Industrial policy: A deadly conceit for left and right

on the Washington Examiner, Alexander Salter has a piece on how the National Conservatives should reject calls to implement industrial policy. His case rests not on the claim that industrial policy is not possible, but rather, precisely on the claim that it is Possible, but not for the reasons we, free market people, often claim.

Here is the psalter:

Classical liberal errors about industrial policy stem from a misreading of the seminal contributions to economics of Ludwig von Mises and Friedrich Hayek. Supposedly Same knowledge problem That also applies to industrial policies that strike at broader economic planning. It’s a lie. Ms. and Hayek demonstrate that governments cannot plan for economic efficiency because private property and markets are the sources of knowledge needed to “solve” the planning problem. But as we have seen, the National Conservatives have much more modest goals. They want more factory workers and more of what factory workers produce. Direct subsidies, tax credits and similar policies are fully capable of achieving this.

I will not address Salter’s claim that the knowledge problem poses no obstacle to industrial policy here. Others have already addressed this claim.

But it’s still worth noting that’s the whole point of Don Lavoie’s 1985 book National Economic Planning: What’s Left? Precisely to correct the sort of misunderstanding that appears in Salter’s op-ed. The knowledge problem does not arise from questions about the size or scope of central planning. Whether it is partial, with “humble aims” as Salter notes, or comprehensive, any Attempts by governments to override market-determined patterns of resource allocation will suffer from knowledge problems. move on.

My big issue with the piece is that Salter seems to be fighting a strawman. Indeed, no one is saying that industrial policy is impossible implementation. What we are saying is that such industrial policies, much like comprehensive central planning, fail over time because resources are not allocated through price systems but through political processes, and therefore plans suffer from public choice problems and knowledge problems. (See pages 96 to 100 of Sam Gregg’s excellent forthcoming book, The next economy, for a comprehensive discussion on this topic). This guarantees all the disastrous results that many scholars have warned about and that we have experienced when these policies were implemented in the past. For example, look closely at industrial policy projects, even those labeled “a success” often have economic and political costs that almost always far outweigh their intended benefits. (See this excellent piece by Scott Lincicome on why he opposes using industrial policy to create productive employment).

Now, I understand that Cass and company think these costs are worth incurring to get the allocation they want. Salter notes this. But, in reality, they may be surprised how difficult (especially, politically) these costs are to ignore after a while.

Finally, I caution Salter on one more fundamental point—namely, his claim that direct subsidies, tax credits, and loan guarantees will actually produce more factory workers and more output from these workers. This result is a given if he makes it sound. Spend money and you will get a job.

Having spent more than twenty years in the trenches of cronyism research, I can tell you that, first, industrial policy in practice will be riddled with cronyism, and second, that this cronyism inhibits the ability of policies to even deliver their “humble.” Goals, such as creating and sustaining more manufacturing jobs. In other words, it’s not impossible, but it’s harder than it looks on paper. There are many reasons for this, but the main reason is that special benefits from the government 1) go to companies that don’t need them and are already doing what they are subsidizing now (like Intel getting massive subsidies from CHIP) to build a plant that is it would have made without subsidies), or 2) for companies that will sooner or later fail (Solinda comes to mind).

1705 Think about the energy loan program. The loan-guarantee program was supposed to encourage new entrants into the green-energy business and create many jobs. In reality, most of the money went to the company already inside green energy business, already Recruitment of people for this work. These companies were paid to do work they were already doing. Of course, the government will claim that the money ‘created’ or ‘supported’ X number of jobs, but this claim is bogus because these jobs existed independently of the handout. As for the rest of the money, it was showered on companies that later left, so no jobs were created.

I can tell the same story for every one of the many other corporate-welfare programs I’ve studied, whether it’s the Export-Import Bank, farm subsidies, or the Small Business Administration. And don’t even get me started on subsidizing Foxconn ($3.6 billion in state subsidies and a complete failure to create the promised 13,000 workers or build a new plant). Other state governments’ economic-development subsidies aren’t good, and I imagine national conservative subsidies to create manufacturing jobs could go the same way.

Salter also thinks there are plenty of manufacturing jobs And Anyone can be a production worker. Remember when President Obama realized there weren’t enough shovel-ready projects to make his stimulus plan work as promised? In fact, studies have shown that stimulus recipients are not hiring people from the unemployment line (and therefore, keeping unemployed contractors in infrastructure jobs) but rather, poaching trained employees from other companies. Therefore, the effect of “targeted” government spending was not to employ more people. I suspect the same may be true when trying to create manufacturing jobs with subsidies.

The good news is that while industry policies aren’t the way to go, there are plenty of government officials to be able to To connect more workers to the workforce and connect them to better opportunities, especially in the most disadvantaged areas of the United States. Indeed, before policymakers rush to implement industrial policy programs, even modest ones, they should recognize that some of the challenges workers face today are often created by existing government programs. The list of possible reforms that would improve the lives of those frozen out of the benefits enjoyed by most workers is too long for this post. But still here are a few.

Many of these barriers exist at the state level (occupational licensing, zoning and land use regulations, and the like). Still, the federal government can also do more, such as removing Trump’s tariffs and other trade remedy regulations, including tariffs, import taxes, antidumping, countervailing duties and safeguards. The federal government could also reform the disability insurance program and other programs that create disincentives to work at the margins. It could deregulate the process allowing Americans to build more infrastructure, produce more energy and more medicine. And much more…


Veronique de Rugy is a senior research fellow at the Mercatus Center and a syndicated columnist for Creators.

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