I am willing to bet that in 2030 you will regret your enthusiasm for industrial policy. Call this a vague broadside, but I don't think that our government is capable of running this type of program in a way that ends up achieving (or even working toward) its goals and not becoming utterly corrupt. How are those ethanol mandates workin' out for ya?
Very helpful post in distinguishing the goals of industrial policy from manufacturing jobs creation.
One of the reasons that industrial policy and jobs creation are twinned together is local/state governments competing for these new businesses and factories. The smaller the unit of government, the less credible is touting the twin goals of climate and defense.
Just like the US can only do so much alone in fighting climate compared to a global view.
"China has one of the world’s top electronics manufacturing clusters; the U.S. no longer does. Perhaps industrial policy could help create an advanced electronics manufacturing cluster in the U.S.; it’s a question at least worth thinking about."
This. The most advanced semiconductor chips are useless without resistors, capacitors, diodes, circuit boards, power supplies, etc. And the U.S. has little to no capability for producing these, arguably, commodity items since the margins are so low. If you cannot manufacture an entire computer from domestic components you may face a severe challenge. Particularly if your enemy is the global source for the SMT resistor.
How do we get an industrial policy that isn't diverted into giveaways?
China's own quest for "national champions" has delivered few champions but titanic corruption. Many of Japan's technology bets foundered. Why are America's odds better?
Why do we think that we'll unlock new investments that wouldn't have happened, as opposed to handouts for what companies were already planning?
I want industrial policy that actually gets us closer to green power, chip diversification, new antibiotics and the rest. I don't want a bunch of giveaways that only improve corporate earnings, and don't accelerate more actual progress. I definitely don't trust the government to automatically get this right.
How do we get industrial policy that makes a difference, instead of industrial policy that makes a giveaway?
Hi, Noah. Off-topic, someone is trying to impersonate you here on Substack as I received an email. This may be a scammer please check. I am not sure if that's you who shared me the email address: //substack.com/profile/157161289-noah-smith?utm_source=substack_profile
Someone please help me understand the FRED graph. (And please note that I stopped reading to write this concern. Please accept my apologies if the answers appear further into the article.)
The CHIPS Act and the IRA were passed in mid August of 2022. The upward spike in the graph looks to start in November or December of 2022.
How, than, were these projects able to go through the planning and permitting process and move into construction in less than 2 months? It would seem that there are three options:
1) The numbers do count work done on planning.... somehow.
2) This country is blessed with some amazing project managers who only work after large government programs are funded.
3) The effect we are seeing was primarily due to some other cause, such as the market's response to supply chain issues that had become obvious two years earlier.
And a cynic might note that politicians are much more likely to vote for things that they know will look successful in the near future.
Mad respect, always with the good analyses. My biggest fear is on decarbonization though. That’s not what this industry policy is thinking about. They just need more renewable energy to continue growing the pie. Sure, fossil fuels will drop relatively, but still increase wildly in magnitude from new energy demands like desalination that can only be met with high energy density fuels. There is simply too much fossil fuel and it’s too profitable to ever allow themselves a decrease in profits. Even if they add their own renewable energy into the mix, fossil fuel industry at the moment is dedicated to increasing output without anyone blinking an eye. Thus electric cars, green energy- these things are only possible now because the fossil fuel lobbyists didn’t kill them, they’ve adjusted and prepared just fine for the future.
Since at least the beginning of WWII, the US has been engaging in a multi-trillion dollar "experiment" in top-down industrial policy: It's been overseen by the Department of Defense and referred to colloquially as "defense spending." I guess the opponents of industrial policy have simply chosen to ignore all that.
Specific catalogued broadside: U.S. history has proven industrial policies work. In fact, the knock-on effect of these policies are still with us today: railroads (one knock-on effect: initial funding to create Stanford University); State Land Grant University System (still the envy of the world); Interstate Highway System (knock-on effect, take your pick: every major trucking freight company, UPS, FedEx, et alia); bar codes/optics: US Postal Service; GPS DARPA (knock-on effects are endless); mRNA vaccines,; $4.2 billion sweetheart government loan to save a Tesla from bankruptcy).
