What's Wrong with Industrial Policy?

My friend Jon Shayne sent me a link to a Jon Stewart piece on the $500m loan to Solyndra, found on Greg Mankiw's blog under the heading "The Problem With Industrial Policy."  It does seem that the Solyndra loan was scandalous: analysts had warned the company's business model was fundamentally flawed and a key Solyndra advisor was a big Obama fundraiser and had several high level White House meetings before the loan went through.

But is this an indictment of industrial policy as a whole?  Conventional wisdom holds that "industrial policy" is politically toxic in the U.S.  Yet, in just the last couple of weeks a series of articles have come out in The Economist, Forbes, and the New York Times that suggest we should rethink our laissez faire stance on government intervention in the market.

Of course, we have long recognized that Japan and South Korea and China have effectively used industrial policy to enter and frequently come to dominate particular markets.  But the sense has been that what works in Asia won't work here.

The Economist's recent article "Workers and (Business) Unite!", for example, argues that there is a lot to be said for the Obama proposals for an infrastructure bank and job training programs.  To quote: "this may look like meddling, and close to tacit industrial policy, but it is practical."  And The Economist does not make such pronouncements lightly.
Jon Gertner in the NY Times Magazine points out that the new economy actually does not employ many folks: a couple of thousand at Facebook, 30,000 at Google.  But old-school manufacturers work on whole other magnitude: GM directly employs 200,000 and probably several times that with suppliers and related businesses

So why is "industrial policy" so politically toxic?  It need not imply a command-and-control market, but following and helping the market in areas that are in our national interests.  Indeed the strongest case is just that: national interest.  Is it in our national interests that so much of our computer technology and memory is made abroad?

Gertner writes about large-scale lithium-ion battery manufacturers starting up in the U.S.  This is technology developed at MIT and the Univ of Texas but used primarily by manufacturers in China and Korea.  It is great that we are the source of the intellectual property and scientific discoveries, but this doesn't help combat widespread employment.  Even with our advanced knowledge economy, only a small fraction of our 300m citizens will work in MIT labs.  Widespread jobs requires a different approach.

Stephen Denning, writing in Forbes, spells out "Why Amazon Can't Make the Kindle in America."  As it turns out we just down have the capacity to build the high-tech displays or underlying semiconductors or even the lithium ion batteries required.  Denning cites an influential Harvard Business Review article by Gary Pisano and Willy Shih who argue that actually manufacturing is fundamentally tied to innovation and that "an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate."