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There are certain ideas in economics that have a scandalous reputation. Like when it comes to how to run a country's economy, there is one thing that economists have said governments should never, ever, ever do. It was considered...
kind of ludicrous, crazy idea. That's Rekha Youhaus. She's a professor of economics at the University of British Columbia. And this ludicrous, crazy idea she's talking about, she studies it. It's called industrial policy. That is the general term for whenever the government tries to promote specific sectors of the economy. The idea is maybe they can supercharge economic growth by giving money to certain kinds of businesses or by putting up trade barriers to protect certain industries.
Now, economists have long argued against this. Was
Was it fair to say that economists hated industrial policy? Yes, I think it is fair to say that. Yeah, economists for the World Bank have said that few phrases elicit such strong reactions as industrial policy. It's been called a taboo subject, one of the most toxic phrases in economics. Some have even said that to economists, it's a road to perdition. Industrial policy is so controversial. It's the policy that shall not be named. Yeah.
The mainstream view in economics has been that industrial policy is inefficient, even harmful, that governments shouldn't try to mess with what the economy produces because that'll just waste money or prop up bad businesses.
And for decades, ever since the free market revolution of the 1980s, politicians largely accepted that view. I mean, they would still slip in a tariff here or a subsidy there, but by and large, there was this almost global consensus. Industrial policy?
But in like the past five, seven years or so, a lot of countries have really started to go rogue. Politicians have embraced industrial policy in big and more public ways, most notably in the United States. It just like all happens.
And not only has it happened, but it's become like Biden's signature economic policy. Right now, under President Biden, the United States is set to spend hundreds of billions of dollars on industrial policy to fund stuff like microchip manufacturing and clean energy investments. It is one of the most ambitious tests of industrial policy in U.S. history. And the billion dollar question is, will any of this work? ♪
Hello and welcome to Planet Money. I'm Jeff Guo. Today on the show, a conversation with Rekha Youhas. She's one of the world's experts on this kind of forbidden idea called industrial policy. Rekha is going to take us on this fun, nerdy journey to explain the theory behind industrial policy, why it is so controversial, and where President Biden's huge experiment might be headed.
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Is there something about, like, your personality that made you attracted to studying something that most other economists thought was a lost cause? Yeah. I mean, I think I am kind of a contrarian. So...
So, yeah, if you tell me we all have to be on board with this, I'm like, are you sure? Have you checked all the evidence? Rekha has spent her entire career checking the evidence. She's one of the few economists who specializes in industrial policy. When I called her up, we started with the basics.
So to get us all on the same page, can you just tell us what is the definition of industrial policy? Because I feel like the name is kind of confusing, right? Because it doesn't necessarily have to do with, you know, heavy industry or industrialization. So what's a good definition for it? So the definition of industrial policy that I like to use is that it is the government trying to change policy.
the composition of the economy in the service of some long run goal. Historically, this has been the government trying to kickstart industrialization. A more contemporary example would be trying to move the economy from being a fossil fuel based economy to a renewables economy. But it is very much trying to change
What is produced domestically? So it's the government doing specific things like funneling money to certain companies or certain parts of the economy in order to get us to produce more X and less Y. That's right. It's not like a broad-based thing. It's very targeted. It's the government making a decision about this priority over that priority. Exactly. And so, like, what are some of the examples of what could be considered industrial policy?
So industrial policy can be many things, which is partly why the definition is quite tricky. So direct subsidies is sort of a classic example of industrial policy, but it can be trade policy. It can be us raising tariffs in order to protect people.
certain sectors until they become competitive. It could also be the government providing workforce development programs. So a good example of this would be what the Biden administration is currently doing in terms of trying to develop a workforce that can then be placed in advanced semiconductor manufacturing facilities. Maybe instead of calling it industrial policy, we just call it like government doing stuff in the economy policy. Yeah.
