May 21st, 2022


The right industrial policy for America

Tyler Cowen

By Tyler Cowen Bloomberg View

Published Sept. 25, 2019

One of the most striking things about current U.S. politics is a renewed interest in industrial policy - on the left as a way to help the working class, on the right as a means of making America great again. There are reasons to be cautious about this bipartisan enthusiasm.

Oren Cass, the conservative commentator and author of "The Once and Future Worker," recently delivered a speech at the National Conservatism Conference in favor of the idea. Industrial policy is a loose term and can mean different things to different people. But I will accept Cass' definition as government policy designed to "support vital sectors that might otherwise suffer from underinvestment."

The first point is that industrial policy has had some success abroad. In South Korea, Singapore and Taiwan, for example, government-supported infrastructure and pro-business attitudes helped the economy become industrialized and attain high living standards more quickly. But some perspective is in order. It is less clear that state-backed mercantile policy has been so successful in Brazil or Argentina, for example, and Hong Kong attained first-world living standards without a major industrial policy.

Given the recent decline in the quality of governance in the U.S., I have my worries about America undertaking too ambitious an industrial policy. I'd like to see the government solve some more basic problems first, such as limiting school shootings or building out Oakland and San Francisco.

The quantitative magnitudes are relevant, too. The most recent detailed study of industrial policy has shown that manufacturing-based industrial policy created net gains in a cross-section of countries, but of less than 1 percent of GDP; good trade policies were much more important. That does not fill me with confidence that today's America is going to get it right.

Perhaps most important, it should be recognized that the U.S. already has an industrial policy - and has for some time. It is a collection of programs and policies at the federal and state level, many of which are highly imperfect, and so the focus should be on fixing what is already in place.

The first and perhaps most significant component of U.S. industrial policy is a high level of defense spending, much higher than that of any other country. The spinoffs of this spending famously include the internet of course, but also early advances in computers and some later advances in aviation. Today's orbiting network of satellites is in part a spinoff from the space program, which was partially motivated by military concerns.

It's not yet clear whether current defense spinoffs will prove as innovative and as potent as those of the past, but there are some reasons to be skeptical. Procurement cycles for weapons can stretch to a dozen years or more, yet technologies are changing far more quickly.

So if I were designing an "industrial policy" for America, my first priority would be to improve and "unstick" its procurement cycles. There may well be bureaucratic reasons that this is difficult to do. But if it can't be done, then perhaps the U.S. shouldn't be setting its sights on a more ambitious industrial policy.

A second form of American industrial policy is the biomedical grants and subsidies associated with the National Institutes of Health. At a budget of almost $40 billion, it is the largest government-supported biomedical complex in the world, and it indirectly supports U.S. pharmaceutical and medical device exports, as well as biomedical innovation.

Is the U.S. getting the most it can from such institutions? There's no clear benchmark, but the pipeline for impressive new pharmaceutical drugs may be drying up, and American life expectancy has been falling for three years in a row. Maybe those changes are not the fault of the NIH. Still, the second plank of my industrial policy for America would be to ensure such institutions were doing the most possible to boost innovation.

The third form of U.S. industrial policy is an impressive network of state universities, which cover about 73 percent of all students in higher education, by one 2011 estimate. More than 9 percent of all college students attend community college in California.

Again, is the nation getting the most out of such institutions? On one hand they subsidize the creation of a quality work force, and state schools such as the University of California at Berkeley and the University of Michigan have produced world-class innovations, including in STEM fields. On the downside, graduation rates are low, there are growing doubts about intellectual diversity in American higher education, and many students with a master's degree end up tending bar or driving an Uber.

This column is not the place to lay out all the potential remedies to this particular challenge. But improving American higher education would be the final plank of the Tyler Cowen industrial policy.

Once all of those improvements have been achieved, well . . . then feel free to get back to me about a bigger and better industrial policy for America.

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Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "The Complacent Class: The Self-Defeating Quest for the American Dream."

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