By James Pethokoukis and Scott Lincicome

To what extent should the US
government intervene in the economy to promote specific innovations and
industries? Is the Chinese economic threat severe enough to warrant such
actions? How will this debate play out within the Biden administration? Recently,
I explored these questions and more with Scott Lincicome.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Scott is a senior fellow in economic studies at the Cato Institute, where he writes on international trade, industrial policy, and economic dynamism. And he is the author of the recently released policy report, “Manufactured Crisis: ‘Deindustrialization,’ Free Markets, and National Security.”

Is industrial policy essentially when the government promotes — via regulatory,
fiscal, or trade policy — certain sectors, technologies, or companies for some
strategic national goal?

Almost.
I would narrow that a bit. By your definition, some pro-industrial policy folks
will consider things like the internet and the iPhone to be industrial policy
because they’re products of basic science research.

So
first, I would make it explicit that industrial policy is inherently
nationalistic — its advocates want any benefits from industrial policy to be
national benefits, whether that is manufacturing jobs or certain products. That
means, for example, that the Pfizer-BioNTech vaccine was not a product of traditional
industrial policy because its contract did not demand an American-made vaccine
or government-controlled supply chain.

Additionally,
industrial policy always contains a government plan to achieve defined
objectives. Basically, the government says, “We need to achieve X” — whether
X is more semiconductor output or increased manufacturing jobs in high-skilled
industries — and then provides incentives, domestic subsidies, or protectionism
to achieve that goal.

How
has industrial policy developed over the past decade, and how do you see it
playing out within the Biden administration?

Well,
when the Chinese government changed course economically about a decade ago with
“Made in China 2025” and other industrial plans, they went from being more
market-oriented to being much more expressly pro-industrial policy and throwing
a lot of subsidies and government action at specific sectors. That set off some
alarm bells within the US government, particularly going into the mid-2010s
when there were also bilateral irritants and problems being created by the
Chinese government. People started saying “We need to do something to
counter the subsidies.” We’ve also seen a slowdown in productivity growth kickstart
industrial policy discussions.

Biden’s biggest plans for industrial policy are in environmental technologies. The administration
has been quite clear that they really want to throw gobs of money at battery
technology, electric vehicles, and any other technologies related to climate
change. And of course, they want that funding to be here in the US in order to
boost manufacturing jobs and “restore the US manufacturing sector.” That’s
classic industrial policy: picking specific industries and economic objectives
in the US and pursuing those goals through subsidies, protectionism, Buy
American mandates, etc.

Given the threats of China and climate
change, can we really just rely on the markets here? If there’s a problem
hurtling at us, doesn’t government need to act to promote the innovation we need?

Well, past results of forced American
industrial policy have been pretty lousy. In the worst case, we end up with
things like the Jones Act which, on supposed national security grounds, forced companies
to use American ships in order to support a domestic shipbuilding industry. As
a result, our shipbuilding industry is inefficient and in decline. It doesn’t
make any good or large ships anymore — and certainly doesn’t sell any abroad. So
we should have some skepticism if people say that industrial policy is always the
answer, as most American “successes” haven’t actually been successful.

Another
reason for skepticism: Chinese growth trajectory is a lot less scary now than
its past catch-up growth has been. Plus, some of their sectors have really
struggled over the past decade, so their subsidy policies aren’t full-proof,
nor do they require that the US abandon decades of market-friendly policy. And
there are other things that the government can do to improve the
competitiveness of the US economy and the outlook for core industries, the most
glaring one being an expansion of high-skill immigration.

The
danger with forcing industrial policy is that we may end up diverting resources
from more productive investments to less productive ones or undermining core
parts of the manufacturing sector. There’s also the risk of just simply
discouraging investment if you inject uncertainty into the markets. All of these
possibilities might leave us in a weaker position than when we started.

But
are those risks acceptable if it means keeping supply chains out of China or
making sure that they have little to no role in anything that can be viewed as
strategic or essential for national security?

There’s
a role for US export controls to some extent. For example, the US could deny
certain technologies to the Chinese government or encourage diversity of supply
through things like the Trans-Pacific Partnership or building alliances to
collaborate on certain critical technologies.

There
are, however, some pretty significant problems that could come of these actions.
First of all, in a lot of these areas the US is not the only supplier of those
technologies, so withholding technology from China would really just harm
American companies.

Additionally,
once you decide to provide subsidies or other government support to industries
deemed “essential to national security,” a lot of other industries
are suddenly going to say that they’re essential to national security as well.
We saw this in the context of COVID when the textile industry argued that it
needed all these new protections because PPE was essential to national
security.

Finally,
there is the risk that non-China supply chain mandates eventually move to
American-only supply chain mandates. Basically, once you start really trying to
force these supply chains to reorient and involve subsidies and protectionism, things
can get dicey.

How
far do you think the US is going to go towards having a lot more government
intervention in dictating industrial policy?

I
think pretty far. Honestly, the goal for those on my side is now just to narrow
the scope of these measures and try to get them to, at the very least, target
legitimate issues.

For example, we shouldn’t fund something just because it has some nexus to actual national defense. Rather, we should tailor policies to actual needs instead of just making them a giant grab bag for anybody who registers as a lobbyist. At the same time, it still remains important to consider the questions that industrial policy raises about the ability of policymakers to figure out what the next best thing is and the potential distortions that these interventions can create — whether it’s really high costs or crowding-out private investment in more productive endeavors.

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.”Scott Lincicome is a senior fellow in economic studies at the Cato Institute, where he writes on international trade, industrial policy, and economic dynamism.

The post 5 questions for Scott Lincicome on the drawbacks of industrial policy appeared first on American Enterprise Institute – AEI.