a new economic strategy for the usa: a framework of alternative development notions

A New Economic Strategy for the USA: A Frameworkof Alternative Development Notions

Nikolaos Karagiannis & Zagros Madjd-Sadjadi

# Association for Social Economics 2011

Abstract This paper seeks to provide a new economic strategy for the United Stateswhile considering a range of development-related impediments to the country’srecent economic performance. It is argued here that strategic industrial policy needsto come to the center stage if local production growth, competency upgrading, andcompetitiveness improvement are to be aggressively pursued. The first sectionoutlines the present context of the US economy by discussing economic and socio-cultural aspects. The second main section frames an alternative developmentparadigm for the United States. Policy recommendations are discussed in the thirdsection. Some brief conclusions end the paper.

Keywords Strategic industrial policy . Endogenous development .

Politico-institutional structures . The United States

Introduction

Perhaps no word at present is used and misused more than globalization. Although theterm may obscure much more than it reveals, it generally serves to refer to variousworld-wide epoch-defining changes in the organization of societies, economies andpolitics. The free market, laissez-faire agenda—based on the neoliberal assumption thatmarkets lead to optimal outcomes1—has been pursued by those who benefit from sucha deregulated, winner-take-all environment (Karagiannis 2004).

For Soc EconDOI 10.1007/s12143-011-9094-9

1But this assumption, which is the theoretical underpinning of global and regional trade liberalization, isweak since the pursuit of Pareto optimal solutions only results in Pareto optimality given a set ofinstitutions. Indeed, such an analysis is true only on a comparative static basis and if one ignores moredynamic institutional effects that are under the heading of X-efficiency (Lieberstein 1966; Karagiannis andMadjd-Sadjadi 2007).

N. Karagiannis : Z. Madjd-Sadjadi (*)School of Business and Economics, Winston-Salem State University, 120 R. J. Reynolds Center,601 S. Martin Luther King Jr. Drive, Winston-Salem, NC 27110, USAe-mail: sadjadizm@wssu.edu

N. Karagiannise-mail: karagiannisni@wssu.edu

In the last three decades, international capital has managed to restore highlyprofitable returns on investments and operations in certain areas (e.g., ITC,speculation, etc.)2 creating opulent prosperity for some at the expense of manyresulting in growing inequality, poverty and misery. Globalization carries theeconomic benefits of specialization and the division of labor to the world level butthese benefits are not equitably distributed. Unfettered globalization coupled withpolitical commitment to policies of liberalization3—as a major force driving globalchange—assure these outcomes (see for example, Karagiannis 2004—amongothers).

Within such a dismal international context, the paper seeks to provide a neweconomic strategy for the United States while considering a range of development-related impediments to the country’s recent economic performance. It is argued herethat strategic industrial policy needs to come to the center stage, where it belongs, ifsustained local production growth, competency upgrading and competitivenessimprovement are to be aggressively pursued. The first section outlines the presentcontext of the US economy by discussing economic and socio-cultural aspects. Thesecond part frames an alternative development paradigm for the United States.Policy recommendations are discussed in the third section. Some brief conclusionsend the paper.

The Present Context

Economic Aspects

Recently, there has been much talk of the downfall of the US economy, and anincreasing number of commentators seem to have been becoming increasinglynervous about this, with the budget and the trade account of the balance of paymentsin substantial deficit, and capital flight, deindustrialization and the “competency-wage-productivity” nexus causing concern. The central element of these discussionsto which people refer is the massive increase in the fiscal, trade, and total nationaldebt, and the questions that arise are: what are the sources of this recent economicdownfall? And can this situation be reversed by pursuing the same orthodox andneoliberal policies?

In the past five decades or so, regional and industrial policies were usuallyconsidered minor complements of standard national macroeconomic policies andwere limited to the large amount of defense-related procurements, the selectivepromotion of R&D, and the correction of micro-imperfections through financialinducements and schemes to the private sector (Karagiannis 2002; Chang 2003). Yet,the rates of economic growth and employment/unemployment have been unstable

2 Financial capital plays a leading role in globalization, i.e., growth in the volume and speculativecharacter of global financial flows in addition to the consolidation of huge concentrations of privatefinance capital—transnational corporations and institutional investors—as the dominant players in worldproduction, trade and finance.3 In addition, there are numerous writings by social scientists and scholars, which explore the importanceof culture to debates on globalization and the world-system (e.g., King 1997; Tomlinson 1999; Suarez-Orozco and Qin-Hilliard 2004; Nederveen Pieterse 2009—among others).

N. Karagiannis, Z. Madjd-Sadjadi

(i.e., Harrod’s “knife edge”) as a direct consequence of a significant slowdown inlocal productive activity, and various problems with the financial markets (e.g., theorgy of financial speculation during the last 20 years, the recent financial chaos, etc.)and the international political economy. The annualized growth rates of GDP (atconstant prices) were 3.3%, 3.8%, and 2.3% during the periods 1981–1990, 1991–2000 and 2001–2009 respectively while the unemployment rates were 7.1%, 5.6%,and 5.4% over the same periods. However, unemployment topped out at 10.1% inthis most recent recession, a level not seen in more than a quarter century, and it isprojected that a return to normalcy in the labor market may not occur for years tocome (US National Economic Accounts, various years).

The US government budget deficit averaged 4.0%, 1.5% and 2.0% of GDPthroughout the 1980s, 1990s and from 2001 to 2008, but was 9.9% in 2009 and isexpected to be 10.6% in 2010. The US trade deficit averaged over the same timeintervals 2.3%, 2.6%, and 5.5% of GDP, with it falling to 3.5% of GDP in 2009 andprojected to be at a similar level in 2010 due to a huge decline in consumer spendingthat is not likely to continue as people begin to suffer from “frugal fatigue”. Thesedeficits are simply unsustainable and show no signs of abating (US NationalEconomic Accounts, various years). Indeed, things only appear to be getting worse.Currently, the US national debt is projected to double over the next 10 year period,while it will take US GDP 30 years to double at the present rate of growth. Unlessthe US can achieve 7% average growth each year, a rate only achieved by Chinaover the past decade, it cannot hope to reduce its debt-to-GDP ratio, which threatensthe economic stability of the country.

We cannot expect a better performance in the near future by blindly followingneoliberalism because the real base of economic dynamism (i.e., productionstrength) has been neglected. Indeed, this approach undoubtedly holds back thegrowth of the US economy. It is clear that neoliberalism has eroded the USmanufacturing strength while, at the same time, failing to deal with the crisis of the“post-industrial era”.4,5 Yet, present policies do not allow the economy to experiencesignificant growth without generating substantial balance-of-payments and othereconomic problems, and increasing inequalities and social misery. According to theCIA World Factbook (2011), Americans do not have the highest incomes in theworld, and income distribution in the US is worse than that of Egypt or Tunisia, bothof which have had revolutions this year carried out by people demanding bettereconomic conditions. The USA is barely in the top 10 of nations in standard ofliving (UNDP 2009, 2010) and, contrary to statements made by conservative talkradio hosts, its health care system is not the “envy of the world” (Blendon et al.

4 For the first three decades after World War II, the United States led the world in manufacturing. Manycurrent industrial trends in advanced and developing countries began in the USA, and almost everymodern invention, including telephones, cars, airplanes, radio, television, computers, the Internet, andmany others, were either invented or first mass-produced in the United States. Services grew out of thecountry’s successful manufacturing base. But since the 1980s, the US manufacturing has clearly shrunkand core industry after industry has orchestrated its own decline, facilitated by short-term reward systems(Hofmeister 2010).5 See available industrial data provided by various US agencies as well as Shapiro and Taylor 1990, p.866; Mowery and Rosenberg 1993; Chang 2003, p. 31.

A New Economic Strategy for the USA

1990, 1995, 2002). These factors point to a fundamental disconnect betweenperception and reality.

The fundamentals of the US economy are not right, and its much vaunted strengthand admiration (i.e., the miracle of the US model of Western capitalism) are beingseriously challenged. Therefore, there is a need to bring industrial strategy to centerstage, where it belongs, and to establish a much sharper focus on a production-oriented approach. Here we set out the case of a strategic framework on the groundsof major structural and systematic deficiencies within the economy. This situationhas been compounded by certain important factors related to the country’s culture,social values, local psychology, political economy, and international relations. Thesefactors are briefly discussed in the next section.

