Industrial policy is a controversial topic in economics, with arguments against government intervention and concerns about inefficiency.
The United States is implementing a new industrial policy to support key industries like green energy manufacturing and advanced computer chips.
Cooperation and coordination among like-minded countries are crucial for the success of industrial policy, particularly in sectors with complex global supply chains like semiconductors.
Deep dives
The Biden administration's bold new experiment in industrial policy
The Biden administration is implementing a new industrial policy that aims to support key industries such as green energy manufacturing and advanced computer chips. This approach challenges the traditional view against industrial policy, arguing that governments cannot effectively pick winners in the market. However, industrial policy has a long history in the United States, dating back to Alexander Hamilton and includes examples like subsidies for the railroads and support for research in advanced technologies. The Biden administration's three new laws, including the Infrastructure, Investment and Jobs Act, Chips and Science Act, and Green Energy Provisions in the Inflation Reduction Act, mark a shift towards direct government support for the economy.
Greg Ip's take on the benefits and drawbacks of industrial policy
Greg Ip, Chief Economics Commentator at the Wall Street Journal, provides insights on industrial policy. He explains that industrial policy is controversial due to concerns about government inefficiency and the success of free-market policies in the past. However, he also highlights the role of government partnerships in significant innovations and advancements, particularly in fields like semiconductors and technology. Industrial policy has fallen out of favor in recent decades but is now experiencing a resurgence as policymakers reconsider the role of governments in supporting key industries. The episode discusses the potential risks of mission creep and the need for a focused approach to industrial policy in order to achieve its economic goals effectively.
The importance of semiconductor manufacturing and its challenges
Semiconductors are a critical component of modern economies, and the United States has realized the importance of maintaining its edge in semiconductor design and production. However, the US has lost much of its manufacturing capacity to East Asia due to factors like lower labor costs and supportive industrial policies. The episode explores the need to address supply chain vulnerabilities, such as dependence on a few suppliers and geopolitical risks. It also discusses potential controversies around buy America provisions and the balance between ensuring domestic capacity and nurturing international partnerships.
Coordinated industrial policy and the role of international cooperation
Cooperation between like-minded countries in the field of industrial policy is crucial for sectors like semiconductors with large economies of scale and complex global supply chains. The episode highlights the importance of coordination and cooperation among allies to ensure resilience and competitiveness. While efforts like the Trade and Technology Council and discussions between policymakers exist, practical implementation and cooperation remain challenging. The episode also explores the risks and benefits of friendshoring, finding a balance between domestic manufacturing and free trade among trusted partners.
Fear of backing the wrong horse in industrial policy
An important concern in industrial policy is the risk of investing in the wrong technologies or sectors. Technological advancements and market dynamics are difficult to predict, and government interventions may inadvertently support less promising industries. The episode mentions recent examples like Intel struggling with its process technology, emphasizing the need to carefully consider technology trends and potential future developments. The fear is that despite good intentions, inappropriate subsidies might be allocated, resulting in excess capacity and missed opportunities.
Under President Biden, the U.S. is pivoting toward what some people call “industrial policy”—that is, using the government to support key industries, like green energy manufacturing and the manufacture of advanced computer chips. There is a strong case against industrial policy in economics: It’s the idea that governments do not know better than markets when it comes to picking winners, and industrial policy just wastes money and distorts the economy. But there’s another view, which is that industrial policy is utterly necessary to help the U.S. build an abundance of computer chips and green energy infrastructure. Greg Ip, the chief economics commentator at the Wall Street Journal, helps us separate fear from fact as we talk about industrial policy.
