Macroeconomic Policy as Implicit Industrial Policy: Its Industry and Enterprise Effects

269 Pages·1998·15.362 MB·English

by  John Randolph Norsworthy, Diana H. Tsai (auth.)

Macroeconomic Policy as
Implicit Industrial Policy:
Its Industry and
Enterprise Effects
Macroeconomic Policy as
Implicit Industrial Policy:
Its Industry and
Enterprise Effects
by
JOHN RANDOLPH NORSWORTHY
Rensse/aer Polytechnic Institute
Troy, New York
and
DIANA H. TSAI
National Sun Yat-sen University
Kaohsiung, Taiwan
....
"
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data
A C.LP. Catalogue record for this book is available from
the Library of Congress.
ISBN 978-1-4613-7485-5 ISBN 978-1-4615-5443-1 (eBook)
DOI 10.1007/978-1-4615-5443-1
Copyright © 1998 Springer Science+Business Media New York
Originally published by Kluwer Academic Publishersin 1998
Softcover reprint of the hardcover 1s t edition 1998
Ali rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, mechanical, photo
copying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC .
Printed on acid-free pap er.
To Clive Choi
TABLE OF CONTENTS
FOREWORD ix
ACKNOWLEDGEMENTS xi
INTRODUCTION
2 MANAGED TRADE AND TARGETED VS. GENERIC 13
INDUSTRIAL POLICY
3 THE USER COST OF CAPITAL: LINK FROM 30
MACROECONOMIC POLICY TO BUSINESS DECISIONS
4 INFLUENCES OF MACROECONOMIC POLICY ON 41
THE ENTERPRISE
5 A CONTEXT FOR INDUSTRIAL POLICY: HISTORY, 65
PERFORMANCE AND STRATEGIC ROLE OF THE
MACHINE TOOL INDUSTRY IN THE UNITED STATES
6 TECHNOLOGICAL CHANGE, LEARNING-BY-DOING, 96
AND THE STRUCTURE OF PRODUCTION IN THE
U.S. MACHINE TOOL INDUSTRY
7 MEASURING THE EFFECTS OF MACROECONOMIC 122
POLICY IN AN INDUSTRY ECONOMETRIC MODEL
8 MACROECONOMIC AND FINANCIAL EFFECTS ON 150
COMPETITIVENESS IN U.S. MANUFACTURING:
SIMULATIONS TO MEASURE POLICY EFFECTS
9 MEASURING AND FORECASTING THE INDUSTRY OF 184
MACROECONOMIC EVENTS: CROWDING OUT OF
MANUFACTURING INVESTMENT IN A MACRO-MICRO
FRAMEWORK
10 TECHNOLOGICAL FACTORS AND INDUSTRIAL POLICY: 219
HARNESSING GENERIC INDUSTRIAL POLICIES FOR
ECONOMIC GROWTH AND COMPETITIVENESS
11 CONCLUSIONS AND FUTURE RESEARCH 230
REFERENCES 238
AUTHOR INDEX 253
SUBJECT INDEX 257
FOREWORD
Whether they should or not, few economists do in fact refrain from making
pronouncements on public policy, although the state of the economy (both here and
elsewhere) suggests that either the advice given is bad or, if good, that it is
ignored ... I happen to think that we are appallingly ignorant about many aspects of
the working oft he economic system --the economics oft he firm and industry.
Ronald H Coase, Economists and Public Policy
In this volume we attempt to address an element of Coase's concern by linking the
empirical economics of the fInn and industry more closely to macroeconomic policies,
and to demonstrate how to assess some of the effects of those policies. The scope of our
study ranges from a structural macroeconomic model of the United States, from which
macroeconomic effects are propagated to detailed structural models of SIC four digit
industries. The rationale for our approach is very much in the spirit of various integrated
macroeconomic/industry models constructed by Dale Jorgenson, working with various
collaborators. Our approach is also consistent with, and motivated by, Lawrence Klein's
agenda of modeling explicitly and structurally the macro and sectoral elements in the
national economy. We also examine the effects of the macroeconomic policies of
different countries on the enterprise. In only one case, our examination of crowding out
of private investment by government defIcit fmancing, is the linkage among sectors
implicit. While explicit structural linkages, rather than "reduced fonn" modeling, opens
the way for discussion of a variety of theoretical and pragmatic alternatives to any
particular choice of linkage, we believe that the structural or "constructivist" approach is
preferable, in part precisely because ofthe discussions it can generate.
