Industrial Policy: The Triumph of Hope over Experience

October 5, 2024 by Dan Mitchell @ International Liberty

Industrial policy is when politicians and bureaucrats use various combinations of tax, spending, and regulatory policies to steer the economy.

 

In other words, they are putting their thumbs on the scale to pick winners and losers.

It means replacing the “invisible hand” of the market with the “grabbing hand” of politics.

I’m motivated to write on this issue today because of a very strange column by David Brooks in the New York Times.

He basically acknowledges that industrial policy has a track record of failure, but he somehow hopes that things will be different in the future.

A new bipartisan we-need-to-rebuild-manufacturing mantra is taking hold. …Joe Biden has…been an industrial policy president. He’s tried to use hundreds of billions of dollars to help America build things — through big infrastructure projects and in factories. …

The government chooses key sectors that will spur economic growth… The government supports those sectors with direct subsidies, tax credits, trade protections and other measures. …Will it contribute to social cohesion and an American economic renaissance, or just become a sinkhole of debt-funded spending that will drag us to stagnation? …

I have no philosophic objections to aggressive government efforts to reshape the American economy. …But I wasn’t born yesterday. Industrial policy has been around for a while, and it’s often been a miserable failure. …

If I were an economist I might be wary, given industrial policy’s mostly unsuccessful record. But I’m a journalist… So, at the end of the day, I agree with those who say the question is not whether we do industrial policy, but how.

Well, looks let at two recent examples of “how” Washington does it.

The Wall Street Journal has a new editorial about the Biden-Harris initiative to subsidize and promote broadband access. At the risk of understatement, it’s been a disaster.

…consider the “internet for all” plan that President Biden tapped Kamala Harris to lead. Fiasco is the word for it. The 2021 infrastructure law included $42.5 billion for states to expand broadband to “unserved,” mostly rural, communities. Three years later, ground hasn’t been broken on a single project. …

Blame the Administration’s political regulations. States must submit plans to the Commerce Department about how they’ll use the funds and their bidding process for providers. Commerce has piled on mandates that are nowhere in the law and has rejected state plans that don’t advance progressive goals. …

Commerce hoped to spread the cash to small rural cooperatives, but the main beneficiaries will be large providers that can better manage the regulatory burden. Bigger businesses always win from bigger government. …The Administration has also stipulated hiring preferences for “underrepresented” groups, including “aging individuals,” prisoners, racial, religious and ethnic minorities, “Indigenous and Native American persons,” “LGBTQI+ persons,” and “persons otherwise adversely affected by persistent poverty or inequality.” …

The broadband non-rollout is a classic of modern progressive government. Authorize money for a cause that private industry could do better, but then botch the execution with identity politics and union favoritism.

And here are some excerpts from an Autoweek report back in May about the Biden-Harris plan to subsidize the use of electric cars.

The Biden Administration’s $7.5 billion effort to jump-start the electric-vehicle charging landscape is moving very, very slowly. Now more than two years after the program was signed into law in late 2021, only eight chargers have been put in place. …

Americans remain worried about range anxiety and finding a place to charge, and the federal funding hasn’t yet been a big factor in changing that—or reversing the current slump in EV sales. …

Alexander Laska, deputy director for transportation and innovation in the Climate and Energy Program at the Third Way think tank, puts a positive spin on the pace of charger installation, attributing it in part to complicated regulations on the federal and state level. The money, Laska says, “comes with dozens of rules and requirements around everything from reliability to interoperability, to where stations can be located, to what certifications the workers installing the chargers need to have.”

Wow. If that’s the “positive spin,” no wonder the proponents of intervention are doing such a bad job.

But, to be fair, at least eight new chargers now exist, which is better than the number (zero!) of new broadband customers that are being served.

In neither case, though, is there even the slightest scent of success. Washington is squandering tens of billions of dollars in exchange for almost nothing.

Not that we should be surprised. Industrial policy has a track record of failure in the United States, dating all the way back to the 1800s. In more recent years, it’s also been a failure in Japan and China.

Mr. Brooks of the New York Times says he’s a journalist rather than an economist, but that’s no excuse for not understanding history.

Industrial Policy on Parade

Veronique de Rugy  – October 23, 2022 @ American Institute for Economic Research

It’s no longer news that industrial policy is making a comeback. Too bad, that. In the zombie parade of bad policies that the left and the new right are now staging, this one is particularly baffling. Industrial policy has been tried on large scales – think the Soviet Union – and on smaller scales, including in the US and many other countries.

