One of the most common refrains from politicians of both parties who want to justify their new programs or higher spending is that it will create jobs. Then there are those who argue that the goal of industrial policy is the creation of “good jobs.” I wish they would stop so we could have a conversation about what industrial policy is about and whether it is the best way to achieve whatever goal it is supposed to achieve.
With that in mind, I thought these comments from Noah Smith and Larry Summers were interesting.
During a Good Fellows podcast a few months ago, Larry Summers made a comment that is worth keeping in mind (The whole discussion is very good and worth listening to).
What Summers is getting at is that industrial policy should be about using the government to achieve what arguably can’t be achieved through market forces. National security is one of those things. But national security will be best promoted if the goal is, well, national security. It will not be effectively promoted if it is used as a Trojan horse for achieving goals – such as job creation – other than national security. As soon as you start talking about job creation, you get distracted from what you claim you are trying to achieve.
Noah Smith also suggests that the first goal of industrial policy isn’t and shouldn’t be job creation. He writes that industrial policy’s goal is climate strategy in the case of the Inflation Reduction Act, and national security (among other things) in the case of the Chips Act. He also believes that that industrial policy as implemented in these two bills could and will lead to a manufacturing boom. However, he explains that even if the manufacturing boom happens, we should not expect a job boom too. Here’s Smith:
So far, the critics of industrial policy tend to spend a lot of their time rebutting the notion that we can bring back the golden age of widespread “good jobs” in factories….
And they’re right. Industrial policy will not turn us back into a nation of factory workers. Every country in the world, including China, sees its share of manufacturing employment fall as it becomes rich — both because consumers start demanding more services as they get richer, and because rich countries can only stay competitive in manufacturing by using lots of automation.
If we do manage to engineer a manufacturing boom, most of the actual production work will be done by robots, because we are a rich country with very high labor costs and lots of abundant capital and technology. Automated manufacturing is what we specialize in, not labor-intensive manufacturing. The latter is for countries like India and Tanzania. America needs to build with robots
This is an important point overlooked by industrial policy fangirls on the right and the left. I would add another point. Industrial policy is meant to reallocate resources in different directions than what profit-motivated actors and market forces would achieve (translation in practice: produce less output using more resources). That doesn’t add up with the belief that “incentivizing” those who invest their money to do something they wouldn’t do without specially created government privileges (such as protective tariffs, tax credits, loans and subsidies) somehow will end up creating growth and jobs.
Smith does correctly note that industrial policy could create some particular jobs in the subsidized industries. As he explains, labor is needed to build factories, which when operating require workers. That said, we should also account for the fact that subsidies given to some industries necessarily shift resources – capital and labor – away from other, nonsubsidized industries. For instance, Dean Baker once explained the unfairness of the ExIm Bank noting—“by diverting capital to the winners picked by the Ex‐Im Bank, we are raising the price of capital for other firms.” If I believed that the government has a way to identify profitable ventures better than market actors, I could buy that on net we would be better off. But I don’t harbor such a belief.
I have to say, though, that I am more skeptical than Smith that industrial policy will create a sustainable manufacturing boom. In part it is because the government forced reallocation of resources once again means producing less output using more resources. Either the government incentives are incentivizing companies to do something they believed wasn’t in their interest before or the government payouts are going to companies to do things they would have done anyway. Neither is the best use of resources. I have found those two things to be true, no matter what government favoritism programs I have studied in the past.
Talking about companies now getting subsidies for something they would have done absent the subsidies, I found this interesting. In a recent paper by Réka Juhász, Nathan Lane, Emily Oehlsen, and Verónica Pérez found that industrial policy “is highly correlated with an industry’s revealed comparative advantage.” Translation: The market discovers ‘winners,’ and then politicians encourage them to expand inefficiently and – more and more – also saddles these firms with politically fashionable strings such as childcare and Buy American requirements.
Free-market advocates recognize that exceptions exist to a policy of free trade or the unhindered functioning of the market. National security is the main one that comes to mind. But it must be a real national-security reason, not a fabricated one like the Trump steel tariffs. We also recognize that if real market failures exist, and persist over time, they could justify government interventions. In this case too we must be clear about what market failure means. It certainly doesn’t mean more than merely that the outcome produced by the market happens to be permanently different than what a few people believe should be the appropriate outcome.
