Industrial policy and wish lists

Some critics of free market capitalism suggest that we should steer the economy with an industrial policy.  Over at Law and Liberty, Patrick Brown has an article entitled The Perils of Inaction. Much of the essay discusses how free trade policies have caused economic dislocation in America’s rustbelt.  Here’s an excerpt:

[N]ot every working- or middle-class parent is an aspiring entrepreneur—many just want a steady paycheck and a sense of stability, and feel that an excessively laissez-faire approach to trade and economic growth has undermined their ability to achieve those goals. . . .

Although the Buchananite and Thielist critiques differ in important respects, they help illustrate the hollowness of an economic approach that errs on the side of being too hands-off. My preferred approach would be to invest in basic and advanced R&D, as in the bill formerly known as the Endless Frontier Act, while at the same time exploring what effective place-based policy might look like in disinvested regions. If conservatives believe, as many will avow, that a healthy family is the core unit of a flourishing society, it will not be enough simply to take our hands off the wheel. The family itself can be threatened if left unprotected against the relentless churn of a market economy.

At first glance, that wish list sounds attractive.  Don’t allow globalization to inflict severe hardship on America’s heartland, and encourage R&D that will promote cutting edge growth.  To his credit, Brown does not recommend tariffs.  Instead, he recommends policies to encourage investment in depressed areas.  So what’s wrong with the plan?

It is easier to see the problem if I restate the proposal as follows:

Move away from a laissez-faire approach to the side effects of globalization in order to slow the pace of creative destruction, and boost R&D in technology to speed up the pace of creative destruction.  In other words, simultaneously put your foot on the accelerator and brake pedal for creative destruction.

Many pundits make the mistake of failing to look at things from a general equilibrium perspective, that is, failing to consider how a policy that impacts one sector affects another.  Many industrial policy proposals focus only at the initial effect, not the indirect effects on other industries.

It is true that trade has cost jobs in specific industries, but the overwhelming majority of job loses in industries such as steel, coal and autos has been due to technological change. As we continue to develop better and better robots, this process will likely continue.  Subsidizing R&D will actually speed up the creative destruction that has eliminated so many blue-collar jobs.  In a few more decades, the number of workers doing routine assembly line work will fall to a very low level, just as farmers have gone from being a majority of the workforce in the early 1800s to less than 2% today.  (And not just in the US, in all developed economies.)

That’s not to say that there are no good arguments for industrial policy. What makes me skeptical about industrial policies, however, is that in many cases I don’t see a coherent plan.  For example, some industrial policy advocates favor protectionism, overlooking the fact that policies that discourage imports also indirectly discourage exports.  Is that the plan?  Should our government be trying to discourage exports?  Policies that encourage R&D in technology also tend to speed up automation, with its associated loss of low-skilled blue color jobs.  Is that the plan?

As usual, Milton Friedman put it best:

At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”

My solution is to move from shovels to earth movers, and have monetary policy set at a level where we have something close to full employment.  Eliminate trade barriers.  Eliminate occupational licensing laws and NIMBY regulations to make it easier for workers to move to where the jobs are.  You can call that an industrial policy; I call it laissez-faire.