✯✯✯ Deindustrialization And Globalization In The Wire

Tuesday, October 05, 2021 6:41:51 PM

Deindustrialization And Globalization In The Wire

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Globalization 2021 - Plenary Session

Finally, industrial policies impose substantial costs beyond the budgetary line item assigned to a specific project. This includes not only substantial cost overruns, but also numerous unseen costs imposed on other parts of the U. Projects frequently fall victim to cost overruns well beyond initial budget projections. Borrowing costs, given the perpetual U. Furthermore, it often takes years to determine whether a project merits its cost. For example, in DOE congratulated itself at the opening of the subsidized Abengoa cellulosic biorefinery in Hugoton, Kansas, but that plant was shut down in and sold off at a severely discounted price as part of a bankruptcy proceeding.

Other industrial policy portfolios raise similar issues. Beyond these seen costs are the many hidden ones that even government industrial policy successes impose on the economy, including indirect costs paid by private parties, deadweight costs to the economy, opportunity costs, misallocation of resources, unintended consequences, moral hazard and adverse selection, and uncertainty. Industrial policies that restrict access to goods and services from disfavored usually foreign suppliers raise prices for both the restricted items and their favored competitors, imposing significant costs on consuming companies and individuals. For example, tariffs that former president Donald Trump implemented to boost the U.

Trade restrictions or taxation to fund industrial subsidies also impose deadweight costs on the economy. Economists have repeatedly found that import restrictions impose substantial deadweight costs on the economy—a key reason why so few economists support them. Industrial policy programs that entail government spending also entail opportunity costs, as explained by St. Each subsidy given to an industry or firm generates an opportunity cost: the cost of foregone alternatives. Given that both time and federal budgets are finite, government industrial policies replace efforts and money that could have been spent on other priorities, potentially imposing significant opportunity costs in the process.

These opportunity costs are sometimes mentioned when government industrial policies publicly fail, but they must also be considered when evaluating the alleged successes, too. Industrial policies also often distort private investment decisions, pushing resources away from productive transactions, businesses, or industries. When the Trump administration pushed automakers to produce ventilators that were never needed, their efforts occupied machinery, labor, and capital that could have been used to make cars that subsequently were in short domestic supply. Industrial policies can also discourage private investment in industries that the government is actually trying to promote. The enormous scale of the public investment appears to have crowded out and replaced most private spending in this area, as [venture capitalists] waited on the sideline to see where the public funds would go.

Finally, potential industrial policy beneficiaries can divert resources from their actual business to obtaining federal benefits lobbying, grant writing, etc. Wired notes, for example, that. Not on the vehicle itself. Overall, countless millions of dollars—dollars that could have been spent on producing better products—have instead been spent on political efforts by companies in the steel, shipbuilding, ethanol, and other industries that are common industrial policy targets. As already noted, government subsidies intended to spur various energy innovations repeatedly discourage them. Numerous other examples abound.

Industrial policies also can generate moral hazard i. Research shows, for example, that government loan guarantees that insure lenders against incurring losses from default can encourage banks to take on risky borrowers, discourage them from undertaking standard due diligence to apply for credit guarantees, and attract a disproportionate share of risky borrowers, thus resulting in inefficient resource allocation overall.

Industrial policies often produce uncertainties due to their inherently political nature frequent elections, program lapses, etc. Numerous studies, for example, show that U. Davis explains,. This evidence points to a positive payoff in the form of stronger macroeconomic performance if policymakers can deliver greater predictability in the policy environment. Both theory and practice show why it is difficult, if not impossible, for industrial policies to achieve such predictability. These outcomes not only undermine the common argument that industrial policies fix market short-termism—they are similarly afflicted if not more so —but also show that such policies impose significant economic harms.

Ford and other U. Some industrial policy advocates argue that these seen and unseen costs are an expected and necessary part of backing ventures considered too risky for private capital and are worth the expense if the project ultimately supports one big winner, such as Tesla Motors. Two trillion? Surely, some number of losers—individuals and the economy overall—would be too much, even if the government picked one winner in the process. Costly public failures might also undermine public confidence in the government and support for future federal policies, industrial or otherwise—jeopardizing the next Tesla or more worthwhile targets rather than nurturing it.

