No, We Shouldn’t Copy Other Countries’ Industrial Policies

Dear Capitolisters,

All eyes are back on Congress this week and the gripping (impossible to follow) drama of whether the House will pass one or both of President Biden’s domestic policy priorities—the $1 trillion bipartisan infrastructure bill and the $3.5 trillion “reconciliation” package. Since both of those bills are chock-full of industrial policy—especially subsidies for “green” technologies like electric vehicles—now seemed like a good time to debunk another common justification for our renewed embrace of industrial policy: other countries’ many successes. As I explain in a new paper out this week, however, there are several reasons why—even if you ignore the economic and practical problems with past U.S. industrial policies—the purported “industrial policy successes” of countries like Japan, Taiwan, South Korea, and China can’t justify similar policies here.

Different Systems Mean Different Outcomes 

For starters, significant political and economic differences limit the extent to which the industrial policy experiences abroad can inform similar efforts undertaken here. For example, several recent economics “literature reviews,” which summarized and assessed empirical studies of industrial policy, found that there haven’t been a ton of analyses undertaken and that, of the few published studies that were, they tended to assess specific cases, industries, and policy episodes (instead of broader, economy-wide analyses). Thus, these papers can’t really predict whether the analyzed cases might translate to the United States. As researcher José Luis Ricón Fernández, whose Nintil blog has done some incredible deep dives into various industrial and R&D policy efforts, put it earlier this year: “If there is one conclusion from the recent empirics of [industrial policy] it’s that it’s pretty much dependent on which industry, which country, in which period of development it is applied.” Pulling broader lessons from this research is thus pretty suspect.

Another reason to avoid simply cutting-and-pasting industrial policy lessons across jurisdictions is our differing political systems. As economist Nathan Lane explained in his 2020 literature review, “Without a doubt, future research must do more to understand the interaction between political economy and industrial policy. Because industrial policy is state policy, its success, scope, and efficacy is sensitive to institutional context.” He adds that, thus far, few economics papers have really examined how politics affects industrial policy, leaving it an open question.

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