In a syndicated column titled “America Has No Industrial Policy,” September 5, 2024, J. Bradford DeLong, an economics professor at UC Berkeley, argues that we need an industrial policy. I think we don’t, and I think it’s a bad idea, but what I found striking is that his article is shot through with incorrect statements that matter for his case.
I’ll deal with his arguments in the order they appear in his article. The bottom line: DeLong fails to make his case.
At the end of his first paragraph, DeLong claims that in the late 1970s “Neoliberalism won.”
He then writes:
Neoliberalism called for shrinking the state, deregulating as much as possible, curtailing antitrust enforcement, and accepting higher economic inequality as a reasonable price to pay to reinvigorate private enterprise and motivate “job creators.” The central assumption was that markets would always deliver better outcomes than government programs could. Yet the consensus today is that this approach failed spectacularly.
What is neoliberalism and who advocated it? DeLong never tells us. He doesn’t name even one neoliberal economist. (I know only one economist who self-identifies as a neoliberal: my co-blogger Scott Sumner.) DeLong seems to have in mind people who call or called themselves classical liberals, economic conservatives, and libertarians. A number of us in those days shared most of those views, although many of us disagreed with DeLong about whether shrinking the state and deregulating would lead to higher economic inequality. I never heard one of them state, and I never stated, that markets would always deliver better outcomes than government programs could. Usually? Yes. Almost always? Probably. But always? That case is much harder to make, which may explain why none of us tried to make it.
Also, if the consensus is that this approach failed spectacularly, it shouldn’t be hard to point to evidence both of the failure and of the consensus. DeLong doesn’t even try. Does he think airline deregulation, which brought down airfares, trucking and railroad deregulation, which brought down shipping rates and revived the railroad industry, failed? Or how about getting rid of price controls on oil, gasoline, and natural gas in the 1980s, measures that ended shortages and revived America’s energy industries? DeLong doesn’t address any of this.
DeLong writes, “Nor was anyone seriously arguing that America’s post-WWII prosperity was the result of an overarching laissez-faire policy.” He’s correct. But then he writes:
The big exception was the school of ostriches at the University of Chicago, who studiously ignored the role played by the US government, since 1933, in directing and subsidizing investment, stabilizing demand and markets, and committing huge amounts of resources to scientific and technological research and development.
This is about as close as he gets to naming names. If you know much about the University of Chicago, you’re probably right to bet that the “ostriches” included Nobel Prize winners Milton Friedman, George Stigler, and Gary Becker. Did they think that “America’s post-WWII prosperity was the result of an overarching laissez-faire policy?” As early as 1962, Friedman laid out, in Capitalism and Freedom, many of the ways in which we didn’t have a laissez-faire policy. He criticized the government for drafting men into the military and for making it hard for people to work without government permission in the form of a license. Indeed, at the end of Chapter 3 of his 1962 book, Friedman listed 14 areas in which government should cut back its role. Why cut back if Friedman thought that we had laissez-faire? That leads me to wonder who is the real ostrich here: a prominent member of the Chicago school or a Berkeley professor who seems completely ignorant of Friedman’s work?
According to DeLong, there was only one good argument against industrial policy. He writes:
No, the only convincing argument against activist industrial policy in the 1980s (and the only one ever since) was that post-1970s America lacked the state capacity to undertake it.
He goes on to quote a very good argument against industrial policy, citing an excellent 1983 article, which I remember well, written by Charles Schultze, who had been President Carter’s chairman of the Council of Economic Advisers. Schultze wrote, and DeLong quotes:
Not only would it be impossible for the government to pick a winning industrial combination in advance, but its attempt to do so would almost surely inflict much harm. There are many important tasks that only governments can do – and, with constant effort and watchfulness, they can do those tasks passably well. But the one thing that most democratic political systems – and especially the American one – cannot do well at all is to make critical choices among particular firms, municipalities, or regions, determining cold-bloodedly which shall prosper and which shall not. Yet such choices are precisely the kind that would have to be made – and made explicitly – for an industrial policy to become more than a political pork barrel.
This is an argument based on two things: (1) the government’s lack of information, and (2) the incentives within the political system. If you stretch the concept, you could call (1) lack of state capacity. But it’s a lack that will always be with us. As Friedrich Hayek pointed out in his “The Use of Knowledge in Society,” government officials don’t have, and can’t have, the information required to know which will be the good investments in the future. Hayek didn’t discuss: the second point: the incentives that government officials have. But Schultze does: that’s his point in mentioning the political pork barrel.
