There’s a certain cyclicality to political economy; stick around long enough, and you’ll see every old policy idea get recycled. The left is rehabilitating socialism from stale epithet to fresh political movement. The right, meanwhile, is reviving industrial policy.
Industrial policy was last hot in the 1980s, as an ascendant Japan seemed about to displace us at the apex of the global economy. Center-left policy wonks spent a decade urging us to copy them. By the time they’d convinced everyone, however, Japan was mired in its 20-year “lost decade,” and the United States was entering an unplanned economic boom courtesy of Silicon Valley. Industrial policy abruptly vanished from the national conversation.
Then came President Trump, whose campaign contained a lot of folk industrial policy. Now policy scholars such as Oren Cass of the Manhattan Institute are putting intellectual flesh on the populist bones. Their arguments were featured prominently at last week’s conference on national conservatism, which reflects the traction they’re gaining on the right.
The first thing opponents of industrial policy should note is that it can work. But there are some other things we should note, too: that while it can work, it usually doesn’t; that it didn’t cause most of the growth it gets credit for in Asian countries; and that the limited benefits it offers probably can’t be realized by modern-day America.
But first, the concession. Done smartly, strategic trade policy and targeted subsidies can boost a country’s competitive position in growth-promoting industries. And because those industries often cluster, successful national champions can be quite hard to dislodge — just think of Detroit’s decades-long dominance of the global auto market. Once a cluster is established, spillover effects can foster further growth in related sectors.
Unfortunately, industrial policy is rarely particularly smart. Even brilliant planners can’t actually predict the future, and if they guess wrong, they can squander a great deal of taxpayer money while actually making the economy less competitive. France’s Minitel network, a sort of proto-Internet once heralded as a triumph of industrial policy, arguably hindered French adoption of the actual Internet.
When industrial policies do go badly wrong, government bureaucratic processes make it hard to shut down obsolete technologies and inefficient enterprises and move that capital to more productive uses. To return to the above example, the Minitel network was finally shut down in 2012.
But Minitel is a relatively benign case, since it did work well for more than a decade. Much worse is when industrial policy gets hijacked by politicians and bureaucrats to pursue political agendas, or line their own pockets, as often happens in the developing world.
In fairness, the United States doesn’t have the kind of rampant public corruption that plagues many of those countries. But then, it’s also short some of the prerequisites to successful industrial policy, such as a highly trusted and effective civil service. If Republicans really want to pursue industrial policy, they’re going to have to agitate for bigger, better-paid government bureaucracies.
Even then, however, industrial policy is likely to fail in the United States. It’s likely to work best when poorer countries are catching up to rich ones, because the planners need only look abroad to identify lucrative economic opportunities. When a country is at the technology frontier — as the United States has been for more than a century — the bureaucrats have to outguess the market. They rarely do.
There can still be a role for a kind of industrial policy that isn’t really aimed at economic development. The United States has an interest in maintaining domestic defense manufacturing for obvious reasons; we also have an interest in promoting sectors that might bring us a cleaner environment. Those policies might make us safer and healthier. They just won’t make us rich.
Moreover, they didn’t even make the Asian model countries rich. Those who look toward Asia for a development model are often blind to their sky-high savings rates, and their enormous development gap. China has a net national savings rate of 22 percent of national income, compared with just under 3 percent in the United States; Japan and South Korea had similar gaps at their prime. Those savings funded them along a development path worn smooth by richer countries, allowing them to experience a century’s worth of European growth in just a few decades.
That sort of boom is a great thing to live through, as year by year everyone gets richer and all sorts of social indicators improve in tandem. A lot of the emotional energy behind industrial policy seems like a desire to emulate that feat, and no wonder.
The problem is, we can’t replicate it because we practically invented it — more than 100 years ago. And it’s a one-time trick that no country ever gets to repeat, no matter how carefully they plan.
By Megan McArdle