Socio-Cultural Aspects6

Like most people, Americans like to think of themselves as somewhat unique. Theconcept of “American exceptionalism” permeates through speeches of Americanpoliticians and commentators although it originates with a non-American, Alexis deTocqueville, in his classic Democracy in America (Lipset 1997, p. 18). As pointedout by Schuck and Wilson (2008, p. x), America is “deeply divided, witlessly vulgar,religiously orthodox, militarily aggressive, economically savage, and ungenerous tothose in need, while maintaining a political stability, a standard of living, and a loveof country that are the envy of the world-all at the same time”. Many of these factorsportend to what is regarded by others as a country that is callously indifferent to therest of the world but which serves as a source of pride for Americans.

Lipset (1997, p. 19) argues that American exceptionalism “can be described infive terms: liberty, egalitarianism, individualism, populism, and laissez-faire”, yet heis quick to point out that what is meant by egalitarianism is equality of opportunity,not equality of outcome. American is the land of capitalism, as is confirmed by thereaction to the “Red Scare” as far back as 1919 and exemplified by the rush tojudgment in the first “trial of the century” that of Sacco and Vanzetti (Young andKaiser 1985; Russell 1986), as well as the McCarthy “witch hunts” of theentertainment industry, and the trial of Ethel and Julius Rosenberg. This antipathyand belief that it is “better dead than red” stands in sharp contrast to a WesternEurope that has embraced socialist principles and has even seen democraticallyelected communists. As such, social and economic policy in the United States takesa decidedly individualistic and capitalistic turn. Governments at all levels in theUnited States collectively are responsible for a lower percentage of overall healthcare costs than in any other country in the OECD (Congressional Research Service2007). “The United States is the only advanced country that does not guarantee itsworkers paid leave” and there are no “legally mandated public holidays” (Ray andSchmitt 2008, p. 21). CEO pay is higher in the US than in any other OECD country

6 This section does not seek to provide a detailed discussion on the US socio-cultural factors(which is beyond the scope of this paper). Instead, to the extent that certain socio-cultural aspectsaffect the US national development, business, society, and government policy-making they arebriefly considered here.

(Abowd and Kaplan 1999). These facts point to a country where individualresponsibility and reward reign supreme.

Yet, “American Exceptionalism” does not convincingly prove that the Americanexperiment is fundamentally superior to that found in other countries. In many ways,America is quite ordinary. While America has, from its beginning, cloaked itself in“the mantra of divine providence”, its conception of “manifest destiny”, which wasfirst used by John L. O’Sullivan in the Democratic Review (Pratt 1927), is little morethan the same argument that countless countries have given that “God is on [their]side”. Besides, while “America burns, the people are fed bread and circuses by theruling oligarchs”. Indeed, America, the country where democracy was reborn after aconspicuous absence from the world stage of more than two millennia, has anabysmal voter turnout when compared with other countries (Powell 1986) and hasseen reelection rates that would rival those of an authoritarian regime (Collier andMunger 1994).

The contradictions only continue. Although the US likes to think of itself a“melting pot” society, dedicated to the principle of E Pluribus Unum (from many,one), it is, in fact, a deeply fractured country that has had a xenophobic and racisttinge that rivals that of more homogenous populations. Today’s Muslim immigrantsare just the latest to face the sting of intolerance from sizable segments of theAmerican population. The country that was born of freedom was one of the last todismantle slavery, and it was only a civil war that served to bring this institution to ahalt. Even then, it took more than a century for the second class citizenship ofAfrican-Americans to be finally overthrown. Other groups faced similar issues.Japanese-Americans were placed in concentration camps during World War II;Chinese-Americans and Hispanics-Americans were victims of state-sponsoreddiscrimination in California; even Irish immigrants faced systemic discriminationwhen they first arrived in large numbers.

Still, this racial and ethnic divide has not been unbridged. Each successive waveof mass immigration has brought with it an infusion of that country’s culture into theAmerican reality. Blues (Jones 1963), jazz (Rublowsky 1971), rap (Rose 1994), androck and roll (Garofalo 1997) were initially developed by African-Americans, whilethe ubiquitous Chinese fortune cookies and chop suey find their origins not from theFar East but rather from America and, at least according to legend, San Francisco’sChinatown (Liu 2009).

The American psyche was further shaped by its agrarian roots and immigrant lore.For much of the 19th century, America had fairly unrestricted borders. Tales of“streets of gold” are seen in hindsight as clearly mythological (Miller and Boling1990–91), but the Horatio Alger myth that one can go from “rags to riches” isactually one that is still believed by many Americans, when, in fact, this is decidedlythe exception rather than the rule. Similarly, the agrarian foundations of this countryled to an increased sense of self-reliance and advanced capitalism (Kulikoff 1992).

The importance of these factors cannot be overemphasized. In 1790, 90% ofAmericans were farmers. Even by 1910, nearly a third earned their livelihood fromagriculture. This experience led to disdain for centralization and prevented centralbanking from being a permanent force in the economy until 1913 (Chang 2003). Italso engraved the now nearly mythic family farm into the American psyche, eventhough the vast majority of Americans now live in urban areas.

To many outsiders, American culture could be seen as simply excessiveconsumerism, fast food cuisine, modern music and film, modern television,entertainment and fashion, yet it encompasses much more. The USA is an enormousexporter of entertainment (especially television), movies, music, video and computergames, and news. It’s even considered to be an “entertainment super-power” alongwith Europe and Japan. Although this readily consumable form of culture is widelyand cheaply dispersed for entertaining consumers worldwide, it is not anunassailable monolith, e.g., witness the increased US market penetration of Japaneseanime and Jamaican reggae music.

Nearly every major American city offers classical and popular music; historical,scientific and art research centers and museums; dance performances, musicals andplays; outdoor art projects and internationally significant architecture. This may, atfirst glance, seem strangely at odds with contemporary American culture since itemphasizes traditional European styles over the more “vulgar” forms of publicentertainment cultivated in America, those being sports (specifically baseball,American football, and basketball, all of which have their origins in the UnitedStates), movies, and Broadway. Yet, these two have come about because of theAmerican experience.

Still, it must be pointed out that the US has not shown particular sensitivity to thepleadings of other nations for protection of “cultural industries” (Galeota 2004),probably because it does not have to “protect” its indigenous culture from theglobalized/popular one that it has fostered upon the world. The prevalence ofAmerican programming on television and the far reach of its movies has presented toforeigners a rather distorted view of American life as America’s cultural icons tendto neglect the more mundane and/or complex elements of human life (for a thoroughdiscussion on this, see Frankel 2006). At the same time, a lack of exposure or a basicsense of indifference to other cultures has made Americans mostly unaware of howtheir actions are perceived abroad and has contributed to the sense of Americanexceptionalism as being unabashedly good.

American belief in self-reliance has led to a relatively underfunded public sectorand a relatively wealthy private sector. Yet, American philanthropy is the bedrockreason for these accoutrements of high society (Gaudiani 2003; Loebl 2010). Inother ways, philanthropy serves to diminish potential social displeasure with thehigh rate of inequality that is present in American society. The thinking is manifestedin two ways: first, wealth in America, in general, has not been passed down for somany generations that people look at it as “unearned” as they do in so many parts ofthe world and, second, those who do the actual earning of the wealth in the firstinstance often act to bring themselves into greater esteem through philanthropicendeavors. Thus, “captains of industry” such as Andrew Carnegie, John D.Rockefeller, and John Paul Getty, among others, were able to deflect, at leastpartially, criticism of their vast holdings, while ensuring that their legacy ofdonations would be felt for a long time.

American individualism manifests itself in other ways as well. Entrepreneurshipand an innovative spirit are indelible hallmarks of America’s work ethic. SiliconValley and Route 128 in Boston serve as centers of the high-tech universe, but thisinnovation has, in the last three quarters of a century, been more driven bygovernment than in previous years. The Internet, the computer, jet aircraft, satellites,

and global positioning systems all originated or were significantly advanced becauseof military needs. Yet, it would be wrong to think that this is somehow antithetical toAmerican norms. As far back as the founding of the Republic, there were two basiccamps: the agrarian idyllic conception of America trumpeted by Thomas Jeffersonversus the staid industrial-based conception of Alexander Hamilton. The firstemphasized individualism; the second an early form of industrial policy. Yet, whileHamilton’s vision of an activist government has seen fruition over the past 75 years,it is more of an ad hoc regulatory type than one that embraces the Hamiltonianvision of proactive action.

