Interesting article. As always... a few comments...
1) Industrial policy (as classically defined) tends to be "good" for lagging countries where the future trajectory of innovation is understood. Even in this situation, it does not work well unless the industry can find a non-innovation based value (ex cost[China] or quality [Japan]).
2) Long term "industrial policy" is much more driven by the rate of innovation... and this requires quite a bit different machinery... perhaps even societal culture. Totalitarian societies are awful in this regard. Freedom is not just a moral value, but a key economic one as well.
3) The rate of innovation is highly correlated with the ability of a country to attract the world's best talent, an ability to "arm" them with resources, and a society which can accept disruption.
4) Linear economic development can be developed with a follower economy. However, over time an innovation paradigm will generate disruptive changes which lead to accelerated growth.
Finally, economists and any policy based on economic studies tend to miss the impact of these non-linear technology trends. Leading to something like the current situation where there is puzzlement at lowering inflation, raising interest rates, AND economic growth.
"Totalitarian societies are awful in this regard. Freedom is not just a moral value, but a key economic one as well."
I wish this were truer than it seems to be. What most surprised me in Noah's post was the repeated references to Park Chung-hee's industrial policy, without reference to the fact that it was both a policy of and a rationalization for a highly autocratic dictatorship that eased only years after Park's assassination (by an associate). Park's industrial policy hit high gear only after his presidency was transformed from a democratic one to a military-backed dictatorship under the novel Yushin Constitution. This allowed Park to use state power to coerce industry into a government-led cooperative (anti-competitive) framework, with a lot of resemblance to classical fascist corporatism (from the perspective of my limited knowledge).
As I understand it, Park's model had high influence on Singapore under Lee Kuan Yew, Taiwan under the Chiang Ching-kuo regime, and the PRC during the Deng years, all authoritarian states, to varying degrees (and with very different specific characteristics--I wouldn't equate any, including the PRC, to Park's ROK in terms of their degrees of totalitarian control).
While South Korea was the proximate inspiration for the Asian "Tiger" economies, Park's inspiration was, I believe, the government-led strategy of postwar Japan, which was something closer to a democracy (albeit virtually a one-party one), implementing industrial policy through its bureaucratic Ministry of International Trade and Industry. That seems to me actually a more applicable model for the US case. Japan's spectacular rise was independent of any "attraction of the world's best talent," but I believe its approach did surpass the later example of the Tigers in fostering innovation. (I'm doubtful that was much a function of the LDP and MITI's role, however, and so not actually an offshoot of industrial policy per se.)
Great examples. My sense is that there are different sorts of "freedom."
What tends to happen is that conventional industrial policy (MITI, SK, Taiwan or the Singapore) tends to "work" in the situation of clear objectives... which only happens when one is behind and can see a leader. This was certainly the case with MITI and SK...don't know about Singapore. As evidenced by the successes in some of these situations, this CAN work in the short/medium term. Key ingredients are clear objectives, often attraction of foreign talent/know-how/smart investment... so you need enough "freedom" to attract foreign interest. Also, the resulting companies have to be globally competitive, so enough "freedom" to operate in foreign markets.
However, what also seems to happen is that the structures one builds for this situation also are not great for catching the next wave of technology innovation. As an example, to my knowledge, none of these situations host the emerging technologies which will drive the world for the next 20 years. I think the reason is that one of the criteria is allowing for the destruction of the past. In the SK and Japan case, it might be allowing sufficient competition to allow for the destruction/restructuring of the big global companies.
The US example is the study of the churn in the DOW. The survival rate of individual companies over a long period of time is pretty poor. The next big mega-companies are built from a creative destruction process which is very hard to predict because it is a function of situation/technology/culture.
Thanks for the good reply, rahul. I think you're correct that the industrial policy of the 1950s-1990s relied on the US as a leader-model in terms of industrial sector success (though not in terms of policy precedents). But in this regard, I think that the lesson is that we can't generalize from past history when it comes to industrial policy for the leading power, the US.
As for a leader-model in terms of policy precedent, I think that Japan played that role, and did so in a remarkably insular way. After the end of the American Occupation, Japan returned to its traditional pattern of highly restrictive immigration and emulation (not importation) of know-how, a pattern that Japan was self-consciously aware had produced dramatic results in the 7th-8th and 19th centuries. (Japan was also aware of the Nazi precedent in 1930s Germany and the US response in 1942-45: periods of intense war create short-term industrial policy eras in many countries.) So far as I know, the ROK also did not import expertise: Park was very much a product of Japanese colonialism and looked inward to emulate others, as Japan had. While I think Singapore followed a far more open model, of necessity (and I suppose British Hong Kong, whose growth to Tiger status I know next to nothing about, did too), so far as I know, 1980s Taiwan did not have the allure to bring in either talent or foreign investment on a major scale.
When you write that Japan and the Tigers are not likely to be great for catching the next wave of technology innovation, I think you're shifting ground. They didn't catch the last wave either--with a few exceptions (Betamax?) none of those economies were major technological innovators. Their power was basically exploiting technologies developed elsewhere by deploying efficient industrial policies which Western countries were loath to deploy, perhaps because of the Nazi example and a presumed link between such policies and authoritarian government. I think that presumption has some justification, but I also think that an approach largely leaning on financial incentives (like the IRA) may demonstrate that the government role can be non-coercive (vs., e.g., the ROK and PRC), and corporate tradition be non-oligarchic (vs. Japan). (I dislike the term "creative destruction"--I think it smacks of smug social Darwinism--but we can see from Japan's example that industrial policy that becomes inscribed as established order degenerates into a type of industry protectionism.)
Thanks for the insightful response... especially into the deeper insight into the cultural aspects. I come from the world of electronics and in this world, Japanese have certain areas (optics) where they are uniquely world-class. These days south korea has developed a similar unique capability in the area of DRAM semiconductors.
On Taiwan, I don't claim to know much about the broader history but do know the history of TSMC. TSMC was seeded by Texas Instruments (TI) employees which were attracted away from the US. Thus, a very specific example. A confluence of events made this company very important. First, they grew competence in the space and are now unquestionably world-class. Second, they innovated/took risk on a business model which was unproven at the time. Third, a whole class of companies wanted to decouple the cost of the fab from the chip product, and they offered a uniquely global oriented collaboration model.
On the IRA, we will see... I think it is a delicate balance. Specifically, it takes a regulatory/political which frames problems and not solutions.
Very interesting story about TSMC, which I didn't know. I followed up (on Wikipedia scale). The company is, as you say, a TI-employee spin-off, and the government on Taiwan did recruit its founder, Morris Chang, to the island, where he hadn't lived before, to lead a government-sponsored non-profit research institute. In that sense TSMC is indeed the outcome of industrial policy leading to the recruitment of international talent with a major industrial payoff. An unusual wrinkle, though, is that through the Chiang Ching-kuo regime, at least (I don't know the situation now), the Taiwan government would have regarded Chang as a Chinese national and thus a presumptive citizen in Taiwan, not immigrant talent. It is certainly true that in the cases of both Taiwan and the PRC this sort of overseas-Chinese international talent was actively sought out, but it was in the context of "repatriation," rather than internationalism. (I don't mean to dismiss your point about attracting international talent, but I do think cultural differences limited what that meant in most of Asia--less so for HK and, perhaps, Singapore--if we take the idea to be represented by the US example, which is far more expansive in both geographical reach and ease of assimilation.)
