Many conservative commentators are upset with President Obama for his expansive economic policies, which have or soon will extend federal control into a wide variety of businesses in the auto, finance and health care sectors. About 2 weeks ago there was an article in the Wall Street Journal by John Steele Gordon outlining why government can’t and shouldn’t run industry. (Judge Richard Posner has expressed similar reservations). Here’s the summarizing paragraph from Gordon’s article:

The Obama administration is bent on becoming a major player in – if not taking over entirely — America’s health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government’s track record in running economic enterprises. It is terrible.

Mr. Gordon’s first “case in point” regards a factory built by the federal government during WW1, to produce steel for battle ships. Quote from Mr. Gordon:

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however — three years after World War I had ended — it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen . . .

I was having a slow day at work, so I decided to get on Google and find out what Mr. Gordon was talking about. It turns out that he was referring to the South Charleston, WV Naval Ordinance Plant. The plant was authorized by Congress in 1916 and the north unit, meant for shell production, was completed and in service in 1918. The armor production plant, which was a fully integrated steel mill, was operable in 1921, after the war was over. Mr. Gordon implies that private enterprise could have built the mill faster. I’m no expert, but five years to get a fully integrated steel mill planned and built, i.e. a factory that takes in coal and iron ore at one end and outputs cut-and-finished steel products at the other, isn’t bad. I rather doubt if US Steel or Bethlehem could have done better, then or now.

The federal government decided to mothball both plants in the 1920s, and had considered selling them in the 30s. However, by 1937 it was becoming apparent that military production capacity would be needed again as Germany and Japan started their campaigns of expansion and genocide. By 1940, the government contracted with two private industrial corporations to re-open the Charleston plants, the north plant for gun and rocket production, and the south plant for armor. By 1940, Carnegie-Illinois Steel had the south plant mill in operation. After WW2 the plants were mothballed again, and the properties were finally sold in 1961.

Oh, I found this out from an article about the factory on a West Virginia historical society site, and another article about President F.D. Roosevelt’s visit to the factory in 1940.

In the end, the armor plant and its adjacent ordinance facility turned out NOT to have been a boondoggle; its available capacity came in handy as Nazi and Japanese expansionism threatened our nation. The plant was operated as a public-private partnership during WW2. This was not the first or last time that would happen.

Mr. Gordon seems to cast government-versus-private operation of industry as an all-or-nothing question. In fact, the truth during the 20th Century was much more complex. One example that comes to mind involves the aluminum industry. During WW2, the federal government needed a lot of aluminum for all of the bomber and fighter planes being used over Europe and the Pacific, so the feds built a couple of big aluminum processing factories. I recall seeing the one in Cressona, PA, out in coal mining country. After WW2 was over, these plants were sold to Kaiser, Reynolds and Alcoa (which ran and eventually bought the Cressona plant), and thus helped to kick-start the post-war aluminum industry for consumer products (lawn chairs, cooking foil, house siding, window frames, etc.).

The feds also semi-nationalized the railroads during WW1. Speaking of railroads, the government owned Conrail from 1976 thru about 1985, as to avoid collapse of the bankrupt eastern RR’s during the oil shock recession of the mid-1970s. After the rail lines to NY, Boston and Philadelphia were rebuilt and industry started using them again, they were sold to private interests, and are now vital components of the two major private rail companies in the eastern USA (i.e., CSX and Norfolk Southern).

Shall I get away from heavy metal, into the modern digital economy? Well, recall that the Internet grew from ARPANET, a 1980s government effort to promote the sharing of defense-related research. The initial infrastructure for the net was put down by the government; private industry took it from there and made it consumer-friendly.

I wrote to my friend Edward Furey, a history grad from Cornell (one of the few Ivy Leaguers I know), whether he had more examples of government involvement in industry during wartime. Being a WW2 specialist, it was not surprising that Ed had a big list. Here’s what came to Mr. Furey’s mind:

Many of the warships that won WWII were built in the Brooklyn Navy Yard and other facilities like the Philadelphia Navy Yard. The Brooklyn Yard, by the way, had been around for a while. They built the Monitor, going from Ericsson’s design to fighting the Merrimac in around 100 days, so the yard was pretty efficient. Rifles and ammo were produced at the Springfield Arsenal. The atomic bomb was designed, developed and tested at government-run facilities, and depended to some extent on the excess electricity made possible by the TVA and New Deal dams on the Columbia River, near Hanford. So the government not only built the weapons, but also supplied the electric power to the plants.

Also, in some cases comparative advantage doesn’t pay off, as when the U.S. government noticed that the best military optics were being made in Germany and Japan. So the Bureau of Standards got into the optics business, making optics for things like periscopes and instruments. For some time it was the only game in town for sophisticated optics, there being no commercial interest in the business.

Finally, the government provided the capital for outfits like Grumman, who were producing 600 Hellcats a month in 1944 in plants almost entirely owned by the Navy.

So, the government can build and sometimes run the facilities needed to win a war. But can they make products and services that can compete in the globalized consumer market of today? Admittedly, that’s a tougher question. Experience from the socialist economies of Europe during the 20th Century suggest that it ain’t gonna work. Here in the USA, we don’t buy cars these days from Renault, Fiat or British Leyland – all nationalized auto companies. We buy them from Honda and Toyota, which are not. BUT, Honda and Toyota aren’t exactly free from government involvement either. The Japanese government was certainly involved in supporting the growth of these firms, especially in the area of finance.

So, it’s not exactly novel or inappropriate for the federal government to become heavily involved in certain critical American industries. Government can take a broader and longer-term view
than the markets can. But the politicians and bureaucrats also have to remember their limits. Government must cooperate with market-driven participants in order to avoid the worst of what John Steele Gordon rightfully identifies regarding the sins of public administration (inefficiency, poor quality, no sense of what customers really want). They have to remember to get out as quickly as possible after they get involved in an industry. Hopefully, President Obama and his team will look to what actually took place in South Charleston, in Cressona, along the eastern railways, and along the information highway, as an interesting set of lessons regarding “industrial policy”.

We obviously need more “industrial history”, and more accurate history, in the current debate about the Obama Administration’s long-term economic plans.