By James Pethokoukis

Does industrial policy work? Does government support of certain favored sectors and companies — including tax breaks, trade protections such as import limitations, subsidies such as loan guarantees, and R&D support — work? And what does “work” mean? Well, there are lots of rationales for industrial policy, as Gary Clyde Hufbauer and Euijin Jung outline in “Lessons learned from half a century of US industrial policy,” a new report from the Peterson Institute of International Economics.

For their analysis, Hufbauer and Jung boiled down those many rationales to three: Did the favored industry become more competitive? Were jobs saved or created? Did industry technology advance? They then divided up various American industrial policy efforts into the categories of trade, subsidy, and R&D, grading policy success on the efficacy of meeting those three objectives. The results are mixed, at best:

And their conclusions:

• “Industrial policy can save or create jobs, but often at high cost. A major political selling point for industrial policy is to save or create jobs in a specific industry or location. In about half our sample, this was achieved at a taxpayer or consumer cost below the prevailing wage. . . . Moreover, jobs created in one state often come at the expense of comparable jobs that might have been created in another state (Mercedes-Alabama; Foxconn-Wisconsin). At the national level, far better policies are available for creating jobs — for example, training programs and earned income tax credits.”
• “Import protection seldom pays off. A big exception: when actual or threatened barriers prompt a world-class firm to open in the United States. Toyota was an example in the 1980s; Taiwan Semiconductor Manufacturing Corporation (TSMC) is an example today. But in most cases, import protection does not create a competitive US industry and it imposes extreme costs on household and business users per job-year saved. Trade policy concentrated on opening markets abroad is a better bet.”
• “Designating a single firm to advance technology yields inconsistent results. Our study did not find single-firm triumphs that compare with the Manhattan Project. Perhaps they exist, but when government confines its support to a single firm to advance frontier technology, it forecloses alternative solutions that might be advocated by different scientists or business leaders. AVTM showed that it is much better to fund multiple firms at the outset. The highly successful model of Operation Warp Speed vividly demonstrated that competition is an American strength.”
• “R&D industrial policy has the best track record by far. Among the 18 cases, DARPA has the outstanding record. The DARPA model entails broad guidance to science and engineering experts who, without political interference, award grants to promising but high-risk R&D. When public R&D strikes gold, private firms step in to commercialize the findings. This model finds favor both with the Biden administration and the Congress.”

This report serves as a needed corrective to the recent enthusiasm in US politics for industrial policy, writ large. Such enthusiasm was last seen during the 1980s thanks to Japan’s economic ascendency. And now with China again. But if China’s productivity woes don’t inspire caution in American proponents of industrial policy, maybe this report will. It should. (I would also recommend looking at this Cato Institute paper on industrial policy by Scott Lincicome and Huan Zhu.)

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