INDUSTRIAL POLICY - Northeastern University
Download
Report
Transcript INDUSTRIAL POLICY - Northeastern University
HARD VS. SOFT INDUSTRIAL POLICY:
When and How the Government Should
Intervene in Markets
JOHN KWOKA
FINNEGAN PROFESSOR OF
ECONOMICS
NORTHEASTERN UNIVERSITY
19 SEPTEMBER 2012
Stockholm, 1974
Implications and Applications
Privatization and deregulation
Less aggressive antitrust policy
Weaker public support for infrastructure, R&D
Reliance on markets and competition
Uncritical embrace of free trade
Opposition to industrial policy
Long History of Antitrust and Regulation
Antitrust and regulation are responses to the difference
between “free markets” and “competitive markets”
Competitive markets are very good at responding to consumers,
harnessing entrepreneurial activity
Markets that are not competitive—even if apparently “free”--cannot
make same claim
Most markets work reasonably well, even if not perfectly
competitive, and do not require government intervention
Under some circumstances, more is necessary
Antitrust sets rules of game: prohibits cartels, big mergers, various
anticompetitive practices
Regulation supervises utilities and other industries that cannot be
competitive due to scale economies
Both policies date back to 1800s in US
Antitrust as Preventive Industrial Policy
Many troubled industries are complacent oligopolies
Weak competition breeds inattention to products, costs, technology
Leaves them vulnerable to outside forces such as imports
Autos, steel, others
Stronger competition can improve performance, help
sector protect itself
Antitrust actions sometimes can help
Breakup of AT&T, Standard Oil
Prohibit efforts by dominant firms to prevent entry, like Microsoft
Antitrust policy has fairly broad political support, in principle
More controversial in practice
Less support for its use in reforming industries
Long History of Direct Industry Involvement
US has long provided support to private sector, especially
infrastructure
Support for roads, canals, railroads in 19th century
Local public utilities (water, power) at turn of century
Massive public works of 1930s
“National Defense Highway Program” of 1950s
R&D at national labs and universities
US has also intervened to defend and rescue companies
and sectors
Lockheed in 1970s
S&Ls in 1980s
Airlines after 9-11
Auto industry in 1979, 1982, 2008-9
Detroit, 1979
Chrysler reports $1.1B loss, in danger of collapse
Problems mostly of own making: products, costs, technology,
management
Similar problems for GM, Ford: “Big 3”
Policymakers concerned with spillovers from collapse
CBO estimated job losses of 360,000
Effects on suppliers, communities, etc.
Others argued Chrysler should be allowed to fail
Should bear brunt of own mistakes
Avoid “insuring” bad management against bad outcomes
Market will shift resources to those better able to manage
To Bail or Not To Bail
No-bailout is a sound economic prescription, under
certain specific conditions
Labor markets can absorb released workers into jobs utilizing
skills and preserving human capital
Physical capital can be put to other good uses reasonably
quickly
Input or output connections limited: modest spillovers
Possible to reorganize with alternative management, financing
If conditions do not hold, may be case for assistance
Important issues of nature, timing, duration
Competition Policy
Auto industry had already attracted scrutiny
Justice Dept. and FTC both conducted antitrust inquiries into
competition problems in 1970-80s
Focused on GM’s dominance, various pricing practices in
industry, cost issues, lack of innovation, exclusive dealers, etc.
Intent was to see if antitrust could help revitalize industry, for
benefit of both consumers and companies themselves
Efforts did not succeed
Antitrust weak policy tool in some circumstances
Issues superseded by Chrysler anyway
Chrysler Bailout
Congress passed Loan Guaranty Act in Dec. 1979
Chrysler got $1.5B in loan guarantees
Had to get some concessions from stakeholders
But no requirement to revamp operations, products
No replacement of management
Chrysler emerged intact, but bailout essentially
gave company money without remedial actions
Problem of moral hazard: failure to penalize certain bad
behavior encourages more of it
Made it more likely Detroit would return to Washington
Detroit, 1982
Japanese car imports doubled from 1976 to 1980
Big 3 production fell from 8.4M to 5.1M
Employment declined from 930,000 to 780,000
Big 3 asked for help from Washington, claiming need for
“breathing room” to respond to import challenge
Reagan administration imposed quotas on imports in 1981
Not a direct subsidy, but allowed Big 3 to raise prices
Prices rose, and US companies pocketed money
Hope they would use time and money to improve products,
operations, management proved vain
These experiences give intervention bad reputation
They are poor public policy
Detroit, 2008-9
“Big 3” sales and production already in long decline
Sales truly collapsed during financial crisis
Huge financial losses to all three US companies
Likelihood that companies would collapse, with spillovers to
suppliers, dealers, communities
Some argued market should be allowed to work
Same arguments as in 1979 against bailout
“If General Motors, Ford, and Chrysler get the bailout that their
chief executives asked for yesterday, you can kiss the American
automotive industry goodbye…The automakers will stay the
course—the suicidal course of declining market shares,
insurmountable labor and retiree burdens, technological atrophy,
product inferiority and never-ending job losses.”
