No, Industrial Subsidies Do Not Benefit the Country As a Whole

by Don Boudreaux on April 26, 2023

This new piece at National Review by my intrepid Mercatus Center colleague, Veronique de Rugy, makes clear just how shoddy and weak are the arguments in favor of industrial policy and protectionism put forth by researchers affiliated with American Compass. Here are a few slices from Vero’s essay (but do read the whole thing):

American Compass recently produced a piece, written by Gabriela Rodriguez, professing the greatness of European industrial policy. Rodriguez uses European governments’ support for Airbus as a case study. Airbus, you see, sold more planes in 2022 than Boeing, invests more in R&D, employs workers throughout Europe, and has lower production costs thanks to the strategic decisions made by a few European governments to turn things around.

Rodriguez’s piece is part of a series of American Compass articles that claims to highlight “lessons on public policy’s vital role in a productive market economy that supports families, workers, communities, and entire nations.” The experience of Airbus allegedly offers a significant contrast with that of Boeing and is offered as evidence that “shareholder primacy does not necessarily yield the most competitive or innovative firms.”

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As American Compass frequently does, this piece overclaims and under-delivers. It’s written as a contrast between two ways of doing business: the mindless, unconstrained way of the free market, supposedly epitomized by Boeing, and the carefully arranged marriage between government and business, supposedly epitomized by Airbus. But this contrast is a cartoon, and to draw it, Rodriguez has to elide some important facts.

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Rodriguez does a poor job of assessing the actual costs involved in Europe’s boosting of Airbus and whether these are justified. Answering these questions properly is important if one is going to argue that subsidies and other special privileges bestowed on Airbus improved life for Europeans. But her piece makes no attempt to show that these subsidies and special privileges — over $200 billion in today’s dollars bestowed on Airbus over the last 40 years — have been beneficial to anyone other than Airbus and its executives, suppliers, and workers. Is the industrial policy that produced Airbus a net positive for the European economy or taxpayers in the countries that supported it?

Europe’s stagnant economic growth, high unemployment rates, and high debt over the last few decades are not evidence in support of that theory. Also, European countries have seen their manufacturing sectors shrink as a share of total employment since the 1970s just like developed countries on other continents.

To make a case for industrial policy, one must be able to show that it has benefited not only the companies receiving government favors, but, more importantly, also the economies and taxpayers of the countries that paid for these favors. This is essential because labor and other resources directed by subsidies into Airbus must come from somewhere. Absent subsidies, these workers and resources would produce other goods and services, so the value of those other goods and services must be weighed against the value of the additional Airbus aircraft whose production has been made possible by subsidies and other privileges. Industrial-policy supporters hardly ever mention these foregone goods and services, much less show that their value could be less than the value of the additional aircraft. Rodriguez just assumes that what we get is the best that can be gotten, and that it was thus worth the expense.

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There are a few claims made by the American Compass piece that are correct, but these aren’t controversial. First, Airbus is an artifact of the state. It was created by a consortium of governments, and it was supported financially by European taxpayers, including through the sweetheart deal whereby it didn’t have to repay its loans unless its planes made a profit in global markets. Second, it is also true that Airbus is one of the two dominant aircraft manufacturers today, hence showing that an enormous amount of subsidies and other financial support doesn’t always lead to failure. These are not new findings, especially considering that the sale of commercial aircraft (whether by Airbus or Boeing) is a geopolitical game in which purchase decisions are often made for noneconomic reasons.

But in the end, I am left wondering, as you should be, what exactly is supposed to be American Compass’s broadly applicable lesson here? Is it that hyper-regulated industries in which large purchases are made by state corporations, politics play an outsized role in orders, and subsidized producers compete for government-orchestrated orders can “work” despite offering a poor return to taxpayers? Or is it that government interventions in some companies make countries and their economies better off? American Compass certainly hasn’t proven the latter, and it hasn’t shown that the former is a strategy worth pursuing for our national defense or our position in the world. Because even if you buy the assertion that Airbus is as successful as American Compass claims it to be, all that says for sure is that it’s successful for its shareholders and workers, not for the people of Europe.

All that Rodriguez’s piece does is prove that some government interventions aren’t failures when only measured in terms of output and worker employment in favored industries. But no one denies that a company can be built, survive, and grab a large share of the market if it’s fed a steady diet of billions of taxpayer funds in the form of subsidies and other special favors. For instance, for decades Airbus didn’t have to start repaying its government loans until it made a profit, and if it never made a profit then it never had to repay a dime. Under these conditions, that it stayed afloat in a duopolistic market is no great achievement.