Along with Samuel Gregg and Adam Thierer, Scott Lincicome is among today’s leading debunkers of industrial-policy myths. And Scott’s form is prime in this recent essay of his at The Dispatch. Some slices:
Over the last few days, several high(ish)-profile industrial policy fans have decried the federal government’s thus-far-problematic implementation of the programs they’ve so vigorously supported. (Capitolism has covered a lot of these wobbles in recent weeks, so feel free to go here, here, or here to catch up.) Kicking things off in the New York Times was Ezra Klein, who was “thrilled to see industrial policy revived” yet deeply troubled that the two biggest federal industrial policy laws—the CHIPS and Science Act and the IRA—were being imperiled by progressive add-ons and existing regulatory impediments that raise costs and slow projects. “Even if no single standard or mandate is decisive on its own,” he worried, “the accumulation of them, in an industry [semiconductors] in which we’ve already fallen ruinously behind on cost, can do real damage”—even outright “failure.”
From the right came American Compass’ Oren Cass, who viewed the political strings attached to the CHIPS Act he’s championed as “not only counterproductive with respect to chip capacity, but also an embarrassment for the broader effort to re-establish the American tradition of industrial policy” and—I kid you not—“so bizarre that one suspects the White House is actively baiting its opponents into turning against the entire project of rebuilding American manufacturing.” Diabolical!
On the one hand, I’m happy to see these (and other) industrial policy fans openly recognize some of the many, many obstacles to crafting and implementing effective industrial policy in the United States—obstacles that I and many other researchers on the right, left, and center have documented at (egregious) length over the last several decades.
But I gotta ask: What took them so long?
Of course, not every U.S. industrial policy project fails because of political meddling, but the risk of well-intentioned federal projects getting bogged down by costly distractions like child care mandates, protectionism, buyback restrictions, or profit-sharing demands—or by just basic political maneuvering—is large and ever present. And that’s because the policies themselves are products of a political, not market, process. Passing almost all legislation requires cobbling together support from a wide range of diverse constituencies—unions, corporations, environmental groups, whatever—and so bills will usually need to reflect some of their insular priorities. Making law also requires navigating various partisan and procedural rules, which often can affect substance depending on who’s in charge of what committee or legislative chamber. Politicians are, after all, self-interested humans and not public service robots, and they will invariably work to add—often buried in a thousand pages of “must-pass” complexity—provisions that advance their own electoral and constituent priorities. (Senate Majority Leader Schumer, to his credit(?), frequently and openly admits as much.)
Implementation of any new industrial policy law, moreover, will require detailed rules and regulations that fill in gaps left (intentionally or otherwise) in the legal text—gaps that elected officials and well-paid lobbyists will also look to exploit for personal gain. (See, again, the IRA.) Enforcement invariably involves discretion too and usually comes with congressional oversight. Research thus shows that government agencies’ agendas often mirror those of the members of the congressional committees that oversee them—members that often actively seek out these committee assignments to steer those same regulatory agencies. Throw in some angry trading partners and a Biden administration quite openly gunning for reelection today, and the result is what literally anyone even remotely versed in this stuff would expect: a mess.
It also ignores that every industrial policy project, even successes but especially failures, has very real economic and political costs beyond simply a budgetary line item, and that—as the Technology Pork Barrel and other industrial policy surveys have repeatedly found—even widely known industrial policy boondoggles are exceedingly difficult to unwind once they’re put in place (see, e.g., ethanol, which has distorted past carbon capture subsidies, or the Jones Act, which is today hindering federal subsidies for offshore wind deployment). Even assuming current problems actually do lead to future reforms (color me skeptical), this is an incredibly wasteful way to discover policy answers that we all already knew before the current experiment began.
Regardless, the entire notion that unsurprising industrial policy problems are to be embraced as some sort of regulatory discovery process ignores the steelmanned case for why new subsidies or other government interventions are supposedly needed in the first place: to correct market failures that are generating problematic commercial outcomes like insufficient onshore semiconductor production. If such outcomes are, on the other hand, the product of misguided government policies that raise costs, depress investment, or otherwise distort the market, then the obvious solution isn’t to start with new industrial subsidies (or whatever) but to fix those other policies and then see whether a real market failure exists and how a targeted government intervention—with appropriate guardrails based on our long experience with such policies—might fix it.
Often, this last government intervention step won’t be needed because, as we’ve discussed a lot around here, markets and private parties are pretty darn good at producing solid commercial outcomes—if governments will let them. Indeed, Klein’s piece unintentionally hits on this when he praises a recent housing project in San Francisco that achieved (relatively) remarkable time and cost savings by utilizing private investment and avoiding byzantine, politicized state and local rules that severely bog down most affordable housing construction and block new and innovative production methods. “More profoundly,” he laments, “it is damning that you can build affordable housing so much more cheaply and swiftly by forgoing public money.” (Lessons abound!)
[Noah] Smith dismissed my and other industrial policy skeptics’ criticisms as merely an “instinctive, tribalist reaction” to the current CHIPS Act problems. (I, in particular, “seized” on a Bloomberg editorial. Gasp!) Cass, meanwhile, groused that “libertarian Republicans who oppose any government interventions in the market are pointing gleefully at Biden’s mis-steps as proof that policies like the CHIPS and Science Act, PPP, and trade enforcement merely hand Democrats more power to misuse.” But, contrary to these and other online histrionics, the most common criticisms of U.S. industrial policy today are grounded as much in experience and common sense as they are in theory or ideology (not to mention “tribalism”). In my own case, I’m naturally more skeptical of government action than your garden variety wonk, but my personal views of industrial policy come less from reading Hayek or Friedman and far more from spending almost two decades advising multinational corporations and a handful of governments on how to navigate or implement industrial policies here and abroad, and then witnessing firsthand how the sausage is actually made (spoiler: not well).
Given that industrial policy cheerleaders seem unaware of some of the most basic criticisms of industrial policy from libertarians and non-libertarians alike and are only today waking up to common industrial policy weaknesses that skeptics have been pointing out for decades, I’m not holding my breath.
DBx: Do read all of Scott’s important piece.
Based on much experience, this “waking up” of industrial-policy proponents “to common industrial policy weaknesses that skeptics have been pointing out for decades” won’t last long. The minds of industrial-policy cheerleaders on this matter will again very soon be comatose.