Industrial Policy Stifles Progress

The once-beleaguered CHIPS Act has finally passed and will soon receive President Joe Biden’s enthusiastic signature. The big ticket item in that legislation is $52 billion worth of subsidies for computer chip manufacturers, but once the bill’s passage looked inevitable, it was stuffed full of additional spending. The CHIPS and Science Act’s cost has now ballooned to $280 billion. And emboldened Democrats have already moved on to another spending spree with the Inflation Reduction Act, a slimmed-down version of Biden’s “build back better” initiative.

Both bills reflect a cross-party shift toward embracing industrial policy—the idea that the government should jump into the economy with both feet and have fun getting wet. Facetiousness aside, the neoliberal era from the late 1970s through the 1990s—when economic thinking carried more political sway and resulted in massive deregulation of airlines, railroads, and interstate trucking and the privatization of the internet—is far behind us.

This change can be seen in former President Donald Trump’s embrace of tariffs, Biden’s continuation of many of those tariffs, and officials’ apparent reluctance toward even the minimal deregulation which would have quickly solved the ongoing infant formula crisis. But we don’t need to infer anything. Consider this recent quote from a senior administration official: “Part of our effort is to create space again for very serious people to really go to bat for the idea that the government has a rightful role to play” when it comes to industrial development. Yikes.

The political zeitgeist has been moving back toward industrial policy, seemingly coincident with rising populism since the 1990s—despite abundant evidence that central planning is poisonous to innovation. Whether it’s encouragement via subsidies or constraint via regulation, using the government to guide the economy is akin to thinking that just a little bit of cyanide won’t hurt.

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-