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Recent Trends in Industrial Policy

Posted: Apr 19, 2024

Recent Trends in Industrial Policy

This week, Central Bankers, Finance Ministers, and other key global economic policymakers met for the IMF and World Bank Spring Meetings.  As part of the April meeting, the IMF released its latest World Economic Outlook, which reflects a modest improvement in its near-term outlook for global output. Underlying that 0.1 percentage point bump, is a backdrop of risks in the offing to include persistent inflation, high debt, and geopolitical challenges. The United States is susceptible to all three.

The prescription for these challenges must involve fiscal consolidation that preserves the U.S. international competitiveness and defense readiness. Unfortunately, this is not the tack that the current administration and an odd coalition of populists in Washington would have the U.S. pursue. Rather, what is old is new again in the form of renewed enthusiasm for substantial government intervention in the market economy, an approach broadly characterized as industrial policy.

For policymakers, one can understand the appeal of industrial policy – it affords officials the pretense of being able to directly control both inputs and outcomes in a $27 trillion economy. But the gap between the promise and execution is yawning. There is substantially little theory underpinning this interventionalist approach to economic policy.

From protectionism, to subsidizing profitable domestic firms, industrial policy is being embraced throughout the world. As documented by economists at the IMF – industrial policy interventions have exploded since 2023.

The IMF and others have documented both theoretical and empirical flaws in industrial policy. For industrial policy to succeed, governments must be able to observe market failures and tailor policy interventions adroitly to correct them. This runs headlong into F.A. Hayek’s “knowledge problem,” which recognizes that diffuse market actors are nimbler and more adaptable then centralized planners. Moreover, industrial policies are susceptible to political capture, whereby government steers resources towards favored constituencies irrespective or even despite the economic merits.

One need not look deep into history to find such examples. Rather, President Biden’s speech to steelworkers in Ohio this week is a classic in the genre. In that speech, Biden foreshadowed tripling tariffs on Chinse steel and doubled down on domestic content requirements as part of an appeal to a key constituency: organized labor. Never mind that unions only represent 9 percent of manufacturing workers and Chinese steel comprises only about 2 percent of steel imports.

The U.S. embrace of industrial policy is particularly troubling because it flies in the face of the prevailing U.S>  economic model that, relative to other economies, is less stifled by distortionary policies, which in turn allows for more efficient allocation of resources in the economy. This efficiency is critical to U.S. preeminence among world’s economies in absolute terms and in providing the highest standard of living among major global economies.