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The return of industrial policies

by Index Investing News
March 29, 2023
in Economy
Reading Time: 2 mins read
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During the latter part of the 20th century and the early 21st century, a consensus emerged that industrial polices were counterproductive. This view was a part of what was known as the “Washington Consensus”.

Unfortunately, economics goes through cycles as one fad after another becomes fashionable, at least until society painfully relearns the fundamental principles of economics. In recent years, industrial policy has come back into style in the US and indeed much of the world. But the new industrial policy doesn’t work any better than previous iterations. Here’s Bloomberg:

By now it’s clear that the Chips and Science Act — which includes a $52 billion splurge for the semiconductor industry — is unlikely to work as intended. In fact, its looming failure is a microcosm of all that’s wrong with America’s current approach to building things.

Bloomberg cites several factors, including regulations that lead to very long delays in constructing new plants.  And even bigger problem is our immigration system:

Another challenge is that the US lacks the needed workforce for this industry, thanks partly to a broken immigration system. One study found that 300,000 more skilled laborers may be needed just to complete US fab projects underway, let alone new ones. Yet the number of US students pursuing advanced degrees in the field has been stagnant for 30 years. Plenty of international students are enrolled in relevant programs at US schools, but current policy makes it needlessly difficult for them to stay and work. The strains are showing: New plants planned by Intel Corp. and Taiwan Semiconductor Manufacturing Co. are both struggling to find qualified workers.

Even worse, chipmakers are burdened with regulations aimed at helping labor unions:

Companies hoping for significant Chips Act funding must comply with an array of new government rules and pointed suggestions, meant to advantage labor unions, favored demographics, “empowered community partners” and the like. They should also be prepared to offer “community investment,” employee “wraparound services,” access to “affordable, accessible, reliable and high-quality child care,” and much else.

Over in Foreign Policy, Adam Posen has a more in-depth examination of the problems with industrial policies:

This policy approach, while having considerable popular appeal at home, is based on four profound analytic fallacies: that self-dealing is smart; that self-sufficiency is attainable; that more subsidies are better; and that local production is what matters. Each of these assumptions is contradicted by more than two centuries of well-researched history of foreign economic policies and their effects. Neither the real but exaggerated threat from China nor the seeming differences of today’s technology from past innovations change underlying realities.

Posen discusses many specific problems with industrial policies, but most of them boil down to one specific error—ignoring opportunity costs.



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