TIME: Almanac 1993/TIME Almanac 1993.iso/time/122391/1223200.000

Text File | 1992-08-28 | 9.3 KB | 192 lines

                                                                                BUSINESS, Page 54

THE ECONOMY

Now This Idea Is -- Shh! -- O.K.


Pinned down by the economy, Bush embraces a once shunned notion
-- "industrial policy" -- to stem the nation's shrinking
technological edge

By MICHAEL DUFFY/WASHINGTON


    In Ronald Reagan's White House, there was no greater sin
than to suggest that America could improve its competitiveness
by stoking private industry with federal money. Reagan's
free-market economists launched search-and-destroy missions
whenever such "industrial policy" proposals were floated in
Washington. Never mind that many strategic industries in Japan
and Europe, boosted at crucial moments by government support,
were winning market share from their American counterparts.
Reagan's opposition to industrial policy was so fierce that the
expression itself had become politically incorrect by the
decade's end. During the 1988 campaign, George Bush derided such
policy as a foolish "Democratic" approach that usually resulted
in wasted taxpayer money, commercial failure or both.

    Today Bush and his aides are singing a much different
carol. Industrial-policy initiatives that were being moved
almost stealthily through the federal bureaucracy have suddenly
been brought front and center, with Bush himself acting as
emcee. Last week the President signed the High Performance
Computing Act of 1991, which authorizes eight federal agencies
to spend $638 million to develop hardware and software for a
teraflop computer capable of performing 1 trillion computations
a second. The same day, Energy Secretary James Watkins announced
that the government's 726 national laboratories -- facilities
that spend more than $20 billion annually, mostly on weapons
research -- will now be available for joint research projects
with private businesses. "U.S. taxpayers made a heavy investment
in defense R. and D. during the cold war period," said Watkins.
"Now it is time to start paying them economic as well as
strategic dividends."

    Still defensive about any departure from Reaganite
thinking, Bush and his aides deny that the government is
meddling in the marketplace. Explained departing White House
chief of staff John Sununu: "I don't know what to call it. But
there are ways of getting federal support into systems in an
efficient way in which financial and technological
competitiveness are not stifled." Another Administration
official was more direct: "Don't call it `industrial policy,'
" he pleaded. ``Call it `George Bush's Incredibly
Forward-Looking Applied Research-and-Development Initiatives.'
"

    Or just call it pragmatic. As the economy sputters and
fears grow that U.S. technological prowess is fading, the
President and his advisers seem to have undergone an overnight
conversion that was actually about a year in the making. The
shift has an unmistakable back-to-the-future quality about it.
During Bush's first two years in office, his aides sheltered the
free-market flame by batting away several internal proposals to
put federal money on the line for emerging technologies. Several
senior officials who tried to steer federal help to strategic
American industries were quietly relieved of their duties (most
notably, former Pentagon technologist Craig Fields). Led by the
free-trade triumvirate of Sununu, chief economic adviser Michael
Boskin and Budget Director Richard Darman, the White House
argued that market forces, rather than government, could best
determine which technologies made it from the lab to the
shopping mall.

    What led to the change of heart was the speed with which
some of America's most vaunted industries -- computers,
semiconductors and commercial aircraft -- have lost domestic and
worldwide market share to Japanese and European rivals.
America's technological edge -- its insurance policy against
economic decline -- has been narrowing. Flush with cash, Japan
has outspent the U.S. on investment and research, devoting
nearly 3% of economic spending to nondefense research, while
American R. and D. spending remained under 2%. Four Japanese
companies -- Hitachi, Toshiba, Canon and Fuji -- each captured
more American patents in 1989 than any single U.S. firm.
Predicts William Archey, senior vice president for policy at the
U.S. Chamber of Commerce: "We haven't even begun to see the
products of that investment."

