Some critics of free market capitalism suggest that we should steer the economy with an industrial policy. Over at Law and Liberty, Patrick Brown has an article entitled The Perils of Inaction. Much of the essay discusses how free trade policies have caused economic dislocation in America’s rustbelt. Here’s an excerpt:
[N]ot every working- or middle-class parent is an aspiring entrepreneur—many just want a steady paycheck and a sense of stability, and feel that an excessively laissez-faire approach to trade and economic growth has undermined their ability to achieve those goals. . . .
Although the Buchananite and Thielist critiques differ in important respects, they help illustrate the hollowness of an economic approach that errs on the side of being too hands-off. My preferred approach would be to invest in basic and advanced R&D, as in the bill formerly known as the Endless Frontier Act, while at the same time exploring what effective place-based policy might look like in disinvested regions. If conservatives believe, as many will avow, that a healthy family is the core unit of a flourishing society, it will not be enough simply to take our hands off the wheel. The family itself can be threatened if left unprotected against the relentless churn of a market economy.
At first glance, that wish list sounds attractive. Don’t allow globalization to inflict severe hardship on America’s heartland, and encourage R&D that will promote cutting edge growth. To his credit, Brown does not recommend tariffs. Instead, he recommends policies to encourage investment in depressed areas. So what’s wrong with the plan?
It is easier to see the problem if I restate the proposal as follows:
Move away from a laissez-faire approach to the side effects of globalization in order to slow the pace of creative destruction, and boost R&D in technology to speed up the pace of creative destruction. In other words, simultaneously put your foot on the accelerator and brake pedal for creative destruction.
Many pundits make the mistake of failing to look at things from a general equilibrium perspective, that is, failing to consider how a policy that impacts one sector affects another. Many industrial policy proposals focus only at the initial effect, not the indirect effects on other industries.
It is true that trade has cost jobs in specific industries, but the overwhelming majority of job loses in industries such as steel, coal and autos has been due to technological change. As we continue to develop better and better robots, this process will likely continue. Subsidizing R&D will actually speed up the creative destruction that has eliminated so many blue-collar jobs. In a few more decades, the number of workers doing routine assembly line work will fall to a very low level, just as farmers have gone from being a majority of the workforce in the early 1800s to less than 2% today. (And not just in the US, in all developed economies.)
That’s not to say that there are no good arguments for industrial policy. What makes me skeptical about industrial policies, however, is that in many cases I don’t see a coherent plan. For example, some industrial policy advocates favor protectionism, overlooking the fact that policies that discourage imports also indirectly discourage exports. Is that the plan? Should our government be trying to discourage exports? Policies that encourage R&D in technology also tend to speed up automation, with its associated loss of low-skilled blue color jobs. Is that the plan?
As usual, Milton Friedman put it best:
At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”
My solution is to move from shovels to earth movers, and have monetary policy set at a level where we have something close to full employment. Eliminate trade barriers. Eliminate occupational licensing laws and NIMBY regulations to make it easier for workers to move to where the jobs are. You can call that an industrial policy; I call it laissez-faire.
READER COMMENTS
Mark Z
Mar 20 2022 at 4:16pm
I think Brown objects to the mentality that encourages people to ‘move where the jobs are.’ He seems to view local economic decline as a problem for which it’s worth it to make most people worse off in the process of trying to solve it. Personally I don’t think local decline is a problem at all. If someone in Detroit would be wealthier and happier in Austin, then Austin growing at Detroit’s ‘expense’ is a good thing (especially if Detroit doesn’t even try to compete with Austin). I think that’s a core source of conflict between proponents and opponents of industrial policy, more than the technical questions of whether industrial policy can increase economic growth in net. Some people (proponents of industrial policy) value abstractions like cities, regions, nations (usually some more than others), more than they value the well-being of the actual individuals who make them up. So they’re not willing to tolerate the local decline that inevitably goes along with general economic improvement.
Scott Sumner
Mar 20 2022 at 6:45pm
“I think Brown objects to the mentality that encourages people to ‘move where the jobs are.’”
I understand that, but subsidizing R&D will lead to even more creative destruction, forcing even more workers to move.
AMT
Mar 24 2022 at 12:20pm
I think Brown would disagree with your analogy of stepping on the gas and brakes at the same time. A more apt analogy would be providing chemo, and also anti nausea drugs at the same time. It seems his suggestion is to target the benefits of the extra R & D on those who would be negatively impacted by more globalization. So those displaced workers might not have to move if new career options are created in their communities. they don’t even have to be directly related to the r&d, rather just construction work or other trades that become In demand in the community. We might gain the benefits of globalization and accelerated R&D and avoid significant and extended job losses.
I’m skeptical it would work out as effectively as we might hope, but it is more nuanced and logical than your description implies.
