The New Economy

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government money. Since 1969 the U.S. has used a variety of methods to protect its industry from imports of inexpensive foreign steel. The result is a standoff that hurts both sides. Hooked on government funds, most European steel companies are weak, inefficient and a drain on their national treasuries. The U.S. Commerce Department has found that government help to some European steelmakers now totals as much as 40% of the value of their products.

The U.S. steel industry has also become weak, inefficient and a drain on the American economy. Steel executives have allowed their mills to become outmoded. Observes Harald Malmgren, a trade consultant in Washington: "When you protect any sector, you are shoring up sick companies and prolonging bad management." The steel industry has not, for the most part, used the breathing space offered by protection to modernize its plants. Instead, National Steel Corp. bought some savings and loan associations, and U.S. Steel borrowed $3 billion to acquire Marathon Oil.

Because the American steel industry has been shielded from competition, companies that buy its product pay artificially high prices. That is one reason, economists point out, for the auto industry's troubles, since it is one of the heaviest steel users. Says C. Fred Bergsten, director of the Institute for International Economics in Washington: "In the long run, jobs saved by protection of one industry tend to be offset by the loss of jobs in other industries." In the short run, protectionism is a big contributor to inflation.

The newest prescription for curing America's economic ills is something called national industrial policy. Its advocates include labor unions, numerous Democratic politicians, a few economists and even some prominent members of the business community, including Felix Rohatyn and Du Pont Chairman Edward Jefferson. The idea comes in different forms and goes by various names. Democratic Presidential Contender Alan Cranston backs Rohatyn's proposal for a new Reconstruction Finance Corporation, patterned on the agency set up during the Depression, to loan money to needy industries. A group of five Democratic Congressmen led by Stanley Lundine of New York introduced a bill this month that would, among other things, launch a national industrial development bank to provide capital to help companies become competitive internationally. Says Lundine: "In today's context, we are simply not able to generate the kind of patient capital necessary to foster innovative, emerging enterprises. We are not able to finance the huge reinvestments necessary to restore a world-class steel industry."

The Reagan Administration is decidedly cool toward industrial policy. Edwin Harper, a White House aide for domestic issues, calls it "backdoor protectionism.' Trade Representative Brock is fearful that too much Government aid would go to established industries with political clout and not enough to fledgling companies. Says he: "We run the risk of freezing ourselves as we are and losing the opportunity of being what we can become."

M.I.T. Economist Lester Thurow argues that most of the industrial-policy schemes under discussion would amount to a prop-up-the-losers approach that he calls "lemon socialism." As an alternative, Thurow suggests that the U.S. emulate to some degree the