Why Industrial Policy Is (Almost) Always a Bad Idea (with Scott Sumner)
Dec 9, 2024
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Scott Sumner, a prominent economist known for advocating nominal GDP targeting, delves into the pitfalls of industrial policy and tariffs. He argues that tariffs often harm rather than help the economy, citing historical fears, like those concerning Japan's rise, which were overblown. Sumner critiques the simplistic notions linking trade to job losses, emphasizes the importance of innovation over manufacturing, and warns against geopolitical anxieties regarding China. His insights advocate for deregulation and promoting educated workforces as a balanced response to economic challenges.
Scott Sumner argues that tariffs and industrial policy often stem from a misunderstanding of economic principles, leading to harmful economic outcomes.
The misconception that imports harm domestic industries ignores the benefits of lower prices and increased competition essential for economic welfare.
Concerns about national security regarding foreign manufacturing require careful evaluation, as reliance on free markets can bolster technological and economic strengths.
Deep dives
Understanding Industrial Policy
Industrial policy generally refers to government actions aimed at altering patterns of economic activity, often to attain specific national goals. This includes reshaping trade flows, addressing environmental issues, and tackling regional economic challenges. However, the term lacks a precise definition and can encompass a wide range of policies that aim to influence market outcomes contrary to free-market principles. For many advocates, industrial policy is a means to correct perceived market failures, but it is often criticized for not understanding fundamental economic theories.
Critique of Vulgar Mercantilism
The concept of vulgar mercantilism highlights the errors of protectionist trade policies that stem from misunderstandings of trade theory. Proponents often invoke familiar but flawed arguments against free trade, suggesting it harms domestic industries and leads to job losses. However, those advocating protectionist measures often ignore the principles of comparative advantage and fail to recognize how imports, while disrupting specific sectors, ultimately enhance overall economic welfare. These misconceptions are perpetuated by the appealing, yet incorrect, notion that imports damage the economy, despite the historical refutations of such ideas.
Counterintuitive Nature of Trade
Many people find it hard to reconcile the theoretical benefits of trade with the observable job losses in certain industries, leading to a skepticism towards economists' perspectives. Public understanding is often limited to the immediate effects of imports on domestic jobs without recognizing the larger economic context. Economic principles indicate that imports create benefits through lower consumer prices and increased competition, fostering innovation and efficiency. This counterintuitive reality challenges common assumptions about trade, highlighting a disconnect between economic theory and public sentiment toward international trade.
The Fallacy of Using Empirical Evidence
Selective use of empirical data often misrepresents the realities of trade and its impacts on economies. Countries that are cited as mercantilist success stories, such as South Korea, often had trade deficits during periods of significant economic growth, leading to misleading conclusions about the relationship between trade surpluses and economic health. Similarly, job losses in certain regions are frequently attributed to international competition, overlooking significant factors like technological advancements and regional economic shifts. Such oversimplifications detract from an accurate understanding of the dynamics of trade and industry.
National Security and Trade Policies
Debates about protecting national security often intertwine with discussions of industrial policy, raising questions about the need for domestic production capabilities. Arguments asserting that reliance on foreign manufacturing poses significant risks can lead to calls for government intervention, particularly regarding critical technologies like computer chips. However, skepticism arises regarding the actual threat levels, and whether these concerns justify reducing free-market principles. A strong position in international trade, combined with technological superiority, likely reinforces the notion that the U.S. is positioned to navigate these geopolitical challenges.
Tariffs are in the air. Will they help or hurt Americans? Listen as economist Scott Sumner makes the case against tariffs and various other forms of government intervention that go by the name of industrial policy. Along the way he looks at some of the history of worrying about the economic and military dangers posed by foreign countries.
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