“Detroit will need to drastically restructure itself:
New labor agreements to align pay and benefits with
competitors…
Management as is must go. New faces should be recruited
from unrelated industries…
Sanity in salaries and perks…Get rid of the planes, the
executive dining rooms…
Investments must be made for future...truly competitive
products and innovative technologies--especially fuel-saving
designs…
Do not give shareholders and bondholders a free pass. They
bet on management and they lost.”
Others argued for government intervention
Loss of jobs in weak economy
CEA estimated 1.1M jobs would be lost
Loss of competition at supplier level
Loss of human capital (skilled workers)
Loss of physical capital (factories, infrastructure)
Financial losses: local taxes, pensions, unemployment
insurance
Some had more nuanced view
“Sometimes circumstances get in the way of philosophy. […]
do it again”
Bush and Obama
Bush provided interim financing to GM, Chrysler
Obama (2009) provided longer-term financing, but
with conditions
Some conditions familiar:
Had to obtain concessions from workers, suppliers, etc.
Other conditions were fundamentally different:
Chrysler forced to find partner
GM required to restructure operations, drop brands
Both had to close plants, alter products, reduce dealer network
Both CEOs were fired, Board members replaced
And both Chrysler and GM forced into “managed bankruptcy”
“Hard Bailout”
No blank checks
Do not simply give out money and hope for best
Rather, transform structure and personnel
Be sure to change operations and incentives
Deal with moral hazard (future reckless behavior)
Separate rescue of company from rescue of people responsible for
problems
Remove CEO, managers, directors; ensure no golden parachutes;
institute legal proceedings if actions criminal
Next set of executives will know they personally will not benefit from
or survive any future crisis of company, and hence deterred
This is good industrial policy
Detroit, 2012
GM sales up by 4 percent year-over year
Ford by 6 percent, Chrysler by 20+ percent
Companies reopening plants, investing in facilities,
resuming hiring
GM building new $500M assembly plant in Hamtramck
Auto manufacturing employment up 63,000 since last August
All three companies profitable
Chrysler has paid off loan, GM about half paid off
Should not exaggerate this, but industry has
stabilized and is recovering
Principles of Government Involvement
Limit involvement to companies with three properties
Systemic effects, i.e., interconnectedness
Widespread and substantial spillovers to other sectors
Real effects on upstream suppliers, downstream producers
Lack of reasonable alternatives for labor and capital resources
Implies risk of long-term diminished prospects, loss of value
Lack of plausible private alternatives
Take full control, transform companies
Never simply grant dollars
Must change operations and incentives
Hold individuals personally responsible
Penalize, change expectations, and deter
Get out ASAP
Avoid involvement that confuses govt. vs. firm responsibility
Wall Street, 2009
Financial crisis left many banks, insurers, mortgage
companies in precarious financial condition
Problems had multiple causes, many of own making
Took imprudent risks
Invented assets of uncertain value
Ignored internal and external warning signs
Lobbied for and secured deregulation
Did firms nonetheless meet criteria for government
assistance?
Most analysts would likely say “yes”
Ran the experiment of not doing so, with Lehman Bros.
Bailout of banks, financial institutions cost $300B
It worked in sense that banks survived
Government had ownership stakes in institutions
Opportunity for same kind of fundamental reforms as in autos
But little effort to change institutions or people
No breakup of banks…now larger than before
No systematic removal of bad actors
No replacement of CEOs or boards
Little holding of companies responsible
Scant efforts to prosecute companies or individuals
Compounded by inadequate regulatory reform
Glass-Steagall separation not restored
Countless provisions of Dodd-Frank being compromised
“Soft Bailout” for Banks
One corrosive result is sense of unfairness
Banks got relief without responsibility
“Banks got bailed out, we got sold out”
Bailout supposed to be accompanied by aid to homeowners
That part of plan got sidetracked, never to return
Second damaging effect is moral hazard
Financial institutions now have reason to believe government
will bail them out
Knowing that, they behave differently toward risk, reward
Creates exposure for taxpayers to future problems, failures
This is bad industrial policy
Why?
Why such a soft approach and so little pushback?
Relentless counterattack by institutions that benefit
Much greater power of financial sector than ever before
No longer “What’s good for GM is good for the country”
Crucial policy role for advocates of banks, financial institutions
Wall Street, Goldman Sachs proteges dominate government
Absence of same tough analytical approach that was used for auto
industry
Conclusions
Industrial policies of antitrust and regulation are
useful tools
Government actions to promote, defend, rescue
certain companies can be useful tools
Entirely possible to conduct these policies with
limiting principles, minimizing adverse effects
Failure to adhere to these principles can also do
great damage
Shifts risk from private actors to public
Creates enormous private power with implicit but very real
claim on future public resources
Some Readings
Clyde Prestowitz, The Betrayal of American
Prosperity (2010)
Neil Barofsky, Bailout (2012)
Josh Lerner, Boulevard of Broken Dreams (2009)
John Kwoka, “The U.S. Auto Industry Under Duress”
Competition Policy International (2009)