“To armchair economists, industrial policy seems like a solution for the country’s economic woes: “Infuse money into Industry A, add trade protections for Industry B, protect workers in Industry C from automation, and the economy will soar! New technology will arrive sooner, domestic firms will outcompete foreigners, and steady employment will ensure a chicken in every pot.” That indeed was the thinking behind Depression-era policies which extended that crisis by seven years.
Economies are not deterministic like physics or chemistry. You can’t pull a lever to achieve a particular effect. A better analog is biological or ecological systems, where there are second- and third-order effects to any given stimulus.
Think about the reintroduction of wolves to Yellowstone National Park: Increased predatory pressure keeps elk herds on the move, leaving more young willow trees for beavers. Growing beaver populations dam more waterways, altering the habitat and spurring additional difficult-to-predict effects. That’s economic policy: You must plan for unexpected downstream effects (pun intended).
That thinking has been missing in Congress this past month. I don’t know what microchip subsidies or a mistitled inflation-fighting bill will ultimately do, but neither do our elected officials.
Compounding the problem is that people, not some agnostic supercomputer, determine which industries and companies are considered worthy of a boost. Humans are subject to influence and pressure, turning industrial policy into a contest of who can secure the most government favoritism—a political game of Hungry Hungry Hippos.
Policies protecting companies from competitive pressure, like subsidies or tariffs, allow them to take their eye off the ball. This “X-inefficiency” means they’re less efficient and pay less attention to customers’ desires.”
“The current legislation has swelled to a total cost of more than $400 billion. The core of the bill is $76 billion in direct funding for domestic semiconductor manufacturing through a variety of grants and tax credits. The rest of the money, beyond doubling the budget of the notoriously silly spenders at the National Science Foundation, is predictably a billion here and a billion there for vaguely named programs with even more ambiguous purposes. For example, as the Wall Street Journal editorial board pointed out, “The Commerce Department gets $11 billion, most of which it intends to plow into creating 20 new ‘regional technology hubs,’ which will somehow expand ‘U.S. innovation capacity.'””
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“Proponents of the legislation would have you believe that the U.S. is overly reliant on foreign, unreliable suppliers of semiconductors, particularly those under threat from China. Semiconductors are unbelievably important components in practically countless goods relied on every day, but that’s no excuse to ignore the fact that the domestic semiconductor industry is, per a 2020 report by the Semiconductor Industry Association, “on solid footing.” U.S.-based semiconductor firms hold nearly half of the global market share, and 44 percent of that production already occurs in the U.S. Moreover, these figures don’t even capture firms based in allied countries such as South Korea and Taiwan that are currently spending billions of dollars to open semiconductor manufacturing facilities in the U.S.—without the need for funding.”
“The argument for bailing out restaurants is thus morphing from a need to save the industry during the pandemic to a desire to relieve it from persistent challenges that have less and less to do with COVID-19.
That’s hard to justify when the industry itself is on a steady track toward recovery, and federal spending is driving inflation to record levels.”
“The US national security establishment sees China as the most urgent threat of the moment, while the entrenched interests of the arms industry endure.
Put another way, although the US is no longer in Afghanistan, taxpayers continue to pay for the American military’s massive global presence. Absent a fundamental rethinking of how the US sees national security and the role the military plays in foreign policy, big cuts are unlikely.”
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“Congress didn’t think that Biden had committed enough to combatting China in his original defense budget request, so lawmakers added some $25 billion in all.”
“Scientists originally suspected the problem was illegal logging in local forests, which are protected as part of the Monarch Butterfly Biosphere Reserve. But as they later discovered, the decline has a lot more to do with what’s happening thousands of miles away in the US. Over the last few decades, industrial farms have decimated grasslands rich in milkweed, the only plants that monarch caterpillars can eat. Less food in the US means fewer butterflies thousands of miles away in Mexico.”
“The vaccines that millions of Americans receive every day are the result of a global system of research, development, manufacturing, and trade. Forcing those networks to be concentrated within the United States wouldn’t make those supply chains more robust, but would leave Americans vulnerable to the accountability problems that seem endemic to federal government contracting.”
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” It’s true, of course, that the federal government paid billions of dollars to Pfizer and other vaccine manufacturers in the form of advance-purchase agreements last year. But that’s a different situation—one that effectively promised prize money but still put the onus on private companies to deliver vaccines that worked. While certainly not an ideal arrangement from a libertarian point of view, it’s far better than an industrial policy that directs public funds to companies that hire the best lobbyists.”
“When you think of the U.S. manufacturing sector, you likely think of General Motors and U.S. Steel, faceless megaliths with armies of disciplined workers. But it’s more like Yellowstone National Park, an intricate ecosystem of small and specialized players, their fates closely intertwined. “If you look at anyone who is a node in a supply chain—a manufacturer, or sub-manufacturer, or raw materials extractor—each of those entities may be partnering with many different customers, as well as many different sub-suppliers beneath them,” says Karen Donohue, an expert on supply chains at the University of Minnesota’s Carlson School of Management. “Their solvency is potentially dependent on the weakest link in both of those networks. And that’s what makes prediction difficult.” A 2018 survey by the consultancy Deloitte found that 65 percent of more than 500 procurement leaders from 39 countries had a hazy view, at best, of their supply chains beyond their most important suppliers.”
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“Professional Instruments’ primary customer is a small company in New Hampshire whose ultraprecision machine tools are crucial for manufacturing in the medical device, defense, consumer electronics, and automotive fields. “It’s almost impossible for someone to anticipate the knock-on effects of some businesses being closed down because they’re deemed nonessential, because they’re suppliers for companies that are deemed essential,” says the company’s recently retired former CEO, who requested anonymity to discuss sensitive business matters. “You build a quarter-million-dollar machine, but if you can’t get one $150 component off the shelf, you can’t put it into production.””
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“Zoom out further, and the pandemic’s global nature becomes palpable. The future of the New Hampshire company is also uncertain, thanks in part to closures abroad. It has representatives in several countries (including South Korea, Japan, and Taiwan, all of which have implemented lockdown measures) and customers in many more. “Representatives might need to come from the U.S. to help install the machines,” says the former CEO. “But with global travel being affected, how are you going to get that equipment installed? You still need those people to travel. These machines don’t install themselves.” In March the company opened a training center in China, but “whether that center will be utilized for some time remains to be seen.””