Rajat
Mar 20 2022 at 9:33pm
I agree that this seems to capture much of the implicit thinking behind industrial policy. Effectively asking coal miners and car plant workers to become social workers or baristas is seen as implausible and/or demeaning, whereas having coal miners become wind turbine installers or car workers become ‘high-tech’ machinists is not – for some unclear reason. This is perhaps an elitist or libertarian or even Randian view, but I don’t think society owes anyone a living and that the “Who moved my cheese?” mindset does no one any favours.
Thomas Lee Hutcheson
Mar 20 2022 at 4:45pm
You left out eliminating the savings-depressing effects of a large structural deficit and a huge increase in skilled immigrants.
Nick Ronalds
Mar 20 2022 at 11:19pm
True but it’s even worse than you say because it ignores Public Choice. “Subsidized” research inevitably means money goes into politically driven and wasteful projects.
Michael Sandifer
Mar 21 2022 at 6:06am
Yes, I oppose industrial policy for all purposes other than national security. Many planning decisions regarding national security don’t strike me as easy to make, and unfortunately, many inefficient policies to please relatively small constituents are adopted with natuonal security as a pretext. Otherwise, I favor free trade.
When considering China’s industrial policies, I often wonder how many of them have pure economic goals, versus strengthening China’s diplomatic softpower and future flexibility to exercise both soft and hard power.
Alan Goldhammer
Mar 21 2022 at 8:58am
I agree that automation is changing manufacturing for the better but it inexorably leads to job loss. The old jobs are lost forever and when you couple that with the loss of jobs to low wage countries you face a conundrum of how new jobs can be created. Not everyone can adapt to the high tech economy which requires specialty training (how many respondents on this blog are capable computer programmers or web designers?).
When supply chain problems hit, it becomes difficult to buy stuff that is either manufacture in whole or in part abroad (we had to wait several months for a new Bosch washing machine and Cafe range and were among the lucky ones; some are almost a year out from getting their ordered appliance).
I don’t purport to have a solution for the free trade conundrum though I would hope that something could be done to level the playing field. For example, the US at one point manufactured lots of solar panels. China saw this as an area that they should specialize in and subsidized the building of plant and pricing so that they became the low cost manufacturer. I don’t think there is much manufacturing of this in the US any longer. Beth Macy had a fine book, “Factory Man” on how China captured the home furniture market by stealing designs and subsidizing the sector. This was challenged through the appropriate channels by John Bassett III. He eventually won the battle but the war was long lost. There still are niche furniture manufacturers in the US but that is about it.
Scott Sumner
Mar 21 2022 at 1:19pm
Note that there are worker shortages in manufacturing, trucking, construction, and many other blue collar areas. Try to get someone to remodel your house! So we are not forcing our blue collar workers to become waiters or computer programmers.
Alan Goldhammer
Mar 21 2022 at 4:59pm
In our area, there are plenty of handymen around that do home work projects and remodeling. There is no wait for them. We bought a condo in December and needed two large built ins removed, new quartz counter tops in the kitchen and one bathroom, and a couple of plumbing items. We were scheduled to move in on January 4 and got everything finished in time except for the mirror in the bathroom that had to be ordered. The appliances were a different matter and got snagged by the supply chain problems. We ordered a new range, microwave, and compact washer and dryer. They were scheduled to be delivered and installed in mid-December. Dryer and microwave arrived on schedule, the other two did not arrive until mid-February
If there is such a trucking shortage (and there is), why are these craze protesting truckers still in this area? Why aren’t they hauling cargo?
Also, I am vice chair of an organization that is presently building seven houses in our area. There has been no issue with getting construction personnel on site and the project is ahead of schedule.
Michael Rulle
Mar 21 2022 at 9:50am
I enjoy it when Scott is clear and on target. As he is in this short essay.
Michael Rulle
Mar 21 2022 at 10:00am
I enjoy it when Scott is clear and on target. As he is in this short essay. He too misses Milton Friedman——I always loved that spoon quote too. I also often miss how similar Scott is to Hayek.
Of course, our politics make this almost impossible. Not just US politics——but virtually all major countries’ politics. But even moving a little bit in that direction would be highly beneficial on the margin.
Maybe the Laissez Faire crowd should also start playing a more aggressive political game. Figure out what voters say they want, and then call Laissez Faire whatever that is. Is it lying? Maybe—-but less so if it actually achieves what voters end up wanting. And —-not to be too cynical, but only to make a point—-politics cannot exist without lying.
At least I have never seen it.
Andrew_FL
Mar 21 2022 at 4:06pm
Whereas this critic of capitalism argues that we should steer the economy through monetary policy, and he has the gall to call that “laissez faire”
Roark
Mar 22 2022 at 8:08pm
There is another reason why US firms establish factories overseas. That is because the global monetary policy is based on the Petrodollar system, whereby oil and other global commodities are priced in US Dollars. This constant demand for dollars keeps it too high for tradeable goods. Firms get access to global supply chains and a cheaper dollar.
Saudi Arabia and other OPEC countries want security guarantees in exchange for producing more oil. That is part of the system.
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