These arguments, as well as other industrial policy defenses, also require quantifying the benefits that alleged successes confer, not merely upon the recipient companies and their workers, but on the U. Although there are cases where government intervention coexists with success, there are many instances where industrial policy has failed to yield any gains. The most difficult issue is that relevant counterfactuals are not available. It might have done still better in the absence of industrial policy—or much worse. Given this basic difficulty, only indirect evidence can be obtained regarding the efficacy of industrial policy.

The authors nevertheless concluded that sectoral targeting has not been not effective. Finally, one must also consider whether an industrial policy success would have occurred in a market without the supporting program. Often, subsidized successes perform no better than their unsubsidized competitors. Most Section funding has gone to large corporations who already have access to capital for investments in research, development, and deployment. Many are wholly owned by yet larger companies. The application process itself all but ensures that only large, established companies will be capable of participating in the program.

As noted above, other analyses of the program have come to the same conclusion. However, the bar is low, and success is still no better than what the market could produce. Industrial policy advocates also routinely fail to demonstrate the existence of the specific economic problem that their proposed policies will solve. The most common problems, without which new industrial policy would not be necessary, are either much less serious than advocates claim or else cannot be fixed with industrial policy.

The supposed deindustrialization of the United States does not justify new industrial policies. There is little merit to the common argument that the U. Overall, as Figures 3 and 4 show, the historical trends in U. Furthermore, Table 1 and Figures 5 through 7 show that the U. As documented by economist Donald Schneider, numerous experts have concluded that overall net investment in the nonfinancial corporate sector i. Research from University of Houston economist Dietz Vollrath shows that a causal connection between total U.

And while some manufacturing industries have undoubtedly declined over the last several decades, these changes usually reflect fundamental shifts in U. These and other U. This is true regardless of whether the enterprises are in manufacturing or other sectors. Manufacturing jobs cannot justify a new industrial policy push. It is highly questionable to assume that the significant decline in the number of factory jobs during the s and s could have been reversed via industrial policy because those same trends were happening in all industrialized nations, including those with robust industrial policies. Furthermore, as shown in Table 1 and Figure 13, U.

The newest steel plants, however, need even fewer workers—one Austrian mill needs only 14 employees to make , tons of steel wire per year. Indeed, American manufacturing jobs tend to be highly productive, but this benefit has a downside: it caps industrial employment. In other words, American workers were improving their ability to produce manufactured goods at a much more rapid pace during the height of manufacturing job loss than during the subsequent period of reemployment. An industrial policy that seeks to achieve the latter objective—for example by reshoring jobs in the textile, apparel, or consumer electronics industries—would inevitably sacrifice the former.

For starters, the labor force participation rate hit Indeed, even in late , when both the U. Finally, wages and incomes, both in and out of manufacturing, do not justify new industrial policies. Instead, stagnation occurred between the late s and the early s, long before the largest declines in manufacturing jobs and before the advent of modern globalization. Ironically, it was during this stagnation period that the United States last became enamored with industrial policy. In general, most Americans are becoming financially better off over time, although they may be doing so through different jobs. The number of these jobs is also expected to increase in the future. The Bureau of Labor Statistics reports that manufacturing workers continue to have higher weekly earnings, but only because they work more hours per week to compensate for the relatively low hourly pay.

The report adds that manufacturing employment declined across virtually all industries since , and that manufacturing hours are more volatile from month to month. In the face of these realities, manufacturers routinely report having difficulty attracting workers, even when offering higher wages, which is consistent with the data on labor force participation and job openings. Finally, it is essential to note that the United States has been trying to increase manufacturing jobs for decades with little avail. This again indicates that, even if manufacturing jobs deserve to be saved, a U. Perhaps for these reasons, even some industrial policy advocates have stopped citing manufacturing jobs as a core industrial policy objective.

