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In arguments over industrial policy, there’s often a moment where someone makes an assertion like: “Every nation has industrial policy. Even not having an industrial policy is a type of industrial policy. The only relevant question is what kind of industrial policy we should choose.” In my experience, the people who make this argument then jump immediately to why a specific kind of industrial policy should be very aggressive indeed, including tools like subsidies and constraints on imports aimed at assisting specific domestic industries or companies.

It’s true, of course, that every nation has some type of industrial policy, if that term is very broadly understood. But I find it usefult think of economic policy and its effects on industry in layers.

The most basic layer is an economy with a legal system that enforces contracts, a functioning financial system, functional bankruptcy laws, low inflation, moderate government borrowing, good transportation and communications infrastructure, and a solid educational system from K-12 up through colleges and universities, workforce training for adults, and so on. These features surely support a more robust development of industry, but without taking sides in which industries will emerge.

As a next step, one can imagine the insight that long-run growth in the standard of living has, in the last 2-3 centuries, been closely related to advances in science and technology. It’s a standard belief among economists that an unfettered free market will tend to underinvest in innovation, in large part because innovations can be copied, and much of the benefit of an innovation goes to users rather than to the inventor. Thus, high-income countries subsidize innovation in a number of way: through protection of patents and intellectual property rights to help raise the reward for successful innovators, through tax breaks for research and development done by firms, and through direct funding of science and innovation at research institutions. These kinds of steps seek to to shape the direction of an economy toward a greater emphasis on technology-based growth. I have argued that despite a recent moderate increase in US R&D spending, there is a plausible case for increasing these incentives with an aim to doubling US research and development spending.

However, one can draw a conceptual line between general support for R&D and targetted support by industry. For example, a society might identify certain technological priorities: say, carbon-free energy production, anti-cancer drugs, stronger domestic production of semiconductors, artificial intelligence, and others. A certain amount of government support of R&D might be aimed at the desired areas. In addition, government might take other steps: perhaps prizes for certain kinds of inventions (think Operation Warp Speed for creating the COVID vaccines), or allow firms to cooperate, without fear of antitrust laws, to fund research jointly, or to build up joint ventures with the highest-performing firms in other countries. But all of these steps are focused on support for research and development of knowledge.

The next level is direct support for industries, or even for certain specific companies. This support might take the form of direct government subsidies or tax breaks for certain firms and/or industries. It might also involve government becoming involved in transportation infrastructure or workforce training that is aimed quite specifically at industrial development in a particular location.

The final layer of “industrial policy” is not just to build up domestic firms and industries with subsidies, infrastructure, and workforce development–as well as support for the underlying technological and scientific expertise–but to hinder international competition with tariffs and import quotas.

There are probably other sensible ways to divide up these categories, but the point I’m trying to make is that using the term of “industrial policy” to refer to all of these steps seems to me to stretch the term so far that it stops being useful. My sense is that most of the economists who would view themselves as against “industrial policy” are also supporters of at least the first two or three levels of policy above–that is, the basic underpinnings of a strong economy including support for research and development. Instead, I would focus on the term “industrial policy” on subsidies or trade barriers aimed at certain companies or industries.

Sometimes this kind of industrial policy has worked. There are plenty of local examples where support (or at least not active opposition) from government was necessary for a large-scale firm to thrive, including specialized training for workers, infrastructure investment, making land available, a local research center, local tax breaks (“tax-increment financing”) and so on. Of course, there are also plenty of cases where local government tried to roll out the red carpet for a firm, and blew a lot of money without much success. As one of many examples, some will remember back in 2018 when President Trump announced to m much fanfare that Foxconn was going to build a giant manufacturing facility in central Wisconsin, which never happened.

Similarly, there are some examples around the world of where countries used tariffs and import quotas–along with all the other technology, workforce, and infrastructure steps mentioned here–to help build a domestic industry, which over time became a global leader. But in the cases that seemed to work, like certain industries in South Korea, the government support for these industries was tied to the industry meeting certain goals for exports that would be cost-competitive in world market. If industries did not meet the goals, the subsidies were cut off. And there are many examples of countries that blocked imports simply to support domestic producers

But all of these types of industrial policy happen through politics, and thus are more likely to be responsive to a combination of powerful incumbent special interests and to wishful thinking (after all, politicians aren’t putting their own money on the line). A lot of prominent industrial policy efforts have turned out badly. I write a few years ago about my qualms about industrial policy:

For example, back in 1991 Linda Cohen and Roger Noll published a book called The Technology Pork Barrel, which was based on case studies of US attempts to build infant industries in supersonic planes, communications satellites, a space shuttle, breeder reactors, photovoltaics, and synthetic fuels. I remember back in the 1980s when Japan announced with great fanfare the “Fifth Generation” computer project, which then went away with out fanfare. I remember when Japan was the shining example of how industrial policy worked in the 1970s and into the 1980s, but somehow it abruptly stopped being a shining example when Japan’s economy entered three decades of stagnation starting in the Brazil decided that it would become a computer-producing power in the 1970s and 1980s, and when Argentina decide that it would become a global electronics superpower. I remember the economic disaster that was the industrial policy of the Soviet Union. I remember the places around the world that have tried to be the next “Silicon XXXX,” generally without success.

Ultimately, every proposal for industrial policy must grapple with the problem of political discipline. As the levels of industrial policy move beyond the basic steps like health institutions and support of research and development, and start to focus on particular industries and companies, how likely is the policy to work? What are the intermediate goals that will be used to judge whether the policy affecting the industry as desired? Will the policy be cut off if the intermediate goals are not being met? 

There is often a heavy dose of irony in industrial policy. Back in the 1950s, the head of General Motors was nominated to become Secretary of Defense. The story goes that when he was asked if he could separate the interests of General Motors from the broader nation interest, he answered: “What’s good for General Motors is good for the country.” The line was quoted for decades to show as an example of an excessively pro-business attitude. (The story isn’t accurate, as I described here.) But when General Motors needed a government subsidy to survive during the Great Recession, a lot of people then argued that what was General Motors was good for the country. Similarly, current US industrial policy favords multi-billion subsidies directly for companies on Intel and TSMC, on the grouds that “the interests of domestic semiconductor manufactures are good for the country.”

There’s an old line that “government should steer, not row”. The idea is that the useful role is to set up policies like appropriate institutions, as well as incentive for innovation in general and for specific industries. But when government gets into the business of direct subsidies and tariffs, it has moved into rowing rather than steering, and the danger of political incentives starting to override sensible economic policy begins to become a greater risk.

These issues and others have been top-of-mind for me lately, because the most recent issue of the Journal of Economic Perspectives, where I work as Managing Editor, published a “Symposium on Industrial Policy” in the Fall 2024 issue. As with all JEP content and archives, the papers are freely available online:

• “Export-Led Industrial Policy for Developing Countries: Is There a Way to Pick Winners?” by Tristan Reed
• “The Political Economy of Industrial Policy,” by Réka Juhász and Nathan Lane
• “Industrial Policy: Lessons from Shipbuilding,” by Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur
• “Semiconductors and Modern Industrial Policy,” by Chad P. Bown and Dan Wang
• “Alexander Hamilton’s Report on Manufactures and Industrial Policy,” by by Richard Sylla

Want more? The most recent Annual Review of Economics also includes a couple of articles on industrial policy:

• “Industrial Policy and the Great Divergence,” by Réka Juhász, and Claudia Steinwender
• “The New Economics of Industrial Policy,” by Réka Juhász, Nathan Lane, and Dani Rodrik
• “Modern Industrial Policy and the World Trade Organization,” by Chad P. Bown

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