To understand this, we need to address how American culture has changedradically in terms of its use of legal tools to settle disputes, and its tendency for itscitizens to uphold the law (i.e., a legalistic society). An increasingly litigiousmentality has meant that Americans increasingly are abandoning the old notions ofself-responsibility that traditionally went along with self-reliance. Everything issomeone else’s fault, and that other person has to pay. This has led to a reduction intrust that others are acting honorably, which can lead to unethical behavior. “Do untothem before they do unto us” and “it is acceptable because everyone else is doing it”become mantras used to justify increasingly more brazen actions that run counter totraditions that exchanges were of a “win-win” variety. Instead, during the past30 years, temptations and opportunities to defraud have risen; legal, moral andtheoretical barriers to abuse of trust and business dishonesty have fallen, leading to a“win-lose” formulation of exchange. America’s culture is moving in a new anddangerous direction as Americans are becoming more accepting and tolerant ofdishonesty and financial abuse (i.e., theories, assumptions, attitudes, actions andcynicism that brought about the corporate scandals of the 1990s and of 2007onward) (Frankel 2006).

In addition, a dollars-and-cents logic overemphasizing the cost-side of industriesand indicative of short-sightedness and a comparative static approach is being seen.Cutthroat competition on pure price has seen the “Walmartization” of America withtraditional service-oriented retailers left on the sidelines. This mentality has pervadedeven to the stoic New York Stock Exchange which recently arranged to merge with aGerman company. The reasoning was a massive erosion of its market power due tohundreds of upstarts that will undercut the exchange by mere hundredths of a centper share (Condon 2011).

The result of this excessive emphasis on costs, instead of quality or otherintangibles, is that spending on technology, R&D, innovation, skill formation etc.may be inhibited. Unless one can see immediately bottom-line results, one will forgothe potential gains that accrue on by thinking long-term and being willing to acceptuncertain pay-offs. This results in a significant divergence between private and socialreturns, and it is one of the key reasons why America is no longer the economicsuperpower that it once was (Karagiannis 2002). The American way of thinking hasadopted a pro-individualistic (i.e., good) but anti-government planning (i.e., bad)stance by emphasizing the dynamics of the market system and focusing on theessential opposition of market forces and government planning. Within such anapproach, there is a sharp division between a state-watchman and industry, in whichtheir roles are quite different. The role of government is seen to be one of regulatoryaction and ad hoc correction of market failures (which is often in contradiction to

long-term strategic objectives) rather than of aiding industrial growth and of creatingnew opportunities for private business, which would not otherwise exist. In addition,it serves to undermine the basic premise of American capitalism: that successdepends on building a better mousetrap. Now, it seems, US firms are concernedmerely with building (or, more correctly, selling) the cheaper one, and that is a race(i.e., production supremacy) that the US cannot win.7

Toward an Alternative Development Paradigm

Historically, the traditional arguments for industrial policies go back as far asthe 18th century. Early arguments in favor of selective protection of industrieshave been prominently associated with US banker and politician AlexanderHamilton (1791) and the German economist Friedrich List (1841). During the 19th

century, the USA was both the intellectual home and the strongest bastion ofprotectionist policies.8 Indeed, during the same period, it was widely believedamong US intellectuals that “the new country required a new economics, onegrounded in different political institutions and economic conditions than thoseprevailing in the Old World” (Spiegel 1971, p. 364). Some of them (e.g., WillardPhilips and Calvin Colton were famous campaigners for infant industry protectionin the early 19th century) “went so far to argue that even internationallycompetitive US industries should have tariff protection because of thepossibility of predatory dumping by large European enterprises, [which], afterdecimating the American firms, would revert to monopolistic pricing” (Chang

7 Presented below are some further characteristics that help define American culture (see www.usculturereport.com/):

1. Americans like change.

2. Education, social contacts and relationships tend to be more work-related (as opposed toneighborhood, community and religion). Family isn’t as important as in most cultures.

3. Employment is not tied to companies or industries or location. Social mobility is related tomoney, business success or job achievements, not social standing or ties in a family. Besides,the principle of “minimum effort maximum gain” (e.g., “work smart not hard”) has beenembedded, to a large extent, into the American way of thinking. All these socio-culturalaspects affect the volume and composition of employment, wages, productivity, skills andcompetency.

4. Most Americans actually pay their taxes.5. It’s a legalistic society.6. The understanding of other cultures is very low as is the understanding of non-American

history. In fact, there is rather little interest in foreign cultures in most areas of the country(exceptions are metropolitan areas with large immigrant populations such as New York andLost [sic] Angeles).

7. “Life is a gamble”; “get-rich-fast syndrome”; “something-for-something” or “something-for-nothing”; “eat, drink, be merry and live for today”; are all expressions of a highly short-termviewpoint which can negatively affect decisions by businesses and people.

8. Undisciplined behavior, which affects all levels of society.9. Might, power of all types, individualism.

8 There are numerous writings on the role of industrial policy in development, and such important notionsas infant industry protection, import-substitution industrialization, etc. are well known. For an overview,see Karagiannis 2002; Karagiannis and Madjd-Sadjadi 2007.

2003, p. 31).9 However, although important, tariff protection was not “the onlypolicy deployed by the US government in order to promote the country’seconomic development during its catch-up phase” (Chang 2003, p. 30). Since theearly 1830s, “the US government supported an extensive range of agriculturalresearch”. Measures included “the granting of government land to agriculturalcolleges and the establishment of government research institutes” (e.g., theBureau of Animal Industry and the Bureau of Agricultural Chemistry). In thesecond half of the 19th century, “the government expanded public educationalinvestments […]10 and raised the literacy ratio to 94% by 1900”. Also, the role ofthe government in promoting the development of transportation infrastructure(through the granting of land and subsidies to railway companies, for example)was “critical in shaping the country’s development path” (Chang 2003, pp. 30–31;see also Kozul-Wright 1995, pp. 100–102).

Ever since the Second World War, the US government has played an large role inresearch and development, especially in the area of national defense. The federalgovernment share of total spending on research and development more than tripled,rising from 16% in 1930 to between 50% and 67% after World War II (Chang 2007).“Industries such as aerospace, computers and the internet, where the USA stillmaintains an international edge despite the decline in its overall technologicalleadership, would not have existed without defense-related R&D funding by thecountry’s federal government. The critical role of the US government’s NationalInstitutes of Health (NIH) in supporting R&D in pharmaceutical and biotechnologyindustries, thus maintaining the US lead in these industries, should also bementioned” (Chang 2003, p. 31).11

Clearly, as briefly mentioned before, certain policies with a strongdevelopmental impact were deployed by the US federal government duringthe 19th and 20th centuries. However, industrial policy has not been developed ina systematic or coherent fashion as a centerpiece of the US government’sapproach to economic policy-making. Especially after World War II, theregulatory and reactive role (as contrasted to the developmental role) has beenthe traditional focus of government intervention in the US economy, with thegovernment “acting to remove market imperfections, acting as an adjunct to themarket, working at the edges of the market system” (whereas in its developmentalpart, the government takes a leading and proactive role in the industrial economy,with the market continuing to play a substantial, indeed crucial, part) (Cowling1990, p. 16).

An important point concerns the economic impact of development policy vis-à-vis the other possible determinants of industrial growth (e.g., the role of themarket and the government, culture, political economy, and social psychology).Within such a holistic context, the construction of an alternative developmentparadigm for the United States will be a deeply political and social process. The

10 In 1840, less than half of the total investment in education was public, whereas by 1900 this figure hadrisen to almost 80% (Kozul-Wright 1995, p. 101 n. 37).11 R&D funding by the federal government is not limited to national defense. 29% of all drug research isconducted by the National Institutes of Health (Chang, 2007).

9 For further discussion see Conkin 1980, p. 188; also p. 178.

obstacles to reform are quite formidable. Specific policy innovations, to beeffective, require radical changes and, to the extent that they challenge the existingconfiguration of socio-economic power, the reforms face severe politicalchallenges. However, a failure to change will lead to a decline in America’srelative prosperity. Unfortunately, those who seek an activist government havetended to emphasize strategies that do not forestall this and indeed may even bringit to fruition much more quickly. This may partly be due to a mistakenegalitarianism that permeates national borders, a desire for more, rather than less,international governance, and a neo-Malthusian view-point that seems to be verypopular with liberals. The call to arms has thus far been coordinated mostly bythose who seek a reductionist government through popular books (Beck and Balfe2010; Hannity 2010) and radio shows (Rush Limbaugh Show, Glenn Beck Show,Sean Hannity Show). In sharp contrast, a more government-directed agenda that iscomprehensive in nature needs to be articulated. It is not the exclusive province ofsmall-government conservatives to accept the premise of American decline and seeit as something to be arrested, rather than managed.