American living standards also cannot justify industrial policies. In terms of basic necessities such as food, clothing, and home goods, Americans today are absurdly rich as compared to only a few decades ago. According a report from Southern Methodist University, the share of American households with access to telephones or cell phones, electricity, air conditioning, home appliances, TVs, computers, and other common household goods is at or approaching percent. Of course, some consumption challenges remain, particularly in health care, higher education, and housing. Finally, industrial policy will not solve the problems of struggling communities in the United States. A Brookings Institution report, for example, found that of the counties with a disproportionate share of manufacturing jobs in had successfully transitioned away from manufacturing by Overall, only 30 of the original manufacturing communities were still struggling.

Posen details similar failures to revive struggling communities or regions in Germany, Italy, Japan, the United Kingdom, and even China— a nation that has pursued unprecedented levels of industrial subsidization and government intervention and that runs perpetual manufacturing trade surpluses. Thus, leaving aside whether national economic policy should relieve states and towns of their responsibilities to create viable commercial centers, little evidence indicates that it can.

Finally, the industrial policy experiences of other countries, particularly China, cannot justify similar policies in the United States. Significant political and economic differences limit the extent to which these experiences can inform U. This includes China, which has commonly been cited to justify new U. In general, real or perceived industrial policy successes in other countries cannot inform whether similar results are possible in the United States or whether the federal government should adopt industrial policy as broadly defined. For example, reviews of the economics literature conclude that the empirical studies of industrial policy are limited and, of the few that have been published, they primarily assess specific cases, industries, and policy episodes.

These papers cannot, therefore, predict whether the analyzed cases would translate to the United States. This challenge is particularly significant for proposed U. Because industrial policy is state policy, its success, scope, and efficacy is sensitive to institutional context. One would also need to consider the specific laws and regulations, such as Buy American restrictions and NEPA, and the sheer size and diversity of the U. Industrial policy successes abroad are routinely exaggerated. The South Korean government intervened heavily in its economy, promoted exports, and maintained import restrictions from the s through the s. Moreover, the exported goods that grew rapidly during the s—plywood, woven cotton fabrics, clothing, footwear, and wigs—were labor intensive and not subject to state targeting.

The government pursued greater targeting of the heavy and chemical industries between and , but the supported industries performed poorly during this period, with relatively low total factor productivity as compared to unsupported industries. Finally, industrial policy successes must be balanced against the numerous failures of such policies in countries around the world. This includes not only the U. Chinese industrial policy may have helped some other industries, perhaps even overtaking Western competitors in the process, but the cost of doing so was enormous, and those policies have introduced systemic challenges that could hamper future growth.

China also faces several other headwinds, financially and demographically, that could derail its ascension to the top of the global economic order. American industrial policy should be considered on its own merits, not on the basis of an overwrought fear of the China threat. Growth in GDP per capita over the past four decades has been relatively steady, with a slight decline over the past decade see Figure 16 , at rates easily surpassing the United States and other countries. He notes that. As Naughton notes, the Chinese industrial policies that American critics are targeting today only began in , when Beijing adopted plans focusing on innovation and seeking to match the industrial capabilities of advanced economies.

The global financial crisis amplified these efforts, and by China established innovation priorities for strategic emerging industries programs with its desire to surpass, not merely match, other nations. While American politicians and pundits often portray Chinese industrial policies as uniformly successful, the reality is much more complicated.

Surely, not all Chinese industrial policies have been costly failures. However, Chinese industrial policy successes are matched by failures. This was a slight downward correction after the firm in predicted the ratio would rise to Industrial guidance funds were intended to combine government direction with private capital and market forces, and have also proven to be unsuccessful.

The Chinese government started providing subsidies to the EV industry in , aiming to develop quality domestic manufacturers and a domestic supply chain ecosystem. These subsidies may have created an EV market from scratch, but they also produced numerous problems that made the Chinese government fear that it was repeating the same mistakes it made when trying to boost its traditional auto industry. In particular:. Instances of fraud and collusion were made public by a government investigation. In some cases, vehicles were sold to companies related to the manufacturer so they could pocket the subsidies. The vast majority of these firms appears to have either not reached the production stage or have products of questionable quality. Indeed, sales in China declined by 20 percent in compared to , shortly after subsidies to private passenger EVs were terminated in June Similar evidence of Chinese industrial policy problems can be found in its domestic aircraft and automotive manufacturing industries, as well as 3G mobile technologies.

