Time For A New Industrial Policy?

Do we need the strong hand of government to correct the trade deficit and stop borrowing from China?


Did a "trade imbalance" contribute to the financial bubble and crisis? Max Fraser in The Nation says it did, and that we need renewed industrial policy to check future imbalances:

This three-pronged approach to protecting autoworkers' jobs--fuel-efficient automotive production, public transportation and renewable energy--can be a model for the green manufacturing economy of the twenty-first century. Much experimentation will be needed to determine the innovation, skill training and capital investment necessary to make these industries competitive. But that's what national industrial policies are designed for--to nurture high-value industries, protect industries from the downward pressure created by global competition and guard against unsustainable trade imbalances, like the one that fueled the American system of debt-financed consumer spending that has plunged the world into recession.

What if Dubya had pursued aggressive industrial policy and pumped up exports in an attempt to balance out the trade deficit? We would have seen a stronger dollar from greater foreign demand for U.S. goods. That means more expensive exports, rebalancing changes made to the trade deficit.

Predictably, when the dollar had a brief increase in value immediately following the financial crisis last fall, we saw a reduction in the trade deficit. Of course, back then no one at The Nation was calling that correction of an "unsustainable trade imbalance" a good thing.

But let's say industrial policy could cut the trade deficit. Would that make us less indebted to foreign governments? No, because the biggest American consumer would still be spending at an astonishing rate. Of course, I am talking about the U.S. government. If you don't want China financing our debt, create less debt at the federal level.

Looking at things that way, industrial policy, by expanding the government further, could make the system that "plunged the world into recession" even worse.

For more on a related topic, see my post from yesterday about GM on my other blog.