Reforms must be guided therefore: in policy terms, by forethought,coordination and consensus; in institutional terms, by rationalizing andreshaping various government departments and agencies which are involved inindustrial growth, investment and trade; and in the political arena, by shiftingthe balance of power toward those social groups and strata favoringdevelopmental solutions to socio-economic problems. This is as controversialas it is problematic in the US, given the constraint by elected sequentialpolitical leadership, the difficulty in establishing long-term planning, theabsence of political will, and the difficulty in having such views channeledthrough political avenues. These features of the American political system wereset in motion by the Founding Fathers so as to act as a check on unbridledgovernment power. However, while these serve to protect a citizenry from anoppressive regime, they also serve to forestall meaningful reform that benefitsthe public.

In the United States, disparate social elements along with leading forces withinthe ruling classes as a whole are staked on expanding the sphere of commercialactivities and services. Government executives and their policy advisors are still tograsp that improving endogenous competency and overall competitiveness is asocio-economic transformation venture that goes far beyond their faith placed onoptimistic outcomes of neoliberal adjustments. However, the pursuit of develop-mental objectives is only possible in the USA if policy formulation moves beyondthe “business-as-usual” ad hoc solutions to correcting macroeconomic frameworkconditions, and deals effectively with the conflicting goals of short-run capital gainsand longer-term socio-economic development.

Thus, local production growth would need politico-institutional and regimechanges which bring into power new elements, such as, forward-lookingentrepreneurs and manufacturers, economic technocrats, and progressive intellec-tuals. These elements must possess the necessary aptitude for meeting the enduringeconomic and political challenges, and hold the potential for agreeing to a

developmentalist ideology which accepts that the government—with effective leversof intervention—must play an important role in restructuring the economy, targetingsectors, raising the quantity and quality of industrial investment, and fostering linkswith civil society. Indeed, government policy and influence will have to be decisivefactors and strategic planning should be limited to selected policy arenas. Thisclearly implies that a combination of plan and market is going to be required as wellas the need for effective statecraft and new government-societal alliances. Besides,local entrepreneurs may need this strategic partnership, especially in their effort toaggressively promote industrial expansion.

In essence, the US government’s mandate should contain the following kernelobjectives:

& the vision which should guide a production-oriented approach is summarized asindustrial growth and upgrading, structural transformation, rejuvenation andstrategic repositioning;

& to deploy strong institutional vehicles in order to mobilize industrial financingand channel mainly local capital into those key, targeted, propulsive and dynamicsectors (i.e., specification of the “economic engines”) which are expected tospread the benefits to the economy as a whole; and

& to coordinate productive investments and to strengthen forward and backwardlinkages between all sectors of the domestic economy.

To dispel concerns that policy intervention will be hijacked by vested interests, thegovernment must provide the “national purpose” framework and a strong domesticplatform, while the technocrats supply planning and overview. This national purposeproves possible to bring together social and political forces in the interests of socially-defined developmentalist agendas. In addition, the growth-oriented restructuring mustlead in a corporatist direction and strategic partnership between government agencies,forward-looking industries, and various social segments. A broad-based consensus isalso required, and could afford scope for strategic planning. But if such thoroughalternative strategies are to solve such problems, they presuppose participation.

To be successful, strategic planning must be democratic and the institutionalstructure must allow for participation at all levels (federal, state, local, etc.).Democratic planning includes participation as one of its defining features—notsimply as a goal but as an aspect of the process itself. Participation is a vital issueensuring that sufficient motivation, creativity and human effort are forthcoming toguarantee that such technically proficient strategies and policies can be successfullycarried out in the USA. Participation by the “social partners” can improve theorganization of production and help restrain the power of interest groups which haveaccess to government decision making.

These are challenges that are not to be disputed, but to insist that they areinsurmountable would be going too far. Radical change often requires being facedwith a “Hobson’s choice”, and that choice may soon be fostered upon the UnitedStates if it continues to rake in trillion dollar deficits. The issue, therefore, for thosewho support active government policy is to understand that a severe downsizing ofgovernment a la Greece or Iceland will likely be in the cards unless radical changes

are made now. Thus, the question is: can policy intervention change to a strategy thatwill maintain most of its agenda before it is forced to change to an agenda that isdiametrically opposed to everything for which supporters of active governmentstand? An industrial policy approach promises the single best change for reversingAmerica’s decline and providing a radical proposal with the funding necessary tocarry out its social objectives.

Issues of Selection

In formulating policies for economic restructuring and diversification, it is essential,therefore, to recognize the critical elements of the system in terms of deriving a long-term strategy. Failure to do so can easily lead not only to short-run, highly partisanconsiderations, and short-term measures dictated by pressing problems (e.g., jobcreation, unsteady growth, fiscal crisis, balance-of-payments constraints), but also tothe adoption of ad hoc approach to development which may be in basic conflict withthe goal of a stronger economic fabric (Karagiannis 2002).

Industrial modeling and targeting, based on a rigorous scientific investigation, haveclearly specified the benefits from alternative energy, an economic engine which canprovide an effective stimulus for local production growth and competitiveness. The factthat decisions relating to a particular industry (alternative energy) tend to have broaderimplications for the national economy as a whole requires a clear examination of theinteracting influences between the promising sectors from the point of view ofendogenous competency, and those that may provide short-term benefits but offer littlehope as a secure basis for future national well-being.

Therefore,—based on past efforts, the present state of affairs, and the futureprospects—it is imperative to aggressively pursue the development of the alternativeenergy sector (other economic engines, on which further emphasis should be placed,are: aerospace, biotechnology, pharmaceutical, ITC, entertainment, and food andbeverage), as there is a potential to market opportunities for its growth, and will setup incentives and open up possibilities for a wide range of new economic activities,for the following reasons:

& it is a good “economic engine” as there is an increasing demand (domesticdemand plus exports) for alternative energy products not currently produced inthe United States. Consequently, local production capabilities will be signifi-cantly enhanced;

& it will allow the local capture of a high percentage of value-added, and thusgenerate profits and contribute to the process of capital accumulation. It will alsoencourage the reinvestment of profits within the local economy;

& the US economy can have some significant prospective competitive advantage inthese industries—higher capability to compete internationally will be responsiblefor its endogenous growth, thereby establishing an expanding market share andcontributing to its balance of payments;

& the targeted sectors will better utilize domestic resources and offer solutions tothe important production-related problems of the country;

& the alternative energy industries will boost the structural transformation anddiversification of the US high-technology sectors, and will develop and

promote stronger intersectoral linkages, with multiple short and, especially,long-run productive effects resulting from investments in infrastructure andthe “accelerators”;

& the propulsive sector will enhance the local skill/knowledge base, stimulatefurther technological progress, develop a pool of expertise, create moremanagerial and entrepreneurial talents and increase productivity and, in turn,will impart—through its complementarities and linkages with the other sectorsand activities—the momentum for “economic take-off”;

& it is a realistic and feasible suggestion which can be successful and does notrequire much; rather, it requires employment of existing resources in differentways, a rigorous system of checks and balances, a “wiser” public finance, anddifferent government policy choices.

Moreover, the growth process is expected to lead to a widening of the localmarket, which in turn will require and/or bring about industrial competencyupgrading and competitiveness improvement. Thus, after resources have beendeveloped and/or put to use, changes in technology and modern productiontechniques will broaden the US production base, will provide sufficient stimulus tothe mobilization of resources of all kinds and/or the inducement to invest, will bringabout a net addition to the effective use of resources and, therefore, to the overallgrowth of the economy.

Strategic Policy Requirements

Increasing and improving capital equipment and infrastructure, improving humancapital and R&D status or pursuing a restructuring strategy for the US economy willtake a long time. Indeed, the effectiveness of such a comprehensive policyframework is a solution in the long term, combines the cooperation of government,private sector, research institutions and funding institutions, and can create dynamiccompetitive advantages. Such thorough knowledge-based strategies would have tobe spawned by certain “growth centers”, and place emphasis on infrastructuraldevelopment, machinery and capital equipment; technical change, technologygeneration and transfer; a higher level of education, and research and trainingcourses; continuous development of scientific manpower; and better managementand marketing methods (Karagiannis 2002).

Prospects for future production growth in the US have been frustrated andlowered significantly due to underutilization of existing resources and the shipmentof business investments and phases of production overseas, in addition to economicdifficulties the country has repeatedly faced. The underutilization of part of itsproductive capacity is proof of this considerable growth potential. As the USeconomy operates at well below its level of physical and human capacity, policies toincrease aggregate demand can yield substantial economic gains.