ACKNOWLEDGEMENTS
For advice, encouragement, and criticism of various parts of this volume, in varying
states of quality, we are indebted to F. Gerard Adams, Jallel Ahmad, Ernst R. Berndt,
Jean-Pierre Bertrand, Wolfgang Bessler, Betty Blecha, Antonio Maria Costa, Michael
A. Crew, Michael Denny, Ray C. Fair, Karl Fischer, Cecile W. Fu, Dale W. Jorgenson,
James C. MacDonald, David H. Malmquist, Jim McIntosh, Catherine J. Morrison, Peter
Pauly, John A. Sawyer, Jack E. Triplett, Thomas A. Wilson, Bernard Wolf, Frank
Wykoff; and to Diana's colleagues in National Sun Vat-Sen University: Dean Dou M.
Hong, Peter C. Lin, Wuu-Long Lin, and Mei-Chiun Tseng. We are particularly grateful
to Zachary Rolnik for his guidance and tolerance during the manuscript preparation. We
gratefully acknowledge the cooperation of William Gullickson, Michael Harper and
Arthur Neef of the Division of Productivity Research, Bureau of Labor Statistics, in
supplying data. We also are pleased to thank Irene J. Norsworthy and Fifi Hui-Fei Tsai
for manuscript preparation, and Wun-Shen Wong and Jason Fong-Chi Tsai for
preparing the tables. Particularly, we gratefully thank our spouses Irene J. Norsworthy
and Charles T. Choi for lovingly supporting us and stoically bearing the spillover effects
of our work. The next book will be easier, folks.
Errors are of course the responsibility of the authors.
1
Introduction
A country's macroeconomic policies strongly influence the economic values of
enterprises operating within its borders. They determine the tax and interest rate
environment in which those enterprises operate and make decisions; thus these policies
determine the after-tax profitability of the enterprise, and the proportion of profits that
reach the owners of the enterprise. In addition to specific policies such as taxes and
monetary policies, the stability of the economic environment resulting in large part from
those policies has an important influence on the investment horizon of the enterprise.
The vulnerability ofthe firm to political caprice is well-known and deplored. In unstable
political regimes, the threat of expropriation induces short business planning horizons;
the temptation to "take the money and run" may in tum retard some of the very actions
by finns that would tend to stabilize the economy: long term investments in training the
workforce, politically articulated demand for and cooperation with infrastructure
development, etc. But poor economic policies, even in politically stable regimes, also
exact a high toll: inflation, sharp business cycles, and budgetary incontinence likewise
induce a present bias in business decisions, even if the excesses ofregulation, protection
and unwise allocation of the tax burden are avoided. Instability in the economic
environment of the enterprise generally adversely affects technology-intensive
industries relative to others because of the long term commitments that type of industry
requires: R&D investments that require years to payoff, early manufacturing experience
while riding the "learning curve", rapid economic depreciation and obsolescence in
physical capital beyond tax-allowed depreciation, and skilled workers whose skills
human capital-are rapidly out-dated if unemployed. These characteristics in turn are
more readily accommodated if the enterprise has continual access to well-developed
capital markets. All of these factors are degraded somewhat in an unstable economic
environment.
In view of the impacts that the macroeconomic environment may have on enterprises,
some governments have focused on the policy tools that contribute to favorable
environment for enterprises. Most governments engage in targeted industrial policies to
some degree, however much they may protest to the contrary. They do so partially to
capture presumed "spill-over" effects from encouragement of widely applied
technologies. The policy tools most commonly used in supporting enterprises include
industry-specific policies (subsidies, regulations, etc.)!, trade barriers (tariff, quotas,
government procurement policy), and other alternative mechanisms to promote
industrial technology and productivity growth and/or to create and insulate domestic
industries or enterprises from international (and sometimes domestic) competitive
forces.
The constellation of macroeconomic and industry-targeted policies, including protection
and regulation, are a country's industrial policy. This said, one country's industrial
policy may be another's macroeconomic hygiene: that is, "good" (i.e. effective)
2 Introduction
industrial policy may result from fiscal and monetary policies undertaken wholly or
partially for other reasons. There are two aspects to industrial policy: specific
interventions and general rule-making. Most of the industrial policy literature concerns
justifying or attacking the former. Emphasis in this study is on the latter. While
industry-or enterprise-specific interventions are acknowledged to be "industrial policy",
macroeconomic policies reflected in tax rates and incentives, depreciation allowances,
and market interest rates are also very important to the success of enterprise, but are
seldom explicitly called industrial policy. These policies create the environment in
which all business decisions are made, and are especially important to intertemporal
decisions. The values of these parameters of the macroeconomic environment, as well
as their stability, quite substantially influence investment decisions of the types noted
above.
In this volume, the effects of generic industrial policy-the term we apply to policies
that are not targeted to specific industries or enterprises-are assessed at three levels:
through the user cost of capital, through the effects of a macroeconomic model on the
decisions of an enterprise, and through the effects of a macroeconomic model on the
machine tools industry via its major customer industries. There are three corresponding
innovations in our approach.