I didn't mean to suggest (as it probably sounded with my Betamax comment) that some of the Tigers and Japan have not ultimately taken their places as sources of leading innovation. Japan is particularly well known for Nobelists in the sciences. I was focusing on the shorter term role of industrial policy boosting these economies towards top-tier world status. Now, 40-70 years later, I'm sure there are many examples that show they have become mature contributors to technological innovation in the areas of their greatest strengths. You named two in your first paragraph about which I'd had no clue. (I wouldn't actually be surprised to learn that I was wrong about earlier decades too.)
Profit incentives create the world’s best talent. Smart people are drawn to lucrative, innovative companies. The supply of smart people is fixed at around 5 percent of the population- that isn’t going to change- the question is what do they train themselves to do/where do they work?
Money makes Google or a tech startup as interesting as Goldman Sachs or McKinsey or a law firm or a medical residency.
yes... agree..the profit incentive is super important. Also, it disciplines investment, encourages risk-taking. The result is typically a jump up in societal productivity which creates the situation for a better lifestyles .... both gadgets as well as time.
I appreciate Noah's highlighting the recently released work of Juhász, Lane, and Rodrik (2023), his observations regarding the reactive tendencies of the economics profession, and laying groundwork for continuing assessments of the what, how, and why of U.S. industrial policy. The authors also posted a two-page summary of their perspective on Project Syndicate, "Economists Reconsider Industrial Policy." https://www.project-syndicate.org/commentary/new-economic-research-more-favorable-to-industrial-policy-by-dani-rodrik-et-al-2023-08 I offer the following observations as someone who's continuously worked in the U.S. industrial policy realm since 1978:
-- as a summer graduate intern in the industrial policy shop of Carter's Secretary of Commerce;
-- an MIT graduate research assistant (1978-82) to dissertation adviser Ben Harrison (Deindustrialization of America), the Energy Lab's photovoltaics program, and the International Motor Vehicle Program;
-- author of the manufacturing chapter of Ira Magaziner's RI Greenhouse Compact (1983 and the basis for my dissertation);
-- founder of two regional economic development consulting firms (1984-2004) (initial clients of our team: AK Gov. Bill Clinton and Burlington VT Mayor Bernie Sanders);
-- co-author of Brookings brief "Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies" (2008) which became the basis for EDA's regional industrial clusters program https://www.eda.gov/funding/programs/build-to-scale and which facilitated co-author Karen Mills becoming Obama's SBA Administrator and co-author Elisabeth Reynolds being Biden's supply chain assessment coordinator;
-- co-founder of the ISA's industrial policy webinar series;
-- publisher of the weekly ISA Industrial Policy and Strategy Update; and;
-- as public policy research professor at George Washington University, quarter-time staff to the American Economic Association's committees on government relations and economic statistics and consultant to Third Way's U.S. Clean Energy Industrial Strategy project.
-- From 2004 until industrial policy's revival, my focus was on improving the federal statistical system for economic decision-making and research, with a particular focus on the role of Decennial Census in the allocation of trillions in federal funding; stopping the dismantling of Economic Census, the American Community Survey, and the Survey of Business Owners; and keeping the citizenship question off the 2020 Census.
Observations for discussion:
1) In the capitalist framework, national economic competitiveness depends on the capabiity of the government to provide incentives that move the nation's businesses, the source of its economic well-being, towards greater international competitiveness. To achieve this end, economists apply the tools they know well, that is, they tend to think of industrial policy as top-down economic engineering in which analysts help policymakers determine the quantitative if-thens of competitiveness in individual sectors (e.g., semiconductors) and craft and implement programs based on the perceived if-then dynamics.
2) In practice, the economic engineering approach is difficult to make work for several reasons.
a) As technologies, markets, and each nation's competitiveness constantly change and so throw off the validity of any if-then beliefs as of the moment. The trick is to develop mechanisms that facilitate public-private consensus-building regarding responses to an ever-changing set of issues and opportunities.
i) In practice, it turns out that successful industrial policy relies on the collaborative (public-private) application of the principles of business strategy to each traded industry deemed key, e.g., chips, clean energy, AI. As a consequence, I find "industrial strategy" to be a more appropriate term than "industrial policy," as the latter implies an approach of "set and forget," which in my experience is a recipe for failure.
iii) Through this lens, an important contribution of the Juhász, Lane, Rodrik paper is the introduction of " the concept of “embedded autonomy,” borrowed from sociologist Peter Evans, to characterize an alternative model of regulation, based on iterative collaboration between government and firms."
iv) Again with DOE, a good example of this approach is Li-Bridge, which is focused on "the development of a robust and secure domestic supply chain for lithium-based batteries." https://www.anl.gov/li-bridge
v) The collaborative strategic approach has been applied successfully at the state and local level for the last 40 years. While it's much more complicated to do at the national scale, the principles are the same.
b) While the U.S. has a very good federal economic statistics system for macroeconomic policymaking, it has a lousy one for industrial competitiveness. The latter requires current, reliable industry-specifiic statistics--not only on traditional measures of output, productivity, and wages but also trade in value-added (TiVA)--and we don't have that.
i) At the moment, the value of each import is assigned 100% to the last country that touched it and not allocated among all the nations that contributed value added. As a consequence, we can't satisfactorily measure the nature of U.S. competitiveness vis a vis other nations. Good news -- for FY2023, Congress gave Commerce money to boost TiVA data. https://www.bea.gov/data/special-topics/global-value-chains
ii) The U.S. has two separate systems of economic statistics by industry--one from Census and one from BLS--and about 1/3 of the establishments are assigned one NAICS code by Census and another by BLS. The result, for instance, is that BLS says the U.S. has about 200K chips production workers while Census says it has about 100K. The source of the problem is that Census is authorized to look at IRS tax data and BLS is not, so cannot sit down with Census to reconcile its business register listings with the Census Bureau's. For details, see p. 168 of FY2024 Treasury Green Book https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf
iii) In developing the new Annual Integrated Economic Survey, Census found that about 1/4 of its case study establishments were misclassified in NAICS. This finding led me to ask OMB to direct Census to examine this problem and how it might be addressed, which OMB did in July. See terms of clearance at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202303-0607-003
The authors note that really any kind of government intervention into free markets is a kind of "industrial policy". It seems to me that even developed countries like the US still use tons of industrial policy, just no one seems to call it that for some reason. You mention the support of exporters but it seems that things like the farm bills every country has or the various government programs to support small businesses are another.
Is there some reason those seem to always be overlooked as industrial policy and do any of the referenced papers you're diving into look into them? It seems like an area ripe for learning since we can compare developed nations policies which (may) have more salience.
There’s no question this “industrial policy” shaped the industry for more than a century, with huge effect on national security, especially during WW2. And of course now seems to subsidize burning hydrocarbons and worsening the climate crisis.
