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.
Finally I think Mike's point on the complexity of supply chain's is quite important.
Yes China makes a lot of batteries. But 50% of the World's Lithium comes from Australia! Noah's antipathy aside, that flow will absolutely be cut off in the event of a war in the Taiwanese straight and China's battery industry would collapse.
Would it be bad for the West? Absolutely, but in a race between China and West over Li-batteries the cards are stacked in our favour. You cannot R&D your way your way to more Lithium deposits in your territory...
I also don't understand the agglomeration point. Isn't that why we have cities - which the US is already great at producing? It's not like the chip fabs are going to be set up in NYC - they will likely require a lot of cheap land and end up in Texas suburbs where those benefits will be much smaller...
I think the main argument against industrial policy is that governments make mistakes and can be corrupted. Having lived in South Africa and the UK I am totally against industrial policy in South Africa and very much in favour of it in the UK. While we love to complain about the UK governments competence and honesty it is vastly better than the South African government.
Initially agreed with Noah, but found myself substantially persuaded by Mike Bird!
I don't want to put words in his mouth, but some points I'd make which I'd say are inspired by his comments in this exchange:
1) Battery/Chips/Renewables/Defense supply chains are complex, which means you can fail to make the final product if you are missing any of the many links in that chain. Manufacturing batteries and electronics with 100% Western materials and components is a lot harder than making covid masks. Consequently, you don't get any defense value from industrial policy from complex products unless you do something big and comprehensive enough to secure all links in the chain, or at the very least, be sensitive to the nitty gritty details of which precise links are vulnerable. Honestly, we're not doing anything like that, we're gesturing at doing that for reasons of domestic politics. If you don't have that benefit of securing your supply chain in the event of conflict, then you are left with the peacetime rationale which is mostly just backfill of economic populism.
2) Point 1 is excacerbated by the significant tension between the objective of securing our supply chains and decarbonizing our economy. Everything electronic will be disrupted in the event of ceasation of trade with China & Taiwan, and it's hard to decarbonize without electronics. It's entirely possible that marginal moves towards decarbonization actually makes our economy more vulnerable to supply chain disruption (reliance on chips and batteries), neither garnering a security benefit nor finding the most cost-effective path to decarbonize ignoring China risk. Consequently, we should chose a strategy and just pay the cost. Or if we really want to do both, we have to pay a much much greater cost and play for more time than we may have (would have been a great idea 30 years ago).
3) If you ignore the goal of securing our supply chains, there is an economic logic to subsidizing green technology (or taxing carbon) without requiring insourcing. If there is a social cost to carbon - though we may not be able to calculate it precisely - straightforward economic logic dictates we would be most efficient to subsidize green technology (or tax carbon) to avoid the negative externalities. Though there are many unprincipled estimates of the cost of carbon, no one doubts there is a cost of carbon, and rough attempts to bracket that value enable us to estimate the scale of the intervention that is appropriate. It should bother us a bit that industrial policy is not doing a technology-neutral look at carbon, but it could still be preferable to the alternative of not accounting for the cost of carbon.
4) If we had something like the social cost of carbon but for defense - I dunno a model in China is able to credible threaten an invasion of Taiwan or ceasation of trade with US and that economic leverage of China hurts human rights at the margin - maybe we could extend the same logic to a marginal incentive towards insourcing. But we have nothing like that from the proponents of marginal defense-oriented industrial policy, and therefore it's not clear at all our marginal policy approach is actually delivering value.
It's a little unsettling to see how casually one talks about a war with China. In that event, I'm not quite sure it would really matter who produces what quantity of what, because I don't know how such a conflict could be constrained to some corner of the world.
This was really good and I’d pay extra for more content of this type and quality (in addition to the posts). Thanks to both of you for a wonderful discussion.
Regarding agglomeration effects of government subsidies, such is/was the economic growth model in the Pacific Rim. Subsidizing the export winner came with financial repression policy, complete with capital controls, at home to support the favored industries.
As an interesting aside, I have long wondered about the effect of fiscal debt on the economy. It seems that the US has found a way to keep the liquidity sequestered in the debt and equities market -- hence the importance of both the commercial and investment banking sector. The result is for winning corporations access to much needed capital to fuel their own growth.
If we're talking about national security, wouldn't stockpiles of crucial components be MUCH more important than domestic production? Production is naturally centralized, especially production that only exists because of industrial policy, and could be a chokepoint if you are dealing with an adversary that has incentive to sabotage your productive capacity. It's not like Ukraine can set up drone or munition factories and expect them to function unmolested! It's much easier to distribute stockpiles widely, and to do the hard part of producing or otherwise acquiring components during peacetime, making them much less vulnerable than production facilities during a conflict.
History favors Mike being right. No doubt we will get some benefit for the trillions that will be spent but the political view is that handouts to donors and policies that please partisan activists are their own reward, no matter what happens economically. Moreover, the Fed’s forecasts for GDP growth rates in 2024 and 2025 are not showing strong growth.
There are solution-neutral ways to increase investment (tax credits, carbon taxes, permitting and enviro law reforms) but that isn’t as fun as paying rich people to buy EVs with Chinese materials.
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.
Finally I think Mike's point on the complexity of supply chain's is quite important.
