Six rules for the West's new industrial policy

Let's start by admitting that it's wasteful, corrupting -- and, sadly, necessary

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Industrial policy is all the rage in Washington, spurred by China's aggressive and sometimes successful use of industrial policy tools. I've lived through a few past enthusiasms for industrial policy, and I'm hoping this time we've learned lessons from the past.  That at least is the premise of my op-ed today in The Hill. Here's the lead:

At the start, we should recognize that letting governments pick economic winners and losers is wasteful, inefficient and corrupting. For the West, and open capital-market economies such as the U.S. and the UK, it's hard to think of a worse policy — other than the alternative, which is to let China pick winners and losers for the world.

So, we need a way to counter China without making a politicized mess of everyone's economy. As they embark on that effort, here are six rules I'd commend to Western governments.

 

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  1. How does China picking winners and losers in their economy let them pick winners and losers for the world. We know how this works out - companies become unable to compete internationally because they depend on government largesse. They become complacent and fail to innovate effectively, because their survival doesn't depend on it.

    If your goal is stronger US industry, picking winners and losers is the surest way to ensure it doesn't happen.

    (The Jones Act effect on the US shipping and cruise ship industries should be a giant blinking red warning light.)

    1. "How does China..."

      Let's give an example. The rare earths mining industry. China currently accounts for ~85% of the rare earths production in the world. It is supported by the Chinese government. And if a nation suddenly does something China doesn't like...they find critical elements they need for their industry are suddenly cut off.

      "Well, can't a competitor just come in that isn't based in China..."

      If one does, and competes with Chinese prices, suddenly the prices of rare earths drop, as the Chinese companies sell them for cost...or below. The competitor goes bankrupt. And the Chinese companies can hike prices back up.

      "Well, can't another company come in and start up production again?"

      Would you like to invest in that company? In the knowledge that once you've made your sizable investment, prices of the elements will suddenly drop, and your investment will be lost...

      1. That's a factor, of course. The other side of it is that China has basically no environmental regulations, and an ample supply of slave labor, which makes them legitimately the lowest cost supplier for a lot of markets where that sort of thing matters.

        And the final problem is endemic corruption among the political classes of the West; A lot of our policy makers are simply bought and paid for, and aren't working for us anymore on issues where that isn't in China's interest.

        1. Bingo—we hemorrhaged jobs to China from 2001-2009 not only because of labor costs but also because America was in an energy crisis. So as late as 2007 Tillerson was advocating America import LNG if you can believe that. So American companies shipped jobs to China because China was willing to poison its people with coal and diesel pollution AND displace millions building hydro dams. So it’s not a coincidence we have added manufacturing jobs since 2010 as fracking was proven economical. Hopefully Manchin and Casey successfully get natural gas included in Build Back Better because it is vital to our economy.

        2. Oh, are libertarians finally starting to understand that companies only care about profits and not what it does to the rest of the planet?

          The solution is simple: The United States could pass legislation forbidding the importation of products from countries and factories that don't pay a minimum wage comparable to the US minimum wage, don't have OSHA-like safety requirements, and don't have environmental protections in place. That way, American companies will no longer have a motivation to bleed jobs to the third world. And it might even improve the lot of the slave laborers in the third world.

          1. "The United States could pass legislation forbidding the importation of products from countries and factories that don’t pay a minimum wage comparable to the US minimum wage"

            So cut off trade to 3/4ths of the world?

            1. You’re assuming they wouldn’t clean up their act to get US business. The strategy I’m suggesting has worked well for China on issues on which China wants compliance; no company that wants to do business in China dates criticize the Chinese government for example.

              And bear in mind that there’s little for which we existentially need any other country. We could manufacture most of our goods here and did so at one time. We just don’t because corporate profits.

              1. "You’re assuming they wouldn’t clean up their act to get US business."

                You mean raise their local minimum wage to $7.25 an hour? Yes, I'm assuming that. Because doing so in most of the world would utterly destroy their economies.

                You can't take a place like Mexico, where the median hourly wage is ~$3.50 an hour for manufacturing (relatively good paying), and double it to get just a minimum wage, without destroying the economy.

                Let alone a country like Nigeria or Ethiopia...

