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Why We Don’t Need Industrial Policy
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By David Parker
3/19/2024Updated: 3/24/2024

Commentary

Marc Fasteau and Bay Area author Ian Fletcher’s new book “Industrial Policy for the United States” (2024) is so well written that it has you believing. Until you realize there is not a single reference, even in the index, to the world’s great economists, all of whom said nations should not have an industrial policy: Adam Smith (1776), F.A. Hayek (Nobel), and Milton Friedman (Nobel).

Then you realize that there are no references to the basic laws of economics, such as the following:

“Marginal utility theory” states that all value is subjective, that all decisions are made at the moment (at the margin), and that a government cannot make decisions (billions per year) on behalf of its citizens.

“Comparative advantage” means that nations should only produce what costs them less to produce (lower opportunity costs) than their trading partners and that government has no business protecting industries that can’t make it on their own.

“Price is a function of supply and demand” means that to protect jobs, government has no right to restrict imports via tariffs or subsidies, which, one, keeps prices above market, and two, raises the price of intermediate goods in manufacturing higher, thus making the nation’s exporting firms less competitive on world markets. And then every job saved costs taxpayers $500,000.

“Law of one price” means that for every good or service in the world there is one price: its lowest—meaning that if prices are higher in your country, it’s because your government intervened in the market by placing tariffs or manipulated your nation’s exchange rate to match the manipulation of other countries.

And “Say’s Law” states that supply creates its own demand and that there is no need for government to hand out money to stimulate an economy if the price of labor (wages) is flexible, i.e., if the nation doesn’t have an industrial policy (with union backing) that interferes in the economy to counter every recession by preventing the price of wages from adjusting downward—such that production doesn’t stop.

Because, with full employment, workers (suppliers) have cash in their hands, which is why demand remains constant. What workers produce (goods and services) is supply, which, when offered in trade (offered for sale), turns to demand: Say’s Law—supply creates its own demand.

In sum: There is no need for industrial policy.

“Industrial Policy for the United States” advocates for an industrial policy despite the fact that free-market economists oppose it. The authors are advocating for what Chinese leader Xi Jinping is advocating for—government that chooses winners and losers, which industries to support and which to ignore. Xi’s vision for China.

In the United States, it is progressives’ vision. That’s not economic freedom! Ignored is this: The degree to which a nation restrains one’s economic freedom is the degree to which it constrains the other two, social and political freedom, because the three freedoms are inherently interconnected.

President Joe Biden’s Bipartisan Infrastructure Deal (2020), as it extends to waiving student college loans and encouraging woke liberalism, supports colleges that support students who cancel free speech, then cancel political freedom by demanding that former President Donald Trump’s name be removed from the electoral ballot in Colorado (2024).

Mr. Fasteau and Mr. Fletcher identify three pillars of industrial policy:

1. Government support of advantageous industries

2. Government protection of industries from foreign imports

3. Government management of the nation’s exchange rate to match the manipulation of other nations

Assumption: Government has that expertise.

Successful people in business may have that expertise, but no one in the public sector does. Nor do economists. Not personally invested, thumbs not on the pulse of the economy, they do not know. At a Bank for International Settlements conference in 2008, when posed the question, “Have you ever seen a derivative?” not one economist answered affirmatively.

In “Industrial Policy for the United States,” there is no reference to Adam Smith, who in “Wealth of Nations” declared that individuals, each pursuing their personal interest to survive, automatically (as if led by an invisible hand) organize society better than anything that can ever be done by design.

The authors state that their ideas are “virgin territory,” that “we are starting almost from scratch,” as if from Babylon 3,000 years ago to the present there is nothing to learn from history or past commercial practices. Or, in 1848, as Karl Marx said: “Communism is so new we just have to try it; we have to see how it will play out.” Sixty million murdered.

The authors request that we look at the economic history of the United States before the American Revolution, that because the colonies were successful as a product of British mercantilism, the United States should continue that policy. Which, to an extent, it does, and that is why America’s textile industry has always been protected by tariffs and subsidies. Because it wouldn’t survive otherwise.