Perhaps one should question some the basic assumptions behind the article and US policies. That climate change is an existential threat to humanity is not being challenged. Rather, the assumption that China is a military state with intention to invade and conquer. It isn’t. The second assumption that should be questioned is that the world is as it has always been and all the US has to do is shuffle a few things. Well, the world has changed exponentially and will continue to do so. The G7 countries that ruled the world in 19th and 20th centuries can no longer do so realistically. They represent about 10 per cent of the world’s population and a declining share of world’s wealth. It is not only China that is changing the world, it is also the “rise of the rest”. For its own success, US “industrial policy” can be about more collaboration with others, not as the world’s boss but in win-win partnership.
"So preserving the ability to make computer chips outside of China is critical to our national security. Some of that production can and will take place in friendly countries like Japan and Korea. But China may be able to interdict shipping from those places in the event of a war, so it makes sense to keep some production in the U.S."
although one could also argue that having a critical resource like chip production located in allied-but-threatened places like Taiwan is an excellent forcing mechanism to counter America's natural isolationist tendencies and making it impossible for the US to let Taiwan go Sudetenland style which would only lead to worse problems down the line. Just look at how much more disengaged in ME US policy has become since they achieved oil & gas self-sufficiency. An America that is no longer willing to play world police because they have achieved autarky is not a good thing.
"The first main purpose of industrial policy is decarbonization. Climate change is a major threat, even an existential threat, to our way of life. And we have only two options for stopping it: the mass global impoverishment of degrowth, or building a bunch of green energy to replace fossil fuel energy. That’s it. Those are our only two options. "
isn't this a bit like a Malthus contemporary saying the only two options to avoid starvation are to have fewer kids or to conquer other people and take their land? There is _always_ a potential technological innovation solution to these problems. These solutions are hard to pinpoint ex ante and sound very deus ex machina, and am not instinctively satisfied either with just blindly trusting they will magically appear, but frankly _if_ we manage to stave off catastrophe I'd say the odds of us getting there through a technological solution are actually much higher than all humanity getting its act together (applies whether getting act together means achieving degrowth or effecting green transition, btw)
Agree re Cato. Half baked libertarian economic "thinking" of the chicago school that doesnt stand up to scrutiny or reality. Gets a lot of money from somewhere though: Alt right sympathisers, and maybe from foreign sources that do not always have the west's best interests at heart.
>There’s also another important reason why subsidizing green energy is better than a carbon tax, and that’s learning curves. The more of stuff like solar and batteries we build, the cheaper it gets:<
I get the political case for green energy subsidization: policy is indeed the art of the possible. But, just to pick a nit, in the parallel universe where the US were able to successfully implement a carbon tax, wouldn't the "learning curve" advantage also apply? We'd "build more stuff like solar and batteries" because it would become increasingly expensive *not* to do so. Right? Or am I missing something obvious?
Has not the USA had industrial policy(s) in place all along? But quietly so, with 'neo-liberalism' taking over from 'the new deal' as above the table talking points? Does not extensive and ongoing support for agriculture; the original homesteading land grants, subsidized irrigation water, exemption from highway fuel tax, and now morphed into subsidies for industrial ethanol production, count? And so with the fossil fuel industry; including below-market-rate drilling leases, public funding for highways, roads, and bridges, minimum parking requirements for housing development, and so on. Aren't these industrial policy in political disguise? [I was going to say 'policies, but for the link between ethanol and fossil fuels, with ethanol requiring more BTU's from oil to produce than it returns. A win for both sides of the industrial policy.]
I am willing to bet that in 2030 you will regret your enthusiasm for industrial policy. Call this a vague broadside, but I don't think that our government is capable of running this type of program in a way that ends up achieving (or even working toward) its goals and not becoming utterly corrupt. How are those ethanol mandates workin' out for ya?