Yes China makes a lot of batteries. But 50% of the World's Lithium comes from Australia! Noah's antipathy aside, that flow will absolutely be cut off in the event of a war in the Taiwanese straight and China's battery industry would collapse.
Would it be bad for the West? Absolutely, but in a race between China and West over Li-batteries the cards are stacked in our favour. You cannot R&D your way your way to more Lithium deposits in your territory...
I also don't understand the agglomeration point. Isn't that why we have cities - which the US is already great at producing? It's not like the chip fabs are going to be set up in NYC - they will likely require a lot of cheap land and end up in Texas suburbs where those benefits will be much smaller...
I think the main argument against industrial policy is that governments make mistakes and can be corrupted. Having lived in South Africa and the UK I am totally against industrial policy in South Africa and very much in favour of it in the UK. While we love to complain about the UK governments competence and honesty it is vastly better than the South African government.
In print, hopefully. It is very difficutl to take issue with points in an aural/video format
.
Initially agreed with Noah, but found myself substantially persuaded by Mike Bird!
I don't want to put words in his mouth, but some points I'd make which I'd say are inspired by his comments in this exchange:
1) Battery/Chips/Renewables/Defense supply chains are complex, which means you can fail to make the final product if you are missing any of the many links in that chain. Manufacturing batteries and electronics with 100% Western materials and components is a lot harder than making covid masks. Consequently, you don't get any defense value from industrial policy from complex products unless you do something big and comprehensive enough to secure all links in the chain, or at the very least, be sensitive to the nitty gritty details of which precise links are vulnerable. Honestly, we're not doing anything like that, we're gesturing at doing that for reasons of domestic politics. If you don't have that benefit of securing your supply chain in the event of conflict, then you are left with the peacetime rationale which is mostly just backfill of economic populism.
2) Point 1 is excacerbated by the significant tension between the objective of securing our supply chains and decarbonizing our economy. Everything electronic will be disrupted in the event of ceasation of trade with China & Taiwan, and it's hard to decarbonize without electronics. It's entirely possible that marginal moves towards decarbonization actually makes our economy more vulnerable to supply chain disruption (reliance on chips and batteries), neither garnering a security benefit nor finding the most cost-effective path to decarbonize ignoring China risk. Consequently, we should chose a strategy and just pay the cost. Or if we really want to do both, we have to pay a much much greater cost and play for more time than we may have (would have been a great idea 30 years ago).
3) If you ignore the goal of securing our supply chains, there is an economic logic to subsidizing green technology (or taxing carbon) without requiring insourcing. If there is a social cost to carbon - though we may not be able to calculate it precisely - straightforward economic logic dictates we would be most efficient to subsidize green technology (or tax carbon) to avoid the negative externalities. Though there are many unprincipled estimates of the cost of carbon, no one doubts there is a cost of carbon, and rough attempts to bracket that value enable us to estimate the scale of the intervention that is appropriate. It should bother us a bit that industrial policy is not doing a technology-neutral look at carbon, but it could still be preferable to the alternative of not accounting for the cost of carbon.
4) If we had something like the social cost of carbon but for defense - I dunno a model in China is able to credible threaten an invasion of Taiwan or ceasation of trade with US and that economic leverage of China hurts human rights at the margin - maybe we could extend the same logic to a marginal incentive towards insourcing. But we have nothing like that from the proponents of marginal defense-oriented industrial policy, and therefore it's not clear at all our marginal policy approach is actually delivering value.
It's a little unsettling to see how casually one talks about a war with China. In that event, I'm not quite sure it would really matter who produces what quantity of what, because I don't know how such a conflict could be constrained to some corner of the world.
We need to talk about that.
This was really good and I’d pay extra for more content of this type and quality (in addition to the posts). Thanks to both of you for a wonderful discussion.
Regarding agglomeration effects of government subsidies, such is/was the economic growth model in the Pacific Rim. Subsidizing the export winner came with financial repression policy, complete with capital controls, at home to support the favored industries.
As an interesting aside, I have long wondered about the effect of fiscal debt on the economy. It seems that the US has found a way to keep the liquidity sequestered in the debt and equities market -- hence the importance of both the commercial and investment banking sector. The result is for winning corporations access to much needed capital to fuel their own growth.
I like the option of podcast / videos. I can drive, shop, do laundry with my AirPods and learn. Transcripts would be handy if I want to read.
If we're talking about national security, wouldn't stockpiles of crucial components be MUCH more important than domestic production? Production is naturally centralized, especially production that only exists because of industrial policy, and could be a chokepoint if you are dealing with an adversary that has incentive to sabotage your productive capacity. It's not like Ukraine can set up drone or munition factories and expect them to function unmolested! It's much easier to distribute stockpiles widely, and to do the hard part of producing or otherwise acquiring components during peacetime, making them much less vulnerable than production facilities during a conflict.
History favors Mike being right. No doubt we will get some benefit for the trillions that will be spent but the political view is that handouts to donors and policies that please partisan activists are their own reward, no matter what happens economically. Moreover, the Fed’s forecasts for GDP growth rates in 2024 and 2025 are not showing strong growth.
There are solution-neutral ways to increase investment (tax credits, carbon taxes, permitting and enviro law reforms) but that isn’t as fun as paying rich people to buy EVs with Chinese materials.