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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


The Case for Intelligent Industrial Policy

Economic strategist Clyde Prestowitz argues for better support for manufacturing.

Starting with his role as an advisor to the secretary of commerce in the Reagan administration in the 1980s, and progressing to his current position as founder and president of the Economic Strategy Institute in Washington, D.C., Clyde Prestowitz has been a consistent voice on the importance of manufacturing in economic competitiveness. Although the title of his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era (Free Press, 2010), might seem alarmist to a global audience, Prestowitz’s perspective is nuanced and oriented toward fundamentals. He argues for sustained industrial policy at a national level: for marshaling the forces of business leaders, government officials, labor unions, and academics for the sake of building economic competitiveness and (especially) a strong and distinctive manufacturing base. He also argues that the global economy is more likely to thrive when more countries manage their economies this way, competing wholeheartedly even as they trade avidly.

Prestowitz focuses on manufacturing in the U.S.; its decline and revitalization have been a theme in his work since his first major book, Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It (Simon & Schuster, 1988). He sat down with strategy+business at the Manufacturing Executives Forum, which Booz & Company conducted in Chicago in May 2011.

S+B: How did you come to realize the significance of manufacturing to economic vitality?
I grew up in a manufacturing environment. My dad worked in the steel products industry, and I visited the original Bethlehem steel mill many times as a boy. The Bethlehem Steel Corporation started to consistently lose money in the early 1980s; it declared bankruptcy in 2001 and closed in 2003. The old steel mill was then replaced with a casino. The passage from steel mill to casino says a lot about the trajectory of the U.S. economy, and about the declining quality of life for the middle class when there is no manufacturing base.

Manufacturing, more than other activities, is critical to prosperity because it generates economies of scale. It also sparks innovation, wholly new products and industries. And it has great multiplier effects: Every factory needs accountants, sandwich shops, component suppliers, and other services. One dollar invested in manufacturing creates two dollars or more of income for ancillary industries. By contrast, a dollar invested in retail creates about 45 cents of additional income.

Finally, international trade overwhelmingly involves goods. When countries like the United States have trade deficits, they are primarily in manufactured goods. Those trade deficits take away jobs. If you want to get those jobs back, there’s only one way: You’ve got to support manufacturing.

I remember, back in the 1980s, debating about whether to subsidize the American aircraft industry against the European upstart Airbus. George Shultz [then secretary of state] said that the Europeans, by subsidizing Airbus, were only hurting themselves — taxing people to pour money down a corporate rathole. Even if he was right, he was ignoring the damage done to our aircraft industry in the U.S. — and the people employed by it, directly and indirectly. Any country that wants to survive needs to focus on the industries that it wants to keep, and support them wholeheartedly.

For the past 25 years, U.S. economic policy has been driven by consumer welfare, by trying to achieve the greatest variety of goods at the lowest prices, without any focus on producers. This combines with the notion that it doesn’t matter what we make, or how we make it, because globalization will even things out in the end. One top official once said to me, “Clyde, don’t worry. The Japanese will sell us cars, and we’ll sell them poetry.” But now we need jobs, and for that, we need manufacturing.

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