Sunday, May 21, 2006

Industrial Policy

Welcome to Charge: the future of energy


Way back when at the end of the nineteen eighties when the first George Bush was mounting his successful campaign for President, the big thing with the so-called New Democrats of that period was industrial policy. You remember, Paul Tsongas, Gary Hart, Donna Rice…well, maybe not Donna Rice, but the other two…. These were guys who were gonna revitalize the party, and industrial policy was a part of their platform.

So what was it? One could assume that it could be almost anything having to do with guiding the industrial sector, but in the minds of the New Democrats it was actually something fairly specific. It was emulating the Japanese, specifically the Japanese organization known as MITI that imposed overarching directives on the Japanese manufacturing sector, pushing it to enter into certain new industries or to emphasize certain of those that had already been penetrated. MITI, so the thinking went at the time, had enabled the Japanese to target certain industries where the U.S. had formerly been dominant such as automobiles, consumer electronics, and steel production, and subsequently to mount powerful challenges that would either displace the American incumbents or rob them of significant market share.

The idea was that we had to learn from the Japanese, and that Big Government which Democrats were supposed to love so dearly was going to shift from dispersing welfare and cracking down on safety violations and become an active partner with business in boosting industrial capacity in key areas.

Industrial policy caught a lot of Republicans flat footed. Japanese firms were the models in American business schools at the time and undeniably they were kicking ass in the markets they had chosen to enter. But most conservatives simply didn’t cotton to the idea of the government “picking winners”, to reprise the argot of the time. They were frankly confused, and they decided that the whole thing was best ignored.

Well, anyway, it turned out that industrial policy didn’t get much exposure in the ensuing campaign when Michael Dukakis clinched the Democratic nomination after the erstwhile leader Gary Hart got a lap dance from Donna Rice on the deck of the good ship Monkey Business. (Ms. Rice has enjoyed a subsequent career as spokesperson for the religious right whom one suspects might have actually hired her to perform that long ago lap dance.) Hart was the real industrial policy booster in the party just as Jack Kemp was associated with flat tax on the other side of the aisle, and, with Hart out of action, industrial policy was effectively off the table. Dukakis didn’t so much as mention it, in fact he didn’t say much of anything that was memorable and spent most of the time attempting to remove the slime with which Lee Atwater was pelting him. He lost, and George H.W. Bush, who had no interest in industrial policy whatsoever, went on to attempt to sell the American public on “the thousand points of light” which sounds like something terribly Zen and never seems to have been clearly defined by anyone.

Wild Bill Clinton who succeeded Bush Pere was supposedly ideologically similar to Tsongas, Hart, and certainly to Donna Rice, but we don’t recall him saying squat about industrial policy, and Al Gore was mum as well. It was one of those notions like community based policing that briefly make for animated conversation at wonk taverns but don’t hold anyone’s attention for more than a few months.

So why bring it up now?

Because we need to start thinking about it again in the context of energy.

Here’s the problem. At some point the world has to transition to sustainable energy sources. Unfortunately, we can’t expect energy markets to function the way they did when previous energy sources came to the fore, and the industrial policies of the past aren’t likely to work to support such a transition.

So we had industrial policies in the past? How could that be when the Japanese came up with idea only a few decades ago?

It turns out that the Japanese did not invent industrial policy, though what they did with it was unique. Japanese industrial policy was and is tied to developing export markets for Japanese good and adding capacity to the Japanese industrial sector to support those markets. American industrial policy, and we always had one, was much more concerned with domestic markets and with effecting fundamental changes in American life through core technological transformations.

American government-sanctioned industrial policy favored the construction of the railroads and the dissemination of motorized transport. Federally insured bonds financed the great railroad expansion following the Civil War, and Federal land grants to the Western railroads of one mile of land on each side of the tracks was a sheer giveaway.

We find further industrial policy in regard to energy emerging in the twentieth century, this time involving both the Federal and local government and massive industrial and financial combinations. Three examples come readily to mind.

When the electrical utilities were building out at the end of the nineteenth century and the beginning of the twentieth, many were financed by the banking trust headed by the House of Morgan which controlled, directly or indirectly, most of the investment capital in the country—private industrial policy, as it were. Furthermore, local governments began to grant monopoly status to electrical utilities in return for token rate regulation on the grounds that they were “natural monopolies”.

The automobile industry and the oil industry that powered it grew as a direct result of government subsidies. Government built almost all the roads over which automobiles traveled and granted oil producers depletion allowances that relieved them, for the most part, from the burden of paying taxes like the rest of us. It all culminated in the Interstate Highway System of the nineteen fifties when the Feds began taxing gasoline and using the revenues to build superhighways.

So now it’s fifty years on, and we’ve got an energy crisis on our hands which, rest assured, is going to get worse. What can the government do apart from drilling in the Alaska Wildlife Preserve or invading Iran? What is the place of industrial policy at this particular juncture?

The usual palliatives being mentioned in the press, don’t, unfortunately, represent very fresh thinking.

A lot of people are all for saddling the auto manufacturers with stringent regulations in order to compel them to boost fuel efficiency. Further funding of hydrogen fuel cell research at the National Laboratories is also being advocated, said research, presumably, being shared with the auto makers who will pass on the benefits to the public.

