Russell Roberts's Blog, page 29
April 15, 2023
Scott Lincicome’s Memo to Industrial Policy Proponents: Political Reality Isn’t Optional
Along with Samuel Gregg and Adam Thierer, Scott Lincicome is among today’s leading debunkers of industrial-policy myths. And Scott’s form is prime in this recent essay of his at The Dispatch. Some slices:
Over the last few days, several high(ish)-profile industrial policy fans have decried the federal government’s thus-far-problematic implementation of the programs they’ve so vigorously supported. (Capitolism has covered a lot of these wobbles in recent weeks, so feel free to go here, here, or here to catch up.) Kicking things off in the New York Times was Ezra Klein, who was “thrilled to see industrial policy revived” yet deeply troubled that the two biggest federal industrial policy laws—the CHIPS and Science Act and the IRA—were being imperiled by progressive add-ons and existing regulatory impediments that raise costs and slow projects. “Even if no single standard or mandate is decisive on its own,” he worried, “the accumulation of them, in an industry [semiconductors] in which we’ve already fallen ruinously behind on cost, can do real damage”—even outright “failure.”
From the right came American Compass’ Oren Cass, who viewed the political strings attached to the CHIPS Act he’s championed as “not only counterproductive with respect to chip capacity, but also an embarrassment for the broader effort to re-establish the American tradition of industrial policy” and—I kid you not—“so bizarre that one suspects the White House is actively baiting its opponents into turning against the entire project of rebuilding American manufacturing.” Diabolical!
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On the one hand, I’m happy to see these (and other) industrial policy fans openly recognize some of the many, many obstacles to crafting and implementing effective industrial policy in the United States—obstacles that I and many other researchers on the right, left, and center have documented at (egregious) length over the last several decades.
But I gotta ask: What took them so long?
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Of course, not every U.S. industrial policy project fails because of political meddling, but the risk of well-intentioned federal projects getting bogged down by costly distractions like child care mandates, protectionism, buyback restrictions, or profit-sharing demands—or by just basic political maneuvering—is large and ever present. And that’s because the policies themselves are products of a political, not market, process. Passing almost all legislation requires cobbling together support from a wide range of diverse constituencies—unions, corporations, environmental groups, whatever—and so bills will usually need to reflect some of their insular priorities. Making law also requires navigating various partisan and procedural rules, which often can affect substance depending on who’s in charge of what committee or legislative chamber. Politicians are, after all, self-interested humans and not public service robots, and they will invariably work to add—often buried in a thousand pages of “must-pass” complexity—provisions that advance their own electoral and constituent priorities. (Senate Majority Leader Schumer, to his credit(?), frequently and openly admits as much.)
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Implementation of any new industrial policy law, moreover, will require detailed rules and regulations that fill in gaps left (intentionally or otherwise) in the legal text—gaps that elected officials and well-paid lobbyists will also look to exploit for personal gain. (See, again, the IRA.) Enforcement invariably involves discretion too and usually comes with congressional oversight. Research thus shows that government agencies’ agendas often mirror those of the members of the congressional committees that oversee them—members that often actively seek out these committee assignments to steer those same regulatory agencies. Throw in some angry trading partners and a Biden administration quite openly gunning for reelection today, and the result is what literally anyone even remotely versed in this stuff would expect: a mess.
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It also ignores that every industrial policy project, even successes but especially failures, has very real economic and political costs beyond simply a budgetary line item, and that—as the Technology Pork Barrel and other industrial policy surveys have repeatedly found—even widely known industrial policy boondoggles are exceedingly difficult to unwind once they’re put in place (see, e.g., ethanol, which has distorted past carbon capture subsidies, or the Jones Act, which is today hindering federal subsidies for offshore wind deployment). Even assuming current problems actually do lead to future reforms (color me skeptical), this is an incredibly wasteful way to discover policy answers that we all already knew before the current experiment began.
Regardless, the entire notion that unsurprising industrial policy problems are to be embraced as some sort of regulatory discovery process ignores the steelmanned case for why new subsidies or other government interventions are supposedly needed in the first place: to correct market failures that are generating problematic commercial outcomes like insufficient onshore semiconductor production. If such outcomes are, on the other hand, the product of misguided government policies that raise costs, depress investment, or otherwise distort the market, then the obvious solution isn’t to start with new industrial subsidies (or whatever) but to fix those other policies and then see whether a real market failure exists and how a targeted government intervention—with appropriate guardrails based on our long experience with such policies—might fix it.
