The United States' Industrial Policy

When people use the term "industrial policy," they usually mean an economic strategy in which the government identifies certain industries that it thinks are "winners" and then supports those industries with preferential regulation and legislation. For example, in Japan, the government promoted the auto and electronics industries.

The majority of economists, at least in the West, take a dim view of this kind of policy. Our freewheeling system of "creative destruction," they say, is superior because it allows outmoded industries to shrink and new ones to grow; witness how America's electronics industry died in the face of East Asian competition, only to be replaced by the higher-value-added computer and software industries. Meanwhile, the East Asians were stuck with the middle-value industries that their governments had picked as winners. No government, economists tell us, can be as smart as the swarm intelligence of The Market.

But it turns out that, all along, our government was engaging in classic industrial policy. The industry we picked as a winner was finance; the laws and regulations we used to support it were many and ingenious. They included allowing banks to maintain off-balance-sheet "conduits" where risky assets were kept; allowing hedge funds to operate in total secrecy; lower tax rates for financiers' pay; government sanction for ratings agencies that systematically concealed risk; implicit government guarantees that backed the risky assets of finance companies; and more.

That finance was our coddled "national champion" is evident in the assertions of major U.S. bankers that their companies should not be nationalized, but should be supported with massive no-strings-attached injections of government money. In other words, the unique "innovation" generated by the finance industry is supposedly still worth betting our economy on.

Sudhir Venkatesh, who studies ghetto economies, writes that drug gangs understands this weakness of industrial policy:

Sudhir Venkatesh, who sat down with actual criminals to watch a season of the critically acclaimed crime drama the Wire, conveys their thoughts to Tim Geithner:

The unanimous opinion among The Thugz was that you must base your work around a time-tested law of ghetto capitalism: losers must die in full view. What? This doesn’t make sense. O.K., well, let me explain. Your first mistake (more accurately, your predecessor’s error) was to mix the bad apples (banks) with the good (banks). By doing so, you forgot what makes capitalism so much fun: winners win at the losers’ expense, and everyone gets to watch and laugh. Sort of like public hangings, except reported on the financial pages. Otherwise, why read The Wall Street Journal?

Paul Volcker, our legenday central banker, writes that "innovation" in the financial industry was worthless crap:

And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.

He scoffed at the notion that those entities must be free to innovate _ stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.

Perhaps our government's one-way bet on finance was why finance industry workers have been massively overpaid relative to workers in other industries.

Perhaps it was why financial sector profits ballooned from 10% to 40% of American corporate profits.

Perhaps it explains the smooth, calm arrogance of American finance exeutives, who even now lavish themselves with massive bonuses and perks while their companies are plummeting in flames.

Our electronics industries were allowed to fail. Our steel industry was allowed to fail. Our auto industry was allowed to fail. But our finance industry, win or lose was backed by the full faith and credit and slimeball patronage of the United States government. We picked finance, and we picked a turkey.