The most important thing, however, is that government interventions that disrupt market allocations almost always means less efficiency (recessions are a different situation). These costs (which include future taxes and distorted capital markets) might be justified if industrial policy is to address a real national-security threat or some other genuine problem that we deem incredibly important. But if so, stop claiming that the goal is job creation.
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.
READER COMMENTS
nobody.really
Jul 28 2023 at 5:39pm
Nice post; thanks.
I understand this post to address the problem of “everything bagel liberalism”: The tendency to try to force every public policy to address every public interest.
Perhaps this all boils down to Public Choice: On what basis should people organize their social interactions to provide public goods and resolve conflicts? For better and worse, many people have chosen democracy—arguable with the goal of diverting popular dissatisfaction with government into relatively peaceful endeavors to influence elections. But every form of government will tend to favor some interests more than others. All else being equal, I expect democracies to favor majority interests over minority ones.
More people identify as employees than as employers, so I would expect democratic agents to pander to the majority by supporting job-creation—or, at least, TALKING about job-creation. And that’s what I observe.
But if pandering to the majority is an inevitable part of governing in a democracy, perhaps selling desirable public policy as a jobs program is the best we can hope for; purity can’t be the goal. As Lord Acton observed in his History of Freedom in Antiquity (1877),
I find “everything bagel liberalism” endlessly frustrating—and understandable. I don’t know of a remedy, but perhaps some strategies can reduce its harms?
Thomas L Hutcheson
Jul 28 2023 at 6:29pm
“Industrial policy is meant to reallocate resources in different directions than what profit-motivated actors and market forces would achieve (translation in practice: produce less output using more resources).” Yes, at market prices, by definition.
But the rationale of IP is that the market prices do not contain all the needed information about national security, supply disruption risk, cost of CO2 accumulation in the atmosphere, or whatever.
A more practical problem with IP is that the instruments chosen (protection and investment subsidies) do not create optimal set of prices to achieve the supposed objectives.
Jon Murphy
Jul 29 2023 at 9:51am
If that is the rationale, then every Intro to Economics student should know that IP is incorrect in pure economic grounds.
Thomas L Hutcheson
Jul 29 2023 at 7:27am
Another layer of irony is that no “industrial policy” can create jobs in the aggregate. Only the Fed can create or destroy jobs. Of course it can shift jobs to Marjory Taylor Green’s district by reducing investment elsewhere.
Jon Murphy
Jul 29 2023 at 9:52am
I assume you do not believe this, but are trying to make a metaphor. If it were literally true, then it would imply the Federal Reserve is effectively the only employer in the US.
Jim Glass
Jul 29 2023 at 9:24pm
I think that one thing Milton Friedman, Paul Krugman and Scott Sumner all agreed upon is that the Fed fundamentally sets the level of employment in the USA. I can quote Friedman and Krugman on that (and when they agreed on something, wow!). Prof. Sumner can speak here for himself.
Jon Murphy
Jul 29 2023 at 10:21pm
Please do.
Jim Glass
Aug 1 2023 at 1:52am
Please do.
Aw, here’s a favorite example from PK. Favorite because of memories … it was back when he was the scourge of all the lefties and progressives — when he said the proof of intellectual integrity was criticizing your own side — and all those lefties hated him! And gods help me, because those days ended in 2000 when he got Bush Derangement Syndrome, one has to be probably at least 45 years old to remember those great vitriolic internecine flame wars. After Bush got elected PK said he wouldn’t criticize a liberal again until the Dems took back the government, which happened with Obama in 2008, but one never recovers from a derangement syndrome. So most people today don’t even know that Krugman ever existed, making me one of the “old ones” carrying the tribal … but I digress…
If you are interested in a fun sample of Krugman going after the likes Robert Kuttner, the Economic Policy Institute, Robert Reich, James K. Galbraith, even Stephen Jay Gould! (“evolution by jerks” 🙂 ) check this.
(“You have Paul Samuelson on your team? Well, we’ve got Jacques Derrida on ours.”) And those guys shot back at him, plenty.
I miss that Krugman. An econ prof friend of mine who knows PK told me back in the 2000s that a pod had been placed under the original PK’s bed and his body is buried in a basement outside of Princeton.
Jon Murphy
Aug 1 2023 at 11:38am
That Krugman quote doesn’t disprove me at all. It actually supports my point that Thomas is, as a literal matter, incorrect to say the Fed is the only one that can create or destroy jobs.
My objection is not to the idea that monetary policy influences macroeconomic outcomes. My objection is to the literal meaning of the phrase “Only the Fed can create or destroy jobs.”
