, the Lumina - nice cars but couldn't hold a candle to their Japanese competition. Only with the introduction of the new Malibu last year has Chevy produced a car that was competitive with Honda's accord offering.

A better comparison demonstrating the short term thinking of the American car companies versus long term thinking of the Japanese is during the 1990s. With gasoline cheep, American's clamored for monster sized vehicles that had huge mark ups. The American car companies concentrated on these for the short term profits and neglected small car development. Ford went so far as to say it was abandoning car development in favor of trucks. During this same time, while trying to develop profitable trucks and larger vehicles, Toyota and Honda continued to do research and development on hybrid vehicles.

You see, because of employee primacy, Honda and Toyota are worried about making sure they have market share in the future as the best way to ensure it's ability to provide jobs for it's employees in some future market. In the 90s efficient fuel consumption was not a market driver. But everyone knows that it has been in the past and could be in the future. So Honda and Toyota throw bones at the project just encase fuel becomes a market driver again. Sure enough, after 2000, fuel prices began to rise, and then went way up and suddenly fuel efficiency became a market driver again for automobiles. Honda and Toyota were sitting there ready with their hybrid vehicles. Meanwhile Ford, GM and Chrysler scrambled to reorient themselves and becoming endangered species in the event.

In regard to the labor arrangements - no two countries have the same mix. Korea has powerful centralized unions. It also has widespread tenure - though not nearly as widespread as Japan. In Europe, in some countries, Unions have representation on the board of directors and in some places local communities, as stake holders, have representation on boards of directors. It's worth noting, in 2006 or 2007 Ford was in the worst position of all American auto companies. Today it is in the best. It had a bigger change to make and almost out of panic made draconian moves. It also secured massive private financing before the sub prime melt down beginning in September 2008.

Without the help of a Department of Industry, the Automotive industry has belatedly restructured. They have largely gotten out from under a lot of the liabilities they acquired in the 1950s, with new arrangements set to take affect in 2010. GM's domestic factories can now produce cars with roughly the same productivity that Toyota does in the United States. Moreover, both GM and Ford has managed to come up with new and better products. GM's Malibu is finally competitive with the Japanese offerings. Both Ford and GM also have some nice cars tabbed to come out in 2010 - it maybe too late.

There is no way that a nation that consumes 15 million cars in a normal year should be without a healthy thriving automobile industry. Japan with much less than half the market, and only a fraction of the amount of paved roads and with perhaps the best public transporation system on the planet and therefor less dependent upon automobils, has 6 to 8 car companies and produces more cars than the United States does.

That Japan is so successful is the result of industrial policy which smoothed out the wrinkles and the headwinds and found ingenious ways to turn liabilities into assets.

The discussion here is on automobiles, but we all know it applies to many industries. Consumer Electronics industry here in the United States lost out to Japanese industrial policy and Japanese companies a long time ago. Eventually electronics became a sunset industry in Japan too, but industrial policy in Japan smoothed the transition to off shoring and at the same time kept Japanese corporations and their brands in the game.

The United States has from time to time implemented sound industrial policy. Most notably during the Reagan administration for Steel as well as Automobiles.

The steel industry was perhaps more sclerotic than automobile industry: a true oligopolily, at least since the 1950s, the entire industry bargained jointly with the steel workers union. In a sense creating a Soviet style steel manufacturing bureau completely devoid of any notion of competition.

In the late 1970s, the Japanese were buying coal from West Virginia, putting it on ships in Baltimore harbor, shipping the coal all the way to Japan, where it burned iron ore from Australian, turning it into steel and shipping it that steel to the United States all for a price cheeper than American steel firms could achieve from manufacturing in mills in the Midwest. Steel, is a strategic material. It goes into cars, buildings, the basis for reinforced concrete, and ships that we fly aircraft off of.

The Reagan adminsitration, in a nifty set of industrial policy, implemented protection for the steel industry with the caveat that Steel manufacturers had to plow a certain percentage of their profits into capital improvements to modernize their operations. Enormous productivity and quality improvements resulted from this policy. Unfortunately, the employment in steel dropped enormously but the domestic steel industry did survive.

Reagan also implement protection for the automobile industry during the 1980s. At the beginning of that decade, Chrysler had to secure government backed loans to ensure it's survival - in order to retool and build it's "K" car platform. As you recall, this created a micro version of the Rx that created the Japanese car industry: government guarantees to private bank loans and protected markets. This gave Chrysler some traction to turn itself around. Chrysler got a lot of milage out of the K car platform spinning it into variety of products, bringing back the convertible and creating the first mini van. Chrysler in the early 1990s had a lot of promise and mojo behind it, until it sold itself off to Daimler. Today a merger with Fiat is probably the best Chrysler can do right now. Fiat has important innovations in small engine technology that gives them an enormous competitive advantage in the small car market that might get Chrysler moving again. If it does survive, it will never be the same company it once was.

