by Kevin Schofield

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There was a time in the early to mid-20th century when the United States was the worldwide leader in manufacturing: American factories churned out automobiles, airplanes, televisions, farm equipment, and a wide variety of goods that were best-of-breed and fueled the post-World War II economic boom. But then the rest of the world started to catch up with us, through a combination of cheaper raw goods, cheaper labor, and, in some cases, simply out-innovating (such as Japan with automobiles and electronics in the 1980s).

American manufacturing companies responded in several ways: stepping up their game in some cases; occasionally partnering (or merging) with foreign companies; sometimes shuttering outdated factories that were no longer competitive; or moving their manufacturing offshore. In fairness, American policymakers contributed to this in part through bilateral “free trade” agreements that were signed with the intent to open up foreign markets to American-made goods and services but that also made offshore manufacturing cheaper and easier. But U.S. elected officials, fearing for both short-term jobs and long-term economic prospects, responded as well, with a variety of “industrial policy” interventions to protect and support American industries, including tariffs on certain imports, bailouts for companies that were “too big to fail,” and R&D investments and tax credits. The federal government now spends about $70 billion annually on industrial policy measures intended to shore up domestic manufacturing.

This weekend’s read is a research report from the Peterson Institute for International Economics looking back over the past 50 years of U.S. industrial policy to see what worked and what didn’t. Researchers looked at three general categories of industrial policy interventions: trade measures, such as tariffs and anti-dumping duties; subsidies for specific firms (rather than for industries as a whole); and R&D investments and tax credits. They evaluated those interventions based on three criteria:

• Did the U.S. industry become more competitive domestically and/or internationally?
• Were jobs created and/or saved at a reasonable cost?
• Was the technological frontier advanced by government assistance?

The second one — creating and saving jobs — has an interesting nuance. It’s not enough to simply create or save jobs; we have to ask how much it costs to do so. If the cost of saving a job is more than the prevailing wage paid to that employee, then it doesn’t seem like a great deal: You could pay the person the same to do a different, valuable job, and still have money left over to help in other ways.

The researchers found that trade measures rarely pay off: They were good for the auto industry, but mixed for semiconductors and “green energy” technologies, such as solar panels, and ineffective for other industries, such as steel and clothing. They rarely made the U.S. industry competitive; they simply prevented foreign competitors from running U.S. companies entirely out of business. 

Further, they tend to be attractive for policymakers because they don’t cost the government anything; the costs (in higher prices) are passed on to consumers instead — about $30 billion per year in total, according to the report.

Subsidies for specific firms also had a poor review. Once again, they were good for the auto industry (the 1980 financial bailout of Chrysler preserved a lot of jobs and gave the company a second chance that it took good advantage of) but bad in almost every other case.

The big winner was government investments in research and development. They advanced the technological frontier and made U.S. industries more competitive, though they have had a mixed record on creating and saving jobs. The biggest win was the government’s Defense Advanced Research Projects Agency, a program that nominally funded U.S. industries to develop and manufacture technologies and goods for the military but in many cases allowed those technologies to be commercialized for wider non-military use. The report points out that “Operation Warp Speed” to create COVID-19 vaccines in record time was also a success, yielding useful vaccines from three separate companies.

More broadly, the researchers concluded that industrial policy can create or save jobs, but at a high cost — which is ironic given that jobs are usually the headline benefit when elected officials announce new policy measures.

They also compare the United States with other regional economies’ industrial sectors to see what worked for them. In particular, they found that growing physical capital and total factory production, as well as increasing worker education levels, had large benefits; they noted that these were some of the factors that led to the dramatic rise in industrial economies in East Asia, and lagging in these factors is tied to weaker industrial sectors in Latin America and South Asia. The researchers also point to a variety of broad economic policies, ones not tied to a specific industry or intervention, that support strong industrial sectors, including stable governments; low inflation; modest budget deficits; high personal savings rates; and high secondary and post-secondary education rates.

Finally, they noted that there are some criteria for evaluating industrial policy beyond the three they looked at that are worth considering, especially in light of transformations in manufacturing over the past few decades. One of those is supply-chain resiliency: as we saw during the recent pandemic, a collapse in the supply chain can have dramatic effects on industrial economies.

Overall, they present a strong argument that, with the exception of investments in research and development, industrial policy interventions by the US. government don’t accomplish much, and what they do accomplish tends to be at a prohibitively high cost. Instead, they suggest that broad economic policy directions, such as education, keeping inflation low, and sound government fiscal policies, probably have more positive impact on the country’s industrial competitiveness.

Scoring 50 years of US industrial policy, 1970–2020

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📸 Featured image by Carolyn Franks/Shutterstock.com.

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