As the French say, “With ifs, one could put Paris in a bottle.” And so it is with industrial policy: if one ignores everything we know about politics, industrial policy could work. After all, it shouldn’t be that hard to direct funding to achieve a certain economic goal or to boost a particular industry.
Unfortunately, political reality means that politicians will unfailingly impose all sorts of requirements on those receiving the funds, tack on goals in addition to those of industrial policy, direct resources to cronies, and resist admitting failure whenever their plans prove futile. The sum of it all is highly counterproductive.
I have written a lot about how industrial policy is usually captured by special interests and how funding ends up being directed at companies that do not need the funding to do the things that the funding is supposed to enable. In fact, a closer look reveals that these companies, often very large with plenty of access to capital, are already doing that thing that industrial policy, or government programs, wants them to do (building factories to produce more chips, investing in solar-panel production, or selling loads of airplanes to foreign companies).
Using industrial policy as a cover for job creation is also a sure way to derail the pursuit of objectives such as boosting manufacturing in America. The reason is largely due to the fact that politicians handing out taxpayer funds typically ignore a key reality: boosting manufacturing output isn’t the same thing as boosting manufacturing employment. Indeed, because modern manufacturing relies so heavily on the use of labor-saving technologies, industrial policies that aim at increasing manufacturing employment stand a good chance of decreasing manufacturing output.
In the same way, prevailing wage and other requirements are a sure way to obstruct the achievement of industrial-policy goals. The Washington Post reports on the obstacles produced by “Buy American” requirements:
The United States no longer produces many of the items needed to modernize roads, bridges and ports.
The $1 trillion infrastructure legislation that the president signed in late 2021, however, insists that U.S. materials be used.
This awkward dynamic spilled into public view this month, when the U.S. Department of Transportation denied a request by the nation’s ports to use federal infrastructure funds to purchase imported dock, cranes, trucks, boat lifts and similar equipment, after industry officials argued that no domestic manufacturers exist for them. In particular, while some smaller cargo-handling units are made in the United States, all of the electric models that support the administration’s climate goals are made overseas, according to the American Association of Port Authorities.
And:
Among the looming headaches: State and local transportation officials fear they will be unable to obtain adequate supplies of the reflective glass beads used to make safety striping for highway pavement. And materials for high-speed rail systems are almost entirely made in Japan or Europe, according to the summary of meetings last year between top DOT officials and industry representatives.
So what will the administration do? The answer is almost certainly not promising. It will extend waivers, likely using political criteria. But even if it doesn’t, that will create an uneven playing field since some producers will have to use more expensive inputs in order to comply with the Buy American rules while other producers will be exempt. This process will create uncertainty, delays, and serious cost overruns. In other words, the Biden administration will continue to spend your money poorly, as Dominic Pino has noted here.
For all you need to know about Buy American requirements, read “Bye, America” by Scott Lincicome.
I will leave you with one thought. While many Democrats support Buy American requirements because of that party’s devotion to labor unions, many on the political right — purportedly to elevate resiliency over efficiency — favor “bringing back” supply chains and being self-sufficient for many goods. Unfortunately, while on the geopolitical front there might be good reasons to not have some particular supply chains going through China, producing everything at home in order to be economically independent even of trading allies would be a huge mistake. I have heard this strategy called the “North Korean strategy,” which is a sensible description. That strategy does indeed sacrifice efficiency — and perhaps even produces a lot of misery (depending on how far one pushes it) — while barely increasing resiliency.
Resiliency, as economists think about it, rests on a diversification of supply chains and on not having single points of failure. This means having suppliers in multiple places, both abroad — not just in one foreign country, such as China — and domestically. In addition, holding substantial inventories is also an important factor (one worth thinking about when several administrations have emptied some strategic inventories without replenishing them).
Think about that next time you are tempted by an argument in favor of industrial policy that rests on resiliency.