Tax breaks for renewable energy also get a lot of support as do further subsidies for the coal industry. Finally, higher gasoline taxes have their supporters, including, most surprisingly, Grover Norquist, the right wing gray eminence who never met a tax he didn’t detest.

So let’s cast a critical eye on all of this conventional wisdom and try to determine if it’s wise at all, that is, if represents appropriate industrial policy.

Cajoling the auto industry into become creative with a lot of burdensome regulations strikes us as fairly absurd—kind of like Singapore dictator Lee Kew’s efforts to coerce his cowed subjects into becoming innovators. As one inventor of our acquaintance told us, the kind of young, rebellious engineers that actually innovate don’t tend to take jobs at General Motors, and, absent such individuals, the organization’s ability to innovate simply isn’t that great. Sure what’s left of the U.S. auto industry can eke out a few more miles per gallon out of existing designs, but they’re not inclined to do anything radical. What they’re more likely to do is lobby Congress to back off, something they’re very, very good at.

We don’t see the official efforts of the National Labs stimulating any revolutions either. We think they do great work, but unlike, say Bell Labs or Xerox PARC, which wrought revolutions in communications, computing, home entertainment, and business machines, the Labs aren’t really oriented toward product development.

The problem here as we see it is a refusal to grapple with the implications of a major technological transformation. Everyone expects that somehow we’re going to change over to this clean, green economy where everything works pretty much like it does now except there’s no smoke and no anxiety attacks at pump. All we’ve got to do is just get over our “addiction” to foreign oil.

This whole discussion we’re having about energy today is so wanting in intellectual clarity and rigor that it is hard to know where to begin in dispelling some of the misconceptions, but we have to try simply because the exercise is so vitally important.

First, we need to stop talking about oil addiction. The implication here is that some kind of sinful self indulgence got us where we are and a little self discipline can set things right. Oil and the mass affluence of late twentieth century America were closely conjoined. The whole of our industrial civilization was built upon it. Absent cheap oil America would not have enjoyed its age of affluence and plentiful material comforts. Only the few would have experienced abundance. What everyone is calling addition was more in the nature of nourishment.

We need to continue to use petroleum because our world is literally built of petrochemicals. What we do need to do is stop burning petroleum. It’s way too valuable to burn. In fact petroleum is the most useful substance in the world. It’s God’s gift and to burn it for energy is a sacrilege.

So just substitute biodiesel or ethanol and set up a bunch of subsidies to speed that along? It’s not so easy unfortunately.

When one goes about substituting for materials or artifacts that serve as the foundation of an entire technological edifice that edifice is apt to change fundamentally or to come tumbling down to be replaced by something else. We know this from past technological transformations.

The only reason we started using fossil fuel in the first place was because we began to run out of wood. England in the thirteenth century was already cutting down most of its forests and firewood was becoming constrained while coal was still readily obtainable from surface outcroppings. Nobody really liked coal—it smelled bad, gave off choking smoke, and cast soot over everything—but what were you going to do, freeze to death?

Coat turned out to be not a very direct substitute for wood as a fuel. It polluted like hell but at the same time it burned much more fiercely. When steam engines came into use in the eighteenth century coal’s hot flame was greatly appreciated. It facilitated the mechanization of industry in a way that wood never could have.

No one could have built a large scale industrial civilization with wood fuel. It took coal. Coal changed everything. And going from petroleum to renewable fuels is likely to change everything as well. But not in the same ways.

What we need to do here in setting a halfway intelligent industrial policy is consider the fact that renewable fuels will not be straight substitutes for petroleum and will not permit the continuation of our current mode of existence. We need to plan way beyond reducing dependence on foreign oil and looking for substitutes because there are no real substitutes. A world with less oil will be a very different world, one that is apt to be very hostile toward our existing transportation and electrical industries.

Industrial policies based on the notion of propping up existing industries and jawboning them into changing are not going to work, at least not in our society. Owners of coal fired electrical generation facilities are not going eliminate carbon emissions, they’re going to back Republican administrations that favor “voluntary emission curbs”. Automobile manufacturers are not going to scrap their production facilities and build hydrogen fuel cell cars. There is no such thing as a smoothly orchestrated technological revolution where the incumbents are in fact revolutionaries. Or as one management consultant put it, “bottlenecks are always at the top of the bottle, they always involve existing top management.”

So what does the government do, do nothing? Trot out some red herring issue like building electrified fences across from Tiajuana, or prayer in the schools, or gay marriage?

Or, to put it another way, what would we say to some well intentioned politician, if such exists, who asked us how to craft policies that will really make a difference?

That, gentle reader, is the subject of the next post.


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George said...

Great paper as always, Dan. I disagree with you on one large-ish point: I am not convinced we need a revolution so much as an evolution into more sophisticated technology. Hybrids are already here, so are they a revolution? If so, it's already happened. From there, a PHEV with a nice Li-ion battery seems like an evolution. Now you have a nuclear powered car. (or wind, or coal...) I don't see why the American automakers could not pull this off. I think they still have a few competent engineers.