As the US continues struggling with Covid-19 and economic recovery, debate is growing about the revival of “industrial policy”—government -led efforts to favor certain industries over others, in contradiction to market fundamentalist approaches. An important new forum in the Boston Review takes on these issues and is well worth your attention. For our future prosperity, these issues are more important than just arguing about deficits and taxes. (Disclosure: I’ve coauthored a piece in the forum.)
In the battle over President Biden’s economic proposals, most commentary focuses on whether the price tag of over $3.5 billion is too large. How much should be paid for? Which taxes should go up or down? Senator Joe Manchin (D-WV), the key Democratic vote for Senate passage of the Biden plan recently called it “the largest single spending bill in history with no regard to rising inflation, crippling debt or the inevitability of future crises.”
But there’s a second debate hidden behind these budget numbers—how and whether government should deliberately foster some industries and withdraw support from others. Although simple introductory economics textbooks say government intervention is always “second best” to markets, in the real world government is constantly favoring some industries over others.
So the debate is really about what type of industrial policy we are going to have, not whether it exists. The Review’s forum centers on an excellent piece by economist Marianna Mazzucato and colleagues—“Industrial Policy’s Comeback.” They flatly (and correctly) say “market fundamentalism has failed to improve economic and social conditions,” calling for “a mission-oriented approach to the economy that embraces an active role for government in spurring growth and innovation.”
Mazzucato is one of our best thinkers on the complex relationships between government and the private sector. Her 2013 landmark book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths showed how government investment undergirded the tech revolution, with Apple and other firms adapting technology developed and paid for by the government, often through military spending.
Economists have long known that industrial policy is central to modern economies. In 2008, Harvard’s Dani Rodrik asked readers to image “a set of policy interventions targeted on a loosely-defined set of market imperfections…implemented by bureaucrats…and overseen by politicians” while subject to “rent-seeking by powerful groups and lobbies.”
Yikes! Rodrik says those sound like good reasons that “governments should stay away from industrial policy.” But he then turns the tables, saying he’s not describing industrial policy. Rather, those complicated conditions hold for “long-standing areas of government intervention such as education, health, social insurance, and macroeconomic stabilization.” And no one thinks we should stop those policies just because they are complicated and sometimes contentious.
So complexity, political debate, attempts to capture benefits at the costs of general prosperity, and addressing critical problems possessing lots of uncertainty characterize all modern social and economic policy. Hence Mazzucato’s emphasis on developing clear “missions” for industrial policy, with government setting overall directions and goals while avoiding “excessively top-down planning by an overbearing state.”
There’s a lot of deep thinking and clear argument in the Boston Review forum, from a wide range of viewpoints, and I won’t try to summarize it all here. Read the forum (and buy the new book the Review is publishing on this topic.)
My contribution to the forum, co-authored with my colleague (and spouse) Teresa Ghilarducci, emphasizes the central role workers and labor unions must play in any successful industrial policy. We hearken back to the great economist John Kenneth Galbraith, who after World War II focused on how the large firms needed to foster innovation and growth could be kept from purely self-interested behavior.
Galbraith’s answer was in the title of his 1952 book—American Capitalism: The Concept of Countervailing Power. Without government and union countervailing power, “private decisions could and presumably would lead to the unhampered exploitation of the public.”
Ghilarducci and I argue that successful industrial policy “promotes unionization and shared economic returns,” not just technical innovation where the gains are captured by a narrow slice of wealthy tech and finance owners. And the politics of industrial policy mean it won’t be enacted without union and popular support.
So as you follow the twists and turns of Biden’s economic plan, where the cable news and commentary are dominated by spending, taxes, and deficits, spare a thought for what that money will be spent on. Senator Manchin correctly warns about “the inevitability of future crises,” but those aren’t mainly budgetary issues. They are structural problems that need industrial policy solutions.
Our economy faces a short and long-term crisis of innovation, climate change, and racial, gender, and economic inequality. Industrial policy is critical to building a long-term, sustainable, and equitable prosperity. I commend the Boston Review forum and book to you as a way to understand this critical issue.