Red or blue, right or left, industrial policy fails
These days the case for interventionist industrial policy is being made loudly, and in all quarters. In the united States, it is championed by bernie Sanders and elizabeth Warren on the far left and by Marco rubio and Oren Cass of the republican Party. In Canada, it is firmly set in the policy agendas of the Conservatives, Liberals and NDP, and is generally supported by business leaders, union officials, public intellectuals, think-tank writers and newspaper columnists — almost everywhere, in fact, except on this page.
Left-wing and right-wing industrial policy have some differences. The left-wing version is obsessed with climate change and prescribes staggering tax increases, supposedly on “the rich” but in reality paid for by everyone, to fund the transition to a green new world. The interventions in left-wing industrial policy are more sweeping, the taxes higher, and the hostility towards markets greater.
right-wing industrial policy advocates usually acknowledge that markets have done some good but then assert that free-market economics is an antiquated idea. Instead of climate change, they are mostly preoccupied with increasing government support for domestic manufacturing and other interventions that they claim will preserve jobs or increase productivity.
Then there are the similarities. both left-wing and right-wing industrial policy are characterized by: a misunderstanding of history; pervasive errors in economic thinking; the misattribution of social ills to market activity and of social improvements to government action; skepticism about financial markets and international trade; a preference for giving more control over corporations to various “stakeholders,” such as the government; a belief that while people in private enterprise are rapacious those in government behave like angels; and an unflagging confidence that government planners have sufficient knowledge to undertake a massive reallocation of economic resources.
The similarities, it seems, outweigh the differences, and so left-wing and rightwing industrial policy should be viewed with equal contempt. both are rooted in the idea that government planning is more capable than free markets of delivering economic growth that benefits the masses, which is flatly wrong. Canadians of all income groups have enjoyed decades of growing prosperity thanks to capitalism, especially in the immediate aftermath of the significant retrenchment of industrial policy and government spending in the mid-1990s; in fact, from 1997 to 2007, Canada led the G7 in GDP growth.
by contrast, government planning has a disastrous track record when it comes to increasing prosperity and improving productivity, a fact conveniently ignored by industrial policy advocates, who, as conservative columnist George Will observes, have repaired to the timeless socialist refrain: “This time will be different.” but, as he explains, “It never is, because government’s economic planning always involves the fatal conceit that government can aggregate, and act on, information more intelligently and nimbly than markets can.”
In a recent discussion hosted by the Wall Street Journal, Oren Cass made the case that governments should play a larger role in economic planning because “some kinds of investment are more valuable to the nation and to the well-being of the economy and to the well-being of workers than other kinds. And that’s not something that investors are necessarily going to notice. That’s not something that’s going to show up in price signals and profits.” but if profits aren’t a good measure of the value of investments, then what is? The subjective preferences of government planners and Oren Cass?
The sharp reply from George Will to Cass: “Industrial policy is inevitably government picking winners and losers. And it’s not just that it’s inefficient, which it manifestly is. It exists to be inefficient. It says economic efficiency is not the value we want to celebrate here.” Industrial policy does not lead to crony capitalism, says Will, rather, it is crony capitalism from the start, so an even more fundamental problem than the widespread economic inefficiencies of industrial policy is the political corruption intrinsic to it.
That is not, of course, to downplay the economic inefficiencies. Industrial policy advocates place great emphasis on making economic growth more “inclusive” to the disadvantaged segments of society, but past experience shows that a rising tide generally lifts all boats while attempts to redistribute income via crony capitalism benefit the powerful, not the poor. In order to have more inclusive economic growth, then, what we really need is more rapid economic growth. but the only thing socialism does to economic growth is provide less of it — a fact not changed by referring to socialism as industrial policy.
government planning has a disastrous track record.