The headline of a recent Washington Post op-ed, “Biden is reviving a lost Democratic industrial policy playbook,” suggests an important question: Why was that playbook abandoned? Writer Henry M. J. Tonks spends considerable time explaining why a group of “young, highly credentialed politicos enamored with the high-tech economy of the future” initially created such a playbook back in the 1980s. After the volatile, stagflationary 1970s, these “Atari Democrats” were looking for a big, new economic idea to propel the party and to counter the “Reaganite, free-market revivalist ascendancy,” as Tonks puts it. They thought they found their answer in the booming Japanese economy, success that many at the time credited to its government-led economic model of central planning, subsidies, and trade protectionism. They pushed Washington to do its own strategic planning and intentional subsidizing of emerging high-tech sectors. What happened to the Atari Democrats and industrial policy ideas? Tonks:

In 1988, the House caucus’s economy task force revived calls for “national strategic planning” around future-growth industries. Nonetheless, the ambition and innovation of New Democrats’ proposals depreciated in the context of the party’s 1980s electoral misfortunes and a resurgence of xenophobia. . . . Therefore, by the time Bill Clinton won back the White House for the party in 1992, New Democrats’ proposals for a Japanese-inspired industrial policy were fading into oblivion. Overall U.S. interest in the Japanese economy also declined in the context of the start of Japan’s “Lost Decades.”

Important point here: Current economic scholarship doesn’t seem to hold 1980s Japanese industrial policy in high regard. This from the new working paper “Picking Winners? Government Subsidies and Firm Productivity in China” by Lee G. Branstetter, Guangwei Li, and Mengjia Ren:

Today’s debate on Chinese industrial policy may remind older readers of the earlier discussion on Japanese industrial policy. In the 1980s and 1990s, an extensive and contentious literature on Japanese industrial policy drew significant attention as U.S.-Japan trade frictions were pushing the U.S. (and other Western nations) to adopt protectionist policies. Drawing upon qualitative methods and largely anecdotal evidence, a group of noneconomists, business experts, and policymakers argued that Japan’s rapid recovery and robust growth after WWII could be explained by skillful industrial policy. Japan’s “government-led” economic model came to be viewed as a threat to U.S. prosperity by some participants in these debates. . . . Economists and more empirically minded social scientists in other disciplines viewed the claims of industrial policy efficacy with skepticism and suggested that Japan’s intervention in its economy tended to favor declining industries rather than growing ones. Eventually, the skeptics were able to bolster their claims with hard data demonstrating that the Japanese government had offered some degree of economic support to nearly all sectors, but that the preponderance of support had not gone to the sectors or firms with the fastest productivity growth. . . . As it turned out, the policy efforts to promote rising sectors championed by some elements of Japan’s bureaucracy were undermined by countervailing efforts to buttress the employment levels and solvency of politically connected but economically weak firms and industries. Japan’s long period of economic outperformance came to an abrupt end in the early 1990s; after two decades of slow growth, few scholars now argue that Japanese industrial policy is a model worthy of emulation.

It seems to me that this new bout of Washington enthusiasm for industrial planning—which isn’t limited to Democrats, by the way—should be informed by the Japan example. More importantly, however, it should be informed by what’s happening with China’s industrial policy since it’s the perceived success of Beijing’s efforts been a motivating force here. 

We find little evidence that the Chinese government picks winners—if anything, the evidence suggests that direct subsidies tend to flow to less productive firms rather than more productive firms. In addition, we find that, overall, the receipt of direct government subsidies is negatively correlated with subsequent firm productivity growth over the course of our data window, 2007 to 2018. Even subsidies given out by government in the name of R&D and innovation promotion or industrial and equipment upgrading do not show any statistically significant evidence of positive effects on subsequent firm productivity growth.

The paper contributes to a growing literature exploring the effect of government subsidies on firm productivity, and relates to a strand of literature examining the effect of R&D related government subsidies in China on firm innovation and performance. The study is limited in the sense that it only covers a very narrow aspect of government support to corporate firms—direct subsidies—and it only measures that support for listed enterprises.

That said, based on the results of this study, we find little evidence that the allocation of subsidies has improved the productivity of Chinese firms. There is more robust evidence that subsidies support slightly higher levels of employment, at least temporarily. This is consistent with the view that political considerations might outweigh efficiency considerations in the allocation of direct subsidies. In the longer run, this approach is unlikely to promote the kind of significant productivity improvements the Chinese economy will need to maintain growth in the face of an aging population, a declining workforce, and mounting evidence of diminishing returns to capital investment.

Granted, picking individual winners isn’t the same as selecting sectors for subsidies and other support. But the result of this study should certainly give pause to advocates of this country pursuing a full-throated industrial policy, even with American characteristics.

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