According to a government audit, for example, the new energy sector generated 1. Chinese industrial policies also have created investment bubbles and overcapacity in many targeted industries—bubbles that Beijing is now trying to deflate. Meanwhile, the subsidized companies that survive may engage in duplicative projects or produce too many goods, resulting in overcapacity where supply exceeds demand. Chinese government efforts to rein in overcapacity have thus far had limited success. Finally, one must consider whether the United States could emulate Chinese industrial policy, even if doing so were desirable. As noted above, moreover, the United States also differs from China in that our political system is less tolerant of costly public failures, particularly in the commercial as opposed to, say, national defense arena.

Popular backlash, which the U. China also faces broader systemic challenges that call its future global economic dominance into question. First, China is experiencing significant demographic headwinds that will only accelerate in the coming years. Last year, its population rose to only 1. China could offset demographic concerns with rising productivity it appears uninterested in immigration , but this factor is also lagging—likely due in part to Chinese industrial policy. It is an open question as to whether China will catch up to more productive developed economies.

Finally and in part due to the aforementioned issues , China faces a growing debt burden that will, unless tamed, weigh on future growth. Chinese government debt may be more manageable constituting approximately 70 percent of GDP , but it is expected to expand significantly in the coming years as the government funds a social safety net for its aging population. While a crisis seems unlikely in the near term, such concerns are almost certain to weigh on future growth and other government initiatives. It is possible that China can overcome these economic headwinds and others, including environmental degradation, overseas project failures, restive populations, alienation of foreign firms, and increasing illiberalism. Advocates for industrial policy often leave unanswered several important questions about its efficacy and necessity.

Resurgent calls for American industrial policy suffer from several flaws. They depend on a malleable definition that prevents legitimate analysis, omits past industrial policy failures, and takes credit—often absurdly—for innovations only tangentially related, at best, to government action. They ignore the many economic, political, and practical obstacles that have historically prevented U. And they erroneously use the experiences of other countries, particularly China, to justify new American industrial policy. In reality, industrial policy, as properly defined, has an extensive and underwhelming history in the United States, featuring both seen and unseen high costs, failed objectives, and political manipulation.

Such efforts warrant intense skepticism—skepticism that today is unfortunately in short supply. Lincicome, Scott, and Huan Zhu. Claude E. Barfield and William A. Schambra, eds. Richard R. Nelson and Richard N. This conclusion thus does not extend to government procurement projects, the justification of which is the spillover itself or in which the procurement is intended to make a market for the technology. The [failed] supersonic transport SST project remains the best case in point. Otis L. Graham, Jr. See David P. Adopt an Industrial Policy? Patrick Windham, Christopher T.

James L. William F. David M. Linda R. Cohen et al. Skyscrapers and office parks in superstar cities of the pre era may continue to sit partially vacant as demand for commercial real estate fails to recover, and Glaeser sees some of them being converted into residences. Kind of like how garment factories in Lower Manhattan got converted into posh loft apartments when clothing production moved overseas. Superstar cities, he says, may get grittier and more affordable, and there may be a painful period of readjustment, but that won't spell doomsday for them. Glaeser says big cities such as New York and San Francisco will continue to hold appeal, especially for young people. The bars. The music scenes. The career and consumption opportunities. Density creates a lot of stimulating and exciting stuff to do, and people will continue to flock to places that have it.

We're not saying that Glaeser is necessarily right about the future. It's possible Toffler's "electronic cottages'' could ultimately kill offices and decimate cities. And, to Toffler's credit, his writings were influential and have helped bring this vision closer to reality. Toffler was certainly right about one thing today: There is a wave of change that's been created by technology. That wave has been energized by the pandemic, and right now we're all surfing it together. We just don't know where it's going to take us. Did you enjoy this newsletter segment? Well, it looks even better in your inbox! View the discussion thread. Privacy Policy. Skip to main content.

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