Thus, a first requirement of a thorough development strategy is that the alternativeenergy sector represents an environmentally-friendly addition to the effective use ofresources and, therefore, to the overall growth of the system. Besides, aggregatedemand must be sufficient enough to stimulate production up to the adequate rate ofcapacity utilization. However, growth of local production lines should go hand in

hand with special consideration of the country’s external trade. In conjunction withthis, the US competitiveness must come to the fore (Karagiannis 2002).

In order to expand production and employment, firms must have the financialresources to invest in the necessary machinery and capital equipment, critical kindsof science and technology initiatives, learning and skills training and upgrading, andshort-run bottlenecks preventing a fuller utilization of capacities have to be takencare of. These bottlenecks may include a lack of the necessary resources and skills,difficulties in raising finance, and a lack of business confidence.

Hence, a second requirement of the proposed strategic approach is that selectiveeconomic policies should provide the resources and stimuli to carry out theinvestments in both working and fixed capital, infrastructure, and the modern factorsof development necessary to raise output and to improve the production andcommercial conditions of corporations at national and local levels (Karagiannis2002; Karagiannis and Madjd-Sadjadi 2007). Active fiscal policy must carry out theinvestments necessary to improve the supply conditions of businesses and to supportthe other expenditures associated with the selective policy. Monetary policy ought toensure that sufficient financial resources are channeled to firms and to intermediaryagencies at reasonable interest rates (i.e., “directed credit programs”). In allocatingsuch credit, preference should be given to those strategies that will increase totaloutput and translate into higher profits and savings (Karagiannis 2002, based onKalecki 1971; and Kaldor 1978a, b).

However, bottlenecks at the firm or macro level can hamper a more efficientcapacity utilization. These bottlenecks must be seriously taken into account, wouldrequire addressing a number of issues simultaneously, and accordingly a mediumand long-term development strategy should have as a basic requirement a close linkwith a deliberate industrial strategy. Such a directed government action should singleout areas of emphasis in selected fields (specified in the previous section) and bedirected toward expanding the national industrial core and upgrading overallcompetitiveness. It should be concentrated on a few focal areas having favorableprospects for growth, and be selectively designed so as to support a group of keydynamic industries managed by modern entrepreneurs. These key propulsive firmscan be instrumental in emphasizing the accelerators of endogenous growth andcompetency, exert pressure to adapt on other supply firms, and introduce modernconcepts of policy making and labor relations. The various spheres of policy (e.g.,industrial policy, regional policy) should be directed toward consolidating thesefocal areas, correcting the imbalances which continually emerge in the wake ofrestructuring and repositioning, reconciling contradictory elements therein, andsmoothing the path for industrial growth.

What has been asserted should not be taken to imply a rejection of the problemsthat could arise with the proposed development strategy. But to face them, a soundeconomic approach ought to complement short-run measures with a thorough planfor the future, which includes a long-term industrial strategy aimed at expandinglocal production, strengthening technological capabilities, and promoting skills andinnovation. Greater levels of production, employment and profits that would beachieved in the short term owing to the fuller use of available resources, wouldactually spur a transition to a more structurally efficient economy. Part of thisincreased production and income in the US would go to higher expenditure on the

modern factors of endogenous competency and lead to faster development of skillsof the labor force. Not only higher profits would allow additional investment butalso a greater fraction of income growth will be channeled toward investment.Hence, in the future, it would be relatively easier to incorporate more moderntechnology and increase productivity, while at the same time raising capitalaccumulation rates (Karagiannis 2002, and for further analysis see Kaldor 1978a, b).

Clearly, for purposes of designing endogenous competency strategies to achievethe development of productive forces and the transformation and diversification ofthe structure of the US production, technically proficient strategic planning isnecessary—indeed, it is inevitable—and should be directed toward the creation ofnew conditions and processes to be effectively and directly determined by theplanning authorities. Strategic planning is a pragmatic attempt to increase thecountry’s long-run capacity to transform itself by building up the infrastructure andthe requisite skills. It is this national strategic planning that can determine thecapacity of the American economy to strengthen its industrial position once again. Inthe development of this framework, strategic policy action generates not only thecapacity to spread the use of modern knowledge and industrial techniques into allelements of the economic transformation so as to spur local industrial activities, butit also creates a dynamic basis for reengagement in the world economy throughhigher levels of exports (thus improving the trade performance and lowering thecurrent account deficit).

Moreover, contrary to the “current orthodoxy”, it appears important to note that itwould not suffice to continue emphasizing only certain services (e.g., ITC, financialservices) which may benefit very narrow sectors and generate limited resources.These services by their very nature neither maximize the benefits of economicactivity to the economy as a whole nor impart the momentum that is necessary todrive the other economic sectors up as they expand. Hence, local production shouldbe oriented toward satisfying domestic demand first with export specializationoccurring as an extension of this. The aim should be to bring about a generalimprovement in the competency and efficiency of the economy, in the level oftechnological infrastructure it relies on, and in the quality of workmanship andservice, so that more and more activities may become increasingly competitive(Karagiannis 2002).

Modern production techniques make it possible to manufacture in small series ona viable basis. Targeting and flexibility are also possible, especially if they can drawon modern industrial planning. Assuming predominance of clear focal areas andinitiatives carried out by both a competent administrative machine and dynamic localfirms, a large part of the additional goods produced will be devoted to exports.Given the growth of production of local industries and the improvement of nationalcompetitiveness, demand for imported capital and goods could decline and exportsof local products expand. Consequently, the country would make a greater and betteruse of its productive resources and capacity, while at the same time easing theconstraints on its balance of payments.

Moreover, given the importance of human resources coupled with consistenttechnical change, investment priorities and the choice of techniques are determinedby the strategies of restructuring and industrial diversification, and by the productchoices to which these strategies give rise. The overall purpose is to increase the

capacity of the American economy to respond at the level of the government, firms,and the population as a whole (Karagiannis 2002).

This is a more feasible and realistic suggestion in light of the fact that these strataand decision makers which blindly support the failed neoliberalism are those whichtend to reject the concept of endogenous development in the US, and seek tomaintain the economic and political status quo by siding with backward-lookingsegments, politicians, officials and policy makers; by further engaging in laissez-faireexperiments; and also as a result of deteriorating terms of trade, and the astonishingtechnological developments taking place worldwide. However, only under such anational strategic planning system and well-conceived and vigorously executeddevelopment programs trade will serve a different function, because the US economyitself will be reoriented to serve different purposes.

Lastly, any economy is underpinned and imbued by social values, codes ofbehavior and ethics, which are in turn reflected in the structure and functioning ofgovernment institutions and private sector firms. US governments have not beensuccessful in indicating a clear course for the public sector to adopt. Yet, theadjustment of its social and political conditions to the country’s urgent social anddevelopmental needs cannot be avoided. If the USAwere to develop growth-orientedproductive activities, therefore, it would be necessary to adopt a number of measuresto remodel its key economic, social, and politico-institutional factors that will berequired to provide the necessary underpinning. More importantly, these thoroughdevelopment strategies and policies assume a much better government action, andwould require an efficient and competent administrative machine. But so does anystrategy capable of overcoming barriers, which also seeks industrial diversification,restructuring, and repositioning in any national economy (Karagiannis 2002).

Devising the necessary policy action to stimulate production expansion andindustrial regeneration, while raising the quantity and quality of productiveinvestment necessary to allow the fullest and most efficient utilization of existingresources, seems to be a more sensible way to confront the future. Such an approachseems, certainly, a better option for the endogenous growth, competency and overallcompetitiveness of the US economy than a frantic search for accelerated, neoliberal-type solutions—a vision that is boosted by the American mindset. The alternativeand more realistic development paradigm would require the pursuit of a thoroughstrategic industrial policy. This is what the US economy actually needs(Karagiannis 2002).

Policy Recommendations

Keynesian Macroeconomic Steering

Macroeconomic policies should be guided by prudence and realism. In fact, holdingdown inflation and maintaining parsimonious budgets are both important compo-nents of any competent and prudent government. Keynesian analysis clearlysuggests that in the case of an economy that is not operating at full capacity,reductions in government spending lead to reductions in income and economicactivity, thereby discouraging investments. Unless investments continue apace, the

future capacity of the economy to produce will not be as great as it would otherwisebe. This will lead to more short-term issues that will require government action, lestit lead to social dissatisfaction and political tension. Instead, policies may be directedtoward removing the imbalances between private savings and investments (in orderto raise the level of domestic savings and finance higher levels of productiveinvestments) and easing the balance-of-payments constraints (Karagiannis andMadjd-Sadjadi 2007).

