… is from page 104 of Paul Krugman’s 1984 paper “The U.S. Response to Foreign Industrial Targeting” (which originally appeared in Brookings Papers on Economic Activity):
The essence of strategic industrial policy is that government intervention allows targeted industries to earn excess returns. Have foreign targeted sectors actually achieved high returns on investment? The answer may seem surprising. None of the most famous targeted sectors has been highly profitable, or indeed even of average profitability.
DBx: Of course, one can always sound the alarm by declaring that “This time it’s different! Unlike industrial policies pursued elsewhere in the past, China’s industrial policy today will succeed.”
Well, very little of what is possible is plausible, and even less is probable. Until and unless politicians and state mandarins not only become programmed not to behave politically, but also to gain knowledge of the all-important on-the-ground (“granular,” as is often said today) details – details that often change in unexpected ways – there is no real prospect of success of efforts by government officials to ‘grow’ their economies through industrial policy. And favored industries are too likely to become lazy and inefficient because of their reliance on subsidies, tariffs, and other special privileges.
I can easily imagine horses evolving long horns jutting from their heads. Such an evolutionary outcome is possible. But I’ll not waste my time and energy worrying about being impaled by a rampaging unicorn. And for the same reason I recommend that we Americans stop worrying about being ‘defeated’ (whatever that really means) by the Chinese as a result of Beijing’s industrial policies.