    In the fiscal-1992 budget he submitted last February, Bush
boosted spending for basic research 13%, but most federal R. and
D. dollars still go into weapons development, which yields few
mass-market spin-offs. In the past year, the warnings about that
imbalance have grown starker. As the Office of Technology
Assessment stated in a blunt report in October, "If there are no
major changes in government policies of developed nations, we
expect U.S. manufacturing competitiveness to continue to sink,
compared with Japan."

    Nor is Japan the only contender. Last month McDonnell
Douglas agreed to sell 40% of its commercial-jet manufacturing
operations to a company owned partly by the government of
Taiwan. In doing so, McDonnell Douglas cited competition from
Airbus, the subsidized European aircraft consortium. Once it's
rolling, the deal could cloud one of the few bright spots in
America's economic picture: the $16 billion trade surplus in
commercial aircraft. "It's a classic example of what's wrong,"
said New Mexico's Democratic Senator Jeff Bingaman. "Much of the
technology that McDonnell Douglas is selling was developed with
American taxpayer dollars. Our government won't support the
company, so it has to look to the government of Taiwan."

    Bingaman and others on Capitol Hill have urged the White
House to identify critical technologies and invest prudently in
each one. The problem for the Administration has been how to
change tack without appearing to double back on the Reaganaut
course. After repeated nudges from his friends in business, Bush
groped his way toward a middle-ground policy in which the
government would join with private industry to help
"precompetitive, generic technology." By restricting federal
financing to investment in broad technologies in the early
stages of development, rather than products ready for commercial
exploitation, the White House insists that it can refrain from
"picking winners and losers" among specific companies.

    At a largely unnoticed South Lawn ceremony in October,
Bush quietly welcomed industrial policy back to the White
House. Flanked by representatives from Detroit's Big Three
automakers, the nation's electrical utilities and officials from
the Energy Department, Bush signed an agreement committing the
government to a three-year, $260 million collaborative search
for a small, lightweight battery to power electric cars. Calling
the consortium "an idea whose time has come," Bush added,
"Electric vehicles represent the next technology milestone in
the auto industry, and we intend to beat our competitors to that
milestone."

    America's automakers realized last year that none of the
Big Three had the resources to invent on its own the car
battery of the future, explains John Wallace, director of
electric vehicles for Ford. But each company had at least one
poorly funded battery research project under way, which, if
linked with the others, could be coordinated to eliminate
overlap and speed a breakthrough. So Ford, GM and Chrysler
joined forces and asked the government to match their efforts
dollar for dollar. "We agreed to cooperate on batteries," added
Wallace, "but compete on vehicles."

    Some industrial leaders are underwhelmed by the
Administration's helping hand. "It is so little, so wimpy,"
complains Andrew Grove, president of the semiconductor giant
Intel. The Hudson Institute, a conservative think tank, proposes
that Washington create a new federal science-and-technology
agency that would coordinate the government's widely scattered
$76 billion annual investment in R. and D. and make industry a
partner at every level. "What we have now," says Hudson fellow
Robert Costello, a former Pentagon official, "is a flea going
up against an elephant, but the flea is growing."

    Yet, as the economy staggers, Bush can be expected to move
increasingly in Costello's direction. Next month the President
will decide whether to double funds for the Commerce
Department's advanced technology office, which dispenses grants
to companies for promising technological breakthroughs.
Meanwhile, Administration officials are examining the
possibility of reinstating the Investment Tax Credit, killed in
1986, to boost private investment in research as well as new
plant and equipment. "I want to emphasize," said Energy chief
Watkins, "that this concept of a new partnership between
government and industry is not about government attempting to
substitute its judgment for that of experienced businessmen and
free markets. It is about U.S. economic growth."

    It's also about politics. Funding for basic research won't
provide any quick fixes for the current recession. But at a time
when Bush will have difficulty administering short-term
economic remedies, notably any major tax cuts or spending
increases, the President has good reason to be a visible
advocate of any policy that improves the prospects for
American's long-term economic future.