The key is to rationalize the situation with the fiscal budget and make thebudgeted funds work smarter, instead of just providing more money. A prudent fiscalmanagement reorients government functions so as to achieve “crowding-in” ofproductive investments that contribute to endogenous growth and competency. Witha rigorous priorities formation, such a policy: 1. ensures that the public purse is notwasted and that such expenditure is in alignment with the strategic plan for thenation; 2. curbs conspicuous consumption; and 3. utilizes both “carrots and sticks”so that the government is more likely to achieve its goals within its budgetconstraints.

As far as the efficacy of fiscal action is concerned, there seems little doubt that in thepresent circumstances an increase in government spending will lead to an increase inoutput (or GDP), both directly in the short term, and then indirectly, through theoperation of the multiplier on personal consumption and the effects of higher activity inincreasing investment. The seriousness of the present economic recession is a strongreminder that the capitalist system is disturbed by business cycles and speculativeattacks; that markets are imperfect; and that the unique powers of the government can beput to good and proper economic use. Therefore, macroeconomic policy considerationsshould include the following: 1. the efficiency and effectiveness (i.e., the quality) ofgovernment sector spending and taxation must be maximized; 2. sound governmentfinances/investments; and 3. non-inflationary aggregate demand management. In otherwords, a conducive macroeconomic policy package should pay particular attention to afaster, non-inflationary domestic demand growth. An expansionary fiscal policy duringa recession will have little or no impact on the price level and investment and,consequently, no “crowding-out problem” will occur.

Some people support the view that fiscal debt is a serious problem. However, theytalk about the US budget deficit being defined in terms of its recent trend rather thanfull employment level of activity. The irony is that the consequence of failing to takeexpansionary action now is likely to be the perpetuation of the level of fiscal deficitsarising from the current recession. It is only likely that these deficits will get back tolower levels once a higher level of economic activity is achieved. Governments havea range of different instruments for achieving these objectives, and the main stimulusmust come from fiscal policy. But the great problem is to secure general agreementthat government action can, and should, be taken in order to increase GDP, andreduce fiscal debt and unemployment.

When discussing capitalist financial systems,

Post-Keynesians have long argued that asset prices in deep capital markets areheavily influenced, if not entirely dominated, by the activities of speculators,whose only concern is to outguess the market, not to evaluate a firm’sproductive potential. Thus, far from enhancing the flow of useful information

between owners and managers, a deep and freely functioning financial market ismore likely to encourage [intensive short-termism and] chronic bouts ofspeculative financial excess—that is, pervasive “coordination failures” incontemporary terminology (Pollin 1998; p. 169). From this perspective, over arange of measures, the “bank-based” financial systems appear to have out-performed the “capital market-based” systems of deep and liberalized financialmarkets, because the former resolve problems of asymmetric information,coordination failure and uncertainty, and class conflict and other incentiveincompatibilities more successfully than the latter. As a consequence, the bank-based systems achieved superior performance in three crucial areas: promotinglonger time horizons; encouraging financial stability; and providing a frameworkfor the successful implementation of government policy (Pollin 1998; p. 169).

Hence, the objectives of monetary policy, on the other hand, must: 1. provide a stablefinancial framework for the successful implementation of government policy; 2. reduce“capital flight”, and prevent asset bubbles from occurring through wanton speculation;3. maintain an interest rate policy that allows for small firms to acquire capital atinternationally competitive rates and provide further incentives for investment intargeted sectors through selective credit cost-reduction policies; and 4. ensure that banksare adequately supervised to ensure these objectives are met (Karagiannis and Madjd-Sadjadi 2007). Regulators must also ensure that the financial sector is well-managed,well-capitalized, and has a time horizon that extends beyond the next quarter.

The Need for Strategic Planning

The direction in which the US economy is pointed at present seems to be somewhatrandom, depending on the current state of the markets rather than based on long-termplanning. Indeed, no thorough development strategy exists at present in the United States,and the future of the nation is left in the hands of transnational industrial and financialcorporations. With an active market for corporate control, the power in the relationshiplies with the large companies (Cowling 1990, p. 14). Even more disturbing, the interestsof these powerful corporations and the nation do not appear to be in alignment.

The market and financial institutions rarely see beyond the next quarter, and theneed to meet the expectations of the quarterly projections is visited on individualfirms. Unfortunately, short-term outlooks (the tyranny of short-term in decisionmaking), which may be beneficial in the short-run, often crowd out long-term issues(Karagiannis and Madjd-Sadjadi 2007). This is especially true for small firms thatlack the ability to generate funds internally and must rely on the market or financialinstitutions for financing. Such a market system allows the short-term perspective ofthe financial institutions to impinge decisively on the rational planning of the long-term future of the industrial base (Chen et al. 2007).

Therefore, we have a strong basis for recommending a framework of, andestablishing a role for, strategic planning in selected policy arenas in the UnitedStates. And while it is important to “leave the market to do what it is good at doing:looking after the myriad, incremental changes which are required within the broadstrategy and, of course, running those sectors which don’t require strategicintervention”, it is equally important to ensure that the rules under which these

markets operate are well-defined (Cowling 1990, p. 17). This is not a knock on thecreative dynamics of the market but merely recognizes that “the governed-market”view is not only a valid perspective, but a necessary one. One way to ensure this isfor the US government to act as a developmental state. The market and thegovernment can successfully coexist and must act as partners with one another tocarve out their own spheres of competency and influence and share in the benefitsfrom their mutual collaboration (Karagiannis and Madjd-Sadjadi 2007).

Mixture of Domestic and Competitive Developmentalism

The American consumer tends to overspend on consumption. Indeed, this excessiveconsumption outstrips the ability of the domestic economy to produce it. The recentAmerican productive inability to service its own market, in addition to the fact that theUS has lost competitiveness, means that the economy experiences a trade deficit crisis.Given that mainly East Asian, especially Chinese, industrial growth has hurt USproduction lines, the country needs to place particular emphasis on its industry tobecome more dynamic and competitive. This also places certain hurdles in the pathwayof the proposed developmental strategy given the country’s very high levels of importsand, thus, makes the notion of “strategic trade” highly relevant and important.

Although the nation is unable to strengthen its industrial capacity, Americans tendto overspend on consumption activities. Simply put, while the country needs toexpand its production capabilities, the society expands its consumption capabilities.On the other hand, when the consumer is spending too much on consumptionactivities, firms may need to go abroad for financing, and this means that they areless agile and responsive to the needs of the country. Only if the country can financemore of its own development and can actively trade both as an importer and as anexporter on an international scale, instead of merely importing from abroad, can ithope to grow. The key is to ensure that industrial development serves the nationalinterest and this requires a two-pronged approach of import substitution (inward-orientation) and expansion of productive capacity and national competitiveness toachieve endogenous growth (outward-orientation).

Still, there are dangers associated with this approach as one may not want to socuddle an infant industry that it never grows up to face the discipline of internationalcompetition. It is also difficult to choose to emphasize certain sectors over others.However, there are two reasons why this must be done. The first is the obvious one:if you try to subsidize everyone, you will quickly run into a fiscal constraint. Thesecond is less intuitively obvious but actually far more important: if you subsidizeeveryone equally, you do nothing to change your competitive advantage. Equalsubsidization does not alter the competitive advantage that each holds. Only bysubsidizing unequally can one alter or extend a competitive advantage. Alternatively,you can even tax to alter your comparative and competitive advantages since all thatmatters is the relative price ratio. Thus, a strategy that will lead to both a reducedfiscal deficit and a growing US economy would be to tax services and other non-traded goods (such as land) while simultaneously reducing taxes on manufacturing(Karagiannis and Madjd-Sadjadi 2007).

