From article Industrial Policy: A Bad Idea Is Back. Manufacturing jobs cannot justify industrial policy. Scott Lincicome, Cato. August 1, 2021. Section 1.
“Industrial policy” = targeted and directed government interventions intended to achieve specific, market‐beating industrial and commercial outcomes within national borders.
In the wake of the COVID-19 pandemic and rising U.S.-Chinese tensions, American policymakers on both sides of the aisle HAVE ONCE AGAIN EMBRACED INDUSTRIAL POLICY TO FIX PERCEIVED MARKET FAILURES AND COUNTER CHINA’S GROWING ECONOMIC CLOUT.
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Perhaps the idea’s biggest fan is President Biden, who — much like his predecessor — has proposed a wide range of federal support for American manufacturers of “essential goods” and “critical technologies.”
In the first half of 2021, BIDEN HAS PUSHED MASSIVE NEW SUBSIDIES such as tax credits, grants, preferential contracts for domestic producers of renewable energy technologies, electric vehicles, semiconductors, and “critical minerals,”
He’s also pushed “Buy American” requirements for the construction materials and other goods needed to implement trillions of dollars in proposed infrastructure spending.
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Congress is eager to play along: both chambers are considering major legislation to subsidize American industrial research and development (R&D).
One could hardly blame the politicians if industrial policy advocates are to be believed.
BY THE ACCOUNT OF THOSE WHO PROMOTE FEDERAL SUBSIDY ALMOST EVERY MAJOR MODERN MARVEL IS AN “INDUSTRIAL POLICY SUCCESS,” including everything involving computers and technology, all types of energy sources, the civil aviation industry, the pharmaceutical and biotech industries, as well as hybrid corn and lactose‐free milk.
However, few such innovations are the result of real U.S. industrial policy.
That a random university researcher on a small federal grant stumbled on a new technology in an unrelated field does not make “industrial policy.”
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Real “industrial policy” has a long and ignominious history in the United States, one that honest supporters acknowledge has been riddled with performance underruns and cost overruns, owing to FOUR MAIN OBSTACLES TO THESE POLICIES’ EFFECTIVE DESIGN AND IMPLEMENTATION.
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First, past U.S. industrial policy efforts have often struggled to surmount F. A. Hayek’s knowledge problem, particularly for high technology goods. Centralized attempts to identify “critical technologies” in the 1990s failed in part because the government could not predict which technologies would be most valuable in the future or foresee how the marketplace would develop.
SEMICONDUCTOR AND SUPERCOMPUTER PROTECTIONISM PICKED THE RIGHT INDUSTRIES BUT THE WRONG PRODUCTS AND COMPANIES.
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Second, even if U.S. planners can pick the right industries or products, POLITICS THWARTS THEIR POLICIES’ IMPLEMENTATION — just as public choice theory predicts.
Supercomputer policy in the 1990s was essentially aimed at supporting one politically powerful U.S. company, Cray, and ignored other American market entrants that offered different and arguably better products.
Energy technology demonstration projects funded by President Barack Obama’s American Recovery and Reinvestment Act (ARRA) were DOMINATED BY UNPROMISING AND NOW FAILED CLEAN COAL AND CARBON CAPTURE PROJECTS, accounting for about five of every six dollars allocated, due in large part to the political influence of coal and ethanol producers and Obama’s affection for his coal-producing home state of Illinois.
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Then, there is Solyndra and the Obama administration’s green energy loan programs, which STUDIES HAVE REPEATEDLY FOUND TO CONNECT FUNDING AMOUNTS TO LOBBYING EXPENDITURES AND CAMPAIGN CONTRIBUTIONS, NOT SCIENTIFIC MERIT.
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Politics routinely causes American industrial policies to suffer from a lack of discipline regarding scope, duration, and budgetary costs.
Unlike private transactions whose success or failure is usually adjudicated — often ruthlessly — by the market, GOVERNMENT INDUSTRIAL POLICIES OFTEN LIVE OR DIE BASED ON POLITICAL CONSIDERATIONS RATHER THAN THEIR ACTUAL EFFICACY.
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Linda R. Cohen and Roger Noll documented such issues in their 1991 book, The Technology Pork Barrel, which examined six federal industrial policy programs originating in the 1960s and 1970s — the Supersonic Transport, the Applications Technology Satellite Program, the Space Shuttle, the Clinch River Breeder Reactor, Synthetic Fuels from Coal, and the Photovoltaics Commercialization Program — and found none truly successful.
FOUR WERE “ALMOST UNQUALIFIED FAILURES,” COSTING BILLIONS and crowding out more meritorious R&D projects yet enduring long after failure was established — a survival owed to political pressure and captured regulators.
