INDUSTRIAL POLICY WITHOUT SUBSIDIES

It's More Powerful Than Handouts

President Biden’s moves to put government support behind strengthening the U.S. semiconductor, semiconductor equipment, electric auto, and a few other key industries have triggered a return of the old debate about the efficacy, or lack thereof, of industrial policy.

To the Anglo-American economics establishment, industrial policy is anathema. It is seen as an exercise in which largely unknowledgeable bureaucrats pick “winners and losers” among businesses and industries by subsidizing and protecting some while ignoring others with the result that those who are subsidized frequently fail while those left to their own devices often succeed. Moreover, those picked to be winners are seen as being chosen largely because they donate to the right politicians rather than because they actually operate winning businesses.

That development of the Internet, the aviation and space industry, the telecommunications industry and many others belies this stereotype has not yet succeeded in obviating it. Yet, industrial policy consists of much more than financial incentives as the present negotiation between the United Auto Workers union and the three major U.S. producers (GM, Ford, and Chrysler/Stellantis) demonstrates.

Let me put this in a personal context to better illustrate the point. I am presently in the market for a new auto, and I am looking for a car made in America, or, at least largely made in America. Tesla is pretty much one hundred percent made in the U.S., but if I don’t want to go electric, my best choice is Honda. Of the top 15 autos with the most American content, Honda takes nine slots with Volkswagen and Toyota taking one a piece. Tesla, of course, takes the top four slots. In short, the traditional American auto makers, GM, Ford, Chrysler, are not even close to being in the game.

For a while I was very interested in the new Ford Mustang which is a very nice EV. Then I found an important drawback. The car is assembled in Mexico. From an American content perspective, I would be better off buying a new Honda or Acura than going with Ford, or with GM or Chrysler.

How is it that even in their own country, the home grown U.S. auto makers can’t make vehicles with as much U.S. content as the Japanese and Germans? A big piece of the answer lies with the auto labor unions - or their absence.

In America, labor-management relations are strongly adversarial. The unions see management and owners as enemies trying to cheat, underpay, and hold them down. While the companies are not allowed to gain monopolistic market share, the unions do have a monopoly of labor, at least in the traditional U.S. auto companies. This means that the U.S. Auto Workers (UAW) control all of the labor employed by GM, Ford, and Chrysler, and that the union can choose to go on strike against all of the makers or only against one of them depending on how they see the best potential for gaining wage and benefit increases. Typically, the UAW targets the weakest company (often Stellantis (Chrysler) as a strike target. The logic is that because the company is less profitable and less rich than the other two, it is least able to bear a strike and therefore most likely to sign quickly for a new contract with many concessions to worker demands.

In this context, workers tend to identify more with the UAW than with the company that employs them. Effectively, in the United States, labor is sometimes at war with the well being of the company/companies that employ it and perhaps also in a way with the policies of the national government.

This is not the case in Germany, Japan, or South Korea. In Germany, the auto union is powerful. It has seats on the boards of some auto makers and has organized pretty much every step of the production process. But, wage negotiations are conducted on an industry wide basis. That is to say that all the auto makers, along with the union, and also with representatives from the federal government sit down together to negotiate wages and benefits industry wide. In this way, the interests of all concerned are discussed and included in the final labor agreement.

In Japan, each company has its own union which includes high ranking executives of the company. The companies in turn are in close communication with and under oversight by the key government ministries with regard to labor and global competitiveness issues. Again, the relationship is not adversarial. The focus is on what is best for the overall, long term welfare of the workers, the company and the country. A great deal of flexibility is available to respond to unexpected developments.

The U.S. system has long proven uncompetitive with the result that the traditional U.S. auto makers now hold a combined share of the U.S. market of less than fifty percent and even the autos they sell are increasingly made in Mexico or China. Honda is actually more an American auto maker than are Ford, Stellantis (Chrysler), and GM.

Maybe it is time for America to join Germany, Japan, South Korea, and China in embracing a broader understanding of industrial policy beyond the simplistic notion of the government subsidizing what it hopes will be winners. Thinking about how to make U.S. auto workers and auto makers into teams aimed at making cars in America rather than in Mexico and China would be an excellent first step.