I'm not sure that's going to catch. It's too wordy. We'll edit it. We'll workshop it. So let's talk about why governments are so interested in industrial policy. Like in theory, why would it make sense for a government to step in and give some industries a helping hand? Right. So the reason for intervening in the economy is
It is that there is something in the market that is not functioning well. The technical term for this is that there's a market failure. Market failures. That the government is hoping to correct. Yes. The reason to do industrial policy is market failures. If you've taken Econ 101, you have heard about this. So what are the specific market failures that industrial policy is aimed at fixing? So the classic case scenario.
is that of a positive externality. So this is going to be an instance where the person who is undertaking a particular action, so say a firm that is producing goods
doesn't capture the full benefits to society of that activity. So imagine that you set up a plant that is doing advanced semiconductor manufacturing. Your workers figure out all the little tweaks on the factory floor that need to happen.
This is great. Now you know how to do this well. But all of a sudden, half your workforce gets up to leave and they found their own company. Oh, no. So it won't necessarily be profitable for you to do this, even though it would be great for the country if you figured out at your own cost how to do advanced semiconductor manufacturing. A second form of market failure is going to be coordination failures. That is, if you and I...
would both benefit from undertaking an activity, but only if the other person is doing it. Okay. And so the idea in these cases is that the government doesn't even need to spend money
All they would need to do is sort of sit us down and have us agree that we're all going to do this together. Interesting. Okay. So the idea behind all of this is that there are these market failures out there, and we all know that markets are not perfect. And that creates an opportunity for the government to come in and fix these things. And that makes sense in theory, but I think a lot of economists would still say that
The government maybe shouldn't do this. That's right. Like, is the cure worse than the disease? Is the cure of the government coming in and trying to fix this market failure, is it worse than the underlying market failure that we're trying to fix? And so why do people think the government can't do this? Yeah, so one of the classic objections to industrial policy is that these market failures might be out there, but the government doesn't have the necessary information to figure out where.
where they are. It's like the government goes out and sees, oh, we really don't have a lot of manufacturing over here. Is that because it doesn't make sense to have manufacturing over here? Or is it because there's some kind of market failure that's preventing the optimal amount of manufacturing to exist in some place? That's right. This is where the information challenge bites. So the other critique has more to do about what we would call political capture. The idea that if the government gets involved
into the business of promoting certain activities in the economy as opposed to others.
That money is not going to go to sort of the deserving recipients. It's not going to go to where the market failures are. It's going to end up going to well-connected firms. So you're talking about like lobbyists and like crony capitalism. That's right. That's exactly it. So those are the theoretical arguments for and against industrial policy. On one hand, industrial policy can fix some real market failures. On the other hand, it might not work that well in practice.
But when Rekha started to study industrial policy, she realized that there wasn't that much hard evidence for either side. In the 50s, 60s, and 70s, a bunch of countries had famously tried industrial policy, but they all had wildly different experiences. In the next part of our conversation, Rekha described how messy and ideological the debate over industrial policy had gotten, and how she and her colleagues tried to get some real answers.
And so what were the examples that people were pointing to to try to figure out if industrial policy is working? Because a lot of countries were doing it, right, or trying it out. Yeah, so I would say for a long time, the state of the debate boiled down to contrasting two examples, one being the East Asia growth miracle, which produced some of the most spectacular results
episodes of economic growth that we have actually ever witnessed in human history. Right. Okay. So you're talking about Taiwan and Japan and South Korea. Like there was a period between the 60s to like the late 80s when these governments were funneling money into specific industries like steel or electronics. And that's worked spectacularly, right? Yes. So the fact is that
These economies somehow managed to pull their citizens out of poverty and achieve kind of the dream of economic growth. And it happened at a speed and at levels that have rarely been seen. The question, of course, is what role did industrial policy play? And proponents will say it played a large role. Skeptics, on the other hand, will say that either the industrial policy that happened wasn't effective or wasn't that important or
or that it was actually harmful, that East Asia, these East Asian economies would have grown even more had they not had these harmful industrial policies that sort of messed with what was being produced. Because there were countries that were doing industrial policy that
maybe didn't have such great results. That's right. And so the other side of the argument will typically point to Latin America, in which many countries also pursued industrial policy with far more modest results than what we saw in East Asia.
Okay, so it sounds like, you know, for decades, that's kind of where the debate stood, right? Like people could pick out their favorite anecdotes, look at what happened in Asia, or look at what didn't happen in Latin America.
