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Mike Bird and Noah Smith debate industrial policy
In which we hash out at least a few of our differences.
Here’s how it all started. I’ve been writing a lot about how industrial policy is the new economic policy paradigm that’s going to finally replace free trade, laissez-faire, and so on. About two weeks ago, Chris Odendahl of The Economist wrote an article pushing back strongly on this idea, arguing that the world is in the grip of a mass delusion, and that industrial policies focused on manufacturing will waste trillions of dollars. I then wrote a post arguing with Odendahl, by trying to explain the goals of industrial policy, and why those goals can’t be met through more traditional economic approaches:
Mike Bird, also of The Economist, was not satisfied with the case I made, so I proposed to him that we do a video debate! And so debate we did. It’s about an hour and 18 minutes long, but we managed to keep it both lively and friendly throughout:
A few key points from the debate:
Mike thinks the sheer number of different justifications given for industrial policy — national security, jobs, decarbonization, technological progress, clustering, local service jobs, and so on — is a negative thing because it allows defenders of the policy to rapidly cycle through these arguments without adequately addressing any single one (a tactic we Americans know as a Gish Gallop). To me, though, having a bunch of reasons to do industrial policy is a feature rather than a bug — just like exercise, the fact that industrial policy has a large variety of potential benefits is a reason to do more of it rather than less.
I try to explain some potential benefits of industrial policy that I think Odendahl’s article missed — keeping our military edge, leveraging local multipliers (also called agglomeration effects) to create local service jobs, productivity-boosting via exporting, and modest supply-chain reshoring as an insurance policy against sudden war. Mike is skeptical, but willing to be persuaded.
Mike is worried that some of industrial policy’s goals will actively conflict with one another. His is example is that the drive to “Buy American” will make it harder and more expensive to decarbonize. Although I agree that this is a danger, my view is that if “Buy American” subsidies are moderate in size instead of large, their net effect will be to create only a small amount of domestic production capacity — which would be very useful in a war situation.
Mike is concerned with quantification of the various benefits of industrial policy, using the “social cost of carbon” — which many economists try to calculate so that it can be used to determine the optimal size of a carbon tax — as a positive example. I explain why I think this is very very difficult, since estimates like this can vary by orders of magnitude depending on small assumptions, so the precision they yield is typically false precision.
Mike and I strongly agree that friend-shoring is often highly preferable to reshoring. This is perhaps unsurprising, as Mike is the creator of the “Altasia” concept, of which I am a huge fan. In fact, this is right, and it’s a reason why our industrial policies need to be more international in scope, and why coordination of industrial policies between friendly nations could be very beneficial. We both with the U.S. would cooperate with Japan, India, and Korea to create an Asian free trade agreement to supersede the old TPP.
Mike is dismayed by the many problems that industrial policy is encountering at the outset — mostly land acquisition difficulties and the lack of a trained domestic workforce. I’m not only confident that these problems can be overcome, but I think their existence represents yet another reason to do industrial policy — when government goals clash with government regulations, the government will suddenly have a greater interest in reducing red tape.
Anyway, enjoy the debate! I’m contemplating doing more of these, or even facilitating debates between other people, so feel free to let me know if you think this is a good format or not, and if there are ways it could be improved.