Industrial policy is still a dumb idea
We’ve written about the return of industrial policy before, but it’s worth recalling just how bad this newly-popular idea really is.
The Wall Street Journal’s Greg Ip writes that the magical thinking behind industrial policy is sweeping western democracies…who seem determined to imitate communist China:
Last month, the U.S. Senate voted for direct industry subsidies with little precedent: $52 billion for new semiconductor fabrication plants, called “fabs.”
Other regions have done the same. The European Union has committed to nearly doubling its share of global semiconductor manufacturing capacity, to 20%. South Korea approved up to $65 billion in support for semiconductors, and Japan promised to match other countries’ semiconductor aid while planning to turn Japan into an Asian data center hub.
And the politicians, like Virginia Democratic Sen. Mark Warner, are keen to admit they are pouring taxpayer money into certain industries because they so admire what China is doing:
“I’ve been impressed with the Chinese model,” said Mark Warner, a former venture capitalist and Virginia governor who as a Democratic senator sponsored the semiconductor legislation. The Chinese state ensures that Chinese, not foreign, companies become the dominant players in its domestic market, effectively guaranteeing them a big share of the world’s market, he said.
“It’s hard to see how a company in America or any normal, traditional market-based economy can compete against that kind of juggernaut and win,” Mr. Warner said.
It’s worth noting that Mr. Warner, who has long touted his “business guy” roots, made his fortune the old fashioned crony way: trading on “the biggest government giveaway in modern times.” It made him rich, but added nothing to his understanding of free markets.
Still, the political class’ naked admiration for the ability of dictators to favor certain industries over others does not make industrial policy any better. If anything, it reinforces the long-standing notion that politicians should stay in their lanes:
“It would be a huge mistake for the U.S. to try and match Chinese government spending,” said Scott Kennedy of the Center for Strategic and International Studies, a think tank. “So much of it is thrown down bottomless pits, leading to over-investment, lower profits, slower innovation and more debt.”
Unbridled waste and futility have never stopped American politicians in the past, so there’s no reason to believe they will have doubt this time.
But maybe this time will be different with industrial policy?
Mr. Warner said U.S. semiconductor subsidies must be allocated through a clear, rigorous process without political interference. But “the truth is you could have a panel that makes exactly the right decisions, technology could leapfrog and, five years later, the valid choices made in 2021 could look pretty stupid,” he said.
So no, it’s not going to be any different. Government will decide who wins and who loses. It will, inevitably, become a game of political favorites. And taxpayers will get the bill for all of it.