đș Plan vs. no plan: My chat with economist Michael Strain on when industrial policy makes sense and when it doesnât
"What we are seeing right now in China illustrates the real limits of that kind of government planning for the economy."
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The Faster, Please! Q&A
đș Plan vs. no plan: My chat with economist Michael Strain on when industrial policy makes sense and when it doesnât
In a recent piece essay, âWhy Industrial Policy Fails,â my American Enterprise Institute colleague Michael Strain laments the zeal for picking winners and losers on both sides of the aisle. While subsidies and tariffs to support favored companies or industries are popular, industrial policy enthusiasts havenât come up with good answers to some pretty important questions. Like this one, for instance: âWhy should we expect the government to do a good job of picking winners and losers, or to allocate scarce resources better than the market? If the government intervenes in markets, how will it avoid mission creep, cronyism, and corruption?â Strain asks.
Keying off his essay, I had a recent chat with Strain, who is is the director of Economic Policy Studies and the Arthur F. Burns Scholar in Political Economy at AEI.
1/ The conventional view is that markets are generally efficient â and even when they're not, governments rarely have the nimbleness and foresight to effectively intervene and pick winners and losers, whether through subsidies or trade protections. In addition, an effective industrial policy requires that bureaucrats be well-intentioned and not captured by vested interests. Is the picking of winners and losers through subsidies, trade protection, or other means an acceptable definition of industrial policy?
Yes. I think industrial policy is somewhat nebulous and the definition is somewhat vague, but I think about it as a government taking action to support a politically favored industry. In some cases, that could be the government of a smaller developing country attempting to provide support for a new industry that they reasonably think has a lot of potential to really help the country. In other cases, it really begins from a place of cronyism. But generally speaking, I think a working definition that covers the large majority of cases would be something like government taking action to support a politically favored industry.
2/ In general, is the goal to provide jobs in that industry? What is usually the motivation, at least in a rich country like the United States, for this kind of policy?
In the United States, I think we've seen two presidents in a row, President Trump and President Biden, really go to unusual lengths to support the manufacturing industry. And I think that there are a variety of reasons for that. There are national security concerns about the United States relying on other nations to manufacture certain important goods. There is concern about the US having an adequate manufacturing sector. As a general matter, there is concern that it has become increasingly difficult for a worker without a college degree to enter the middle class. Manufacturing has traditionally been an important route for non-college educated workers to enter the middle class, so there's an attempt to strengthen that path for workers. I think since the populist moment began following the 2008 financial crisis, there has been increased concern about the working class, and that has driven some of this. I don't think we should be surprised that a large number of the states that would be helped by the industrial policies of President Trump and President Biden are swing states that are important for presidential elections. I think there are a host of underlying reasons why economic policy has taken the turn that it has.
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