Industrial Policy Isn’t the Way to Get a Manufacturing Boom

If you haven’t yet, please read Dominic Pino’s piece here.

I will add a few things. A boom in construction spending on manufacturing doesn’t necessarily translate into a boom in manufacturing production. In fact, manufacturing output has shown no signs of growth for a while now:

Noah Smith has a post in which he wonders why that might be. He thinks it is most likely the fact that there is a lag between building factories and the resulting increase in manufacturing output. But he worries that the gap between pouring money into building factories (one way of doing industrial policy) and producing output is the fault of something else:

a third, scary possibility — it’s possible that money is getting spent, but only on overpriced consultants and environmental impact studies and other things that are mostly waste, and that the actual physical factories won’t get built. In a post last year, I argued that Americans have become used to the idea that reallocating dollars on spreadsheets means that real stuff is getting built, but that this is often not the case. I called this mistaken belief “checkism” — the idea that all you have to do is write the checks, and everything else will work itself out.

But in fact, there’s a danger even beyond checkism. There’s also the danger that U.S. state capacity is so low that the government checks won’t even go out at all, because the government won’t know where to send them.

He sums it up this way.

In other words, U.S. industrial policy is running into at least three big sets of problems:

1. Lack of bureaucratic state capacity

2. Onerous contracting requirements

3. Burdensome Permitting, especially NEPA

Smith’s big realization is the reason that market liberals well-versed in public-choice theory are skeptical that industrial policy will ever deliver on its stated goals. Politicians can’t help themselves from trying to favor special interests (including labor unions) or impose some of their other policy preferences along the way.

But Smith omits a huge regulatory burden faced by those in the manufacturing business, one that will hinder everyone’s — Democrats’ and Republicans’ — attempts to use industrial policy to boost manufacturing output: tariffs. As we all know, when it comes to protectionism, there has been little light between the Trump and the Biden administrations. In the WSJ, Phil Gramm and Don Boudreaux remind us that “protectionism shrinks rather than expands production”:

It does so most directly by obstructing U.S.-based producers’ access to inputs. As Dartmouth’s Douglas Irwin has shown, more than half of American imports are raw materials or intermediate goods used as inputs in production. Restricting these imports raises producers’ costs and thus hamstrings American production and competitiveness. Every job “created” or “saved” by tariffs, which force American consumers and users of protected inputs to pay higher prices, keeps noncompetitive firms operating. . . .

A similar story is told by manufacturing output. Over the first three quarters of 2018 it rose by 2.5%, spurred by tax cuts and deregulation. As tariffs commenced, it quickly began to fall. By the last quarter of 2019 manufacturing output was 4.7% lower than it was in the third quarter of 2018. On the eve of the pandemic, 32,000 fewer Americans were employed in manufacturing than at the same point in the prior year. These realities are difficult to square with protectionists’ assertions that tariffs encourage production and create or save manufacturing jobs.

In addition to many references to academic studies, the piece has plenty of examples of production being hampered by protectionism. On that note, you should all be skeptical when national conservatives join with the political Left to claim that we need protectionism to boost production.

Tariffs are one of many regulations imposed on the manufacturing sector that likely have contributed to the trend in manufacturing output during the last 15 years. I suggest that those who want to boost manufacturing would be better off with a rigorous regulatory reform than with industrial policy.