                1. But how much of a profit are the factory owners making in those places? My view is that there’s enough money even in those places for ever to have a basic standard of living; it just means the rich won’t be as rich.

                  But raising their minimum wage to 7.25 isn’t what I said anyway. I said comparable to. In other words, a factory worker in Ohio and a factory worker in Pakistan should enjoy the same standard of living, but the cost of living is lower in Karachi than it is in Akron. So the Pakistani worker doesn’t need to make as much so long as his paycheck has the same buying power. If an American factory worker works fo, say, 90 minutes to buy himself and his wife a nice steak dinner, then a Pakistani worker should be able to take his wife out for a nice steak dinner after 90 minutes too. Even though the steak costs less in Pakistan.

                  1. I mean, you simply have a basic misunderstanding of the relative economies between these places, between the US and Pakistan. They're not comparable. They're not even close. For that matter, you have a basic misunderstanding of a manufacturing wage in the US....

                    I mean, a nice steak dinner for two people? How much do you think that costs? How much do you think the average manufacturing wage in the US is? Have you actually looked at these numbers?

                    For that matter, if you're comparing the cost of a restaurant meal across countries, the best measure is the so called "Big Mac Index". And it's not "that" different between Pakistan and the U.S. Pakistan is only about 35% cheaper. Whereas the difference in their wages are dramatic. Pakistan's per capita income is just $1200 a year. Even if you're using PPP stats, it's $4800. Whereas the US current per capita income more than $60,000 a year.

                    Pakistan currently has a minimum wage of $0.62 per hour. Your proposal would increase it by more than a factor of 10....

                    That would be like increasing the US minimum wage to $80 an hour. It just doesn't work. It would destroy the economy.

                    1. It doesn’t matter to my point how much a steak dinner costs or how much a factory worker makes. When you’re through table pounding maybe you can re read what I said, slowly and carefully this time. I said factory workers should have comparable standards of living, not item by item identical.

                      But suppose you’re right and it would destroy Pakistan’s economy. Since the goal is to keep American jobs in America, or at least to not allow American companies to evade American regulations by moving their operations to Pakistan, please explain why concerns about the Pakistani economy are even relevant.

                    2. 1. No, you SAID " a minimum wage comparable to the US minimum wage"
                      Which is rather different. ESPECIALLY in the context of comparing wages across countries. Which is the entire point.

                      2."But suppose you’re right and it would destroy Pakistan’s economy.... ...please explain why concerns about the Pakistani economy are even relevant."

                      Because it's a choice the country would make. And given a choice between utterly destroying their own country's economy, and cutting trade with the U.S., the country will cut trade with the U.S. As will the other 3/4ths of the world, which would have the same choice. Which will leave the US cut off...not the other countries.

                      Do you like Coffee? That's all basically gone, the US can't import it anymore from those low wage countries. And Hawaii doesn't make anywhere near enough for the US. Do you like bananas? Those are gone too. Lithium for batteries? Most of that is imported from low wage countries in South America.

                      That's just for starts... The concept you have...that you can demand other countries have comparable minimum wages to the US, or else you'll stop tradings with them....is nuts. Off the wall bonkers.

                    3. AL, if there are multiple possible ways to interpret what someone said, and one of them is off the wall bonkers, and the other is not, unless you’re talking to a complete moron, chances are good that their intended interpretation is not the one that’s off the wall bonkers. Most of the time anyway.

                      I get that Pakistan is not an apples to apples comparison to Ohio. But there’s no reason other than corporate greed that a Pakistani factory, especially an American owned Pakistani factory, can’t pay a living wage.

                      And if it can’t sell those cheap goods to Americans, to whom will it sell them instead? You think there’s a market in China for all those t shirts? You think other third world countries will buy up all that coffee and bananas?

                    4. "unless you’re talking to a complete moron,"
                      I'm pretty sure that's what I'm doing at this point...

                      But I'll give you one more shot.

                      What EACTLY what would be a "comparable" hourly minimum wage in Pakistan that you would propose? In US Dollar values. Just so we're absolutely clear.

