Industrial policy loses steam as an issue in '84 presidential race

When Martin S. Feldstein, chairman of President Reagan's Council of Economic Advisers (CEA), decided last fall what to discuss in this year's annual report of the three-man panel, he figured the controversial issue of ''industrial policy'' would be a hot election issue.

''I don't think so anymore,'' he said in a recent interview. ''I have a feeling that the candidates are wandering away from it. I don't think it's a topic that excites the American public. But there was enough talk about it in economic circles, congressional circles, that it seemed worth trying to set out the different arguments, the foreign experience.''

That effort took a 24-page chapter in the annual report that came out early in February.

In a sense, the United States has at least an ad hoc industrial policy, in that tax, regulatory, safety, or other government policies have an impact on industrial decisionmaking. But proponents of industrial policy argue that a conscious, coherent government strategy is necessary to revitalize the nation's manufacturing sector. They often cite Japan as an example of a nation with a successful industrial policy.

Industrial policy is a vague term that can vary in its interpretation from mere government studies of future industrial opportunities to government financing and planning with some muscle behind it.

Among the concrete proposals are:

1. A central agency to shape the federal government's industrial policy.

2. Councils including representatives of business, labor, and government to gather information on specific industries and forge a consensus strategy.

3. A federal development bank to invest money in industries deemed to receive inadequate capital from private financial markets.

4. Government aid and import protection for declining industries to help them adjust to new economic conditions.

The Democratic Party presidential candidates are divided on the issue of industrial policy.

Walter F. Mondale endorses a limited industrial policy to increase competition, helping out with aid to education and research. Only George McGovern proposes the creation of publicly financed industrial development banks at the state level. Jesse Jackson also supports an industrial policy, but doesn't want any large new agency.

But John Glenn opposes any large agency or development bank, and Gary Hart calls for the cooperation of business, labor, management, and private capital to facilitate growth of key industries.

One reason industrial policy has lost some of its backing in Democratic circles is the economic recovery. Industry is coming back rapidly without government direction.

Another is that some leading Democratic intellectuals have attacked industrial policy. ''Charlie Schultze is a good example of the kind of intellectual support you can get in the Democratic Party,'' Dr. Feldstein said. Mr. Schultze, now at the Brookings Institution and formerly President Carter's chairman of the Council of Economic Advisers, strongly opposes the idea of an industrial policy.

In the CEA's annual report, Dr. Feldstein argues that an industrial policy is meant to deal with a nonexistent problem - the long-term decline of US manufacturing. Although selected manufacturing industries face serious problems, the US is definitely not ''deindustrializing,'' he notes. The output, employment , and capital stock of US manufacturing grew from 1950 through 1980. (Since then , because of recession and recovery, output has plunged and bounced back.)

''Moreover,'' the report continues, ''manufacturing's share of total output and capital stock was roughly constant between 1960 and 1980. The manufacturing share of total employment progressively declined, but the decline is a sign of relative productivity growth, not a sign of industrial demise.

''There is no evidence of either an absolute or relative long-run decline of US manufacturing output,'' the report asserts.

However, US manufacturing has shifted away from capital-intensive, labor-intensive, and resource-intensive industries toward high-technology-intensive industries. Between 1960 and 1980, high-tech industries saw an increase of more than 40 percent in their value added - that is, revenue of these high-tech industries minus the cost of inputs purchased from other industries. High-tech employment increased by more than 20 percent.

Indeed, Dr. Feldstein held, US manufacturing output and employment have generally performed well compared with other major industrial nations. Output and employment grew more rapidly in the US than most European manufacturing sectors between 1960 and 1980. Japanese output grew more quickly, but the difference with the US declined substantially after 1973.

The council's report goes on to argue that the use of industrial policy to solve the problem of declining industries would be mistaken because it could slow necessary adjustments. The government would find it ''very difficult to cut off or even phase out the aid, as various European governments' experiences with declining industries have shown.''

Feldstein does not even concede that Japan's industrial policy is a good example for the US. But he suggests the management of individual firms could learn some lessons from the Japanese.