Can Industrial Policy Save the US Economy? (Updated)

In honor of Labor Day, and because the national unemployment rate stands at a disheartening 9.1 percent, I wanted to discuss this article in last week’s New York Times Magazine:

“Over the last two years, the federal government has doled out nearly $2.5 billion in stimulus dollars to roughly 30 companies involved in advanced battery technology.

For decades, the federal government has generally resisted throwing its weight — and its money — behind particular industries. As the former White House economic adviser Lawrence Summers put it, America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff. The conviction in Washington was that manufacturing deserved no special dispensation. Even now, as unemployment ravages the country, so-called industrial policy remains politically toxic.”

I am not convinced that the use of stimulus monies to develop an industry is a good idea, something which the author of the article appears to implicitly acknowledge when he writes:

“‘It was a calculated risk — a lot of money, to be sure, but given the stakes, I think it was a pretty thoughtful bet,’ says Ron Bloom, who recently served as an assistant to President Obama for manufacturing policy. ‘If vehicle electrification really does take off, as many, many people think it will, and we’re not part of it, then we could lose our leadership of the global automobile industry.’ Which would be catastrophic. By some estimates, as much as 20 percent of all manufacturing jobs are directly or indirectly related to the automobile industry. Bloom points out that the United States is not the only country betting on batteries; a number of Asian countries have done so as well.”

In other words, policy makers have no idea whether this will work, since other countries — whose economies are much better at manufacturing than the US economy is — are also making those batteries.

Would it really be such a catastrophe if America were to stop making automobiles? Much like agriculture stopped being our comparative advantage at the end of the 19th century and during the first half of the 20th century, manufacturing is no longer our comparative advantage — services, research and development (R&D), and education are.

It might make sense to have an industrial policy if the US economy were a developing country transitioning from an agricultural to a manufacturing economy. In the present case, wouldn’t it be better to have a technological policy designed to help us progress from a manufacturing to a services, R&D, and education economy rather than regress to a manufacturing economy? This is perhaps the most important point made by Tyler Cowen in The Great Stagnation.

The American obsession with “making stuff” — and the resulting obsession with maintaining a dying sector of the economy alive — is reminiscent of another distinctly American cultural trait, i.e., the systematic denial by many of Taylor’s First Law of Health Policy (“Everyone dies”), and the obsession with extending life at all costs.

Update: I had initially forgotten to mention that I owe the “Taylor’s Laws of Health Policy” terminology to fellow Cornell alum Paul Kelleher, a philosopher at the University of Wisconsin.

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