Over on the Baker Institute website, I have a piece entitled "Will the Biden Administration’s Industrial Policy Experiment Succeed?" You won't be surprised to hear that I am skeptical that the administration's industrial policy moves will be good for the U.S. economy overall, for the following reasons:
-- past industrial policy efforts have generally not gone very well
-- regulatory capture is hard to avoid
-- corporations play governments off each other to get subsidies for the investments they already plan to make
-- subsidies shift financial resources from one sector to another, so if we are doing more of one thing, we are doing less of some other thing
-- domestic industrial policy leads to international trade conflict
-- wealthy countries can afford more subsidies, putting economic development in poor countries at risk
-- if every country followed this approach, it would lead to a terribly inefficient global economy
-- some of the efforts to get the U.S. to manufacture more seem to reflect nostalgia for the 1950s, but based on what I know about that era, I don't think we should be trying to go back there, and anyway those were special circumstances that couldn't be replicated now
Regardless of all that, we seem to be going ahead with various industrial policy initiatives, which leads me to conclude the piece with these points:
If we are going to do industrial policy, there are better and worse approaches. For example, subsidies that go directly to consumers (e.g., tax breaks for buying an electric vehicle) are better than subsidies to specific producers, as producers are highly skilled at regulatory capture. Thus, if fighting climate change is the goal, then a “light touch” industrial policy that favors the clean energy vehicle sector as a whole — by subsidizing purchases of its products rather than giving subsidies directly to individual auto manufacturers — makes the most sense.
For a mix of reasons, the Biden administration is going forward with many of the initiatives it labels as industrial policy. As noted, studies of past efforts show serious flaws in these policies, but it is all being tried again, so there will now be a chance to do some new assessments. What we need is an objective evaluation of these efforts. How well are the policies achieving their stated objectives? Are there unanticipated effects?
Industrial policy is being put to the test. Let’s use this opportunity to give it another thorough evaluation.
