Saturday, July 03, 2010

Andy Grove comes out in favor of industrial policy

Andy Grove, the famous Intel boss who built the company into the world's leading semiconductor manufacturer, has come out in favor of old-fashioned industrial policy. His arguments are twofold: 1) that industrial policy creates more middle-class jobs than our current approach, and 2) that industrial policy creates "network effects" among industries that give advantages tomorrow's technology startups. Some excerpts from his article:

On job creation:
You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?

Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs.
On industrial network effects:
There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas.

Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny (figure-E).

That's a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up...

[In the U.S. there is] a general undervaluing of manufacturing—the idea that as long as "knowledge work" stays in the U.S., it doesn't matter what happens to factory jobs. It's not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry.

And on what to do about it:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

Now, in many intellectual circles in America it has come to be regarded as an article of faith that "protectionism" and "industrial policy" are the road to ruin (just as in Asia the exact opposite has become an article of faith). Just the other day, for example, a friend of mine - a very smart lawyer - suggested that Washington Post columnist Steven Pearlstein be "flayed" for arguing that only the threat of tariffs can get China to change its currency policy.

But after actually reading some trade theory and development theory at the highest academic level, I have to say that the only thing I'm more sure of is how little I ought to be sure of when it comes to this topic. Sure, trade in general is awesome. But to let the light of that basic truth blind us to the subtler questions of industrial policy, strategic trade interactions, etc. is as absurd as to let the fact that communism failed blind us to the efficiency of some kinds of government intervention in the economy.

The bottom line: I am not sure whether Andy Grove is right about industrial policy. But I am reasonably sure that no one else is sure whether he's right, especially the vast commentariat that shrieks "trade war" and "protectionism" whenever anybody suggests anything like what Grove is suggesting. And I am sure that Andy Grove, though old, is a very smart guy. And when very smart guys - like Grove, or like Paul Samuelson, the greatest economist of our age - start saying things that contradict our conventional wisdom, we should at the very least pay close attention.

Update: Yves Smith and Rajiv Sethi respond to Grove's article. Smith is broadly supportive. Sethi is skeptical, but, like me, recognize economists' fundamental ignorance in these sort of matters and are made uneasy by the possibility that Grove is onto something. Tyler Cowen, meanwhile, goes for an off-the-cuff defense of the conventional wisdom. Mark Thoma agrees with me and Sethi, and points out (correctly, in my opinion) that the social inequality case for industrial policy is stronger (so far) than the innovation-and-efficiency case.

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