3) Back to the notion of industrial strategy, the CHIPS and Science Act lays out a decent framework for developing and implementing one for science & technology competitiveness.
a) Congress specified the nation's ten "key technology focus areas" and directs NSF to annually review and revise this list. (Sec. 10387)
b) Congress directs OSTP to:
i) create an NSTC interagency working group that "shall seek to ensure that the activities of different Federal agencies enhance and complement, but, as appropriate, do not duplicate, efforts being carried out by another Federal agency" within the key technology focus areas designated by Congress in 2022 and by NSF thereafter. (Sec. 10651)
ii) conduct by December 31, 2023 and every four years thereafter a Quadrennial Science and Technology Review, " a comprehensive examination of the science and technology strategy of the United States, including recommendations for maintaining global leadership in science and technology and advancing science and technology to address the societal and national challenges and guidance regarding the coordination of programs, assets, capabilities, budget, policies, and authorities across all Federal research and development programs." (Sec. 10613)
iii) prepare by December 31, 2024 and every four years thereafter "a comprehensive national science and technology strategy of the United States to meet national research and development objectives for the following 4-year period." (Sec. 10611)
c) OSTP, then, is on the hook to create a unit that has the capability of carry out the items in b), i.e., be the brains of the operation. OSTP is addressing a series of organization challenges to fulfilling its mandate.
d) Keep in mind that graduate programs in industrial strategy/policy don't exist--in OSTP and elsewhere, this is all being figured out on the fly by smart people without the desirable training or experience. Thought experiment: If you were to design a master's degree program in national industrial strategy, what would it look like?
4) Little known and understood today, from 1790-1930 the federal government actively pursued industrial strategies and policies for the purposes of national competitiveness.
a) Tariffs, a form of economic engineering, provided the foundation of these efforts. Until the Great Depression, Congress was highly invested in keeping the power to set tariffs and sought, over and over and over again, plans, strategies, and data to guide its efforts. In fact, as I described for the U.S. International Trade Commission centennial history volume (2017), the present-day federal economic statistical system (Census-1810, BEA-1820, BLS-1888) is built entirely on the foundation of congressional efforts to get the data it thought it needed to set tariffs. See Ch. 2 of https://www.usitc.gov/publications/other/centennial
b) Around 1820, Henry Clay articulated the broader American System of Economics as a framework for national economic devevlopment. The principles were largely implemented by Abraham Lincoln during the Civil War, as the Democrats who'd blocked muscular federal economic development efforts had left the government. So under Lincoln, Congress created the USDA and the National Academy of Sciences and passed land-grant programs that built state public universities explicitly for economic competitiveness (Morrill Act); the transcontinental railroad (Pacific Railway Act); and the Homestead Act. Soon after his death, Congress created what today is the National Center for Education Statistics.
c) From 1900-1930, federal industrial policy was pursued through corporatism, i.e., close business-goverenment collaboration. A great example -- in 1912, the Commerce Department's Bureau of Manufactures organized a conference of 700 local chambers of commerce to charter a U.S. Chamber of Commerce because the government needed a nationwide business partner in taking advantage of European demands for U.S. goods. The premier practitioner of government-business collaboration was Commerce Secretary Herbert Hoover (1921-1929). I describe his efforts in a recent article for BEA, "The Origins of the Survey of Current Business: A Window on the Evolution of Economic Policy, Research, and Statistics" https://apps.bea.gov/scb/issues/2020/10-october/1020-origins-scb.htm
d) As a side note, the BEA article shows how, ironically, Hoover's efforts to promote business-government collaboration provide the data foundation for the development of national economic accounting by Simon Kutznets and Robert Nathan in the 1930s, which in turn made effective macroeconomic policy possible.
Your point 4 is extremely under appreciated today. Not only was industrial policy the norm for the US from its earliest years until less than 100 years ago. But industrial espionage was outright encouraged by the founding fathers. https://www.history.com/news/industrial-revolution-spies-europe
I think state intervention into the economy has to be a sliding spectrum. 100% free markets don't work, but state control beyond a certain point has equally disastrous results. I'm not certain as to where along the spectrum this falls, honestly.
Theoretically it seems like a good idea.... yet if we look at the evidence if Big Government Projects...we see only massive failures like Post Office, Amtrak & V.A. Medical Systems ... and these activities have been around for hundreds to thousands of years... what is the scientific probability.. that Big Government can handle New Knowledge & Technologies... when they can’t do ancient, simple work like delivering the mail??? Since the World’s Most Effective Entrepreneurs, Venture Capitalists & their Staff barely succeed 14% of the time.... asking an Extremely Super Defensive Organization, like Government, to succeed in these lightening speed ,innovative areas , is liking asking a 800 pound Quarterback to be Effective. ... after all what is the last Big Government Success Story... WW II. 1945....
USPS processes about 5,000 pieces of mail per second, with an annual volume of 127.3 billion pieces of mail. It's very price-competitive on time-sensitive and package delivery that it has to compete in, particularly for small businesses that don't get the volumes for UPS, Fedex and DHL rates.
Amtrak is failed by its dysfunctional and inept management -- Congress. And Amtrak's poor performance is a distinctly American problem. While Japan has two shinkansen networks privately owned and operated, Amtrak is structured closely along the lines of European train agencies as state-owned enterprises. The best known are SNCF in France and Deutsche Bahn in Germany. They are profitable, and can operate autonomously like businesses -- namely, employees are not civil servants like Amtrak workers. The sole shareholder or the majority shareholder is the respective governments; in Germany, the state-level governments might also own a share of DB.
Fun fact about SNCF: It exists in the U.S., operating under the name Keolis. It bids on tenders to operate train and bus services. Its biggest contracts are the Boston commuter rail network and in California, half of the Foothill Transit and 40% of the Orange County bus systems. It recently lost its biggest bus contract, half of RTCSNV (Las Vegas), which has decided to return to a sole contractor, the French conglomerate Transdev.
And a fun fact about Amtrak: According to the Rail Passengers Association (ne NARP), Amtrak is America's seventh- or eighth-busiest national airline (if you insert Amtrak's train and/or bus boardings on a list of busiest U.S. airlines; Amtrak is not in the aviation business).
VA: The Veterans Affairs health system is an argument for more government involvement in health-care, not less. It is leaner administratively than the insurance-hospital-industrial complex (the only private provider that comes close to it is Kaiser Permanente, which also provides umbrella health care). It gets the best prices on prescription drugs.
Scientifically, because the VA's patient base it veterans, it provides unique medical treatment affecting military personnel, like PTSD treatments, prosthetics and trauma care to name some fields.
And in Energy policy, look at history.. Jimmy Carters $88 billion ($240 billion todays dollars). SYNFUELS Program... today we have The Green Energy Scam , multi trillions extorted Ftom middle class taxpayers, for a fake green energy , which pollutes equally as fossil fuels ( just HIDDEN MUCH BETTER) but costs/wastes 55% more than fossil fuels.. when analyzed by Independent people... not oriole living off tax grants .. worst.. this Green Energy Grift is totally dependent on fossil fuels to mine, manufacture and operate this wasteful green energy equipment
And inefficient wind turbines that blocked one of the best generation sites (Altamont pass) for decades, designed and built with subsidies by companies that are essentially non-entities in the business now.
I benefited from his program - building passive solar hot water heating systems for Asarco during the late Carter years. Of course they made it with copper! (Rather than black plastic) and we were unionized. It’s all good.
I think your Venture investment model is spot on. It was also Jack Welch's portfolio model and th3 now haha ancient 4 box (BBM?). Star, Growth, cash call, sell... sort of. Also be 1 or 2 or be sold.
Letting go, stopping investment is always the most difficult decision. For business as well. And of course so few new ventures make it to success.
