What's Old is New Again: Industrial Policy's Revival

With Chiara Criscuolo, OECD; Mary Hui, Quartz; Michael C. Munger, Duke University; moderated by Walter Frick, ProMarket.

[themaskedman]

What utter nonsense. First of all, China's efforts to boost manufacturing employment have largely failed: employment in this sector peaked at about 30% a decade ago and has been on the decline ever since. And this happened under heavy state subsidies and government protections for industry. The results in the West are even worse: no country has managed to increase their share of manufacturing employment by more than a small fraction after becoming a developed economy.

The reason why "industrial policy" doesn't work is quite simple: it's because wealth does not correlate with manufacturing growth. The wealthier people are the more money they spend on services and the less they spend on manufactured goods. This has happened in the US, it's happened in Western Europe and it's happening in China. It is totally unrelated to trade policy and there are no trade restrictions you could possibly enforce to reverse this unless you go out of your way to make the average person substantially poorer. Hence the fallacy of the manufacturing fetish.

Of course there's a problem of definition: exactly what is "industrial policy" and how does it differ from other economic policies? If it is defined as any policy designed to boost "industry" (without defining what an "industry" is), then trade liberalization is technically an "industrial policy" since one of the goals of free trade is to enhance productive capacity and make domestic firms more competitive (which it does quite well). But this is not what people are thinking about when they hear "industrial policy" nor is it the aim of the Biden administration. Biden's industrial policy is fundamentally protectionist and it's purpose is not to "boost manufacturing" but to protect certain manufacturing industries that peaked decades ago and can't compete in international markets. And the reason why there's broad economic consensus against these policies is because, number one, they're stupid, and number two, there's more than 2 centuries of research into the effects of these policies indicating they don't work.

It is actually quite remarkable that we're _still_ debating mercantilism and whether it matters where something is made or where your source materials were produced. But alas, the Trump Era lives on.