But you and your colleagues, you wanted to go beyond that, right? You wanted to figure out, does industrial policy work? When does it work? How does it work? And it sounds like you've found some answers. Yeah, so I think we found some answers, though we definitely don't have all the answers. It's a difficult topic to study because we'd really like to sort of run two versions of history. We'd like to see Korea...
all else equal, doing a lot of industrial policy. And then we'd like to sort of rewind and see Korea doing no industrial policy. And then we want to compare outcomes. But you don't have access to a time machine. Exactly. We don't have access to a time machine. This is the fundamental problem in social sciences. For this reason, we sort of need to do something a little bit more sophisticated, a little bit more complicated. So you're trying to look at
For clever ways of figuring out maybe there's some natural experiments out there that can help us untangle some of this causality, figure out if industrial policy was actually doing anything. Exactly. I wanted to try to evaluate the economic rationale for doing industrial policy and the name of the game is
at least the way I saw it, was coming up with this historical experiment to show people, well, look, let's just forget about East Asia. Forget about what you believe about Latin America. Just look at this thing and let's see what happens here. So you wrote this paper. And when I first read this paper, it really tickled me because you went and you studied Latin
France at the time of Napoleon, back when Napoleon was trying to take over the world. And you found that actually a really great natural experiment hiding in all of this war stuff that was going on. That's right. So the Industrial Revolution has started in Britain.
They figured out how to mechanize cotton spinning. This is going to be sort of the iPhone of the first industrial revolution. They figured out this amazing new technology to produce cotton yarn very cheaply. And so they have this headstart in this industry.
And France is sort of trying to keep up. And so the Napoleonic blockade enters in this moment. And where sort of the entry point for this paper comes in is that the blockade isn't successful. It's partially successful. OK, right. So to explain a little more, France is at war with Britain. Napoleon has set up this huge blockade to cut off the British from trading with the rest of Europe.
But because it's a patchy blockade, in some places British products are still getting through. So those parts of France still have to compete with this really good British yarn.
But other parts of France are protected from British competition. And this basically created a natural experiment in the power of trade protectionism, right? Which is a type of industrial policy. So what did you find? So what I found in this paper is that the parts of France that became more protected from trade protectionism,
They thrived in the long run. And even after the blockade ended, the less well-protected parts of France never managed to get into the industry in the same way. And this result is what is speaking to the fact that indeed, it seems like there was some market failure in France that prevented firms from being able to enter the industry and
And this temporary event was enough to sort of give certain producers in certain parts of France the ability to overcome that externality and become competitive in the long run. Yeah, what I think the message from your paper is that these market failures are real and industrial policy can, in some circumstances, fix them and make things better.
But also, like, is it replicable? That's exactly it. That's exactly it. That's the challenge I think the paper leaves us with. So I think this really makes me worry that we should spend a lot more time figuring out how to do industrial policy well because the problem is very real. Yeah. Well, I feel like we have to figure out pretty quickly how to do this well because countries are spending, you know, hundreds of billions of dollars on industrial policy. I think that's fair.
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In the past couple years, industrial policy has had this kind of renaissance, this comeback all around the world, but especially in the United States. Now, for decades, the United States has been doing some stuff that looks like industrial policy. Think of the subsidies that we have for farmers or the way the government supports aerospace manufacturing. When President Trump did his tariffs on steel and aluminum and washing machines, that was kind of a move toward industrial policy.
But the Biden administration, they have gone big. They have really embraced industrial policy. They've put it at the center of Bidenomics and they're pouring a lot of money into it. There is the CHIPS Act, which is going to spend hundreds of billions of dollars on R&D and microchip manufacturing. There is the Inflation Reduction Act, which will spend hundreds of billions of dollars on solar and other green energy stuff.
This is maybe the most aggressive industrial policy the U.S. has done in decades. And Rekha told me she kind of didn't see any of this coming. I mean, one thing that I was reflecting on as I was prepping for this interview is just how quickly...
And to me, completely unanticipated, the world has changed. It just like all happened. Yeah. I kind of feel like this is your moment as one of the few economists who specializes in studying industrial policy. Like you're not on the outside anymore. You're like one of the cool kids. I know. And, you know, I kind of I think the profession is engaging with industrial policy now a little bit more now.
