Industrial Policy Meets the Real World

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The U.S. Capitol Building on Capitol Hill in Washington, D.C., December 4, 2020 (Tom Brenner/Reuters)

Industrial policy looks great on paper. The government simply has to identify an industry that needs support, prop it up with subsidies, loans, tax breaks, or protect it from foreign competition with tariffs and other trade regulations, and we will be on our way to fixing many of our problems.

Some have learned from history, and simply want for more funding for R&D rather than a top-down central plan. Others have learned nothing. Either way, whatever form it takes, industrial-policy plans have to go through Congress, and then be implemented by various government agencies.

And that’s when things rarely go according to plan. Take the United States Innovation and Competition Act of 2021, formerly known as the “Endless Frontier Act” or EFA. It was originally going to be a $100-billion-over-five-years increase in federal support of R&D to boost innovation. However, after going through Senate Commerce Committee markups last month, things have gone in a very different direction as this analysis summed up:

$100 billion boost in federal support for R&D is now less than $40 billion in new spending, of which less than $10 billion is reserved for anything resembling research or development.

Once the senators on the committee had their turn adding their preferred crony provisions, shifting R&D funding to other priorities and adding rules that had nothing to do with subject at hand, the thing became a 1,500-page, $250 billion industrial-policy legislation, which looked nothing like what it was meant to be. Big surprise. Over at The Dispatch, Scott Lincicome has a good piece explaining why we shouldn’t be surprised by this development.

The legislation went through the House, and needless to say, it didn’t improve it.

That’s Congress. But then there is the fact that the winners picked by the government may not all turn out to be the champions we hope they will become. A few years ago, I explained that this has happened before:

Consider the detailed case studies by economists at the Brookings Institution. In 1991 Linda R. Cohen (with help from Roger G. Noll, Jeffrey S. Banks, Susan A. Edelman and William M. Pegram) wrote an entire book called The Technology Pork Barrel on the federal government as an investor in R&D for the sake of technological advancement.

What’s interesting about this book is that the authors are sympathetic to the usual arguments presented in favor of government intervention in R&D. They believe that the market in some cases fails to invest enough in R&D—an argument made across the political spectrum, including many libertarians. The authors also believe this failure keeps economic growth artificially low, and that government should correct this problem. And still, in the end, they conclude that people should be skeptical about federal government support for R&D.

And yet, we continue to believe that somehow, this time, industrial policy will work better. You even hear conservatives make arguments like, “It works in China, so we have to do the same.” It’s as if some people are convinced that the problems that have plagued past and current central-planning efforts in the U.S. government don’t exist in China. But the truth is that China’s successes may not look as good relative to the U.S. if you look closely at the data and facts. Also, the U.S. private sector may not even be as deficient at R&D investments as some believe.

Yet, the myth endures especially when it promises to defeat China somehow. Here is President Biden applauding the House’s approval by wide margins of two potential and complementary alternatives to the Senate-approved United States Innovation and Competition Act of 2021:

“We need historic – once in a generation – investments in our competitiveness that support R&D, innovation, our semiconductor industry, and advanced manufacturing to grow our economy and create good-paying middle-class jobs in every corner of America,” Biden said in a statement.  “By rebuilding those domestic sources of strength, we can out-compete China and the rest of the world for years to come.”

The belief that more government spending and regulations are what economic growth and innovations are made of will always baffle me. This is why I am delighted that in the past year, my colleague Adam Thierer has devoted so much of his time looking at other countries’ past industrial-policy efforts. Here is his must-read piece about the Japanophobia of the ’80s and ’90s, which was rooted in part in a profound fear of its industrial policy. It is an important walk down memory lane:

Revisiting the era of what critics called “Japan Inc.” or “the Japan Model” provides some important lessons regarding how debates over China might unfold in coming years. China’s human rights abuses, anti-democratic tendencies and growing military aspirations make it a far more serious threat to U.S. interests than Japan ever was. Nonetheless, the panic about Japan and its economic planning efforts remains instructive, especially with a massive 1,500-page, $250 billion industrial policy bill recently passing in the Senate and political interest in countering China at an all-time high.

He concludes:

Perhaps the most ironic indictment of industrial policy punditry lies in the way all the earlier books and essays about Japanese planning not only failed to forecast the many flops associated with it, but also did not foresee China as a potential future economic juggernaut. Korea, Singapore and Taiwan were mentioned as potential Asian challengers, but no one gave China much consideration. What might that tell us about the ability of experts to predict the future course of countries and economies? It is a reminder of the wisdom of another great Yogi Berra quote: “It’s tough to make predictions, especially about the future.”

Thierer has more articles, some co-authored with Connor Haaland, that I highly recommend, looking at questions such as whether we should model our innovation policies on China, or whether European-style industrial policy spurs tech innovation. Also, don’t miss this great interview with Matt Ridley on the future of innovation. This body of work should take some of the shine off the enduring appeal of industrial policy. But will it?