Industrial policy not a remedy for income inequality

The idea of industrial policy has taken on almost a mystical quality for many progressives. The idea is that it is somehow new and different from what we had been doing, and if we had just been doing industrial policy for the last half century, everything would be better.

This has led to widespread applause on the left for aspects of President Biden’s agenda that can be considered industrial policy, like the CHIPS Act, the Inflation Reduction Act (IRA), and the infrastructure package approved last year. While these bills have considerable merit, they miss the boat in terms of reducing income inequality in important ways.

First, the idea that we had not been doing industrial policy before Biden, in the sense of favoring specific sectors, is just wrong. We have been dishing out more than $50 billion a year to support biomedical research through the National Institutes of Health and other government agencies. If that isn’t supporting our pharmaceutical industry, what would be?

We also have a whole set of structures in place, most obviously Fannie Mae and Freddie Mac, but also a number of other financial institutions, as well as tax policy, to support home ownership. We also support the (bloated) financial sector through tax policy, deposit insurance, and all but explicit too big to fail guarantees.

Even the subsidies for the shift to clean energy in the IRA were not new. They hugely expanded and extended subsidies that had already been in place. This was good policy from the standpoint of saving the planet, but it was not a sharp break from what we had previously been doing.

The government has always favored some industries, implicitly at the expense of others, so we are not doing something new if we declare “industrial policy.” However, there is an argument for making the subsidies explicit so that they can be debated.

For example, it might have been easier to move away from fossil fuels if we had to debate whether we would continue to subsidize the industry by not making it pay for the damage it was doing to the environment. If someone proposed subsidizing a new development by letting it dump its untreated sewage on neighboring properties, there would likely be less support than if the city just let the development do the dumping without any explicit policy. So, there is an advantage to having subsidies be explicit, even if the idea of subsidizing specific industries is hardly new.

There are a variety of motives for the industrial policy measures Biden has pushed through. The climate ones in the Inflation Reduction Act and the infrastructure bill are both obvious and important.

There is also the belief that these measures will hasten economic growth. There is a good case for this. Much research shows that infrastructure spending increases productivity and growth. There are certainly visible bottlenecks that can constrain the economy, which became clear with the supply chain problems during the pandemic.

There is also a national security issue. This can be overplayed. We don’t really need to worry about being cut off from supplies of key inputs from Canada, and probably not from Western Europe, in the event of a military conflict. On the other hand, being heavily dependent on semiconductors from Taiwan, in a context where a conflict with China is unfortunately a possibility, is a problem. For this reason, some reorientation towards domestic production make sense.

However, one of the main motivations for these measures is to reduce income inequality by increasing domestic manufacturing. This is not likely to be the outcome.

This competition had the predicted and actual effect of costing us millions of manufacturing jobs, and putting downward pressure on the wages in the jobs that remained. Since manufacturing had historically been a source of relatively high-paying jobs for workers without college degrees, our trade policy had the effect of increasing wage inequality.

Eurasia Review