                    5. That's funny coming from someone who has repeatedly demonstrated an inability to understand simple English.

                      It's not a direct comparison, nor can it be, since Pakistan is not Ohio. The question is what would be considered a middle class existence in Pakistan, because in the United States, most factory workers enjoy at least a lower middle class existence. Americans and Pakistanis spend their money on different things. Americans and Pakistanis have different expectations for what a middle class existence looks like. But I'll tell you what it doesn't look like: Trying to support a family on $5 a day.

                      For more specifics, we'd have to do an in depth analysis of how the Pakistani middle class lives and how much money it takes to achieve that status. Not your egregiously oversimplified caricature.

                    6. So, I gave you one more shot. One more shot to explicitly define what you meant by a comparable wage

                      And you failed. Completely. Just utterly avoided the question.

                      You're asking for " legislation forbidding the importation of products from countries and factories that don’t pay a minimum wage comparable to the US minimum wage," But then fail to define, upon repeated questioning, exactly what a comparable minimum wage would be. The most direct comparison...one that would equivalent to the US minimum wage...apparently was rejected. But when questioned about what it actually was...again, the point was avoided.

                      I'm supposed to guess at your "intended" interpretation, and assume the best possible answer, but when I ask what your interpretation ACTUALLY is, you can't answer....

                      Your argument is so inherently flawed, that you can't even comprehend it...so yes...I am apparently talking to a "moron"

      2. So, let me get this straight... we bankroll companies which can't even compete with China now - foreclosing the entrance into the market of companies which innovate enough to do so, and this works why?

        Also, why does anybody buy your expensive rare earth metals in the first place? If you throw up tariffs on rare earths, the people who need rare earth metals will just move their manufacturing overseas and import the finished products to the US. If you throw up tariffs on the products too, the US simply doesn't do things like widespread adoption of electric cars. It's just pants-on-head stupid economics that makes us all poorer.

        On the one hand: if China is selling rare earth metals at stupid cheap prices, what's the problem? They're shooting themselves in the foot and we're getting cheap rare earth metals.

        On the other hand, if the US government is really going to intervene in the rare earth market, when China goes stupid cheap, why doesn't the US government just buy up a strategic stockpile of the stuff and warehouse it. It's not like they go bad.

        Isn't China's economy on the verge of a meltdown anyway *because* the government has been bankrolling companies? China's debt-to-GDP ratio is spiralling out of control. They can't keep dumping goods on world markets without triggering a crisis. Your disaster scenario would only be a disaster for China.

        1. "So, let me get this straight… we bankroll companies which can’t even compete with China now – foreclosing the entrance into the market of companies which innovate enough to do so, and this works why?"

          I wouldn't propose bankrolling anyone. A major reason that China was able to take over so many industries is that our own governments ended up in the grip of a anti-human version of environmentalism, and went about deliberately driving a number of industries out of the country.

          What we need to do isn't to subsidize industry, just reform regulation so that it's possible to profitably do these things in America again.

          1. +1 steel mill worth of equipment shipped to China... without the environmental scrubbers

          2. I don't disagree with anything you said there =)

        2. "So, let me get this straight… we bankroll companies which can’t even compete with China now – foreclosing the entrance into the market of companies which innovate enough to do so, and this works why?"

          Bankroll or support (via tariffs, loans, etc), yes. "Innovation" only takes you so far, especially if a competitor country is willing to support their product and flood the market with product for free, or close to it, in order to drive out competition.

          "Also, why does anybody buy your expensive rare earth metals in the first place? If you throw up tariffs on rare earths, the people who need rare earth metals will just move their manufacturing overseas and import the finished products to the US."

          The rare earths make up a fairly small % of the overall cost. It's not worth moving an entire manufacturing site for a difference in cost of ~1% on the overall product. Also, many of the products that are made cannot be effectively made overseas, or imported into the US.

          "On the one hand: if China is selling rare earth metals at stupid cheap prices, what’s the problem? They’re shooting themselves in the foot and we’re getting cheap rare earth metals"

          Nothing....assuming they continue to sell them. Problem is, they may not continue to sell them, for strategic reasons. Assume there was a trade war with China, and the supply suddenly "dried up" as China restricted their export. A number of major industries, including defense would grind to a halt. It's a very effective tool for Chinese "diplomacy". And in a potential shooting war....

