Localizing the Economy

NOW that President-elect Clinton has selected his senior economic advisers, led by highly regarded Sen. Lloyd Bentsen of Texas and New York investment banker Robert Rubin, he must turn to the difficult task of implementing an economic plan for American renewal and growth. In doing so, Mr. Clinton must choose between a highly centralized economic strategy driven by Washington agency bureaucrats and federal categorical programs or a locally based strategy that empowers communities and local decisionmakers across the country.

The Clinton administration should resist the mistaken but beguiling notion that America can be rebuilt from Washington. Pressure for a centrally managed industrial policy will come from many sources, including congressional leaders, federal policy experts looking for new programs to run, and big business. These forces were evident this year when Congress, confronted with large losses of jobs and industrial capacity due to a declining defense budget, took its first step toward an industrial strategy by pr oviding $1.6 billion in transitional assistance to defense firms and workers. But what began as a promising endeavor resulted in 26 separate categorical programs. Several new programs will take more than a year to put into operation, long after many defense firms cease to exist.

This cumbersome, fragmented, and ineffective approach reflects a well-intended but counterproductive disposition to address every challenge with a separate program.

In fashioning a new industrial strategy, federal lawmakers should consider the advantages of decentralizing management and streamlining administration to foster grass-roots economic development.

First, states have working relationships with the private sector and have proven programs in place, run by seasoned professionals who know how to use government resources to leverage private investment. Federal initiatives to bolster existing state and local programs would build an industrial strategy from the bottom up. Building a dual system with centralized decisionmaking in Washington would be wasteful and time-consuming.

Second, technology transfer between public research institutions and the private sector does not generally take place in Washington. Technology transfer is a labor-intensive, locally originated endeavor. Creating new commercial research authorities in Washington is not as productive as building thousands of local bridges between public research and private interests across the country.

Congress already spends $76 billion annually on research and development - four times its annual investment in highways and mass transit. While this funding supports more than 700 federal laboratories and research at hundreds of universities, virtually none of it is spent on technology transfer.

Before we create new federal research authorities in Washington, let's focus on commercializing existing technology. We should expand the manufacturing and technology extension services that states have already created to take technology off the laboratory shelf and into the workplace.

THIRD, state and local tax-exempt bonds should be utilized to bolster a national investment strategy. Rather than have Washington bureaucrats pass on the merits of grant proposals in parts of the country they have never seen, let local experts who must live with their decisions evaluate the merits of projects. Over the last decade, Congress has made it increasingly difficult for state and local governments to fund infrastructure and economic development projects through tax-exempt bonds. Reversing this t rend would enable states to rebuild public infrastructure, creating jobs today and enhancing our nation's future productivity.

This approach is much less expensive than creating or expanding federal grants programs. A $1 billion federal revenue loss from state and local tax exempt bonds could support more than $40 billion in capital spending for worthwhile projects. This will be as close to a federal capital budget as the Clinton administration can hope for in the next term.

Fourth, federal incentives to stimulate economic growth should focus on human-resource investments. Immediate productivity gains can be achieved by introducing high-skills work systems at existing manufacturing facilities. At several defense firms on Long Island, introduction of new, high-skills production methods resulted in a 10-to-1 return on investments in the first year of operation. Regrettably, none of the 60 federal jobs-training programs support on-site training to implement new, high-skills pro duction methods.

Many states have filled this void by developing on-site training programs for employees at existing plants. These public investments leverage private job training dollars and permanently upgrade worker skills. If Washington is prepared to subsidize the acquisition of new equipment through an investment tax credit, it should also invest in workers by supporting state skills-training programs targeted on existing manufacturing facilities.

Finally, we should revamp the defense conversion legislation enacted last year. Programs should be consolidated, administration streamlined, authority delegated to states, and expenditures of funds accelerated to meet the immediate needs of defense firms seeking to make the transition to commercial markets. Future assistance should be provided through industrial innovation grants to states. By putting the economic agenda in the hands of millions of Americans across the country, Clinton will draw on the n ation's innovation, creativity, and entrepreneurial spirit.