In this way, the US can alter its competitive advantage in such a manner as toreduce the trade deficit without causing a ballooning of the fiscal deficit. This, in

general, is similar to the argument for the single tax on land as proposed by HenryGeorge (1912) or post-Keynesian contributions on tax incidence by Mair andDamania (1992), Mair (1994), and Laramie and Mair (1996).12 Since many personalservices cannot easily be relocated and are not as subject to reductions in theirprovision as manufactured goods, this is a more optimal tax policy and it reversesthe current implicit fiscal advantage given to services in the United States, due totheir exclusion in most states from sales tax provisions. In addition, since capital istaxed through tariffs and other mechanisms and service industries have lower levelsof capital consumption than manufacturing, they are often taxed at differentiallylower rates. This fiscal advantage for services, at least in part, may have served a rolein the diminishment of the importance of manufacturing in the US economy and is,at least, one reason why the service trade still maintains a surplus in US financialaccounts. Still, international trade in services is less than one-third that ofmanufacturing despite its far greater presence in the US economy and, althoughservices can move (as witnessed by the outsourcing of computer technical support),it is much less likely to move than manufacturing. After all, one can move a callcenter; but one cannot move the Grand Canyon.

Moreover, during the current era of globalization, US economic policy hasemphasized strategic alliances and higher levels of foreign direct investment (FDI)without consideration of any other plausible direction to activity. Although strategicalliances and FDIs are policy options, they should not be the main or the sole ones.Instead, decision makers must look to ways to encourage strategic alliances andFDIs while promoting local production too. In a certain way, it is all aboutleveraging one’s resources. Therefore, FDI and strategic alliances can, and should,be used to expand industrial infrastructure, technology, and business acumen forwhich domestic firms may be reluctant. The degree to which this develops in anygiven country depends on the extent to which the country can successfully negotiatewith foreign enterprises, the need for technology transfer, and the strategicimportance of the particular industry to the broader development needs of thenation. This means that the US government should not take a “one size fits all”approach to FDI, contrary to the neoliberal recommendations. Instead, policies needto be fine-tuned for each sector depending on the needs of the nation, and policiestoward each sector may change over time as conditions dictate (Chang 2003;Karagiannis and Madjd-Sadjadi 2007).

Most importantly, strategic alliances and FDIs that do not serve the needs of thenation should not be actively encouraged, especially when they come with thestipulation of providing concessions and/or government subsidies. This most oftenoccurs in so-called megaprojects that are politically palatable because of theperception that the government is actively engaged in job creation and they appear tocreate hundreds or thousands of jobs. However, these jobs often come at enormouscost to the public purse and more jobs would have been created, albeit across manycompanies, instead of just one project if public funds were better stewarded. Inaddition, such schemes often sacrifice the environment for the economy when nosuch trade-off needed to occur in the first place.

12 According to the post-Keynesian analysis of tax incidence, the structure of taxation and the relationshipbetween the type of tax revenue and the direction of government spending are of great importance.

The Need for Industrial Growth

Growth is governed by the growth of demand, and demand for industrial productsleads to output growth and important efficiency benefits which induce further growthof demand. Indeed, the expansion of industry represents a net addition to theeffective use of resources and can contribute to a higher degree of capacityutilization in the USA. Thus, industrial policy has a role and industrial targeting is animportant component of that policy. In this regard, the role of the US government atthe national level should be limited to the strategic oversight of endogenousdevelopment efforts “which are essential in the case of a limited array of keyindustries or sectors—many activities being left to market processes without strategicguidance” (Cowling 1990, p. 18). In other words, the US government adopts astrategic view of future industrial growth in the economy and provides a range ofsupport mechanisms to those sectors deemed to have a key role to play in the future.This is clearly a process of industrial targeting, properly involving nurturing ofprioritized sectors, which leads to product differentiation (Karagiannis 2002).

Therefore, such a framework seeks to link endogenous technological capabilities andtechnical progress occurring in the targeted sectors to growth and change in the USeconomy as a whole. These prioritized industries can utilize the modern knowledge andtransform this knowledge into new technologies and products. As profitability—nowand in the future—depends upon continuous technological advancement, technicalchange can be expected to influence the volume of investment expenditure and opens upnew and more profitable opportunities for expansion.

It is clear that the sort of intervention described above, while pursuing a thoroughdevelopmental strategy, is both a difficult and a dangerous project. It is difficult toidentify certain areas of industrial activity on which resources should beconcentrated and, as a consequence, tend to neglect others (the difficulty arisesfrom the fact that the size of local capital producing industrial capacity is likely to bea challenge); it is also potentially dangerous to continually protect certain areas ofindustrial activity from the discipline of international competition. Nevertheless, wehave to face up to the consequences of selective intervention (Cowling 1990, p. 20).

Undoubtedly, the US government must address the systemic deficiencies that aremanifested in the three macroeconomic imbalances (i.e., massive fiscal debt, theimbalance between savings and domestic investments, and massive trade deficit) byimplementing a strategically focused production-oriented approach. A central choicefor implementation is a sector that is closely aligned with high technology: thealternative energy industry. This sector is hitherto long-ignored, supply chain partnerfor the country’s other sectors. So long as these products are indigenous, it will makethem more likely that this product differentiation will prove successful. This sectorwill also increase benefits to primary production and services because it will enhancethe complementarities and forward and backward linkages, and would allow forproduct differentiation on the international stage.

To achieve the above, the government may emphasize “clusters” as important“growth centers”. The effects of these clusters will be to bring together key playersin economic development, upgrade technological infrastructure and skills, acceleratelearning and innovation, induce the exchange of important technical and marketinformation, stimulate the formation of new businesses, improve managerial capacity

and entrepreneurial skills, reduce investment risks, and increase profit margins andeconomic growth rates (Karagiannis 2002).

Selective Incentives, Disincentives, and Investments on the Accelerators

Investments in the USA have recently been inadequate in providing sufficient resourcesfor future production or bringing about the full utilization of existing resources.Entrepreneurs have been reluctant to invest in longer-term projects and have developed arentier-like appetite for short-run capital gains. Besides, financial markets havesignificantly encouraged endemic short-termism and various speculative ventures(Karagiannis 2002). These factors, in conjunction with weak or absent governmentsupervision, can foster a casino economy mindset and a dysfunctional business culture(“Casinoville” is an apt description for the current ugly state of financial markets or theorgy of financial speculation), in which insider trading, conflicts of interest and moredirect forms of corruption can increasingly become common (Clayton 2001, p. 16).

Further, neoliberals argue that high wages (and thus high total cost of local economicactivities) in the USA is a serious barrier which discourages productive investments. Inthe USA, too, loans and financial schemes are seen to be partial and unsuccessful policymeasures for a successful production growth strategy. Indeed, these traditional incentivepolicies offer only marginal solutions, often encourage rent-seeking, clientelism,favoritism and squandering, and usually recommend some temporary assistance,without getting at the root of the problems. The answer is twofold: 1. special emphasison capital accumulation and on government finance and guidance of higher levels ofinvestment; and 2. selective incentives to key favored firms and disincentives todisfavored industries and services (Karagiannis and Madjd-Sadjadi 2007).

1. Planned investments on specific knowledge, technological innovation, specifictraining and research, must provide the industrial requisites to thoroughly support theprioritized sectors and activities; increase the total quantum of skills and expertise;and boost the overall competency and competitiveness of the American economytoward higher rates of growth and “high wages high productivity”. The key issuehere is that investment responsibilities should be closely tailored to the needs of thebusiness sector with a view to loosening the fetters and accelerating the pace ofprivate investment (obviously, private sector investment on real production—insteadof merchant-type activities—and on the “accelerators” of endogenous developmentand competitiveness is also highly desirable and essential).13

2. Selective incentives/disincentives provide important benefits and must beconsidered as one tool in the industrial policy arsenal. Disincentives to disfavoredand unsuccessful businesses or services, such as imposition of higher licensing feesor duties for such enterprises, can release capital for industrial development either

13 Investments in education, health and nutrition of the poor in particular, not only meet real, basic needsof a wide spectrum of the US population and increase their welfare directly, but also enhance theircapacities for productive labor. Indeed, such spending can affect the productivity of the poor, therebyenabling them to earn higher incomes, which in turn would permit them to purchase the bundle of goodsand services they need with their own earnings (necessary to open up their access to opportunities for afull life). But, on the other hand, social programs are likely to have limited impact on the country’seconomic growth or competitiveness unless the overall development strategy also contains explicitconsideration of growth-generating policies and competency-inducing plans.

through revenue enhancement or by channeling investment into targeted sectors. Inaddition, selective disincentives are somewhat impervious to challenge in that theyconfer no perceivable unfair advantage to the country utilizing them. This has theadditional benefit of simultaneously adding sectors that are being emphasized.Therefore, discouragement of unfavored businesses and services accelerates theprocess of moving capital out of them and into the more favored ones. Moreimportantly, in the face of trade agreements and competition among nation-states,this option enables industrial policy makers to justify the gradual ratcheting down ofincentives to force disfavored and unsuccessful businesses or services to stop“suckling the mother’s milk of subsidies” (Karagiannis and Madjd-Sadjadi 2007).