America put on the myopic glasses of Free Trade and Globalization and walked China right into the 2nd most powerful and most dangerous nation over the last 30 years.
What if we had a National Security based industrial policy 30 years ago? We would not have Communist China $10 Trillion dollars from hard working Americans thru China-Mart.
I read that during the Obama administration a bomb made in the US was dropped somewhere in the world every 20 minutes. Lots o’people might call the US the most dangerous country in the world...how did Zelinsky come to power? The overthrow of Yanukovich, which directly led to the Luhansk and Donbas “Republics” and then Crimea. The uniparty decided to sell out our industrial base to the PRC for cheap shit. Change my mind.
Some of the most successful US industrial policy has been research based, not direct investment. Think about the long term return from Land Grant Colleges, NASA or the Human Genome Project. It’s huge. For a developed country, as opposed to one playing catch-up, committing the government to do hard things and funding the research to make it happen has been a good path to policy success.
If there is any space for nonideological comments, I might observe that there is a considerable class of natural experiments that seems to have been little studied at least in the "industrial policy" context. In all of the major wars since about 1850, the combatants have made strenuous efforts to increase domestic production of military goods. The US economy is particularly rich in examples and the results have been various enough to provide considerable statistical contrast. Alexander Field has made a very interesting start on analyzing the World War II US experience, but without any international comparisons and without examining some measures of considerable interest from an industrial policy standpoint. A much earlier study of Japan by Jerome B. Cohen (Japan's Economy in War and Reconstruction) is very limited in methodology and data but still interesting in light of Japan's subsequent putative success in industrial policy. There are also some studies of Britain's industries in the world wars that I have not paid a great deal of attention to. But overall this seems to me a lode in want of mining. At my age it is not something I want to undertake, but I hope that someone will.
I tend to think that governments are an important part of every nation's economy. Interest rates, stability of the currency, intellectual property rights enforcement are as important as an explicit policy of developing a specific segment of industry. There is no escaping from industrial policy. The decision to build superlarge submarines or not build them can not be avoided. Or rather a passive decision not to make any specific submarine mandates is still a decision.
I think we should promote a TSMC plant on American soil even if it does not pencil out right now. After a major earthquake in Taiwan or hostile actions by the PRC will be too late, and either of those events are clearly within the realm of possibles.
I find that the real irony is that the government, who writes the laws, know what direction they want the industry to go in, but won’t tell. Economists in academia are left trying to figure it all out. Wouldn’t it be much easier for government to say what they want, and academic economists tell government how to achieve it. Then everyone tells the public where to position themselves?
Throughout the 1970’s and the 90’s, the mantra has been government is bad, and free markets, deregulation, and Milton Freeman are good. So we were taught lots of laissez-faire and Adam Smith. But all the while, the national economy never worked like this at all. The government still had us moving in a certain direction.
Good and topical post, even though I am a sceptic.
Also, there have been studies on the Korean model of innovation, and especially the Japanese one, which the Koreans copied. Mercantilist, high tariff, coordination between trading companies/conglomerates (Japan) or Chaebols (S Korea) and the government, low domestic consumption. What’s good for GM is good for the country was the US version of the era, except we weren’t mercantilist, our unions weren’t subservient, our voters wanted consumer goods and we didn’t let big corporate power dominate the entire supply chain to the same degree. Some of these studies were produced by Finance and industrial ops professors at B-schools rather than economists. The Japanese model was very much a thing in the 1980s. Check HBR archives.
Industrial policy often fails because it is engineered by politicians and their donors, sometimes supported by partisan hack economists doing the bidding of the the former two groups. Well, that and because nobody is good at predicting the future so the focus is almost always on some currently fashionable idea (as long as it intersects with the donor community).
Here is an example- Yellen is a good economist while also being a partisan hack. Same with most of the CEE.
What was her economic justification for the $2 trillion Covid handout in early 2021 coming immediately on the heels of the $900 billion handout in December 2020? In the end we got more inflation than growth, creating a price squeeze in goods. Where was the economic analysis justifying the IRA as an optimal solution? I suppose the bonus subsidies for union labor was supported by studies from S Korea’s industrialization? 😊
Basic research, prototype competitions, regulatory/permitting reform, investment incentives, job training (in partnership with state universities for skilled factory floor and clean room positions) and low taxes all make a lot of sense to me as do nat sec-oriented policies like a few in the CHIPs act and some of the export bans.
Handing out cash so that union labor gets to assemble Chinese battery components for cars we pay rich people to buy? This wouldn’t be my priority, but I am no expert.
I am sympathetic to industrial policy in theory but in practice there is little to love about it and I am not sure economists are best placed to design it (unless we are talking about broad macro policies like investment credits or supply side/micro policies like regulations and permitting).
Do you think there’s a correlation between the low unemployment and the “hand out” from the passing of the IRA? Are wages increasing relative to the cost of goods and services, or just following inflation? Is real income for low and middle income families finally improving or still stagnating as they have since Ronald Reagan was President?
I’m in Boone Picken’s camp. Why no Natty transportation? We have enough to run them for 50+ years while we figure out the next way to power vehicles...
Surely the best place to start is not with "industrial policy" at all, but rather a policy objective: reducing CO2 emissions, protecting supply chains from hostile disruption, increasing growth of manufacturing, etc. Then one would ask why this might be an appropriate activity for _government_. CO2 emissions, an externality, supply chain disruption, a collective action problem, manufacturing, good question. _Then_ one would ask what is the best instrument for addressing the problem: CO@ emissions, a Pigou tax on emissions; supply chain disruption, a tariff on risky sources of supply in proportion to the risk: manufacturing growth, a tax credit credit on manufacturing plus possibly across the board tariffs and subsidies of manufactured exports.
In the case of the current proposals it looks like only the first two objectives are in play and subsidies for the capital investments of either CO2-reducing technologies or supply disruptions do not seem to be the correct policies.
While your essay dwells on " the common critique that government doesn’t have enough information to “pick winners” or may have difficulty jettisoning "losers," you totally overlook the USA's active industrial policy of subsidizing "winners." Economists should study why we subsidize, for example, the pharmaceutical industry and the gas and oil extraction industries, where the companies involved are both proven successful and extraordinarily profitable.
Interesting article. As always... a few comments...
1) Industrial policy (as classically defined) tends to be "good" for lagging countries where the future trajectory of innovation is understood. Even in this situation, it does not work well unless the industry can find a non-innovation based value (ex cost[China] or quality [Japan]).
2) Long term "industrial policy" is much more driven by the rate of innovation... and this requires quite a bit different machinery... perhaps even societal culture. Totalitarian societies are awful in this regard. Freedom is not just a moral value, but a key economic one as well.
3) The rate of innovation is highly correlated with the ability of a country to attract the world's best talent, an ability to "arm" them with resources, and a society which can accept disruption.
4) Linear economic development can be developed with a follower economy. However, over time an innovation paradigm will generate disruptive changes which lead to accelerated growth.
Finally, economists and any policy based on economic studies tend to miss the impact of these non-linear technology trends. Leading to something like the current situation where there is puzzlement at lowering inflation, raising interest rates, AND economic growth.
"Totalitarian societies are awful in this regard. Freedom is not just a moral value, but a key economic one as well."
