The return of industrial policy

The stars have aligned, and industrial policy is slowly starting to rise from its centuries-long slumber beneath the ocean floor...

President Obama and congressional Democrats -- out of options for another quick shot of stimulus spending to revive the sluggish economy -- are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing.

That approach, heralded by Obama last week in Detroit and sketched out in a memo to House Democrats as they headed home for the August break, is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas.

The strategy also repackages policies long pursued by the White House -- such as investing in clean energy, roads, bridges and broadband service -- with more than two dozen legislative proposals aimed at developing a plan for promoting domestic manufacturing.

Mark Thoma is highly skeptical of this, but his reasons are telling:

On the "Make It in America" initiative, I have a hard time getting excited about it, and it may leave the administration open to charges of protectionism (though I'm not sure how that charge would play with the Democratic base). I am not a big fan of industrial policy generally, it goes against the instincts that are beaten into economists during their training, but I don't have a better answer to the question of where will the good jobs come from in the future.

Economists are skeptical of industrial policy because they have been taught to be. This is not to say that industrial policy (in any of its many and various forms and incarnations) is a good thing. Rather, economists have the ability to write down models that support any conclusion they like, and generally have neither the inclination nor the ability to use data to destroy the models that don't work. The reason they have been taught to dislike industrial policy is because the people who taught them decided they disliked industrial policy, and hence wrote down models too simple to have a role for industrial policy. In Japan, by contrast, economists decided they liked industrial policy, and so wrote down models to support that conclusion (a fact I discovered while editing economics papers written by Japanese authors).

But what ends up happening is that policymakers end up making policy based not on any economic model, but on the ideological and intellectual assumptions that drove the creation of the prevailing models. When "neoliberalism" was politically popular, we got neoliberal policies and neoliberal models. Now that neoliberalism seems to the casual observer to have crashed and burned, we'll get something else. Maybe industrial policy, maybe something new. But it won't be backed up by data either. Policymakers will continue to "cross the river by feeling for the stones."