Why Do We Need Industrial Policy???
I have thoughts on a typically interesting essay by Brad DeLong. It was sent to project syndicate and also my e-mail inbox. I think I should not quote it at length without paying. His claim is that, whether or not one likes industrial policy, we need it now. Given the 700-word limit, he doesn’t discuss Biden’s industrial policy and how it seems to be working.
I will try to define industrial policy not as anything by laissez faire but specifically as picking winners. A progressive income tax is not industrial policy. A carbon tax is not industrial policy.
“Today, President Biden will travel to Westby, Wisconsin to announce $7.3 billion for clean, affordable, reliable electricity for rural America, funded by his Inflation Reduction Act. . . . The President will announce the first round of rural electric cooperatives selected and the first award …”
Key words are “selected” and “award”.
The two main points are that there are good reasons to oppose industrial policy, because it won’t be implemented by a benevolent technocrat but rather will go through the sausage factory. Projects will be financed because of the efforts of interest groups and lobbyists, because they are in the districts of powerful congressmen or the states of powerful senators and, in an outdated metaphor they will amount to rolling out the pork barrel (by the way, does anyone have any idea what a pork barrel literally was ? Has anyone seen one ?)
Accepting this, Brad argues that we need industrial policy to fight global warming, to avoid being dependent on China which is run by a ruthless expansionist dictator, and hmm to deal with the concentration of economic growth on superstar cities near the coasts and also to build the US from the middle class out and avoid plutocracy and the hypertrophy of finance (I guessed the first two and am surprised to read the third as a reason we need industrial policy — also it seems to mix two problems). I think he is thinking of subsidies to rural areas, red states etc. This is a bit too obviously political to appeal, hence the observation that finance is centered in New York (and not that information technology is centered in his home metropolitan area).
Given the 700-word limit, Brad does not clearly distinguish industrial policy from other public interventions. I think it is possible to deal with the problems he discusses without picking winners. Global warming could be fought with a carbon tax instead of the industrial policy financed by the inflation reduction act. Home shoring and friend shoring could be achieved by high tariffs on imports from China (another Biden policy) and with equipment investment and research and development tax credits. Restrictions on exports of US only technology and equipment is somewhere in between — it involves specific decisions but does not subsidize any US firm or other concentrated interest. Special interests will be pleading against it reducing the danger that it gets out of hand.
I think we need industrial policy exactly because it is (metaphorically) a pork barrel. Notably the Inflation Reduction Act is an act while carbon taxes remain a proposal supported by activists and economists. The unappealing aspect of industrial policy is that while it may serve the public interest, it will certainly serve powerful interests. I think this means that it will happen (the fact that it is happening also suggests this). If it is possible to serve the public interest on balance by subsidizing green investment in the states of powerful senators and in swing states and by subsidizing the firms with the best lobbyists than so be it.
Other policies might theoretically achieve the same necessary goals without enambling so much rent seeking by special interests. However, for that very reason they will not be enacted. It is best not to let the best be the enemy of the good.
Robert:
As you once told me or said in passing without intention, I am not an economist. I wandered near the topic during my pursuit of an MA. Indeed, it was suggested I might want to attend classes at the “school of ostriches.” I stuck to the supply chain and manufacturing side of things in the trenches on inventory, purchasing, and planning. One can get paid a good sum of money yearly working with the neanderthals of business.
As you can probably tell, I read Brad’s commentary and will not use it here either.
I think you are right; the proposed act will have a large influence in rural areas and it will also open up opportunities for pork when it comes to business and manufacturing. However, I also believe this could spread electrification and internet in areas most needing it which would also attract business or make these areas more appealing.
I am guessing no one heard about the Flint water crisis when the state management in charge of water for Flint decided to change from clean lake water to river water and skip one essential step involving the chemical in the water which interacted with the lead piping. A few hundred thousand now have issues due to lead. But they are poor and many of them are minority, so there was no hurry to fix the issue. That is an example of the local authority heading up an issue.
So, we have these buckets of funding available to build in rural areas. I do not believe I would worry too much about utilities. The issue will be what business will benefit, who brings them to town, what neighborhood will be defiled, and will locals be hired or labor imported?
There appears to be a project in every state of the union. State influence may have been involved which would cast a political influence over the project as you state. I believe Biden knows how to handle the politics of this allocation after 30 years in Congress. His biggest mistake was student loan. If you look closely at the detail for each state, there is a provision for student loans also.
So what is the alternative to this?
The Invisible Hand of the Market, good bad or indifferent …