Very helpful post in distinguishing the goals of industrial policy from manufacturing jobs creation.
One of the reasons that industrial policy and jobs creation are twinned together is local/state governments competing for these new businesses and factories. The smaller the unit of government, the less credible is touting the twin goals of climate and defense.
Just like the US can only do so much alone in fighting climate compared to a global view.
"China has one of the world’s top electronics manufacturing clusters; the U.S. no longer does. Perhaps industrial policy could help create an advanced electronics manufacturing cluster in the U.S.; it’s a question at least worth thinking about."
This. The most advanced semiconductor chips are useless without resistors, capacitors, diodes, circuit boards, power supplies, etc. And the U.S. has little to no capability for producing these, arguably, commodity items since the margins are so low. If you cannot manufacture an entire computer from domestic components you may face a severe challenge. Particularly if your enemy is the global source for the SMT resistor.
How do we get an industrial policy that isn't diverted into giveaways?
China's own quest for "national champions" has delivered few champions but titanic corruption. Many of Japan's technology bets foundered. Why are America's odds better?
Why do we think that we'll unlock new investments that wouldn't have happened, as opposed to handouts for what companies were already planning?
I want industrial policy that actually gets us closer to green power, chip diversification, new antibiotics and the rest. I don't want a bunch of giveaways that only improve corporate earnings, and don't accelerate more actual progress. I definitely don't trust the government to automatically get this right.
How do we get industrial policy that makes a difference, instead of industrial policy that makes a giveaway?
Hi, Noah. Off-topic, someone is trying to impersonate you here on Substack as I received an email. This may be a scammer please check. I am not sure if that's you who shared me the email address: //substack.com/profile/157161289-noah-smith?utm_source=substack_profile
Someone please help me understand the FRED graph. (And please note that I stopped reading to write this concern. Please accept my apologies if the answers appear further into the article.)
The CHIPS Act and the IRA were passed in mid August of 2022. The upward spike in the graph looks to start in November or December of 2022.
The USBLS says that the construction spending is actual spending on "materials, labor, and equipment" used to produce different "assemblies" that lead to completed buildings. This all seems very tangible. https://www.bls.gov/ppi/factsheets/producer-price-index-data-for-nonresidential-building-construction-sector-new-industrial-building-construction-naics-236211.htm
How, than, were these projects able to go through the planning and permitting process and move into construction in less than 2 months? It would seem that there are three options:
1) The numbers do count work done on planning.... somehow.
2) This country is blessed with some amazing project managers who only work after large government programs are funded.
3) The effect we are seeing was primarily due to some other cause, such as the market's response to supply chain issues that had become obvious two years earlier.
And a cynic might note that politicians are much more likely to vote for things that they know will look successful in the near future.
Excellent article - thanks Noah! Gives one lots of food for thought.
Mad respect, always with the good analyses. My biggest fear is on decarbonization though. That’s not what this industry policy is thinking about. They just need more renewable energy to continue growing the pie. Sure, fossil fuels will drop relatively, but still increase wildly in magnitude from new energy demands like desalination that can only be met with high energy density fuels. There is simply too much fossil fuel and it’s too profitable to ever allow themselves a decrease in profits. Even if they add their own renewable energy into the mix, fossil fuel industry at the moment is dedicated to increasing output without anyone blinking an eye. Thus electric cars, green energy- these things are only possible now because the fossil fuel lobbyists didn’t kill them, they’ve adjusted and prepared just fine for the future.
Since at least the beginning of WWII, the US has been engaging in a multi-trillion dollar "experiment" in top-down industrial policy: It's been overseen by the Department of Defense and referred to colloquially as "defense spending." I guess the opponents of industrial policy have simply chosen to ignore all that.
