More at Washington ExaminerAlexander Salter has a piece on how we should reject calls from national conservatives to implement an industrial policy. His argument is not based on the assertion that industrial policy is not feasible, but precisely on the assertion that it is doable, but not for the reasons we free market people often claim.
Here is Salter:
I will not go into Salter’s assertion that the knowledge problem presents no obstacle to industrial policy here. Others have already discussed this claim.
But it’s still worth noting that all the interest of Don Lavoie’s 1985 book National economic planning: what’s left? is precisely to correct a misunderstanding of the kind that appears in Salter’s editorial. The knowledge problem did not arise from questions about the size or scope of central planning. Whether partial, with “modest objectives” as Salter notes, or global, any any attempt by government to override the market-determined pattern of resource allocation will suffer from the knowledge problem. Let’s move on.
My biggest issue with the play is that Salter appears to be fighting a straw man. Indeed, no one is saying that industrial policy is impossible to implement. All we are saying is that such industrial policy, like comprehensive central planning, fails over time because resources are not allocated through the price system but rather through the political process, and therefore the plans suffer from problems of public choice and knowledge problems. (See pages 96-100 of Sam Gregg’s excellent forthcoming book, The next economy, for an in-depth discussion of this issue). This guarantees almost all of the disastrous results that many academics have warned against and that we have experienced in the past when these policies were implemented. For example, if one takes a closer look at industrial policy projects, even those that qualify as “successful” often turn out to have economic and political costs that almost always far outweigh the expected benefits. (Look at this excellent piece by Scott Lincicome on why he opposes using industrial policy to create manufacturing jobs).
Now, I understand that Cass and company think these costs are worth incurring to get the allocation they prefer. Salter notes it. But, in practice, they may be surprised how hard these costs are to ignore (especially politically) after a while.
Finally, I caution Salter on an even more fundamental point – namely, on his assertion that direct subsidies, tax credits and loan guarantees will certainly lead to more factory workers and more production of these workers. He gives the impression that this result is acquired. Spend the money and you get the jobs.
After spending more than twenty years in the trenches of clientelism research, I can tell you that, first, in practice, industrial policy will be riddled with clientelism, and second, that this clientelism hampers the ability of politicians to even keep their “modest” promises. objectives, such as creating and maintaining more jobs in the manufacturing sector. In other words, it’s not impossible, but it’s harder than it looks on paper. There are several reasons for this, but the main reason is that special government favors either go to 1) companies that don’t need them and are already doing what they are now subsidized for (like Intel getting massive subsidies from the CHIPs law for the construction of a factory that she would have built even without the subsidies), or 2) to companies that will sooner or later fail (Solynda comes to mind).
Think about the 1705 Energy Loan Program. The loan guarantee program was supposed to encourage new entrants into the green energy sector and create many jobs. In practice, most funds have gone to companies that already there the green energy sector, already employing people for these jobs. These companies were paid to do things they were already doing. Of course, the government would claim that the money “created” or “supported” X number of jobs, but that claim is false because those jobs existed independently of the donations. As for the rest of the money, it was dumped on companies which then went bankrupt, thus creating no jobs.
I could tell a similar story for each of the many other corporate welfare programs I have studied, whether it be the Export-Import Bank, agricultural subsidies, or the Small Business Administration. And don’t get me started on grants at FoxxCon ($3.6 billion in state subsidies and a complete failure to create the promised 13,000 workers or build a new factory). Economic development grants from other state governments are no better, and I suppose the national Conservative grants to create jobs in the manufacturing sector could very well go the same way.
Salter also seems to assume there are plenty of manufacturing jobs. and that anyone can become a factory worker. Remember when President Obama realized that there were not enough projects ready to start for its recovery plan to work as promised? In practice, research has shown that stimulus recipients weren’t hiring people from the unemployment lines (and therefore, not laying off contractors in infrastructure jobs) but, instead, poaching trained employees from other companies. Therefore, the impact of “targeted” government spending was not more people employed. I suspect the same may be true when trying to create manufacturing jobs with subsidies.
The good news is that even if industrial policy is not the way to go, many government officials box do to connect more workers to the workforce and connect them with better opportunities, especially in the hardest-hit areas of the United States. Indeed, before policymakers rush to implement even modest industrial policy programs, they should recognize that some of the challenges facing workers today are often created by existing government programs. The list of potential reforms that would improve the lives of those who have been excluded from earnings enjoyed by most workers is too long for this post. But here are a few anyway.
Many of these barriers exist at the state level (professional licensing, zoning and land use regulations, etc.). Still, there are a lot of things the feds could do too, like scrapping the Trump tariffs and other trade remedy regulations include customs duties, import taxes, anti-dumping, countervailing duties and safeguards. The federal government could also reform the disability insurance program and other programs that, at the margin, discourage work. It could deregulate the licensing process to allow Americans to build more infrastructure, produce more energy, and produce more medicine. And more…
Véronique de Rugy is a senior researcher at the Mercatus Center and a syndicated columnist at Creators.