Jim Glass
Aug 1 2023 at 11:21pm
That Krugman quote doesn’t disprove me at all. It actually supports my point that Thomas is, as a literal matter, incorrect to say the Fed is the only one that can create or destroy jobs.
Krugman’s explicit point was that industrial policy, trade policy like NAFTA, will not create jobs on net — because “the average unemployment rate over the next 10 years will be what the Fed wants it to be”.
That’s how I read Thomas’s comment — as tipped by his literal words, “can create jobs in the aggregate.” He’s full square with Krugman on that.
If you want to disregard his “in the aggregate”, then sure, but then literally what is your point? That the local Dominos can create jobs by hiring a few delivery persons? I guess that’s a “gotcha” of a sort.
Businesses created jobs all the way from 1929 to 1933 as the unemployment rate rose to 25% due to Fed policy. If that’s your literal meaning example of creating jobs, you can have that point too.
Jon Murphy
Aug 2 2023 at 9:07am
Jim-
I do not dispute the Fed can influence the economy (although the experience of the past few years indicates that even that influence is limited. They seem pretty incompetent at influencing the unemployment rate currently).
Rather, my point is about clarity of communication. As a literal statement, Thomas’s comment implies that the Fed is a central planner or industrial planner. But, as you rightly note, they are not. Krugman’s comments support me on that.
We can reasonably understand Thomas’s comments as a metaphor for “the Fed can influence the economy.” I am sure that is how Thomas meant it; I know the guy and he is no fool. But I want to make sure the point is clear for readers.
You say it’s a “gotcha” point. I disagree. Like with Pierre’s recent post on GDP and David’s recent post on graphs, communication is important. Imprecise or glib communication leads to confusion. Speaking of imports as a subtraction to GDP leads to many people to think imports reduce GDP. Hang around here and you’ll see commentators insisting imports have to reduce GDP because they are a subtraction to GDP. Indeed, one person here stated that imports “destroy factories more effectively than any missile” based off this misconception.
Clarity is important. I am all for metaphors, so long as they do not confuse.
Richard W Fulmer
Jul 29 2023 at 6:29pm
This is true, not just of manufacturing, but of every industry, and not just of countries but of companies. Companies, whether they provide goods or services, strive to provide them ever more efficiently – that is with less labor and fewer resources. That’s why job growth tends to come from new businesses rather than existing ones.
Industrial policy proponents like to quote Adam Smith’s statements supporting government intervention into the marketplace without noting that this “support” is heavily qualified and limited to a few exceptions.
Anders
Aug 7 2023 at 6:07am
About two three decades ago, there was much hype around a new type of industrial policy. Dani Rodrik and several others advocated seeing industrial policy (I would call it innovation policy, as it is about catalysing experimentation well beyond the narrow sense of industry: manufacturing and mining) as a constrained process of targeted support that would make the difference between entrepreneurs trying out ideas or avoiding doing so because of the inordinate risks (costs of self-discovery, coordination externalities, and the like).
That all seemed to make sense. Government intervention has made a difference here and there, albeit arguably more by accident than by design and at high costs. Even Darpa held, some argue, the Internet back a decade by restricting diffusion of the pieces of the puzzle it contributed.
Surely, doing industrial policy adhering to, say, Rodriks institutional design principles would, at the very least, be much more effective (or for those fervently against intervention the least of all evils) than what is planned in terms of place-based policy, overweening focus on particular technologies rather than ideas of how to use it, and massive, open-ended subsidies to existing sectors that should long ago have proven their mettle and be able to stand on their own (or replaced by better ideas).
The real question is: why in the world are we, as far as I know pretty much everywhere, nowhere close to putting this spirit into practice? Despite valiant efforts: it was for a decade a near-obsession of the World Bank. If anything, some parts, especially related to the energy transition, are reminiscent of the abject failures of the past if not a downright reversion to the coercive corporatism of the likes of Mussolini (Mazzucatos rise to fame pretty much exactly a century after his march on Rome).
Just like the US could bring everyone above the poverty line through simple cash transfers at only half the cost of current welfare spending, or has more public spending per capita on health care than that of Swedens universal health care system (itself far from a paragon of efficiency), the question should not be if we redistribute, provide universal health care, or do industrial policy or not – but first addressing the reasons why we have such enormous levels of waste. Yet efficiency is nowhere among political talking points – as if we have no other options than, say, Ron Paul and AOC-type extremism.
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