I wish this were truer than it seems to be. What most surprised me in Noah's post was the repeated references to Park Chung-hee's industrial policy, without reference to the fact that it was both a policy of and a rationalization for a highly autocratic dictatorship that eased only years after Park's assassination (by an associate). Park's industrial policy hit high gear only after his presidency was transformed from a democratic one to a military-backed dictatorship under the novel Yushin Constitution. This allowed Park to use state power to coerce industry into a government-led cooperative (anti-competitive) framework, with a lot of resemblance to classical fascist corporatism (from the perspective of my limited knowledge).
As I understand it, Park's model had high influence on Singapore under Lee Kuan Yew, Taiwan under the Chiang Ching-kuo regime, and the PRC during the Deng years, all authoritarian states, to varying degrees (and with very different specific characteristics--I wouldn't equate any, including the PRC, to Park's ROK in terms of their degrees of totalitarian control).
While South Korea was the proximate inspiration for the Asian "Tiger" economies, Park's inspiration was, I believe, the government-led strategy of postwar Japan, which was something closer to a democracy (albeit virtually a one-party one), implementing industrial policy through its bureaucratic Ministry of International Trade and Industry. That seems to me actually a more applicable model for the US case. Japan's spectacular rise was independent of any "attraction of the world's best talent," but I believe its approach did surpass the later example of the Tigers in fostering innovation. (I'm doubtful that was much a function of the LDP and MITI's role, however, and so not actually an offshoot of industrial policy per se.)
Robert,
Great examples. My sense is that there are different sorts of "freedom."
What tends to happen is that conventional industrial policy (MITI, SK, Taiwan or the Singapore) tends to "work" in the situation of clear objectives... which only happens when one is behind and can see a leader. This was certainly the case with MITI and SK...don't know about Singapore. As evidenced by the successes in some of these situations, this CAN work in the short/medium term. Key ingredients are clear objectives, often attraction of foreign talent/know-how/smart investment... so you need enough "freedom" to attract foreign interest. Also, the resulting companies have to be globally competitive, so enough "freedom" to operate in foreign markets.
However, what also seems to happen is that the structures one builds for this situation also are not great for catching the next wave of technology innovation. As an example, to my knowledge, none of these situations host the emerging technologies which will drive the world for the next 20 years. I think the reason is that one of the criteria is allowing for the destruction of the past. In the SK and Japan case, it might be allowing sufficient competition to allow for the destruction/restructuring of the big global companies.
The US example is the study of the churn in the DOW. The survival rate of individual companies over a long period of time is pretty poor. The next big mega-companies are built from a creative destruction process which is very hard to predict because it is a function of situation/technology/culture.
Good examples though...
Thanks for the good reply, rahul. I think you're correct that the industrial policy of the 1950s-1990s relied on the US as a leader-model in terms of industrial sector success (though not in terms of policy precedents). But in this regard, I think that the lesson is that we can't generalize from past history when it comes to industrial policy for the leading power, the US.
As for a leader-model in terms of policy precedent, I think that Japan played that role, and did so in a remarkably insular way. After the end of the American Occupation, Japan returned to its traditional pattern of highly restrictive immigration and emulation (not importation) of know-how, a pattern that Japan was self-consciously aware had produced dramatic results in the 7th-8th and 19th centuries. (Japan was also aware of the Nazi precedent in 1930s Germany and the US response in 1942-45: periods of intense war create short-term industrial policy eras in many countries.) So far as I know, the ROK also did not import expertise: Park was very much a product of Japanese colonialism and looked inward to emulate others, as Japan had. While I think Singapore followed a far more open model, of necessity (and I suppose British Hong Kong, whose growth to Tiger status I know next to nothing about, did too), so far as I know, 1980s Taiwan did not have the allure to bring in either talent or foreign investment on a major scale.
When you write that Japan and the Tigers are not likely to be great for catching the next wave of technology innovation, I think you're shifting ground. They didn't catch the last wave either--with a few exceptions (Betamax?) none of those economies were major technological innovators. Their power was basically exploiting technologies developed elsewhere by deploying efficient industrial policies which Western countries were loath to deploy, perhaps because of the Nazi example and a presumed link between such policies and authoritarian government. I think that presumption has some justification, but I also think that an approach largely leaning on financial incentives (like the IRA) may demonstrate that the government role can be non-coercive (vs., e.g., the ROK and PRC), and corporate tradition be non-oligarchic (vs. Japan). (I dislike the term "creative destruction"--I think it smacks of smug social Darwinism--but we can see from Japan's example that industrial policy that becomes inscribed as established order degenerates into a type of industry protectionism.)
Robert,
Thanks for the insightful response... especially into the deeper insight into the cultural aspects. I come from the world of electronics and in this world, Japanese have certain areas (optics) where they are uniquely world-class. These days south korea has developed a similar unique capability in the area of DRAM semiconductors.
On Taiwan, I don't claim to know much about the broader history but do know the history of TSMC. TSMC was seeded by Texas Instruments (TI) employees which were attracted away from the US. Thus, a very specific example. A confluence of events made this company very important. First, they grew competence in the space and are now unquestionably world-class. Second, they innovated/took risk on a business model which was unproven at the time. Third, a whole class of companies wanted to decouple the cost of the fab from the chip product, and they offered a uniquely global oriented collaboration model.
On the IRA, we will see... I think it is a delicate balance. Specifically, it takes a regulatory/political which frames problems and not solutions.
Very interesting story about TSMC, which I didn't know. I followed up (on Wikipedia scale). The company is, as you say, a TI-employee spin-off, and the government on Taiwan did recruit its founder, Morris Chang, to the island, where he hadn't lived before, to lead a government-sponsored non-profit research institute. In that sense TSMC is indeed the outcome of industrial policy leading to the recruitment of international talent with a major industrial payoff. An unusual wrinkle, though, is that through the Chiang Ching-kuo regime, at least (I don't know the situation now), the Taiwan government would have regarded Chang as a Chinese national and thus a presumptive citizen in Taiwan, not immigrant talent. It is certainly true that in the cases of both Taiwan and the PRC this sort of overseas-Chinese international talent was actively sought out, but it was in the context of "repatriation," rather than internationalism. (I don't mean to dismiss your point about attracting international talent, but I do think cultural differences limited what that meant in most of Asia--less so for HK and, perhaps, Singapore--if we take the idea to be represented by the US example, which is far more expansive in both geographical reach and ease of assimilation.)
I didn't mean to suggest (as it probably sounded with my Betamax comment) that some of the Tigers and Japan have not ultimately taken their places as sources of leading innovation. Japan is particularly well known for Nobelists in the sciences. I was focusing on the shorter term role of industrial policy boosting these economies towards top-tier world status. Now, 40-70 years later, I'm sure there are many examples that show they have become mature contributors to technological innovation in the areas of their greatest strengths. You named two in your first paragraph about which I'd had no clue. (I wouldn't actually be surprised to learn that I was wrong about earlier decades too.)
Thanks for this exchange.
Profit incentives create the world’s best talent. Smart people are drawn to lucrative, innovative companies. The supply of smart people is fixed at around 5 percent of the population- that isn’t going to change- the question is what do they train themselves to do/where do they work?
Money makes Google or a tech startup as interesting as Goldman Sachs or McKinsey or a law firm or a medical residency.
yes... agree..the profit incentive is super important. Also, it disciplines investment, encourages risk-taking. The result is typically a jump up in societal productivity which creates the situation for a better lifestyles .... both gadgets as well as time.
