Is there a "right" angle to industrial policy?
Our sister website, Law and Liberty, is hosting a forum discussion on industrial policy. The discussion begins with a masterful piece by Acton Institute’s Sam Gregg. Gregg rejects the notion of “broad-based growth”, defined by the World Bank as economic growth which is “broad-based across sectors, and inclusive of the large part of the country’s labor force.”
There are a number of excellent points Sam’s article (beginning with the first paragraph), but let me single out this passage:
Sectoral economic change has characterized the history of America’s development since the 1790s. In 1800, the U.S. economy was dominated by agriculture and mineral production, with an estimated 85 percent of the workforce engaged in farming. On the eve of the Civil War, America had the world’s second-largest GDP and second-largest industrial base. In 1900, just under 40 percent of the total US population lived on farms, and 60 percent lived in non-metropolitan areas. By 2016, the respective figures were about 1 percent and 20 percent. Beginning in the late-1960s, the move from factories to service-provision started accelerating across the United States, as it did in all the world’s developed economies. In 2015, approximately 80 percent of the American workforce was located in the entire service sector.
These transitions reflect what it means to live in an economy orientated towards the generation of growth. If an economy is to continue growing and competing with the rest of the world, then people and material resources must continuously shift to higher value-added sectors, and, within specific sectors, to the more efficient firms.
That, however, doesn’t mean that entire economic sectors disappear or become less productive. While the percentage of Americans who work in agriculture today is far smaller than what it was 100 years ago, U.S. agricultural productivity has never been higher. Technological developments ranging from tractors in the early twentieth century to high-tech vertical farming in more recent years may have reduced agricultural employment as a percentage of America’s workforce, but they also have magnified agriculture’s output many times over. The same technological transformations have changed the profile of agricultural employment. Agronomists and agricultural scientists, for example, are more needed today than unskilled labor.
A similar story may be told about American manufacturing. Although the number of Americans employed in manufacturing has dropped since the 1970s, real manufacturing production grew by 180 percent between 1972 and 2007. By 2019, it had rebounded to pre-Great Recession levels. Today, America continues to rank high among the world’s manufacturing nations and is a major global locus for manufacturing investment.
Thus, while American manufacturing constitutes a smaller slice of the U.S. economy than the services sector, it is more sophisticated and productive than it was 50 years ago. The oft-repeated mantra of economic nationalists that America is de-industrializing is simply false. The service sector may have grown faster and bigger, but that doesn’t imply that the manufacturing sector’s output has shrunk. It simply means that manufacturing’s overall share of the U.S. economy was many times bigger 50 years ago.
The rejoinder to Gregg is by Patrick T. Brown, a fellow with the Ethics and Public Policy Center. Scott Sumner has some brilliant comments on this piece. I would like to add a couple of things. First, Brown’s article begins with a non sequitur:
Gregg offers some worthwhile reminders about inescapable tradeoffs. But if industrial policy advocates sometimes fall victim to a misplaced nostalgia for backbreaking factory jobs, Gregg’s framework downplays the cost of doing nothing. Part of the point of a modern welfare state is precisely to provide a form of social insurance for those caught on the wrong side of economic trends. After all, not 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.
Brown’s first point is very sensible: not everybody is an aspiring entrepreneur and indeed the great majority of people aspire not to be one and are far more risk averse than entrepreneurs (of any kind) tend to be. This does not mean by definition that they will be “on the wrong side of economic trends”: you can be an employee in thriving business sectors. Indeed, “social insurance” provided by the welfare state should work (though it is not always particularly efficient) as a buffer for those who are left behind. But then if you have such social insurance, why do you want to have an industrial policy, too?
Brown offers two arguments:
The first, more in the tradition of a Pat Buchanan, is that a properly conservative approach to trade would be more incremental and more concerned with ramifications on community and family life. The second is that a government that turns a blind eye to the existence of positive externalities, or is indifferent to developing a comparative advantage, will find itself on the receiving end of economic trends, rather than driving them.
I find the second particularly unpersuasive. Brown himself later trims it as something like “so far as you have government intervention, industrial policy may be better than other kinds of interventions” (“Accepting government interventions in the economy need not be all or nothing. But once we have accepted certain practices to support the economy, pursuing industrial policy, in a sense, becomes a question of which tax breaks or provisions would be most effective, rather than a question of principle“). I think that besides creating further room for crony capitalism, this argument tends to assume government can be on top of innovation, which I am rather skeptical about – for the very record of industrial policy Gregg mentions in his piece.
But I’d like to note that it is an argument which is not concerned with those who are left behind by abrupt and disruptive innovation. The stress on “managing” trade not to allow a free market to reshuffle society’s values is a more dubious argument than most conservatives assume, as it is somehow predicated on economic forces shaping a society’s values (did not conservatives think the opposite?), but it also assumes that communities need to be preserved as safety nets that are more efficient than government welfare. But the idea that the government should pick winners has little to do with providing aid to those workers who become the losers of the competitive game: it has a lot to do with helping some businessmen to win the competitive game.
On a more general note, I find the title “The perils of inaction” interesting. It beautifully summarizes the rhetoric of all kinds of interventionism, right and left. Inaction will be too expensive, so something should be done and possibly now. This even in context in which we have very limited information to make choices that are correct (for example in picking winners). I find more promising and consistent, if we care to, to deal with the crisis of communities and traditional social structures, or to unemployment in some particular area, as problems in themselves, to be tackled as such. That sounds more reasonable, and humble, than endorsing industrial policy, which is intrinsically alternative to (and not correcting of) a free market, as it changes it from a competition for consumers’ favor to a competition for bureaucrats’ favor. When it comes to the economic game, let’s give inaction a chance.