As discussed here repeatedly, “industrial policy” is having a(nother) big moment in the United States. Just this month, for example, the Senate passed the U.S. Innovation and Competition Act, which provides tens of billions of dollars for domestic semiconductor manufacturing and the commercialization of “key technologies”; the Biden administration released a lengthy new report urging new federal actions on “supply chain resiliency”; and lawmakers inched closer to a trillion-dollar infrastructure bill — each promising to counter China’s rise and/or revitalize the U.S. economy and key industries in ways that the market supposedly can’t or won’t.
As Huan Zhu and I explain in a new Cato working paper, however, advocates for these and other federal interventions routinely leave unanswered several important questions about U.S. industrial policy’s efficacy and necessity:
- What is “Industrial Policy”? Advocates of “industrial policy” often fail to define the term, thus permitting them to ignore past failures and embrace false successes while preventing a legitimate assessment of industrial policies’ costs and benefits. Yet U.S. industrial policy’s history of debate and implementation establishes several requisite elements – elements that reveal most “industrial policy successes” not to be “industrial policy” at all.
- What are the common obstacles to effective U.S. industrial policy? Several obstacles have prevented U.S. industrial policies from generating better outcomes than the market. This includes legislators’ and bureaucrats’ inability to “pick winners” and efficiently allocate public resources (Hayek’s “Knowledge Problem”); factors inherent in the U.S. political system (Public Choice Theory); lack of discipline regarding scope, duration, and budgetary costs; interaction with other government policies that distort the market at issue; and substantial unseen costs.
- What “problem” will industrial policy solve? The most common problems purportedly solved by industrial policy proposals are less serious than advocates claim or unfixable via industrial policy. This includes allegations of widespread U.S. “deindustrialization” and a broader decline in American innovation; the disappearance of “good jobs”; the erosion of middle‐class living standards; and the destruction of American communities.
- Do other countries’ industrial policies demand U.S. industrial policy? The experiences of other countries generally cannot justify U.S. industrial policy because countries have different economic and political systems. Regardless, industrial policy successes abroad – for example, in Japan, Korea and Taiwan – are exaggerated. Also, China’s economic growth and industrial policies do not justify similar U.S. policies, considering the market‐based reasons for China’s rise, the Chinese policies’ immense costs, and the systemic challenges that could derail China’s future growth and geopolitical influence.
The answers to these questions — teased above and thoroughly explored in the paper — show that industrial policy has an extensive and underwhelming history in the United States, featuring high costs, failed objectives, and political manipulation. Surely, not every U.S. industrial policy effort has ended in disaster, but events here and abroad — including in China — argue strongly against new government efforts to boost “key” industries and workers and thereby fix alleged market failures.
New efforts thus warrant intense skepticism – skepticism that today is unfortunately in short supply.
You can check out the whole paper here.
