Should the federal government be in the business of promoting U.S. manufacturing on the dime of taxpayers and consumers, and at the expense of other industries? Will this sort of industrial policy, on net, increase American prosperity?
President Obama clearly thinks so, and his top economic advisor Gene Sperling made exactly that case in a recent speech flagged by Ezra Klein today.
The heart of the argument is that subsidizing manufacturing (though Sperling never uses the word “subsidize”) is good for the economy because manufacturing has “spillover effects” and it stimulates other sectors, too.
For instance, Sperling argues
If an auto plant opens up, a Wal-Mart can be expected to follow. But the converse does not necessarily hold – that a Wal-Mart opening definitely does not bring an auto plant with it.
He points to plenty of studies and numbers to make his case. I think everyone interested in Obama’s economic policy should read this Sperling speech, because it gives something of an academic justification for what I call Obamanomics: increasing subsidies and regulations, while also aggressively using the tax code to steer economic activity.
I’ll leave it to economics experts to really drill down on Sperling’s arguments (I’ll start by suggesting you read this Bruce Bartlett piece on Japan’s long, disastrous experience with industrial policy), but I want to point out something important that Sperling and Klein missed, and one clarification I want to make to Klein’s discussion.
First, I think any discussion of national industrial policy needs to discuss how an increased government role in steering profits always yields more cronyism and tends to favor large corporations over small business – it certainly helps existing businesses at the expense of would-be startups or even brand-new industries.
I discussed this in a column after Obama made an export-promoting trip to North Carolina:
I’ve written a book and dozens of columns of specific instances where this happened under Obama, and I was writing about it under Bush, when such politicized economic policy had a different flavor.
This is a real cost that should be addressed. Breeding corruption has moral and economic costs, as does favoring incumbent businesses. The folks crafting the industrial policy can always promise that this time they will steer the economy without any cronyism or favoring the big guys. But American political culture provides little reason to believe this.
And separately, there’s the point where I feel compelled to clarify Klein’s treatment of the matter. Klein writes that industrial policy had – before now – basically been rejected by policymaking economists.
That might be true, but, boy, do politicians still have as much love for industrial policy as ever. For some reason tariffs are verboten among most Republicans and a sizable chunk of Democrats, even though bailouts, green-energy tax credits, R&D tax credits, empowerment zones, export subsidies, and all sorts of other industrial policy measures regularly win majorities of both parties. This is partly explained by the factors I discussed above: politicians, as a class, gain from the ability to make certain firms or industries profitable.
If Klein is correct about government economists, then it’s crucial we really debate industrial policy, because if government economists mostly agree it’s bad while politicians all engage in it, then we’ve got quite an untechnocratic little mess, don’t we?
