Podcast Summary
A shift towards more aggressive industrial policies: Governments are investing billions in specific sectors, but the effectiveness and potential drawbacks of these policies are still debated among economists
Industrial policy, which involves governments attempting to promote specific sectors of the economy, has long been a controversial and divisive topic among economists. Traditionally, the consensus has been that industrial policy is inefficient and harmful, and governments should not interfere with the economy's natural production processes. However, in recent years, there has been a shift towards more aggressive industrial policies, particularly in the US under President Biden, with hundreds of billions of dollars being invested in sectors like microchip manufacturing and clean energy. The success of these policies remains to be seen, and the debate over their effectiveness and potential drawbacks continues. Rika Yuhas, an expert on industrial policy, joins us today on Planet Money to discuss the theory behind industrial policy, its controversial history, and where this new wave of industrial policy might be headed. This message comes from NPR sponsor GlobalX ETFs. GlobalX ETFs specialize in exchange-traded funds (ETFs) that track emerging trends and generate income potential. Visit globallexetf.com to discover how you can get started.
Government's role in changing economy's composition: Government uses targeted interventions like subsidies, trade policies, and workforce development programs to correct market failures and align economy with long-term goals.
Industrial policy refers to the government's deliberate efforts to change the composition of the economy in pursuit of long-term goals. It involves targeted interventions, such as subsidies, trade policies, and workforce development programs, aimed at correcting market failures, particularly those resulting from positive externalities. Industrial policy is not limited to heavy industry or industrialization, but can encompass various sectors and policies. The government's role is to prioritize certain industries or sectors over others to align the economy with its objectives.
Government intervention in economy through industrial policy: Industrial policy can address market failures and promote industries, but comes with risks of political capture and limited government ability to identify market failures. Effectiveness depends on various factors, with mixed evidence for and against.
Industrial policy, which involves the government intervening in the economy to address market failures and promote specific industries, can be an effective solution to certain economic challenges. However, it also comes with potential downsides, such as the risk of political capture and the government's limited ability to identify and address market failures. The debate over industrial policy is complex, and its effectiveness depends on various factors. While some countries have had success with industrial policy, others have faced challenges. The evidence for and against industrial policy is mixed, and further research is needed to understand its potential benefits and drawbacks.
Examining Industrial Policy Through Natural Experiments: Researchers investigate industrial policy's effectiveness by analyzing natural experiments, seeking to understand when and how it contributes to economic growth
The debate over the effectiveness of industrial policy has long centered around contrasting examples of East Asia's economic miracle and Latin America's more modest results. While proponents argue that industrial policy played a significant role in East Asia's growth, skeptics contend that it may have been ineffective or even harmful. To move beyond anecdotal evidence, researchers sought to evaluate the economic rationale for industrial policy through historical experiments, acknowledging the difficulty of conducting a time machine study. By examining natural experiments, they aimed to untangle causality and provide insights into when and how industrial policy works.
Impact of Trade Protectionism during the Industrial Revolution: Protected regions thrived, while less protected areas struggled in France during the Napoleonic Wars, highlighting the importance of addressing market failures through industrial policy but raising concerns about its replicability and effectiveness.
The Napoleonic Wars presented a natural experiment for studying the impact of trade protectionism during the Industrial Revolution. France, attempting to compete with Britain's cotton industry headstart, implemented a blockade to limit British imports. However, the blockade was not entirely successful, creating protected and less protected areas within France. The study found that the protected regions thrived in the long run, while the less protected areas struggled to compete. This result suggests a market failure in France that prevented firms from entering the industry. The paper highlights the importance of addressing market failures through industrial policy, but raises concerns about the replicability and effectiveness of such interventions. In the current context, with countries investing heavily in industrial policy, it is crucial to understand how to implement it effectively. In another context, the US, as the world's leading supplier of blood plasma, pays people for their donations, a practice not commonly adopted in other countries due to potential coercion concerns. The ongoing debate around this practice and its economic implications is explored in a recent bonus episode.
Biden's Aggressive Industrial Policies: A Shift in US Economic Strategy: Effective industrial policies require deep investments in bureaucratic capacity and expertise to address market failures in green energy and other areas.
The Biden administration is implementing aggressive industrial policies with a focus on addressing market failures in areas like green energy. This represents a significant shift in US economic strategy and requires a high-quality, technocratic bureaucracy to effectively evaluate and distribute funding for innovative technologies. The success of these policies depends on deep investments in bureaucratic capacity and expertise. While there are valid concerns about political motivations and the future of manufacturing, the literature suggests that industrial policy can be effective when implemented thoughtfully and with a clear understanding of the industries and technologies involved.
Comparing Industrial Policy and Venture Capital: Both industrial policy and venture capital involve risks and failures, and the government should be given flexibility to pivot from unsuccessful projects and invest in more promising ones.
Industrial policy, like venture capital investing, involves taking calculated risks with public funds, and some failures are inevitable. The comparison between the two highlights that not every government investment or venture capital bet will be successful, and it's essential to allow for failures and learn from them. The government, like venture capitalists, should be given the flexibility to pivot from unsuccessful projects and invest in more promising ones. The fear of failure should not prevent the implementation of industrial policy, as the potential benefits for the economy and American people outweigh the risks. Additionally, the US has not engaged in large-scale industrial policy for a long time, and it's crucial to learn from both successes and failures to inform future policy decisions.
Exploring the Role of Students in School Fundraising: NPR's Planet Money episode delves into how schools rely on students for fundraising, the amount raised, where it goes, and why this approach is common.
Schools often rely on students to act as salespeople for various fundraising initiatives. This was explored in a recent episode of Planet Money, which followed a school's fundraising efforts over the course of a year. The episode delved into how much money was raised, where it went, and why this approach is common. It's an intriguing look into the financial workings of schools and the role students play in supporting them. If you're curious about the impact of fundraising on education and the experiences of students, this episode is definitely worth a listen. Produced by Willow Rubin, edited by Sally Helm, engineered by Valentina Rodriguez Sanchez, fact-checked by Sarah Juarez and Emma Peacley, and executive produced by Alex Goldmark, with Jeff Guo hosting. Tune in to NPR for more insightful stories.
