… is from page 99 of Samuel Gregg’s excellent 2022 book, The Next American Economy: Nation, State, and Markets in an Uncertain World:
[I]ndustrial policy supposes that if markets apparently fail to produce certain products, or to foster certain economic sectors deemed important for regional or national well-being, the government must intervene to rectify the problem. But what if the failure is not one of the private sector at all? What if the problem is pre-existing high taxes on profits generated by start-ups? Or regulatory barriers to entry for entrepreneurs? Or weak protections for intellectual property rights? Or preexisting subsidies that incentivize businesses to invest in established industries rather than new enterprises? Or some combination of these factors? In short, what if the problem is primarily government failure? Even relatively free economies contain numerous distortions that flow from government interventions that create perverse incentives for labor and capital to flow in less-than-optimal directions. The solution to such problems is less government intervention, not an industrial policy.
Another government intervention that stymies adjustments to economic change – and, hence, that causes such change to appear to undiscerning eyes to be the result of a failure of markets – is land-use regulations. (Thus the photo above.) Especially harmful are restrictions on the building of housing that’s affordable by poor and middle-income people. Several of my colleagues at the Mercatus Center, including GMU Econ alum Emily Hamilton, are hard at work both to expose the damage done by land-use restrictions and also to offer proposals for easing these regulations.