Often, this last government intervention step won’t be needed because, as we’ve discussed a lot around here, markets and private parties are pretty darn good at producing solid commercial outcomes—if governments will let them. Indeed, Klein’s piece unintentionally hits on this when he praises a recent housing project in San Francisco that achieved (relatively) remarkable time and cost savings by utilizing private investment and avoiding byzantine, politicized state and local rules that severely bog down most affordable housing construction and block new and innovative production methods. “More profoundly,” he laments, “it is damning that you can build affordable housing so much more cheaply and swiftly by forgoing public money.” (Lessons abound!)
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[Noah] Smith dismissed my and other industrial policy skeptics’ criticisms as merely an “instinctive, tribalist reaction” to the current CHIPS Act problems. (I, in particular, “seized” on a Bloomberg editorial. Gasp!) Cass, meanwhile, groused that “libertarian Republicans who oppose any government interventions in the market are pointing gleefully at Biden’s mis-steps as proof that policies like the CHIPS and Science Act, PPP, and trade enforcement merely hand Democrats more power to misuse.” But, contrary to these and other online histrionics, the most common criticisms of U.S. industrial policy today are grounded as much in experience and common sense as they are in theory or ideology (not to mention “tribalism”). In my own case, I’m naturally more skeptical of government action than your garden variety wonk, but my personal views of industrial policy come less from reading Hayek or Friedman and far more from spending almost two decades advising multinational corporations and a handful of governments on how to navigate or implement industrial policies here and abroad, and then witnessing firsthand how the sausage is actually made (spoiler: not well).
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Given that industrial policy cheerleaders seem unaware of some of the most basic criticisms of industrial policy from libertarians and non-libertarians alike and are only today waking up to common industrial policy weaknesses that skeptics have been pointing out for decades, I’m not holding my breath.
DBx: Do read all of Scott’s important piece.
Based on much experience, this “waking up” of industrial-policy proponents “to common industrial policy weaknesses that skeptics have been pointing out for decades” won’t last long. The minds of industrial-policy cheerleaders on this matter will again very soon be comatose.
Quotation of the Day…
… is from page 13 of my colleagues Virgil Storr’s and Ginny Choi’s excellent 2019 book, Do Markets Corrupt Our Morals?:
The least advantaged in market societies are better off than the least advantaged in nonmarket societies and may be better off than the most well-off in some nonmarket societies. This material fact, we argue, is of moral significance.
April 14, 2023
Beware of ESG Investing
Investors should be even more wary when considering companies that pursue ESG. At the time of Mr. [Michael] Jordan’s sponsorship decision, everyone at least agreed that the lone goal of a company was to maximize value for shareholders. Under ESG investing, by contrast, conflicts arise not only over how best to pursue company goals but over what the goals are. In his 2022 testimony before the U.S. Joint Economic Committee, Hoover Institution economist Joshua Rauh noted that ESG investment “is plagued by inconsistent and changing definitions that ultimately have reduced managerial accountability to shareholders.” Because maximum shareholder value is no longer management’s exclusive aim, managers will wrangle endlessly over which goals to pursue and how to trade them off against one another and against shareholder value. That’s bad for both investors and the economy.
Some Links
Writing in the Wall Street Journal, David Barker debunks the Federal Reserve’s climate ‘science.’ A slice:
Examples of climate activism abound. This year the Fed is forcing big banks to produce complex reports on their climate vulnerability in a “pilot project” that is sure to expand and might lead to lending restrictions. A query of the Fed’s listing of recent publications returns hundreds of research papers, press releases and policy statements related to climate change. The San Francisco Fed hosted a conference on climate change in May, in which 27 Fed economists participated.
With all this effort, one might hope the Fed would produce high-quality research on climate change. But I took a close look at two Fed studies on the subject and found shockingly poor analysis. These studies on the effect of temperature on U.S. and world economic growth are cited without a hint of skepticism and widely lavished with media attention. I’ve managed to debunk both.
In the September issue of Econ Journal Watch, I discredited a paper from the Richmond Fed claiming that warming reduces economic growth in the U.S. I showed that the paper had serious problems with its statistical reasoning and robustness. My analysis concluded that the data used in the paper showed no meaningful relationship between temperatures and growth.
GMU Econ alum Dominic Pino reports on the Biden administration’s detachment from reality regarding electric vehicles. Here’s his conclusion:
The rush to EVs combined with a rush to renewable energy, on the scale the Biden administration wants, is so extreme that even the government’s own numbers don’t support it. Betting everything on an enormous increase in solar capacity while mandating ever-more EVs is a risk that most elected officials probably wouldn’t take — but insulated from democratic accountability, administrative agencies are doing it anyway.
Richard Fulmer busts some myths about the profit motive.
Arnold Kling ponders varieties of human motivation.
Chelsea Follett talks with GMU law professor Todd Zywicki about the dangers of ESG investing.
