What about an “industrial strategy”?

Freedom beats state subsidy

TRUMP’S ECONOMIC NATIONALISM IS AN OLD IDEA THAT DELIVERS ONLY FAILURE

discoursemagazine.com

There is a “hot new idea bouncing around the corridors of power”, say Matthew Mitchell and Adam Thierer. Depending on whether it hails from the political left or the right, it comes under different names – industrial policy, economic nationalism, green new deals. But the underlying idea is the same: the state selectively discriminates in favour of some industries or firms with the idea of creating national champions that will become global leaders and create jobs. The trouble is, this idea is not new. And whenever it’s been tried before, the results have not been good. 

PICKING LOSERS

Consider, for example, the US state of Wisconsin’s efforts to woo technology group Foxconn. In the summer of 2017, in exchange for up to $3.6bn in direct payments and other privileges, Foxconn promised to make a $10bn, 13,000-employee investment. This is not now going to happen. “But even under the original terms, the deal was bad.”

Boosters were looking forward to a $62.4bn return over 15 years due to multiplier effects as state spending boosts growth. That healthy rate of return, though, depended on some “heroic assumptions”. Costs were ignored, including the higher taxes needed to fund the subsidy and the unseen costs of wasted resources that could have been invested elsewhere. And it was simply assumed that the subsidy would make all the difference (in fact, subsidies are rarely the decisive factor when firms make investment decisions, and were probably not in this case either). At the national level, “past fiascos present a similar story”. 

There is a better way. The global dominance of the US tech giants was not created by industrial policy. True, the state was involved in “laying the early groundwork” for what became the internet. But the reason digital innovation “exploded” in the mid-1990s had nothing to do with “grandiose industrial planning”. Instead, the US followed Friedrich Hayek – it created an environment conducive to economic growth. Innovation and growth was allowed to flourish without state interference or discriminatory taxes, and with dispute resolution left to voluntary bodies and the courts.  The result was that many US tech firms became household names. This approach seems less exciting to politicians  as it’s harder for them to take credit for successes. But  the more “boring” option “reaps bigger long-term rewards”. Forget picking winners: it’s “generalised economic freedom” that delivers the goods.