The Empty Promises of Industrial Policy

Industrial policy is having a moment. This is the idea that the government—state or federal—can provide a boost to "strategically important" industries. This is sometimes for national security reasons, but more often, it is done in the name of a country's economic future and competitiveness. 

But government-directed industrial policy has been tried countless times. Lawmakers should notice its mountain of failures and stop repeating the same mistakes. 

From the New Deal in the 1930s to the Obama stimulus in 2009 to the CHIPS and Science Act today, many on the left cheer along when the government picks and chooses specific industries to support. In a piece somewhat critical of "progressive" economics, Noah Smith writes that one "big, bright spot" for the movement is "industrial policy, which promises not just to restore American manufacturing, but to revitalize whole areas of the country."

Some on the right are falling for industrial policy as well. The conservative think tank American Compass says industrial policy will "align private and public interest" and "allow capitalism to deliver on its promise." Sen. Marco Rubio (R–Fla.) has criticized current federal investments but says he "believes in industrial policy—done right."

Governments have long tried their hand at industrial policy, and the results are abysmal. This is true for both small and large attempts to win the future through government policy.

American industry and manufacturing succeeded in spite of, not because of, the high tariff policies of the 19th century. Trying to grow strategic industries in Africa, India, and the Middle East did little to positively improve their economies. The idea that governments can create the future was at the heart of socialism, and the communist countries that tried to implement it failed. The Soviet Union's centralized planning and Chairman Mao Zedong's agrarian modernization were complete economic disasters—and also killed millions of people. 

Attempts at industrial policy have been made at the state level as well. During the early days of Michigan's statehood, politicians attempted to go all-in on nurturing chosen industries. Just like electric vehicles and renewable energy today, all the rage then was for "internal improvements," which meant for railroads, canals, steamships, and lighthouses. Lawmakers tried their hand at subsidizing these strategically important industries.

The governor at the time, Stevens T. Mason, said privatized railroads were "extortion from the public." But the resulting failures of this government-directed industrial policy nearly bankrupted the new state, upsetting the public so much that they amended the state constitution to ban state ownership or financing of select industries. This ban on state industrial policy arguably led to the great age of entrepreneurship in Michigan. 

More than 100 years later, the lessons were unlearned. For much of the past few decades, Michigan has repeatedly attempted—and repeatedly failed—at successfully instituting a state-based industrial policy.

For instance, Michigan prizes its auto industry and, thus, lawmakers have subsidized it for decades with a series of massive handouts. Taxpayers paid billions trying to retain or increase auto jobs. It failed: Michigan has only a little more than half the auto and auto parts manufacturing jobs it had in 2000, while the industry has grown in other states. 

State "economic development" officials also tried their hand at bolstering what they perceive as important industries of the future. Michigan's largest newspaper, The Detroit Free Press published this headline: "A Billion-Dollar Jolt For State: Can it Re-energize Michigan, Auto Industry?" The article explains how a $1.4 billion government grant is being used to make Michigan a "technology epicenter" for the emerging battery industry. Officials pledged it would create 40,000 jobs. 

But that article is from 2009. In the 15 years since it was published, this spending aimed at boosting a "strategically important" industry was a complete failure. Only 1,677 jobs—or 4 percent of the dreamt-up figure—were actually created.

That's typical of these projects. An analysis of Michigan's largest select incentive program showed that only about two percent of the firms met their job projections and fewer than 20 percent of the total jobs ever came into existence. That's not a great return on the more than $20 billion (and counting) policymakers have cumulatively pledged in Michigan.

Michigan's example is not unique. There's no evidence anywhere that pursuing top-down industrial policy produces better economic results. Despite having lots of other people's money to spend, politicians do not possess the information or knowledge, let alone the incentive, to spend this money wisely. The states that do the most of this aren't the ones with the fastest-growing economies. In fact, it is typically the opposite.

Unfortunately, lessons aren't being learned. Instead of looking at the national and state failures of industrial policy, current politicians are plowing ahead. Yesteryear's grants to railroads and battery manufacturers are today's semiconductor and data center subsidies. The lesson for politicians has not been how to do these programs more effectively or to stop doing them—but rather, that these economic development deals are handy ways to get in the headlines for creating jobs without having to actually create any jobs or any accountability for them.

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