David Henderson and Charley Hooper had lunch with Jay Bhattacharya.
Vinay Prasad reports on ‘debunkers’ returning to the ‘soft targets.’ Two slices:
In retrospect, what happened is simple. Most scientists who spend time debunking pseudoscience or writing for wikipedia are not the best scientists out there. The best scientists are working on publishing their own original scholarship— pushing new ideas that never existed in the history of the world.
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People who are not the best scientists— who spend most of their time attacking soft-targets— and who pledge their allegiance to the political left— ironically did tremendous damage to science by creating a caustic environment where real debate could not occur. Worse, they encouraged delusional regulators (Peter Marks) into believing their decisions were correct, and others into thinking that the real enemy were scientists who disagreed. The grand irony then is that these people who see their life in service of a good— combating anti-science ideas— fueled anti-science in the time of crisis.
These days, COVID-19 debates are mostly in the rearview mirror, and the debunkers have returned to soft targets. I see them writing about de-toxification and supplements— topics that are well within their skills. But sadly, in a time of great uncertainty and unprecedented decisions, they thought they could help.
Prof. Peter C Gøtzsche tweets: (HT Jay Bhattacharya)
Sweden did the right thing by avoiding lockdowns and face masks. Excess mortality was among the lowest in the world (see my tweet from 24 March). This was confirmed in the best such study, just published two days ago.
Quotation of the Day…
… is from page 30 of Randy Holcombe’s 2023 paper “Untangling Political Economy,” which is chapter 2 of The Legacy of Richard E. Wagner (Peter J. Boettke and Christopher J. Coyne, eds., 2023):
Markets enable people to coordinate their activities so that individuals can make use of the knowledge of others without having that knowledge themselves.
DBx: This statement is very simple and straightforward. This statement also conveys a profound truth.
This truth, alas, is ignored, or insufficiently appreciated, by nearly everyone outside of a tiny band of economists and classical liberals. Yet one glance at everyday reality in modernity makes this truth impossible to deny.
Consider, for example, the device on which you’re now reading my words. Even if you’re a renowned computer scientist or a genius software engineer, you have no idea how to make any of the vast majority of the components of your device. You don’t know how to make the glass that is the screen, the plastic or metal that forms the casing, the tiny lens of the tiny camera that’s in that device, the electricity-generating and transmitting processes without which that device would be useless. Yet each of these myriad different things exist. Each exists because a few individuals have the specific knowledge necessary to produce it, without any of these individuals – or you – having anything close to the knowledge necessary to produce the entire device.
The millions of different individuals each with his or her own specific knowledge must have their productive efforts coordinated with each other if the final results are to be useful – are to have value. This coordination is achieved by each person being guided by market signals – that is, by prices of outputs, prices of inputs, asset values, and profits and losses.
Advocates of industrial policy wish either to censor or to ignore the knowledge conveyed in markets. But the only ‘knowledge’ that they have to replace that which they censor or ignore comes from their hunches and personal preferences. Industrial-policy advocates simply assume that, if they can imagine some economic outcome, then the government can directly allocate resources to achieve that outcome and do so in ways that improve the well-being of ordinary people. The particular imagined outcomes, depending on what they are, might be achievable. What is not achievable, save by pure and highly unlikely chance, is the attainment of these outcomes in ways that are not excessively costly – that is, in ways improve the well-being of ordinary people.
April 13, 2023
Quotation of the Day…
… is from pages 142-143 of Thomas Sowell’s 1983 book, The Economics and Politics of Race: An International Perspective (original emphasis):
Long-run political policies are almost a contradiction in terms in societies where politicians are elected in the short run.
DBx: This reality is yet another that is ignored or waved-away by proponents of industrial policy.
April 12, 2023
Some Links
On April 20th in New York City, Phil Magness will debate historian Woody Holton on the 1619 Project.
Emma Camp counsels: “Don’t freak out over teens having fast food jobs.”
Scott Gerber explains that even U.S. Supreme Court justices are allowed to have friends.
Scott Atlas talks with Jennifer Sey about the malignant growth of corporate wokeism.
We can now start taking an account of which parts of the COVID state are gone for good, and which are permanent additions to Leviathan.
Elizabeth Bennett tweets: (HT Jay Bhattacharya)
Me, in clinic: “He doesn’t have autism. It’s just that you’ve mostly kept him in the house for his entire 2 years of existence and he hasn’t really developed any social skills.”
Same speech, second time this week. Fear-mongering in the US about COVID and kids did real damage.
Quotation of the Day…
… is from pages 45-46 of Angus Black’s 1970 book, A Radical’s Guide to Economic Reality (original emphasis):
All it takes are some workers who find out that they’re being underpaid. Some of them might move to areas of higher wages and leave exploiting Capitalists with too few workers. To get these necessary extra workers, wages will have to be raised.
