George Will had a great piece in the Washington Post on Friday about the failure of industrial policy. He gives a good list of government-granted privileges that have gone bust.
From Solyndra to the permanently closed Fisker Automotive to Lordstown Motors to “Yellow, a trucking company that received a $700 million federal loan during pandemic-era industrial policy” and more, it is hard to argue that industrial policy and its favorite offspring, cronyism, don’t waste a lot of taxpayer dollars. That’s not surprising. The whole point of industrial policy is either to (1) incentivize companies to do something that they wouldn’t do otherwise because it wouldn’t be profitable, or (2) incentivize banks to lend money to companies and projects that couldn’t get access to capital on their own merits. Neither is part of a recipe for profitability, economic growth, or the creation of better-paying jobs.
But such cronyist intervention will continue, of course, since this administration is committed to doing industrial policy while loading the beneficiaries of its largess with burdensome requirements such as childcare and Buy American.
There is, however, another reason to be skeptical of the value of industrial policy (and cronyism). George Will omits it from his column, but I think it may be the most important reason of all. It’s this: While industrial policy does direct some of its subsidies and spending toward projects that will later fail, in most cases, it directs these handouts to companies that were already doing what they are now subsidized to do or would have done without the subsidies. Think about the program that gave us Solyndra, the 1705 green-energy-loan program. Most of the funding went to companies that had lots of access to capital and were already in the green-energy business — specifically in solar and wind.
Looking at the CHIPS Act, Scott Lincicome wrote last year:
The most advanced chips are today imported from East Asia, but U.S. powerhouse Intel and other semiconductor manufacturers—enjoying astronomical profits due to intense global demand—are planning future investments in production of advanced and legacy chips in the U.S., with or without subsidies. They have gone on a spending spree in the U.S. and other locations outside of China or Taiwan.
Yet, these are now the happy beneficiaries of our industrial-policy handouts. A new paper confirms that industrial policy tends to give handouts to companies in sectors with an already established comparative advantage:
We find that within countries, industrial policy is targeted at sectors that have a higher comparative advantage in international trade. We show this correlation holds at different levels of aggregation (Harmonized System 2 and 6-digit level data), and controlling for a variety of time-varying fixed effects. In other words, on average, countries direct new industrial policies toward sectors in which they have an established international presence.
This is the quintessential definition of doing less with more. And it’s no way to enhance an economy’s performance.
That’s a waste of resources, and it is most often than not the result of companies being politically connected. It also explains why so many recipients of these government handouts end up doing fairly well. They would have succeeded on their own — though I am sure they prefer benefiting from lower borrowing costs, tax credits, or government cash.
Now, I am curious to see how these companies fair in the end. While it is true that many of them would build semiconductors and invest in green energy without the handouts, the Biden requirements may on net make it harder for some to succeed (think giving someone a small floatation device while loading them down with heavy bricks as they jump in the water for long swim). We will see, I guess.
Overall, this should make people skeptical of the claim that industrial policy will create many jobs. Either the subsidized companies will fail — as the ones mentioned in Will’s column did — or they didn’t need the subsidies in the first place. Besides, even with an industrial-policy-led manufacturing boom, we shouldn’t expect a job boom as most manufacturing is automated these days.
Finally, there is indeed a case for industrial policy on national-security grounds. What that exception implies, however, is that there is a case of disrupting the efficient allocation of the market for a non-economic cause that we deem extremely important. That implies that a cost will be paid.
Identically, if my friends on the left want to claim that there is a case for industrial policy to pursue a climate strategy, that’s fine. But let’s all be honest that there is a cost to achieving that goal, too, and let’s stop pretending that achieving that goal through top down industrial policy will make the economy stronger. I do believe, however, that climate-change adaptation can be achieved mostly through an unhindered market that responds the consumer demand and adopt innovations from the most creative among us. Such a process would make the economy stronger.