Specific catalogued broadside: U.S. history has proven industrial policies work. In fact, the knock-on effect of these policies are still with us today: railroads (one knock-on effect: initial funding to create Stanford University); State Land Grant University System (still the envy of the world); Interstate Highway System (knock-on effect, take your pick: every major trucking freight company, UPS, FedEx, et alia); bar codes/optics: US Postal Service; GPS DARPA (knock-on effects are endless); mRNA vaccines,; $4.2 billion sweetheart government loan to save a Tesla from bankruptcy).
Perhaps one should question some the basic assumptions behind the article and US policies. That climate change is an existential threat to humanity is not being challenged. Rather, the assumption that China is a military state with intention to invade and conquer. It isn’t. The second assumption that should be questioned is that the world is as it has always been and all the US has to do is shuffle a few things. Well, the world has changed exponentially and will continue to do so. The G7 countries that ruled the world in 19th and 20th centuries can no longer do so realistically. They represent about 10 per cent of the world’s population and a declining share of world’s wealth. It is not only China that is changing the world, it is also the “rise of the rest”. For its own success, US “industrial policy” can be about more collaboration with others, not as the world’s boss but in win-win partnership.
"So preserving the ability to make computer chips outside of China is critical to our national security. Some of that production can and will take place in friendly countries like Japan and Korea. But China may be able to interdict shipping from those places in the event of a war, so it makes sense to keep some production in the U.S."
although one could also argue that having a critical resource like chip production located in allied-but-threatened places like Taiwan is an excellent forcing mechanism to counter America's natural isolationist tendencies and making it impossible for the US to let Taiwan go Sudetenland style which would only lead to worse problems down the line. Just look at how much more disengaged in ME US policy has become since they achieved oil & gas self-sufficiency. An America that is no longer willing to play world police because they have achieved autarky is not a good thing.
"The first main purpose of industrial policy is decarbonization. Climate change is a major threat, even an existential threat, to our way of life. And we have only two options for stopping it: the mass global impoverishment of degrowth, or building a bunch of green energy to replace fossil fuel energy. That’s it. Those are our only two options. "
isn't this a bit like a Malthus contemporary saying the only two options to avoid starvation are to have fewer kids or to conquer other people and take their land? There is _always_ a potential technological innovation solution to these problems. These solutions are hard to pinpoint ex ante and sound very deus ex machina, and am not instinctively satisfied either with just blindly trusting they will magically appear, but frankly _if_ we manage to stave off catastrophe I'd say the odds of us getting there through a technological solution are actually much higher than all humanity getting its act together (applies whether getting act together means achieving degrowth or effecting green transition, btw)
Agree re Cato. Half baked libertarian economic "thinking" of the chicago school that doesnt stand up to scrutiny or reality. Gets a lot of money from somewhere though: Alt right sympathisers, and maybe from foreign sources that do not always have the west's best interests at heart.
>There’s also another important reason why subsidizing green energy is better than a carbon tax, and that’s learning curves. The more of stuff like solar and batteries we build, the cheaper it gets:<
I get the political case for green energy subsidization: policy is indeed the art of the possible. But, just to pick a nit, in the parallel universe where the US were able to successfully implement a carbon tax, wouldn't the "learning curve" advantage also apply? We'd "build more stuff like solar and batteries" because it would become increasingly expensive *not* to do so. Right? Or am I missing something obvious?
Has not the USA had industrial policy(s) in place all along? But quietly so, with 'neo-liberalism' taking over from 'the new deal' as above the table talking points? Does not extensive and ongoing support for agriculture; the original homesteading land grants, subsidized irrigation water, exemption from highway fuel tax, and now morphed into subsidies for industrial ethanol production, count? And so with the fossil fuel industry; including below-market-rate drilling leases, public funding for highways, roads, and bridges, minimum parking requirements for housing development, and so on. Aren't these industrial policy in political disguise? [I was going to say 'policies, but for the link between ethanol and fossil fuels, with ethanol requiring more BTU's from oil to produce than it returns. A win for both sides of the industrial policy.]