Britain, with centuries of weaving and manufacture at a level American textiles can’t approach, has the comparative advantage. Why, then, does the United States continue to protect textiles? To maintain jobs in an inferior business? To deprive the nation of higher-quality lower-priced imports?

Mr. Fasteau and Mr. Fletcher maintain that Japanese industrial policy created Japan’s successful auto industry. Not true. After World War II, the auto and electronics industries in Japan were not subsidized. This is precisely why they, not government-subsidized industries, succeeded!

Successful enterprises, a market phenomenon, are the result, always, of one individual, not a community of workers or government planners. In Japan, Soichiro Honda put a metal jacket around his motorcycles to create cars at half the price of an American car (and unlike American cars, these never broke down). Kiichiro Toyoda (Toyota) made cars at half price, as Akio Morita at Sony in the electronics industry did with tape recorders.

In the United States, Steve Jobs and Steve Wozniak made simple computers. When they left Apple, every CEO who followed drove the company to ruin, until in the 1980s, Apple stock fell to zero. Zero! Until Jobs came back.

And then Elon Musk’s SpaceX sends up 100 rockets for every one launched by NASA—reusable and at a fraction of the cost. No industrial policy.

Protect American jobs? With the 2008 financial crisis, the U.S. government bailed out heavily subsidized American car manufacturers. Not Tesla, whose book value was three times Ford, General Motors, and Fiat-Chrysler combined. Should Toyota’s U.S. factories be protected? Those factories don’t manufacture anything; they’re assembly plants doing what any 12-year-old with computer skills can do. High-end engineering, motor, and electrical manufacturing are performed in Japan.

Mr. Fasteau and Mr. Fletcher state: “Within particular industries, the strongest firms were often content with a moderate tariff, believing that anything higher would just help their weaker domestic competitors survive.”

The authors should have mentioned that the idea for that quote, originating in 1870 from Otto von Bismarck, is the very essence of industrial policy, the corporate state, and the regulated economy with taxes and tariffs so high that only the largest corporations with their low long-run average costs (economies of scale) can afford to comply—which turns those corporations into monopolies.

In exchange for that gift, those chosen monopolies are made to do the government’s bidding: one, raise their monopoly prices so high that they can afford to pay health care, pension, high wages, unemployment insurance, and cultural access for the nation’s working class; two, more importantly, support the dictator’s demand for a lifetime in office. In the 20th century, there were Mussolini and Hitler with fascism—socialism from the right. There were Lenin, Stalin, and Mao with communism—socialism from the left. In the 21st century, there are Xi and Russian President Vladimir Putin with autocracy. Is that Mr. Fasteau and Mr. Fletcher’s hidden agenda: the rationale for autocracy?

On Feb. 20, The New York Times published an article titled “U.S. Awards Chipmakers $1.5 Billion to Expand.” Mr. Biden had granted Global Foundries $1.5 billion to vitalize its semiconductor manufacturing. The administration will also make available another $1.6 billion in loans. The purpose is to triple that company’s production. No mention, of course, that all of that is paid for by America’s middle-class taxpayers (without, of course, their knowledge).

Without the investment, the facility in Vermont would have had to close, according to administration officials.

Congress has also passed a bill that would give the semiconductor industry more than $50 billion.

“The bang for the buck that the federal government is investing is huge. This shows our best days are not over. We can compete,” Sen. Chuck Schumer (D-N.Y.) said.

(We? Socialist America can’t compete with capitalist China.)

Again, it costs $500,000 to save a single job in industries that can’t compete. There are billions of dollars in grants to industries that do not have the comparative advantage.

Do we really want industrial policy where government gets to pick and choose, like Xi? That’s not how a free-market economy works.

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David Parker is an investor, author, jazz musician, and educator based in San Francisco. His books, “Income and Wealth” and “A San Francisco Conservative,” examine important topics in government, history, and economics, providing a much-needed historical perspective. His writing has appeared in The Economist and The Financial Times.

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