          "On the other hand, if the US government is really going to intervene in the rare earth market, when China goes stupid cheap, why doesn’t the US government just buy up a strategic stockpile of the stuff and warehouse it. It’s not like they go bad"

          They actually have been. But stockpiles can only be so large, on a national level.

          "Isn’t China’s economy on the verge of a meltdown anyway *because* the government has been bankrolling companies? China’s debt-to-GDP ratio is spiralling out of control. They can’t keep dumping goods on world markets without triggering a crisis."

          Crises have a way of influencing authoritarian countries to take sudden actions to fix their crisis...like cutting off vital supplies of goods, in order for political advantage.

        3. But let's put this in more direct terms...

          Imagine if the US bought 95% of the bullets it used from China.

          And then China threatened the US with a war. And cut off the supply of bullets to the US.

          Wouldn't that put the US is a disadvantageous position, militarily speaking, if it couldn't buy more bullets?

          1. You really expect me to believe that, if national security was really on the line and war loomed, it would be that hard to start a rare earth metal mine (or a bullet factory)?

            I call BS.

            1. You really think you could get it running fast enough? I think you underestimate how long things take to get done.

              Bullet factories are trivial, that the sort of manufacturing people do at home as a hobby. Rare earth refining at scale? Quite another matter.

              1. All true. I was using bullet manufacturing as an easier to understand example.

                In this case, of course, the "bullets" are high end missiles which require rare earths to build.

            2. Rare earth minerals are not concentrated to useful levels in many places. Even if you have control over such a place, setting up a mine can take $1 billion and several years - more if there are (and there always are) environmental objections and lawsuits delaying things.

              These mines would also take 5-6 years to begin to pay out a profit, meaning that it might require large subsidies to get people to try to create new ones before the market is cut off - and afterwards, it is too late.

              An interesting read on this particular topic, from MIT:
              The Future of Strategic Natural Resources

            3. Hard...no. Hard to do instantaneously? Yes.

              Facilities can't be built instantaneously. And in the meantime....well...

              "Sir, we're out of bullets!"
              "Well, build a bullet factory to make some!"
              "Sir, that will take 6 months"
              "But we need the bullets now!"
              "umm...."

              1. Yes, it's possible to construct a scenario in which trade is an issue; the problem is that it would require cartoon levels of stupidity on everyone's part to make it happen. Even Donald Trump wouldn't be dumb enough to wait until the military was out of bullets to start trying to acquire more.

                1. Cartoon levels of stupidity are what we're trying to recover from right now. "Hey, let's become dependent on a totalitarian communist state for materials and parts! It will moderate their worst impulses, and what's the worst that could happen?"

                2. (During a dispute with China...)

                  "Sir, we're out of high tech missiles!"
                  "Well, get more from the factory."
                  "The factory says they're out of refined neodymium to help make the missiles!"
                  "Well, tell them to get more."
                  "The factory says they buy it all from China."
                  "Well tell them to buy some from non-Chinese sources"
                  "The factory says there aren't any non-China sources, and it'll take 2 years to put up a mine and refining facility in the US to make more"
                  "But we need those missiles now..."
                  "Umm...."

      3. China tried that before and reaped only short term political gains. What most people and talking heads don't realize is that rare earth elements are actually very common and that it's just expensive to produce, due largely to health and environmental concerns. When China throttled exports other companies outside China saw an opportunity and took it. Sure the metals from those companies are/will be more expensive but at least their partners don't have to worry about suddenly losing all access for no good reason. And in today's economy that reliability is paramount as ever larger amounts of money rely on each step in the process.

      4. You know that (a) predatory pricing is a myth, and (b) there's no way for China to "cut off" an individual country, right?

  2. You might be right over the long run, but over the long run, companies with state-subsidized competitors end up dead, or close to it. Sure, China's policies produce politicized and inefficient companies, but that's just drag; it's not fatal, and it can be overcome with enough government money. Look at the heavily subsidized Airbus, for example, or the steel industry, where state subsidies have crippled US competitors.

    1. Really? Care to cite any historical examples. Because that's not how competition with Japan played out. (Our industrial policy with semiconductor manufacturers, for example, was an abject failure and net worse for US companies).