The fact that past industrial policy attempts were abandoned due to grotesque failure to achieve their goals seems to make no difference to those who are intent on reviving this practice. Indeed, we need not look as far back as the 1980s for evidence of the folly of trusting government to guide industrial development; we have a contemporary example. And this example is detailed by none other than the New York Times, which recently reported that, after years and billions of dollars, California’s effort to build a high-speed train has been a disaster.  A tidbit:

Now, as the nation embarks on a historic, $1 trillion infrastructure building spree, the tortured effort to build the country’s first high-speed rail system is a case study in how ambitious public works projects can become perilously encumbered by political compromise, unrealistic cost estimates, flawed engineering and a determination to persist on projects that have become, like the crippled financial institutions of 2008, too big to fail.

This effort qualifies as industrial policy because the government claims to know better than private markets what is the best means of transportation and worth high-jacking resources to produce bureaucrats’ preferred outcome. But as usual, government officials – spending other people’s money – miss the obvious.

There’s a reason why trains in the U.S. trains are far less popular than planes. There’s a reason why travel by rail make more sense in small countries, and along the densely populated northeastern coast of the U.S. But politicians and intellectuals, enamored of the notion that trains are more friendly to the planet than are planes, ignore these realities in pushing for an industrial outcome that will likely never be profitable. For a walk down failed-rail-project memory lane see this piece by Phil Klein.

Building a high-speed rail connecting Los Angeles and San Francisco was always going to be challenging due to California’s geography. And of course, most of you will not be surprised to learn that this large-scale government project is in fact failing, in large part because of the perverse incentives that pervade such a government project. From conception to planning to building, the incentives consistently encourage waste and error. Again, legislators aren’t funding this boondoggle with their own money. Nor will they be personally accountable for cost overruns, failure to deliver, or what are certain to be many technical problems.

The cost overruns here are almost comical for something that literally hasn’t been built yet. In 2008, the train’s cost was projected to be $33 billion. Fourteen years later the final plan is projected to cost $113 billion – a mere 242 percent more than the sum used to peddle the scheme to the general public.

In addition, decisions on construction are unduly – but not unsurprisingly – influenced by special interests rather than by good economic sense. As the Times writes: “political deals created serious obstacles in the project from the beginning.” Here’s more:

A review of hundreds of pages of documents, engineering reports, meeting transcripts and interviews with dozens of key political leaders show that the detour through the Mojave Desert was part of a string of decisions that, in hindsight, have seriously impeded the state’s ability to deliver on its promise to create a new way of transporting people in an era of climate change.

As if the project wasn’t difficult enough to deliver on, legislators decided to create costly detours to serve political friends:

Political compromises, the records show, produced difficult and costly routes through the state’s farm belt. They routed the train across a geologically complex mountain pass in the Bay Area. And they dictated that construction would begin in the center of the state, in the agricultural heartland, not at either of the urban ends where tens of millions of potential riders live….

Mike Antonovich, a powerful member of the Los Angeles County Board of Supervisors, was among those who argued that the train could get more riders if it diverted through the growing desert communities of Lancaster and Palmdale in his district, north of Los Angeles.

Even the SNCF engineers from France who came to work on the project eventually gave up:

There were so many things that went wrong,” Mr. McNamara said. “SNCF was very angry. They told the state they were leaving for North Africa, which was less politically dysfunctional. They went to Morocco and helped them build a rail system.

Morocco’s bullet train has been in service since 2018.

The report is worth reading in its entirety. It is the most ridiculous and clichéd story of why industrial policy fails. Such projects are often taken over by special interest groups (remember Alaska’s bridge to nowhere) that bloat the cost, and in extreme cases lead the project to failure.

This experience is commonplace. My colleague Jack Salmon told me about the plans for HS2, a high-speed rail project in the U.K., that started in 2009 to link London to Birmingham, Manchester, and Leeds. The high-speed train was promised to reduce the time of the journey by 30 minutes. Salmon sent me the following information:

The first stage was predicted to be completed by 2020, and with a further connection to Scotland operating by 2030. In 2010, the new conservative-led coalition amended 50% of the planned route after rural conservative MPs made a fuss about noise pollution and property values. At the time, the cost was estimated at about £30 billion. In 2013, the cost of the project was revised up to £50 billion. In 2014, the cost was revised to £57 billion. By 2019, the Oakervee review estimated that the projected cost, in 2019 prices, had increased to £88 billion. Lord Berkley, deputy chair of the review, said that these estimates were very optimistic and could actually be as high as £170 billion. The route is now estimated to be completed by 2045, although this will likely be pushed back. By that time, this £30 billion gravy train could end up costing £1 trillion.

That’s the problem with industrial policy, and such gravy train projects. Politicians can’t help themselves and these projects are always highjacked by special interests.

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Veronique de Rugy

Veronique de Rugy is a former writer with AIER. She is a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist.

Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.

She received her MA in economics from the Paris Dauphine University and her PhD in economics from the Pantheon-Sorbonne University.

Follow her on Twitter @veroderugy

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