I appreciate Noah's highlighting the recently released work of Juhász, Lane, and Rodrik (2023), his observations regarding the reactive tendencies of the economics profession, and laying groundwork for continuing assessments of the what, how, and why of U.S. industrial policy. The authors also posted a two-page summary of their perspective on Project Syndicate, "Economists Reconsider Industrial Policy." https://www.project-syndicate.org/commentary/new-economic-research-more-favorable-to-industrial-policy-by-dani-rodrik-et-al-2023-08 I offer the following observations as someone who's continuously worked in the U.S. industrial policy realm since 1978:
-- as a summer graduate intern in the industrial policy shop of Carter's Secretary of Commerce;
-- an MIT graduate research assistant (1978-82) to dissertation adviser Ben Harrison (Deindustrialization of America), the Energy Lab's photovoltaics program, and the International Motor Vehicle Program;
-- author of the manufacturing chapter of Ira Magaziner's RI Greenhouse Compact (1983 and the basis for my dissertation);
-- founder of two regional economic development consulting firms (1984-2004) (initial clients of our team: AK Gov. Bill Clinton and Burlington VT Mayor Bernie Sanders);
-- co-author of Brookings brief "Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies" (2008) which became the basis for EDA's regional industrial clusters program https://www.eda.gov/funding/programs/build-to-scale and which facilitated co-author Karen Mills becoming Obama's SBA Administrator and co-author Elisabeth Reynolds being Biden's supply chain assessment coordinator;
-- Industry Studies Association board member for industrial policy (2020-present) https://www.industrystudies.org/, the outgrowth of the Sloan Industry Studies Network (founded 1990) of 26 centers modeled on the MIT IMVP https://www.industrystudies.org/index.php?option=com_content&view=article&id=49:research_centers&catid=19:site-content;
-- co-founder of the ISA's industrial policy webinar series;
-- publisher of the weekly ISA Industrial Policy and Strategy Update; and;
-- as public policy research professor at George Washington University, quarter-time staff to the American Economic Association's committees on government relations and economic statistics and consultant to Third Way's U.S. Clean Energy Industrial Strategy project.
-- From 2004 until industrial policy's revival, my focus was on improving the federal statistical system for economic decision-making and research, with a particular focus on the role of Decennial Census in the allocation of trillions in federal funding; stopping the dismantling of Economic Census, the American Community Survey, and the Survey of Business Owners; and keeping the citizenship question off the 2020 Census.
Observations for discussion:
1) In the capitalist framework, national economic competitiveness depends on the capabiity of the government to provide incentives that move the nation's businesses, the source of its economic well-being, towards greater international competitiveness. To achieve this end, economists apply the tools they know well, that is, they tend to think of industrial policy as top-down economic engineering in which analysts help policymakers determine the quantitative if-thens of competitiveness in individual sectors (e.g., semiconductors) and craft and implement programs based on the perceived if-then dynamics.
2) In practice, the economic engineering approach is difficult to make work for several reasons.
a) As technologies, markets, and each nation's competitiveness constantly change and so throw off the validity of any if-then beliefs as of the moment. The trick is to develop mechanisms that facilitate public-private consensus-building regarding responses to an ever-changing set of issues and opportunities.
i) In practice, it turns out that successful industrial policy relies on the collaborative (public-private) application of the principles of business strategy to each traded industry deemed key, e.g., chips, clean energy, AI. As a consequence, I find "industrial strategy" to be a more appropriate term than "industrial policy," as the latter implies an approach of "set and forget," which in my experience is a recipe for failure.
ii) Among the federal departments, in my view DOE has been the most successful in implementing this approach, largely because it's being headed by a former McKinsey business strategy consultant. See, for example, https://liftoff.energy.gov/ and https://www.energy.gov/policy/securing-americas-clean-energy-supply-chain
iii) Through this lens, an important contribution of the Juhász, Lane, Rodrik paper is the introduction of " the concept of “embedded autonomy,” borrowed from sociologist Peter Evans, to characterize an alternative model of regulation, based on iterative collaboration between government and firms."
iv) Again with DOE, a good example of this approach is Li-Bridge, which is focused on "the development of a robust and secure domestic supply chain for lithium-based batteries." https://www.anl.gov/li-bridge
v) The collaborative strategic approach has been applied successfully at the state and local level for the last 40 years. While it's much more complicated to do at the national scale, the principles are the same.
vi) Until recently, these regional efforts have been deemed "not interesting" by most economists, but that's changing. Dani Rodrik, mentioned earlier, and Gordon Hanson are carrying out the Reimagining the Economy project https://www.hks.harvard.edu/centers/wiener/programs/economy Also see Scott Stern et al. https://www.nber.org/books-and-chapters/role-innovation-and-entrepreneurship-economic-growth
b) While the U.S. has a very good federal economic statistics system for macroeconomic policymaking, it has a lousy one for industrial competitiveness. The latter requires current, reliable industry-specifiic statistics--not only on traditional measures of output, productivity, and wages but also trade in value-added (TiVA)--and we don't have that.
i) At the moment, the value of each import is assigned 100% to the last country that touched it and not allocated among all the nations that contributed value added. As a consequence, we can't satisfactorily measure the nature of U.S. competitiveness vis a vis other nations. Good news -- for FY2023, Congress gave Commerce money to boost TiVA data. https://www.bea.gov/data/special-topics/global-value-chains
ii) The U.S. has two separate systems of economic statistics by industry--one from Census and one from BLS--and about 1/3 of the establishments are assigned one NAICS code by Census and another by BLS. The result, for instance, is that BLS says the U.S. has about 200K chips production workers while Census says it has about 100K. The source of the problem is that Census is authorized to look at IRS tax data and BLS is not, so cannot sit down with Census to reconcile its business register listings with the Census Bureau's. For details, see p. 168 of FY2024 Treasury Green Book https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf
iii) In developing the new Annual Integrated Economic Survey, Census found that about 1/4 of its case study establishments were misclassified in NAICS. This finding led me to ask OMB to direct Census to examine this problem and how it might be addressed, which OMB did in July. See terms of clearance at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202303-0607-003
iv) In a piece I wrote for the 2012 CAP series on industrial competitiveness, I discuss these issues but the last, which was new to me. https://www.americanprogress.org/article/economic-intelligence/
Continued in the next comment . . .
The authors note that really any kind of government intervention into free markets is a kind of "industrial policy". It seems to me that even developed countries like the US still use tons of industrial policy, just no one seems to call it that for some reason. You mention the support of exporters but it seems that things like the farm bills every country has or the various government programs to support small businesses are another.
Is there some reason those seem to always be overlooked as industrial policy and do any of the referenced papers you're diving into look into them? It seems like an area ripe for learning since we can compare developed nations policies which (may) have more salience.
I worked in the oil industry for many years. The oil industry has enjoyed a huge tax break since 1913 with a tax break for “intangible drilling costs”. https://www.investopedia.com/terms/i/intangible-drilling-costs.asp#:~:text=The%20steps%20required%20to%20get,new%20oil%20and%20gas%20wells.
https://www.crfb.org/blogs/tax-break-down-intangible-drilling-costs
There’s no question this “industrial policy” shaped the industry for more than a century, with huge effect on national security, especially during WW2. And of course now seems to subsidize burning hydrocarbons and worsening the climate crisis.
