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