FLEA MARKET ECONOMICS

WHERE ARE THE INDUSTRIAL-STRENGTH SOLUTIONS TO AMERICA'S
ILLS?

I was talking to a former labor organizer, now pastry chef, over dinner. We
sampled the October surprise during appetizers, moved to robust discussion of
the S&L banking collapse during the entree, and by espresso had settled down to
musings about America's industrial policy.

"The country's out of control. Take education, training, long-term investment
in R and D and plant upgrades. We're doing none of that," he said, steamed.

Normally I would ignore opinions from so obvious an outsider, but I had been
wondering myself about the proper relationship between government and industry
that might succeed in fending off the Japanese and defending against the EC '92
initiative in Europe. I was intrigued. So I turned to some experts to find out
just what sort of industrial policy our leaders had planned.

The issue has become so sensitive, apparently, that my queries were stonewalled
throughout the Bush administration. Finally a source who preferred to remain
anonymous clued me in: "This administration does not traffic in industrial
policy. It does not pick winners and losers."

Fine. What about the $100 million per year that has gone since 1988 to the chip
manufacturing research consortium Sematechroughly half the organization's
budget? Doesn't that make an industrial policy? Sematech's goal isn't broad
basic research: It aims to develop a specific manufacturing technology for
.35-micron random access memory chips by 1993. Isn't that picking a winner? No,
I was told, that's a technology policy because it focuses on precompetitive or
generic technologies. Our policy encourages partnerships between government,
universities, and firms to develop technologies critical to the whole U.S.
economy-not specific products. "Unfortunately, the terms precompetitive and
generic are awfully fuzzy," says MIT's Richard K. Lester, executive director of
the Made in America Study. "It's really not clear that these words will have
much meaning in practice."

Consider the tale of Sematech and a now-defunct second consortium-one aimed at
going fullblown into the chip manufacturing business-U.S. Memories. Sanford Kane
was one of Sematech's founders and a former IBM VP for industry operations.
After successfully bringing together natural competitors, like IBM and AT&T, to
form Sematech, the next step was to create a private consortium to manufacture
semiconductors in the United States.

Kane went to Washington to argue his case in 1989, as U.S. Memories attempted to
raise start-up money. He wanted the President's support, not federal funds-just
a mention of U.S. Memories as one of those points of light. Kane says that he
was aware that high-level conversations took place in the White House (rumored
to have included John Sununu, among others). Nothing ever came of these
conversations. The President never backed U.S. Memories. It disappeared.
Along with it, quite possibly, went our best chance of remaining a major player
in the global semiconductor business. "These guys have the notion that the
worst thing they could do is to pick winners and losers," says Kane. "They don't
want to be involved in anything that reeks of industrial policy. Unfortunately,
having no industrial policy is still an industrial policy. It's just the worst
one."

Even the middle ground is a place that politicians fear to tread, according to
Robert Solow, MIT's Nobel laureate in economics. "A nonregulated market does
too much of some things, like polluting, or too little of others, like
training," he says, "and it's been hard to detect any will or idea on the part
of the administration to take action on such issues." Even Congress, he
observes, addresses such concerns only occasionally.

I'm not an economist, but I say it's time to take an even greater step. Forget
the industrial policy word games and face facts: The free market is all about
picking winners and losers, so any cooperative effort between government and
industry involves a gamble. Politicians, whose current approach to hedging bets
is to make none at all, should bite the bullet and, reconsider their aversion to
making choices on which technologies and products the nation should back.

You win by playing good odds, making enough bets, and managing your stake
intelligently. The goal is to win more than you lose, not to never lose or
always win. Our foreign competitors are packing the casino right now. Unless
we grab a seat at the table, we will end up losers for sure.