How many decades can something exist and still be deemed a crisis?
What do you want to call it?
evolution? business as usual ? a nothing burger?
You should tell that to insurance companies and US taxpayers.
Reamer comment continued:
3) Back to the notion of industrial strategy, the CHIPS and Science Act lays out a decent framework for developing and implementing one for science & technology competitiveness.
a) Congress specified the nation's ten "key technology focus areas" and directs NSF to annually review and revise this list. (Sec. 10387)
b) Congress directs OSTP to:
i) create an NSTC interagency working group that "shall seek to ensure that the activities of different Federal agencies enhance and complement, but, as appropriate, do not duplicate, efforts being carried out by another Federal agency" within the key technology focus areas designated by Congress in 2022 and by NSF thereafter. (Sec. 10651)
ii) conduct by December 31, 2023 and every four years thereafter a Quadrennial Science and Technology Review, " a comprehensive examination of the science and technology strategy of the United States, including recommendations for maintaining global leadership in science and technology and advancing science and technology to address the societal and national challenges and guidance regarding the coordination of programs, assets, capabilities, budget, policies, and authorities across all Federal research and development programs." (Sec. 10613)
iii) prepare by December 31, 2024 and every four years thereafter "a comprehensive national science and technology strategy of the United States to meet national research and development objectives for the following 4-year period." (Sec. 10611)
c) OSTP, then, is on the hook to create a unit that has the capability of carry out the items in b), i.e., be the brains of the operation. OSTP is addressing a series of organization challenges to fulfilling its mandate.
d) Keep in mind that graduate programs in industrial strategy/policy don't exist--in OSTP and elsewhere, this is all being figured out on the fly by smart people without the desirable training or experience. Thought experiment: If you were to design a master's degree program in national industrial strategy, what would it look like?
4) Little known and understood today, from 1790-1930 the federal government actively pursued industrial strategies and policies for the purposes of national competitiveness.
a) Tariffs, a form of economic engineering, provided the foundation of these efforts. Until the Great Depression, Congress was highly invested in keeping the power to set tariffs and sought, over and over and over again, plans, strategies, and data to guide its efforts. In fact, as I described for the U.S. International Trade Commission centennial history volume (2017), the present-day federal economic statistical system (Census-1810, BEA-1820, BLS-1888) is built entirely on the foundation of congressional efforts to get the data it thought it needed to set tariffs. See Ch. 2 of https://www.usitc.gov/publications/other/centennial
b) Around 1820, Henry Clay articulated the broader American System of Economics as a framework for national economic devevlopment. The principles were largely implemented by Abraham Lincoln during the Civil War, as the Democrats who'd blocked muscular federal economic development efforts had left the government. So under Lincoln, Congress created the USDA and the National Academy of Sciences and passed land-grant programs that built state public universities explicitly for economic competitiveness (Morrill Act); the transcontinental railroad (Pacific Railway Act); and the Homestead Act. Soon after his death, Congress created what today is the National Center for Education Statistics.
c) From 1900-1930, federal industrial policy was pursued through corporatism, i.e., close business-goverenment collaboration. A great example -- in 1912, the Commerce Department's Bureau of Manufactures organized a conference of 700 local chambers of commerce to charter a U.S. Chamber of Commerce because the government needed a nationwide business partner in taking advantage of European demands for U.S. goods. The premier practitioner of government-business collaboration was Commerce Secretary Herbert Hoover (1921-1929). I describe his efforts in a recent article for BEA, "The Origins of the Survey of Current Business: A Window on the Evolution of Economic Policy, Research, and Statistics" https://apps.bea.gov/scb/issues/2020/10-october/1020-origins-scb.htm
d) As a side note, the BEA article shows how, ironically, Hoover's efforts to promote business-government collaboration provide the data foundation for the development of national economic accounting by Simon Kutznets and Robert Nathan in the 1930s, which in turn made effective macroeconomic policy possible.
Your point 4 is extremely under appreciated today. Not only was industrial policy the norm for the US from its earliest years until less than 100 years ago. But industrial espionage was outright encouraged by the founding fathers. https://www.history.com/news/industrial-revolution-spies-europe
I think state intervention into the economy has to be a sliding spectrum. 100% free markets don't work, but state control beyond a certain point has equally disastrous results. I'm not certain as to where along the spectrum this falls, honestly.
Creating monopolies/monopsony is what US companies are great at because it generates a lot of wealth.
Most of them aren't natural but the result of backroom deals, paid for regulation etc.
One way to make the US economy much better would be to work to reduce the monopolies/monopsony.
Is Google a natural monopoly?
Theoretically it seems like a good idea.... yet if we look at the evidence if Big Government Projects...we see only massive failures like Post Office, Amtrak & V.A. Medical Systems ... and these activities have been around for hundreds to thousands of years... what is the scientific probability.. that Big Government can handle New Knowledge & Technologies... when they can’t do ancient, simple work like delivering the mail??? Since the World’s Most Effective Entrepreneurs, Venture Capitalists & their Staff barely succeed 14% of the time.... asking an Extremely Super Defensive Organization, like Government, to succeed in these lightening speed ,innovative areas , is liking asking a 800 pound Quarterback to be Effective. ... after all what is the last Big Government Success Story... WW II. 1945....
I'm not sure the Post Office, Amtrak or the VA are failures at all, much less massive ones.
USPS processes about 5,000 pieces of mail per second, with an annual volume of 127.3 billion pieces of mail. It's very price-competitive on time-sensitive and package delivery that it has to compete in, particularly for small businesses that don't get the volumes for UPS, Fedex and DHL rates.
Amtrak is failed by its dysfunctional and inept management -- Congress. And Amtrak's poor performance is a distinctly American problem. While Japan has two shinkansen networks privately owned and operated, Amtrak is structured closely along the lines of European train agencies as state-owned enterprises. The best known are SNCF in France and Deutsche Bahn in Germany. They are profitable, and can operate autonomously like businesses -- namely, employees are not civil servants like Amtrak workers. The sole shareholder or the majority shareholder is the respective governments; in Germany, the state-level governments might also own a share of DB.
Fun fact about SNCF: It exists in the U.S., operating under the name Keolis. It bids on tenders to operate train and bus services. Its biggest contracts are the Boston commuter rail network and in California, half of the Foothill Transit and 40% of the Orange County bus systems. It recently lost its biggest bus contract, half of RTCSNV (Las Vegas), which has decided to return to a sole contractor, the French conglomerate Transdev.
And a fun fact about Amtrak: According to the Rail Passengers Association (ne NARP), Amtrak is America's seventh- or eighth-busiest national airline (if you insert Amtrak's train and/or bus boardings on a list of busiest U.S. airlines; Amtrak is not in the aviation business).
VA: The Veterans Affairs health system is an argument for more government involvement in health-care, not less. It is leaner administratively than the insurance-hospital-industrial complex (the only private provider that comes close to it is Kaiser Permanente, which also provides umbrella health care). It gets the best prices on prescription drugs.
Scientifically, because the VA's patient base it veterans, it provides unique medical treatment affecting military personnel, like PTSD treatments, prosthetics and trauma care to name some fields.
