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.
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.
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....
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.
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).
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.
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.
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.
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....
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.
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).
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.