1. In the treatment of the user cost of capital, the effects of financial capital are
incorporated, although they are uniformly neglected in the literature analyzing
industrial productivity and economic growth.
2. In the analysis of the effects of the macroeconomic environment on an
individual enterprise, the economic theory of the firm is reconciled with the
conventional fmancial statements of fmancial accounting: the income
statement, balance sheet and cash flow statement, revising these statements as
necessary to reflect economic reality. The assessment is then carried to the
shareholder's valuation of the equity ofthe enterprise.
3. In assessing the effects of the macroeconomic environment on a key
manufacturing industry, multiproduct/interrelated input demand models of the
two four digit machine tool industries--metal cutting and metal forming-are
embedded in the Fair macroeconomic model to capture the full general
eqUilibrium effects of various tax and other macroeconomic policies on the
industry. The assessment focuses on elasticities of demand for machine tools
with respect to the various policy parameters. Moreover, the models of the
machine tools industries themselves incorporate separation of economies of
scale from economies of scope and learning effects.
The authors believe that the analytical approaches developed and applied here constitute
an integrated approach to the assessment of generic industrial policies on industries and
enterprises, and that application of these tools provide a constructive alternative to the
special pleading and finger-pointing that pervades the industrial policy literature and
public debate.
Industrial and Technology Policy
Much of the discussion of industrial policy has been little more than mere discussion.
Until recently, most of the broad issues of industrial policy would be recognizable to
Introduction 3
resurrected participants in the free trade vs. mercantilism debate of the 18th and 19th
centuries.
The new dimension is the intertempora1 one: the intertempora1 choices of firms, and
their implications for growth. This study does not join the debate in the usual way: it
would avail little to add to that copious flow of verbiage. Rather, it focuses on the
factors in the macroeconomic environment that affect the investment and spending
decisions of enterprises and households, and on measuring the resulting effects on
enterprise and industry. In our view, the industrial policy debate should be recast in this
more analytic framework, in the manner of the discussions in, e.g., King and Fullerton
(1984), Shoven (1988) and Jorgenson and Landau (1993). The objective is to address
industrial policy issues in these terms, where quantitative evidence has a role, and the
discussion can consequently proceed beyond the concerns of alternative utopian
aesthetic systems. The Scholastics of the Middle Ages never seem to have decided how
many angels can dance on the head of a pin; it is doubtful that those of today will
determine whether an unspecified country will be better off with targeted industrial
policies and managed trade or free markets and free trade.2 There are simply no
observations of the former or the latter in the pure forms that their proponents so
vigorously advocate. Nor is it expected the true believers in these imaginary systems to
the ideas offered here. If the proponents of world socialism can maintain in the face of
its collapse that true Marxism never got a fair trial, then dedicated orthodox
interventionists and their equally orthodox opponents can ignore any evidence that may
be adduced from real world economies and firms, or, a fortiori, simulations thereof3
Rather, the less ambitious aim of this study is to interest policy-makers in alternatives to
the current orthodoxies of managed trade and picking winners, or of complete laissez
faire.
To this end, methods are demonstrated that measure effects of the overall
macroeconomic environment on individual industries and enterprises. While the effects
of particular policies can be separately accounted in the manner of partial derivatives, it
is the whole set of policies shaping the macroeconomic environment that are important.
The effect of a particular policy will generally depend on other policies simultaneously
in force. Thus an investment tax credit has no value when the corporate tax rate is zero,
but a strong incentive effect when the corporate tax rate is relatively high. A particular
policy may not be undertaken with the objective of affecting the environment of
business, and yet may have profound effects. Personal tax rates, for example, may be
enacted largely for their impacts on the after tax distribution of income, but if high, they
will tend to raise market interest rates, and generally shorten the payout horizons of
private firms. In a pluralistic society, coordination of economic policies may be more
difficult; all the more reason to explicitly consider the effects of implicit industrial
policy. The term generic industrial policy is used here to refer to policies that have no
industry dimension: they are not targeted at, e.g., achieving higher domestic automobile
sales or more rapid diffusion of selected technologies. To this degree, generic industrial
policies do not involve the analyst in the conundrum of second best scenarios. This is
not to say, however, that generic industrial policies do not influence the allocation of
resources, the distribution of income, or growth of the economy. Targeted and generic
industrial policies are considered in detail in Chapter 2.
The technological dimension of macroeconomic policy is seldom discussed, although
the discussions of targeted industrial policy are replete with considerations of economies
of scale, economies of scope (both within and among enterprises), learning effects