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The authors’ principal conclusion: “American political institutions introduce predictable, systematic biases into R&D programs, so government projects will be susceptible to performance underruns and cost overruns.”
Other programs with the same results include the Jones Act, the U.S. ethanol program, the U.S. antidumping law, and the clean coal megaprojects.
In each case, LEGISLATORS AND BUREAUCRATS RESPONDED TO YEARS OF FAILURE NOT WITH REFORM OR TERMINATION BUT WITH MORE FUNDING OR PROTECTIONISM.
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Third, industrial policies are often undermined by other government policies that have distorted the market at issue.
Substantial ARRA funding for carbon capture was diverted to ethanol — a subsidized energy product with few if any environmental benefits but substantial political backing.
Federal loan guarantee applicants’ compliance with the following INCREASED PROJECT COSTS, DURATION, AND PAPERWORK — AND SCUTTLED SOME PROJECTS ALTOGETHER:
-the Davis‐Bacon Act. mandating high wages and favoring politically connected labor unions
-the Buy American Act, mandating domestic content
-the National Environmental Policy Act. requiring government review and approval of projects “significantly affecting” the environment
New legislation to boost U.S. R&D spending and subsidize domestic semiconductor manufacturing has been larded with Davis Bacon and Buy American rules, just as public choice predicts.
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Fourth, industrial policies have costs far beyond the budget assigned to a specific project.
Beyond the “seen” cost overruns (especially after considering federal borrowing costs), U.S. INDUSTRIAL POLICIES CREATE A HOST OF “UNSEEN” COSTS, such as
-indirect costs paid by others, e.g. consumers paying more for tariffed goods
-deadweight loss for the economy as a whole
-opportunity costs
-misallocation of resources
-uncertainty inherent in a system dependent on politics, not the market
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Almost all these issues arose in the government bailouts of General Motors (GM) and Chrysler.
The Obama administration deemed these an industrial policy “success” because they only “cost” taxpayers about $10 billion, the difference between the current‐dollar value of funds the government “invested” and recouped.
However, this rosy projection IGNORED
-THE TRUE INTEREST‐ADJUSTED COST TO TAXPAYERS, ESTIMATED TO BE $14 BILLION
-whether the $61 billion the government invested could have been better spent at the time, such as direct payments to and retraining for autoworkers
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Other neglected considerations include
-THE LONG‐TERM COSTS TO GM AND CHRYSLER BECAUSE THEY WERE NOT REORGANIZED VIA STANDARD BANKRUPTCY PROCEEDINGS
-the costs (e.g., lost business) incurred by Ford and other U.S.-based automakers who did not receive special treatment
-the costs to U.S. consumers and the economy because these companies’ better products and business models were not rewarded with additional business
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On top of these are
-the moral hazards that resulted from ENCOURAGING THE CONTINUATION OF THE COMPANIES’ AND THEIR UNION’S IRRESPONSIBLE PRACTICES
-the costs to bond‐holders and other investors who did not receive the fair value of their holdings
-the cost of uncertainty about whether political actors will again decide to intervene in the U.S. market and legal system, citing the bailout as precedent
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Industrial policy advocates’ responses to these criticisms are routinely deficient.
The list of alleged successes and rosy projections of direct economic benefits for recipient companies are rarely compared with assessments of whether the U.S. economy overall would be better off without the industrial policies.
THERE IS LITTLE CONSIDERATION GIVEN FOR WHETHER AN INDUSTRIAL POLICY SUCCESS WOULD HAVE OCCURRED IN A MARKET WITHOUT THE SUPPORTING PROGRAM AT ISSUE.
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Assessments of Department of Energy loan guarantee programs, semiconductor subsidies (SEMATECH), and cleantech startups funded by the U.S. Advanced Research Projects Agency‐Energy (ARPA-E) all have found GOVERNMENT SUPPORT MOSTLY WENT TO COMPANIES THAT COULD HAVE OBTAINED PRIVATE FUNDING or produced outcomes the market could have provided, and did previously without government assistance.
(end of section 1)
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“The list of alleged successes and rosy projections of direct economic benefits for recipient companies are rarely compared with assessments of whether the U.S. economy overall would be better off without the industrial policies.”
Industrial policy is
-special interests defeating general interests
-wanting short run perceived small gain rather than long run actual big gain
-politicians desiring to look and feel good rather than do good
Politicians use industrial policy to increase their prestige, power and control over us, which in turn increases our perceived need for dem which in turn increases our votes for dem.
They understand future voters cannot vote for current politicians
Big government is like a big body, fat cells demand nourishment and to multiply.
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