This morning, Andrew Stuttaford mentioned the measures European governments are taking to avoid facing the worst consequences of their bad energy policies. Here is yet more evidence that, when it comes to energy and to industrial policy, not only is the world upside down, the U.S. itself is headed in the wrong direction. Indeed, when the U.S. president is lectured by his French counterpart about America’s abusive use of green energy, including electric-vehicle subsidies, you know you’re in a bizarro new world.
Here’s the Wall Street Journal on this:
The EU and the U.S.’s key Asian allies say the new EV subsidies, introduced under the Inflation Reduction Act, discriminate against their companies with its North American assembly and contents requirements. . . .
Monday’s meeting took place as governments from Europe, South Korea and Japan piled pressure on Washington to address their concerns about its EV subsidies program. Following his meeting with Mr. Macron on Thursday, Mr. Biden said the U.S. could make “tweaks” to the Inflation Reduction Act, which provides subsidies to U.S. manufacturers and tax incentives for electric vehicles and other products that are assembled in North America. Any changes would be designed to make it easy for European companies to participate in the program.
This would be funny if it weren’t so sad. Indeed, both France and the U.S. use misguided energy subsidies. As the WSJ points out:
Earlier this year, the U.S. passed the Chips Act, a $280-billion legislation to provide subsidies and support for research and development to increase domestic production. The European Union introduced similar legislation, raising concerns that global semiconductor companies may pit one against the other to get better deals or create oversupplies in the long run.
But even if Europeans didn’t subsidize their green-energy industry, they wouldn’t be hurt by the idiotic U.S. policy that subsidizes some companies at the expense of all the others (and of taxpayers). Such subsidies shift capital away from more efficient investments towards the politically favored ones. We have understood this reality about subsidies since the time of Adam Smith, but there was unfortunately little supporting empirical evidence. Such evidence is now, fortunately, pouring in.
A recent paper in this category, by Lee Branstetter, Guangwei Li, and Mengjia Ren, is titled “Picking Winners? Government Subsidies and Firm Productivity in China.” The authors examine the extensive array of subsidy programs in China — the existence of which is the excuse many U.S. legislators use for supporting similar American subsidies — and their impacts on the productivity of subsidized firms.
The paper asks the following questions:
Are Chinese industrial policies making the targeted Chinese firms more productive? Alternatively, are efforts to promote productivity undercut by efforts to maintain or expand employment in less productive enterprises?
The economists observe:
We find little evidence that the Chinese government consistently “picks winners”. Firms’ ex-ante productivity is negatively correlated with subsidies received by firms, and subsidies appear to have a negative impact on firms’ ex-post productivity growth throughout our data window, 2007 to 2018. Neither subsidies given out under the name of R&D and innovation promotion nor industrial and equipment upgrading positively affect firms’ productivity growth.
In other words, subsidies hurt productivity both ex ante and ex post. They also find that China’s industrial policy “may have generated limited effects in promoting productivity.”
In this same vein, I recommend the excellent 2019 book by Nicholas Lardy, The State Strikes Back. Here, Lardy looks at the cost to the world, and to the Chinese people, of China turning its back on free-market reforms in order to embrace industrial policy and subsidies. I also recommend Ronald Coase and Ning Wang’s splendid 2012 book, How China Became Capitalist. Coase and Wang document how China was enriched by its embrace of free-market policies. At a time when some conservatives are arguing that the U.S. should follow in the economic footsteps of China and move away from “free-market fundamentalism,” as they derisively call it (don’t I wish we had free-market fundamentalism in this country), I think there are more than a few lessons to learn from the Chinese experience — and they are not the ones U.S. legislators are learning. I will spell it out: Let’s not emulate Chinese economic policies to compete with China.