And in Energy policy, look at history.. Jimmy Carters $88 billion ($240 billion todays dollars). SYNFUELS Program... today we have The Green Energy Scam , multi trillions extorted Ftom middle class taxpayers, for a fake green energy , which pollutes equally as fossil fuels ( just HIDDEN MUCH BETTER) but costs/wastes 55% more than fossil fuels.. when analyzed by Independent people... not oriole living off tax grants .. worst.. this Green Energy Grift is totally dependent on fossil fuels to mine, manufacture and operate this wasteful green energy equipment
And inefficient wind turbines that blocked one of the best generation sites (Altamont pass) for decades, designed and built with subsidies by companies that are essentially non-entities in the business now.
I benefited from his program - building passive solar hot water heating systems for Asarco during the late Carter years. Of course they made it with copper! (Rather than black plastic) and we were unionized. It’s all good.
I think your Venture investment model is spot on. It was also Jack Welch's portfolio model and th3 now haha ancient 4 box (BBM?). Star, Growth, cash call, sell... sort of. Also be 1 or 2 or be sold.
Letting go, stopping investment is always the most difficult decision. For business as well. And of course so few new ventures make it to success.
America put on the myopic glasses of Free Trade and Globalization and walked China right into the 2nd most powerful and most dangerous nation over the last 30 years.
What if we had a National Security based industrial policy 30 years ago? We would not have Communist China $10 Trillion dollars from hard working Americans thru China-Mart.
I read that during the Obama administration a bomb made in the US was dropped somewhere in the world every 20 minutes. Lots o’people might call the US the most dangerous country in the world...how did Zelinsky come to power? The overthrow of Yanukovich, which directly led to the Luhansk and Donbas “Republics” and then Crimea. The uniparty decided to sell out our industrial base to the PRC for cheap shit. Change my mind.
Some of the most successful US industrial policy has been research based, not direct investment. Think about the long term return from Land Grant Colleges, NASA or the Human Genome Project. It’s huge. For a developed country, as opposed to one playing catch-up, committing the government to do hard things and funding the research to make it happen has been a good path to policy success.
If there is any space for nonideological comments, I might observe that there is a considerable class of natural experiments that seems to have been little studied at least in the "industrial policy" context. In all of the major wars since about 1850, the combatants have made strenuous efforts to increase domestic production of military goods. The US economy is particularly rich in examples and the results have been various enough to provide considerable statistical contrast. Alexander Field has made a very interesting start on analyzing the World War II US experience, but without any international comparisons and without examining some measures of considerable interest from an industrial policy standpoint. A much earlier study of Japan by Jerome B. Cohen (Japan's Economy in War and Reconstruction) is very limited in methodology and data but still interesting in light of Japan's subsequent putative success in industrial policy. There are also some studies of Britain's industries in the world wars that I have not paid a great deal of attention to. But overall this seems to me a lode in want of mining. At my age it is not something I want to undertake, but I hope that someone will.
I tend to think that governments are an important part of every nation's economy. Interest rates, stability of the currency, intellectual property rights enforcement are as important as an explicit policy of developing a specific segment of industry. There is no escaping from industrial policy. The decision to build superlarge submarines or not build them can not be avoided. Or rather a passive decision not to make any specific submarine mandates is still a decision.
I think we should promote a TSMC plant on American soil even if it does not pencil out right now. After a major earthquake in Taiwan or hostile actions by the PRC will be too late, and either of those events are clearly within the realm of possibles.
I find that the real irony is that the government, who writes the laws, know what direction they want the industry to go in, but won’t tell. Economists in academia are left trying to figure it all out. Wouldn’t it be much easier for government to say what they want, and academic economists tell government how to achieve it. Then everyone tells the public where to position themselves?
Throughout the 1970’s and the 90’s, the mantra has been government is bad, and free markets, deregulation, and Milton Freeman are good. So we were taught lots of laissez-faire and Adam Smith. But all the while, the national economy never worked like this at all. The government still had us moving in a certain direction.
Good and topical post, even though I am a sceptic.
Also, there have been studies on the Korean model of innovation, and especially the Japanese one, which the Koreans copied. Mercantilist, high tariff, coordination between trading companies/conglomerates (Japan) or Chaebols (S Korea) and the government, low domestic consumption. What’s good for GM is good for the country was the US version of the era, except we weren’t mercantilist, our unions weren’t subservient, our voters wanted consumer goods and we didn’t let big corporate power dominate the entire supply chain to the same degree. Some of these studies were produced by Finance and industrial ops professors at B-schools rather than economists. The Japanese model was very much a thing in the 1980s. Check HBR archives.
Industrial policy often fails because it is engineered by politicians and their donors, sometimes supported by partisan hack economists doing the bidding of the the former two groups. Well, that and because nobody is good at predicting the future so the focus is almost always on some currently fashionable idea (as long as it intersects with the donor community).
Here is an example- Yellen is a good economist while also being a partisan hack. Same with most of the CEE.
What was her economic justification for the $2 trillion Covid handout in early 2021 coming immediately on the heels of the $900 billion handout in December 2020? In the end we got more inflation than growth, creating a price squeeze in goods. Where was the economic analysis justifying the IRA as an optimal solution? I suppose the bonus subsidies for union labor was supported by studies from S Korea’s industrialization? 😊
Basic research, prototype competitions, regulatory/permitting reform, investment incentives, job training (in partnership with state universities for skilled factory floor and clean room positions) and low taxes all make a lot of sense to me as do nat sec-oriented policies like a few in the CHIPs act and some of the export bans.
Handing out cash so that union labor gets to assemble Chinese battery components for cars we pay rich people to buy? This wouldn’t be my priority, but I am no expert.
I am sympathetic to industrial policy in theory but in practice there is little to love about it and I am not sure economists are best placed to design it (unless we are talking about broad macro policies like investment credits or supply side/micro policies like regulations and permitting).
Do you think there’s a correlation between the low unemployment and the “hand out” from the passing of the IRA? Are wages increasing relative to the cost of goods and services, or just following inflation? Is real income for low and middle income families finally improving or still stagnating as they have since Ronald Reagan was President?
I’m in Boone Picken’s camp. Why no Natty transportation? We have enough to run them for 50+ years while we figure out the next way to power vehicles...
I don't think there's an engine that can burn Natural Light beer.
Surely the best place to start is not with "industrial policy" at all, but rather a policy objective: reducing CO2 emissions, protecting supply chains from hostile disruption, increasing growth of manufacturing, etc. Then one would ask why this might be an appropriate activity for _government_. CO2 emissions, an externality, supply chain disruption, a collective action problem, manufacturing, good question. _Then_ one would ask what is the best instrument for addressing the problem: CO@ emissions, a Pigou tax on emissions; supply chain disruption, a tariff on risky sources of supply in proportion to the risk: manufacturing growth, a tax credit credit on manufacturing plus possibly across the board tariffs and subsidies of manufactured exports.
In the case of the current proposals it looks like only the first two objectives are in play and subsidies for the capital investments of either CO2-reducing technologies or supply disruptions do not seem to be the correct policies.
While your essay dwells on " the common critique that government doesn’t have enough information to “pick winners” or may have difficulty jettisoning "losers," you totally overlook the USA's active industrial policy of subsidizing "winners." Economists should study why we subsidize, for example, the pharmaceutical industry and the gas and oil extraction industries, where the companies involved are both proven successful and extraordinarily profitable.