I once read where the management guru, Peter Drucker said that GM should have been broken up during the 1950s. I don't know that he really said that, but it does make sense. In the 1950 Japan's MITI ensured that its auto industried was purposely fractured so that no one could dominate it. Imagine if we had anti-trust laws in the 1950s designed to break companies up if they became 'too big to fail' or monopolistic. Imagine if we had had a Department of Industry empowered to supervise such a break up, in conjunction and coordination with the Deparment of Justice.

Now before you comment on some of the agencies of such an policy, keep in mind, shareholders can and do benefit enormously from brake ups of companies. John Rockefeller was far richer man as a result of the break up of Standard Oil - though he was far less powerful.

You can imagine then a healthy, monopolistic GM being broken up into as many as four companies, or perhaps one for each make: Chevy, Pontiac, Oldsmobile, Buick, Cadillac and GMC Trucks, Ford and Chrysler being broken up into three companies: Chrysler, Dodge, Plymouth, Ford, Mercury and Lincoln. If Japan could afford 8 car companies with less than half the market, America could have afforded 11 car companies. With 11 car companies competing in 1960, do you think that Japanese companies would have been able to establish a beach head here - ever?

The question then is what should we be doing to save the auto industry? The current policy seems a rehash of the same old 'consolidation model' that has plagued American industry for over a half century. Instead of three car companies with roughly 11, 12 or 14 makes, we are going to have two, maybe two and a half car companies and maybe 8 makes.

It seems to me that consolidation model is nothing but the staged retreat from a wealthy industrial society. There is something wrong with ours (and perhaps Britains) economic institution arrangements. We shouldn't be retreating from the industries that create real wealth nor handing over our markets to other nations who just happened to be better organized than us because they're more pragmatic in terms of economic ideology.

Instead of consolidating the auto industry, the Obama adminstration should do the opposite. Go back the industrial policy play book that Japan perfected all those years ago:

(1) Put up protection for the auto industry so as to provide for its restructuring - to last up to 20 years. This can be done in a similar way to how Reagan did it. Provide quotas to foreign makes, with a bias towards the ones that have plants here and perhaps fairly stiff tariffs for imports especially for those countries that won't receive our imports.

(2) Don't consolidate - do the opposite - Break GM up into 2 companies that hopefully will become 6 within a decade. Break Ford and Chrysler into two companies. Imagine 15 years from now, 12 independent American auto companies competing against each other. Undoubtedly some would fail -but wouldn't be too big to fail, others would grow larger as a result and again be split in two in an ever churning competitive environment.

(3) Provide loan guarantees to banks that make capital loans to the automotive industry.

(4) Impose a new social/labor contract on the auto industries and their unions. Unions will be broken up into company unions but a majority of workers will be given tenure and workers will have a representative on the company boards. The labor federation will become a confederation. Local unions will still have to pay dues to the central office. The role of the central office will be oriented towards research, development and as a political counter part to the U.S. Chamber of commerce for advancing the cause of labor in government and society, especially for lobbying considerations.

Not all companies or industries should be subject to this new labor model. Just those that are publically held and do not have concentrated ownership to oversee the management of the company. As stated earlier - employees are good proxies to the interest of shareholders (and society in regard to consolidation), where there is no dominating shareholder, the new model should be employed or at least considered. Those industries that come in for restructuring will have no choice.

(5) Public Health Care and Portable Pensions. Health Care reform right now is the one policy change that could take the U.S. out of its current depression. The cost is a tax on companies trying to compete and soaks up wages of workers stealing their purchasing power and thus placing a drag on demand. The core problem with the economy is a lack of demand which stems from a lack of purchasing power, which stems form declining wages for the median worker. Thus health care reform is a two-fer for fixing the economy - eliminating a cost disadvantage on American companies trying to compete, and placing purchasing power in the hands of masses of American workers. As things currently stand, the U.S. government already spends on health care as much as France does. This means that something like Medicare for all could be done tomorrow and there would be no new taxes - essentially a policy change done for free.

A longer term policy should allow companies and employees to set up new pension and savings programs that are portable.

These policies would see the return of a new competitive, healthy automotive industry in America 15 years down the line. Jobs with good pay and high rates of satisfaction. People building real things for society.

The United States has had a Department of Agriculture at the cabinet level since the Lincoln administration, and below the cabinet level even before that. Somehow, despite it being the oldest of industries, the American farmer is still competitive on a global basis. The USDA shapes agriculture policy - balancing off a variety of competing interests to ensure that farmers are competitive on a global basis, that they are making sufficient amounts of money, that consumers have access to healthy food at inexpensive prices with a large number of choices. Not that there aren't problems with agriculture, but only if we had a department of industry that oversaw our industrial sector so well.

One of my roommates in college was an agriculture major, he use to say "If you're going to bitch about American agriculture, at least don't bitch with your mouth full." Great point. It's high time we had a Department of Industry.