DeLong seems to find the Schultze case against industrial policy persuasive, writing:
This argument was broadly convincing. The sense at the time was that too many government decisions were driven not by considerations of the public interest, but by the fact that, as Senator Barbara Boxer once said, in a slip of the tongue: “the B-2 carries a large payroll [in my state]” (she meant payload). Too many of the agencies that would manage and direct economic development seemed to have been captured by investors, managers, or oligopolies of one sort or another. Too many glass-and-steel buildings on K Street (the Washington lobbying industry) were funded by too many interest groups and staffed by too many former legislators and their aides. How could technocratic cost-benefit analysis in the public interest ever be more than a sham?
Well said, although he gets the California senator wrong: As Harvey Rosen points out in his textbook Public Finance, the person whose tongue slipped was Dianne Feinstein.
Yet, look at DeLong’s title. He says we have no alternative to industrial policy. In other words, even though the government officials still don't have good information and still have the wrong incentives, we need industrial policy.
Why?
His last paragraph gives the reason:
Now, however, the United States has three overwhelming reasons to go all in on industrial policy. First, there is the looming disaster of runaway global warming, which requires action on a scale much larger than Al Gore correctly called for nearly a half-century ago. Second, there is the need to reorient the US economy from coastal finance and plutocracy to middle- and working-class prosperity nationwide. And, third, Chinese President Xi Jinping announced a “no-limits” partnership with Russian President Vladimir Putin just before the latter launched his full-scale invasion of Ukraine. Since then, it has been clear that we are undergoing a historic geopolitical and geoeconomic transition in which, as Adam Smith wrote in The Wealth of Nations, “defense … is of much more importance than opulence.”
DeLong clearly believes that, absent a major government policy, we will have runaway global warming. He would do well to read the careful work of David Friedman in which Friedman finds that, even if, as is likely, the world is warming, there is no basis for expecting anything close to a catastrophe. We can adapt and we will have time.
DeLong’s second reason is too vague to understand. What is coastal finance? Do firms that are not on the coast lack finance? What is the plutocracy? And if his goal is to have middle-class and working-class prosperity nationwide, he can relax: we already have it. The best single measure of prosperity, if we must choose only one, is real median household income. As this graph from the St. Louis Fed shows, in 1984, it was $56,780. By 2019, before the pandemic and associated lockdowns, it was $78,250, an increase of 38 percent. Moreover, the inflation adjustment the St. Louis Fed uses is the Consumer Price Index, which notoriously overstates inflation. That means that the increase in real household income from 1984 to 2019 was well over 38 percent. We’ll have even more prosperity if we get rid of government programs that throw resources down the drain. Does DeLong believe that government doesn’t fund major waste?
Third, DeLong seems to think that China’s and Russia’s government threaten us. Certainly, China’s government threatens Taiwan and, possibly, countries nearby such as the Philippines. Russia’s government, of course, does more than threaten Ukraine and theatens some of the countries it’s close to. But how is that a threat to us? The Pacific and Atlantic oceans come in awfully handy.
DeLong ends by writing:
For these reasons, the most important economic-policy question for America today is not whether we should pursue an industrial policy. We have no choice. The question, then, is this: What can we do to prove Schultze wrong?
That’s the wrong question. The right question is: Was Schultze wrong? I think he wasn’t.
While reading this, I could not help but recall the long-standing adage: if government is the answer, it must be a very stupid question. I also recall the demand for an "industrial policy" during 1975-85, usually citing Japan, Inc. As a direct result, Japan has endured its Lost Decade which is now three decades long, topped by government debt of some 250% of GDP. We have seen this movie before and it is not a happy ending.
As for laissez-faire, that is another false front hyped strictly by liberals. Every time I hear it, I simply ask what part of the American economy is not highly regulated. The silence in response is, as I have written previously, deafening. This has been a primary driver of American industry to offshore sources: regulation drove production costs prohibitively high.
Global warming, aka climate change? Not serious in the slightest. Human activity is 1/3 of 1% of so-called greenhouse gases. That is, humans have introduced less GHG since the dawn of the Industrial Revolution than what a single year of nature does. Our impact to too infinitesimal to be measured.
David, Good stuff. It seems J Bradford DeLong brought a knife to a gun fight.