Emphasis on Quality

For the USA to succeed, it must do so as a quality value-based producer, as opposedto simply a low-cost one. The United States simply cannot compete in the low-wageareas and so must, instead, be ever vigilant to improve quality and provide goodvalue for the consumer. This must be a recurrent theme throughout the supply chainand requires the institution of modern management techniques such as just-in-timeand total quality management. This also requires constant retraining of workers, anemphasis on purchasing high-quality machinery, and having an adequate supply oflabor to configure and maintain these machines. It requires an understanding ofproper inventory control procedures and minimization of transportation costs, aswell as rigorous quality control and testing.

The government and society must realize that the actions of individual businesseswill reflect on all companies in the country. Thus, export licensing is important toensure that the nascent export sector is not stymied by the actions of a few who wishto take shortcuts to success. American firms must realize that, in order to be globallycompetitive, they must achieve on both quality and price, providing the most “bangfor the buck”. Products that do not live up to these standards not only will backfireagainst the firms that produce them but against other American companies too,causing a further deterioration in the terms of trade and the balance of payments(Heizer and Render 1996, pp. 79–80).

Politico-Institutional Reforms

In the American system of government, the President of the United States sets thetone for the rest of the nation. Although legislators may serve an unlimited numberof terms, none of them have the same bully pulpit afforded to the President and nonehave the same national mandate that is carried by a Presidential election. Planningcannot occur in the legislature with 535 representatives acting not in concert, butrather as independent voices working on behalf of their constituents. Although thereis a considerable degree of party discipline, it is still not at the same level as is foundin parliamentary systems and, furthermore, the separation of the executive branchfrom the legislative branch means that the administration of laws does not alwayscoincide with the passage of laws. This means that all policies are developed in shortsegments by one elected government, and often conflicting policies are enacted insubsequent short segments by the next elected government. This is a fundamental

feature of any system that has term limitations on its executive branch. However, thisis a major constraint on the pursuit of developmental strategies and policies as USgovernment institutions are limited in their abilities to perform certain tasks. For thisimportant reason, and perhaps for others, strategic developmental action in the USArequires wide consultation, broad political consensus, a strong sense of realism, andcommitment to “national purpose” goals in order to ensure that such thorough,technically proficient strategies cannot easily be reversed, but they are simplyratifying plans already established.14

To argue this is not possible is to deny the radical overhaul of the US underFranklin Delano Roosevelt. Such a fundamental transformation requires a set ofcircumstances that will be favorable to such a policy shift but these circumstancesappear to be coming into alignment. Certainly, it will not be easy but when facedwith the choice to evolve or die, animals do one of those two things, and institutionsdo the same. The key is whether the need for radical change is recognized earlyenough for Americans to be the managers of that change and controllers of their owndestiny or whether they will lose that ability and instead be shaped by thecircumstances.

It is argued here that a central core is needed, a Bureau of Industry and Trade—apowerhouse dedicated to raising the quantity and quality of industrial investmenttoward establishing the targeted sectors. This core planning staff should consist of asmall, entrepreneurial team rather than a vast bureaucracy: we must avoidsquandering people and resources over a whole range of bureaucratic activities.The team should be recruited partly from within the civil service (choosing brightand highly competent members), but also from business, professionals, and theacademic and scientific world: a “new look Bureau” would need some well-educated, well-trained and efficient technocratic planners. With the assistance ofconsultants (if needed), the US government establishes the politico-institutional linksbetween government and industry, and forms a broad consensus on the best policiesto pursue (Cowling 1990, p. 24).

Economic policy will be built around the twin pillars of Treasury and Industry: theformer with a relatively short-term demand perspective; the latter with a longer-termsupply perspective. The new Bureau should be organized around the requirements of astrategic planning agency with a long-term commitment and the powers to intervenedecisively and take the necessary policy action (Cowling 1990, p. 24).

Still, more work is needed in other areas to ensure a transition to a highertrajectory development path. Without fundamental reform of existing governmentinstitutions, the results will likely be stillborn. Government intervention requires atechnocratic public sector that also benefits from managerial competency that canthoroughly formulate and properly execute policy, and bring about desirable results.It has to be reminded that by promoting the interests of the few over the needs of themany, the American society has suffered from an overemphasis on the needs ofspecial interests.

14 Wide consultation, broad political consensus, determination, a strong sense of realism, and commitmentto “national purpose” are deemed to be necessary prerequisites—indeed, they are inevitable—given therange and magnitude of the country’s socio-economic problems, vexing production decline, andunsatisfactory macroeconomic performance.

Undeniably, the US has suffered, and continues to suffer, from an erosion ofpolitical institutions owing to changes in the structure of class relations. This must bedealt with if developmental action is to be pursued. Theoretically, developmentalstates are ones that have “strong” politico-institutional structures that allow thegovernment to resist these influences and put in place policies that serve the nationalpurpose rather than narrow special interests. These policies need to be crafted in aconsultative manner with scientists, experts, and forward-looking businessmen. Atthe same time, a technically competent public administration that is well-insulatedfrom harmful political interference needs to stay focused on carrying out the policiesthat have been introduced. Just as important, functions of various governmentalagencies need to be arranged so that spheres of operation are not overlapping so as toreduce to a minimum interdepartmental conflict that retards the ability tosuccessfully implement policies in the USA (Karagiannis 2002).

In order to be effective, the politico-institutional structure must be altered to allowfor a pathway to successful production-oriented selective interventions designed topromote economies of scale and network externalities that can enhance Americandevelopment—since policies to undertake development require appropriate andeffective politico-institutional structures. Unless politico-institutional conditions arereformed, any attempt to promote endogenous development will be stifled. Thus,institutions need to be reformed so that a national development plan that is consistentwith the realities that currently exist in the United States can be developed andimplemented successfully (Karagiannis and Madjd-Sadjadi 2007).

In order to achieve success, the following preconditions must be met: 1. thegovernment must credibly commit to pursuing a production-oriented strategy; 2. thegovernment bureaucracy must be streamlined and insulated from political andindustrial pressure, and the skill base of government employees must be upgraded; 3.government employees must be given greater power to implement policies as well asgreater responsibility for the consequences of these activities; 4. a long-termdevelopment view must replace the current focus on the short-run in both thegovernment and the financial sector; and 5. the government sector must have itsincentive structure changed so as to dissuade the pursuit of rent-seeking and othercorruptive behavior (Ahrens 1997, p. 116). Without these preconditions, such analternative development strategy for the USA will founder on short-term expedients,the deficiencies and conservatism of the civil service, the existing configuration ofsocio-economic power and certain interests, or the mindset of politicians and people.

Conclusions

This paper has sought to establish the US case for selective government action by:describing the form an endogenous development strategy should take; proposing thealternative energy and other industries as key propulsive sectors of high potential;and outlining the way of creating appropriate institutions. Finally, necessary policysuggestions were made to support this alternative national development frameworkfor the United States.

The pursuit of orthodox economic policies over the past two decades suggeststhat the “invisible hand” alone cannot be relied on to promote the required economic

adjustment. In this context, ideological issues also play a role. It is thus necessary toexpose and challenge both the current complacent orthodoxy and the failedneoliberalism. Instead, a strategic approach encompassing thorough, technicallyproficient developmental action and industrial targeting must be seen as necessary inthe face of the unprecedented changes in the global environment. To be successfulwill require wide consultation, broad consensus, government intervention of highquality, determination, and special emphasis on production-oriented growth.

There is no need for vast bureaucratic machinery and procedure because the approachis clearly entrepreneurial. Such an approach will utilize and maximize the productiveresources available for endogenous development; promote cross-sectoral links, andcreate economies of scale across a range of industries and firms; place emphasis on theaccelerators of competency and development; and, finally, identify inefficiencies andgaps to adequately develop and use new products and processes—enabling bothgovernment and private policy-making to be better targeted. Such an alternativeframework will also have to be underpinned by strong commitment to nationaldevelopment, and collaboration among government, business, and civil society.

The current conditions in world economy may increase the potential advantagesof pursuing governed-market policies. Indeed, contrary to the “current orthodoxy”,the accomplishment of these strategic development goals requires better governmentaction, and this is most likely achieved from developmental state-type policies. Thisis what the US economy needs. What really matters is not the “extent” ofgovernment intervention but the “quality” of such intervention.

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