Wanted: Development Strategy

I have argued for a long time that America needs to develop and adopt a re-industrialization policy. Now I have another piece of evidence that this is an urgent requirement for our economy: GM and Ford are dying.

No one should underestimate the historical importance of the U.S. car industry. America has been the #1 carmaker since WWI, and the making of cars has been one of the cornerstones of our prosperity. One could argue that we are just shifting from one set of industries to another. We quit making buggy whips, after all. Well I would respond: have people stopped buying cars? Have cars ceased to be an value-added item? On the contrary, our citizens remain obsessed with them, only now the benefits of cars are being sent abroad rather than used here at home to fuel economic growth. The impending disappearance of car manufacturing is a first-class economic disaster and a clear sign that our position as a leading economic power is in serious peril.

But the government getting involved is useless, right? Wrong. There is not a single example of a country industrializing without massive government support. Government policies have used subsidies, tariff protection, favorable regulations, etc., to encourage the creation of vital industries. Britain, the U.S., Japan Germany, France, Korea and now China all developed through explicitly mercantilist policies. The laissez-faire types simply don't know anything about economic history. Read a book.

Now I am not arguing that we should just write GM a check or give it another tax cut. Given the incentives of the global economy, they would still be shipping jobs overseas. What we do need to do is take the "race to the bottom" problem MUCH more seriously by establishing a set of international agreements on labor and wage policy (Robert Reich has recently come out in favor of this strategy in the American Prospect). And we need to use government policy to leverage the creation of NEW companies rather than just rewarding old ones. Creating a "favorable business environment" does not mean open borders, low taxes and no regulation. If it did, why is it that no new major industrial enterprises have been created in the last generation? Why is it that all of our entrepreneurs have been in the service economy? And why is Mississippi the nation's poorest state?

America no longer makes much. We have effectively de-industrialized, which is why our currency depreciation has not shrunk the trade deficit. In this sense we are in exactly the same position we were in two centuries ago when we were trying to industrialize in the first place. Alexander Hamilton recognized that it would take affirmative government action to create the conditions for industrialization and economic development. He didn't wait for some magic "free hand" to do the task for him - he rolled up his sleeves and made it happen. It's time we learned from his example.