Even if workers don’t take the time to find out about better-paying jobs, greedy Capitalists will make them aware of these opportunities. Why? Because you can trust a profiteer to buy the cheapest labor possible. If workers happen to be relatively cheaper in an adjoining city it pays some Capitalists to offer them slightly higher wages as an inducement for some of them to change location. Profit-hungry employers fight for the cheapest labor around tend to drive wages up to normal.
DBx: So true.
I wonder how many are the people who argue, on one hand, that employers are so greedy for cheap labor that they – employers – too quickly move their operations overseas to ‘exploit’ such labor, but then argue also, on the other hand, that domestic labor markets are filled with monopsony power. This pairing of arguments reflects inconsistency of thought of those who make the pairing.
April 11, 2023
An Open Letter to P.M. Sunak
Such a move would also be sound ethically. Every protectionist measure infringes on the freedom of ordinary men and women to spend their incomes as they choose. This infringement is unjust if only because it is done to artificially enrich some individuals at the expense of their fellow citizens. This coerced transfer of income would be unethical regardless of the size of the gains bestowed on the privileged interest groups compared to the size of the losses imposed on the masses. Yet economics makes clear that the losses inflicted on the masses are larger than are the gains unfairly seized by the interest groups.
Protectionism isn’t only unethical; insofar as its purpose is to enrich the country as a whole, it’s also economically stupid.
As you are no doubt aware, the economic and ethical case for free trade was forged most solidly in your country. To this day, no more powerful case against protectionism exists than is found in Adam Smith’s 1776 Inquiry Into the Nature and Causes of the Wealth of Nations. David Ricardo’s explanation, in 1817, of the principle of comparative advantage only further reinforced Smith’s case for free trade. From David Hume and Smith through Harriet Martineau, Richard Cobden, John Bright, William Gladstone, Edwin Cannan, Winston Churchill, and, today, Daniel Hannan, your country has blessed the world with some of the most insightful and eloquent champions of free trade.
And the free trade that these men and women championed was unilateral free trade. They advocated that each government remove protective trade restrictions, regardless of the economic or trade policies pursued by other governments.
For the sake of the citizens of your country, I urge you to travel this same wise path. Advocate and work for a removal of all protective barriers erected by the British government without concern for whether governments in the U.S. and elsewhere follow suit. Were you to pursue a policy of unilateral free trade, you would honor – by following it – Britain’s glorious free-trade tradition.
Inspired largely by the principled advocacy of Cobden, Bright, and their Anti-Corn Law League, Prime Minister Robert Peel (joined by the Duke of Wellington in the House of Lords) courageously supported what remains to this day the single most significant move, both substantively and symbolically, toward free trade ever done by any government – namely, the repeal of the corn laws. In June of 1846 Parliament voted to remove these high tariffs on grain imports unilaterally. It did not do so in exchange for similar tariff reductions abroad; it did so exclusively for the benefit of the British people.
As both a citizen and resident of America, my own narrow interest would likely be better served by your refusal to lower British trade barriers except in exchange for the U.S. government’s lowering its trade barriers. I most certainly want my government to lower the barriers that it obnoxiously erects against my and my fellow Americans’ trade with non-Americans. And so your committing to allow the British people to enjoy the fruits of freer trade only on the condition that the U.S. government allow Americans also to enjoy these fruits is more likely than would your unilateral lowering of trade barriers to entice my government to let me trade more freely.
Quotation of the Day…
… is from pages 59-60 of the 1982 Economics Nobel laureate George Stigler‘s November 1959 Quarterly Journal of Economics article, “The Politics of Political Economists,” as reprinted in Stigler’s 1965 collection, Essays in the History of Economics (original emphases); the second paragraph of this quotation was featured here as a Quotation of the Day more than eight years ago:
The conservatism of the economists cannot be explained by the vulgar argument of venality: that economists have sold their souls to the capitalists. The current rates of pay for good economists are much below what I would assume to be the going rate for a soul.
The main reason for the [political] conservatism [of economists on the economic front] surely lies in the effect of the scientific training the economist receives. He is drilled in the problems of all economic systems and in the methods by which the price system solves these problems. It becomes impossible for the trained economist to believe that a small group of selfish capitalists dictates the main outlines of the allocation of resources and the determination of outputs. It becomes impossible for him to believe that men of goodwill can by their individual actions stem inflation, or that it is possible to impose changes in any one market or industry without causing problems in other markets or industries. He cannot unblushingly repeat slogans such as “production for use rather than for profit.” He cannot believe that a change in the form of social organization will eliminate basic economic problems.
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