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:
The pushback against industrial policy has begun
Note: This post originally misattributed an Economist article by Christian Odendahl to Mike Bird. The Economist does not publish bylines, and I had accidentally received the impression from a Twitter discussion that Bird had written it! In the 2020s, America has begun to change our economic policy paradigm — the basic framework that leaders and intellec…
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.
I don’t listen to podcasts or videos. Not an effective use of time. I can speed read or skim a written piece.
I’m not sure why Substackers tend to move toward podcasts. But most subscribers have several Substack subscriptions and can’t listen to a bunch of podcasts or videos every day. I’ve cancelled subscriptions where the content was mostly links to videos.
I have to say Noah's call for a "Just do it" attitude didn't really convince me.
His own example I think demonstrate why it's such a bad idea. Yes, the UK won a bunch of medals when it hosted the London Olympics, but it did so at the cost of 100s millions of pounds at a time of deep austerity (just for additional training, not the cost of actually hosting the games). Same with Australia for the Sydney Olympics.
Is getting an extra 20 Gold medals worth a hospital or two at a time of deep spending cuts? I would say no, but I suppose if you want to just shout "Let's do it and be legends" then you can. And many politicians did exactly that.