Cato today published my new White Paper on the perils of American industrial policy, and the timing couldn’t be better. The Senate, for example, has passed the Infrastructure Investment and Jobs Act (the Bipartisan Infrastructure Bill) and the U.S. Innovation and Competition Act, each of which contain numerous subsidies and other measures intended to boost American manufacturing and compete with China. Those bills now sit with the House, which is also considering a bunch of industrial policy proposals, such as special tax credits for union-made electric vehicles, in President Biden’s $3.5 trillion “reconciliation package.”

As explained in my new paper, U.S. industrial policies have a long history of high costs (for the federal budget and U.S. economy), failed objectives, political dysfunction, and empty justifications. Prominent among those justifications, especially today, is that industrial policies have worked well in countries like South Korea, which has a long history of economic interventionism. I cite oodles of research showing why such claims are misguided (for Korea and others), but a brand new National Bureau of Economic Research (NBER) working paper provides some excellent additional support – and some broader lessons along the way.

The paper, from economists Minho Kim, Munseob Lee, and Yongseok Shin, uses a novel and detailed dataset to examine the effects of Korea’s “heavy and chemical industry” (HCI) drive in the 1970s — a prominent “industrial policy success story.” The authors make several key findings:

First, labor productivity and output did indeed rise faster in the Korean factories targeted by the HCI policies, but total factor productivity (i.e., how efficiently and intensely all inputs are utilized in production) in those industries actually declined during the HCI period. In particular, Korean government policies led to a severe misallocation of resources in targeted industries, thus negating any plant-level gains. As the authors put it, “resource allocation across plants within the targeted industries/​regions worsened substantially, to the point where the gains in plant-level productivity are completely undone by the worsened misallocation.” This misallocation was most severe among new establishments that had sprung up during the HCI period, suggesting that the government subsidies buoyed big, new, inefficient firms, not particularly nimble or productive ones. And even though Korea’s industrial policies ended in 1979, productivity in the targeted industries continued to decline through the 1980s.

Second, the same misallocation of resources did not occur in non-targeted industries in the 1970s. Thus, the authors conclude, productivity at targeted Korean industries would have been 40 percent higher in 1980 had no industrial policies been implemented. “In other words, the exacerbated misallocation within the targeted industries/​regions relative to the non-targeted ones had the effect amounting to a 2.8‑percent-per-year loss in total factor productivity during this period.”

Third, Korean industrial policies increased business concentration in targeted industries, with potentially damaging implications. For example, the average size of a targeted firm more than quadrupled between 1967–1980, while the average size of a non-targeted firm increased to a much lesser degree over the same period (see Figure 1). Many of the ballooning establishments in the targeted industries were new entrants with the greatest misallocation of resources.

The authors speculate that Korea’s HCI drive may therefore have been instrumental in empowering the large family-run conglomerates, known as Chaebols, whose outsized political and economic influence has for decades been a big problem for South Korea. (Many new HCI establishments with the highest misallocation of resources were in fact owned by these Chaebols.)

These new findings are consistent with research cited in my new paper and elsewhere showing that Korean industrial policy hasn’t been the roaring success that some advocates today claim. (One analysis, for example, “finds that South Korea’s industrial policies in the 1970s erected barriers to entry and allowed incumbent firms to exploit their policy‐​induced market power, and that additional liberalization would have increased national welfare by as much as 10 percent of GDP.”) The NBER working paper also provides yet another cautionary tale for current industrial policy proposals in the U.S. Congress – showing, for example, how company-specific industrial policy “successes” can mask unseen, industry- or economy-wide costs; how industrial policies can actually render targeted industries worse off than if a nation had simply done nothing; and how industrial policies can breed broader political, social or economic problems (e.g., cronyism, corruption, and anticompetitive behavior).

Such lessons, and many others, rebut the simplistic message from industrial policy advocates that a few microeconomic “wins” abroad justify expansive new U.S. government programs to steer the economy to national greatness. As usual, a broader perspective is needed — yet sorely missing on Capitol Hill right now.

My new Cato White Paper, “Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary,” is available here.