      1. And i mean cite in more detail. Airbus doesn't seem to be driving Boeing out of the market. And steel subsidies haven't worked as you think they are - they've killed US steel industry by making us incapable of competing.

        1. I will never understand why we wouldn’t want as much cheap steel as we can get our hands on?? Obviously you want cheap energy but unlike steel imported cheap energy would be easier for adversaries to cut off supply. In both instances the federal government should have a backup plan instead of policies like Trump’s steel tariffs which ironically made the steel magnate responsible for bankrupting Big Steel wealthier while only producing a handful of new jobs.

          1. Of course you want cheap steel. The problem is cheap steel that could suddenly be cut off, because your cheap source is a strategic adversary, not an ally or even neutral. Imagine for a moment how WWII would have gone, if "the arsenal of democracy" had been dependent on Germany for steel supplies.

            In some degree it's a coordination problem; We have trade with other Western countries, and any of them can get a huge, (If perilous!) economic advantage in that trade, by buying artificially cheap supplies from China. So we're all on the hook, if we can't agree to all cut China off.

            And we're never going to agree to that, because China has bought and paid for a lot of our political leaders.

            1. Steel can’t be cut off like energy..and energy can’t be recycled like steel. If the Soviets were selling us cheap oil and it could be stored and used in products that can be used or recycled I would have bought as much cheap oil from the Soviets as possible because it was making us stronger. Anyway, Trump’s tariffs failed to create jobs so Bethlehem Steel isn’t coming back and tariffs only made steel more expensive.

              1. It's not quite that easy...

                To get a steel plant up and running is a major capital investment, both in time and money. Even recycled steel requires major investment....and a major steel mill.

                Countries don't simply keep a year's supply of ready to go steel plate and bar on hand. They continually use it. And if you suddenly find your steel supply cut off, all the manufacturers who rely on it...well, they're up a creek, for a sizable chunk of time.

                1. Steel isn’t like energy no matter how much you want to rationalize Trump’s tariffs failing. And guess what you need to build a steel mill?? Steel!! So you would buy enough cheap steel to get everything up and running before you implemented the tariffs…and then you would keep importing cheap steel for as long as possible with tariffs simply high enough to produce enough revenue to keep the steel mill ready to go.

                  But Trump’s tariffs had nothing to do with national security because expensive steel makes America weaker…the tariffs were about winning the Electoral College and enriching a Trump donor—the magnate that ironically bankrupted Big Steel!!

                  1. "And guess what you need to build a steel mill?" Steel!

                    While steel is a (very) small part of the expense, the real expense is in time, money, and people. That's the real issue.

                    If there's nothing there, and you can make a capital investment of a few billion dollars, then it pays for itself over time.

                2. It's worse than that, because for a lot of industrial processes, much of the real details of how to do them isn't written down, it's in the heads of the people who run them.

                  Interrupt steel making for a couple years, sure, you can resume doing it.

                  Interrupt it for ten years, the people who used to do it moved on to something else, and even if you can lure them back with outrageous salaries, they'll be stale, and have to catch up.

                  Interrupt it for twenty years, those people are gone, and you have to learn how to do it all over again.

                  China has captured multiple industries that way, and now escaping China's grasp will be the work of a generation, and very painful. But it's something we're going to need to do, and we better get started on it somehow.

                  1. Wow, you guys must think Trump is awful because his tariffs accomplished nothing on the scale of what you are advocating!?!

                  2. China has captured multiple industries that way

                    I mean, it hasn't, but you do you.

  3. Why is an article about economic policy published in Volokh? It seems a bit outside the legal world upon which this blog is centered.

    1. Why is right-wing Republican authoritarianism so prominent at a self-described "often libertarian" blog hosted by a self-described "libertarian" website?

      Some questions just fade . . .

    2. Not all the Volokh Conspirators have exactly the same set of interests, or post the same kinds of content. Sasha Volokh does his poetry readings, Baker does his podcast, Blackman does "Today in Supreme Court History", and so forth.

  4. China is building coal fired power plants to power solar panel factories, that service western markets, using slave labor.

    Some “success” to emulate.

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