Because sort of reality has outpaced us. Because it's happening in the real world now, we kind of got to say something. Yeah. So talking about the Biden administration, it seems like there are real market failures that the Biden administration is trying to target here with the market not investing enough in green energy stuff. But...
In terms of like implementation, like I feel like there are critics who say, oh, they're just, you know, propping up industries that are politically important. They're doing things that sound good, like manufacturing, even though, you know, who knows if manufacturing really is the future of jobs in America? Yes, I think those are sort of reasonable assumptions.
concerns and concerns that I worry about. There is some guidance, I think, that the literature yields in terms of how to manage the
the challenges to industrial policy. In terms of informational challenges, one thing that we see across the board in cases of successful industrial policy are deep investments in bureaucratic capacity, in having a high quality bureaucracy that is technocratic,
More bureaucrats. More bureaucrats. I know that sounds funny, but if you look at the Department of Energy Loan Programs Office that is distributing a lot of the Inflation Reduction Act money, that is exactly what we see happening. They have scaled up their personnel massively because they are looking at proposals for
for green technology, they are thinking about who should we be giving loans to. That needs people who actually understand the technology, who actually understand the science of this stuff. Well, that's interesting because I feel like that's a critique I hear all the time, which is the government shouldn't be doing industrial policy because industrial policy involves picking winners and losers, picking who's going to get the money and who's not going to get money. And government's
really bad at picking winners and losers. I think that's right. I think it is hard to pick winners and losers. Of course, the government doesn't know everything. Of course, they don't see every single market failure. Yeah. There's this very infamous example of a time when the U.S. government not so long ago, you know, made a big bet on
Green energy. I'm talking about Solyndra Which is this famous example where they've lost half a billion dollars in
loaning money to this solar company that totally failed, didn't work. And it was this huge headache for the Obama administration. And everybody was like, look, see, the government picks a loser. And the American people have lost like half a billion dollars. Yes. So that's right. I believe at the same time as Solyndra, the Department of Energy was also financing Tesla. So sort of one way of looking at this.
is to say, yeah, the government made some bets. Some of them paid off and some of them didn't. You know, the venture capitalists would say, OK, these were the ones in my portfolio that were bust and these were the ones that worked. What is a venture capitalist doing? They're making a lot of risky bets, knowing that most of them won't pay off. But one good bet is going to pay for the rest.
And in some way, depending on sort of the context, that is the bar that we should be holding the government to as well. I think that's a really interesting comparison, the comparison you're making to venture capital, because we don't think of venture capitalists as dumb or, you know, maybe some people think they're dumb, but we don't hold them to the standard that every one of their investments is.
every one of their bets has to pay off. That's exactly it. And I think that's the way that we should view industrial policy. Of course, this entails risks. The question is not, should we have failures? The question is, can the government get out of things that are not working? And of course, this is where
The government is in a tricky position because it has all these political temptations to keep funneling money to things that are obviously not working. You know, we might have to close these factories and that's going to mean some people lose their jobs. That's a hard thing to do. But failure is not the thing that we should be afraid of with industrial policy. It should be throwing money.
bad money after the good money. And I think this is, you know, to be fair, you know, we've talked about the fact that the U.S. hasn't done industrial policy on this scale in a long time. You know, if we think private firms need some time to learn stuff, why wouldn't this be true for the government? I think there's merit to that, too. Well, I mean, worst case scenario, if none of this Biden administration industrial policy works out, at least you have a lot of good case studies to write papers about. Yeah.
That's right. I mean, I think that I can learn from the successes as well as the failures. For the sake of the American people and for the sake of the world economy, I hope this works. We appreciate it. Rekha, who teaches in Vancouver, will be watching what happens from her perch in Canada. On our next episode, why do schools turn kids into salespeople? So everyone put your hands like this, pump them up and say big money.
We follow one school's fundraising efforts for over a year to see how much they raise, what the money goes to, and why this is how we do things. That is on the next Planet Money. This episode was produced by Willow Rubin and edited by Sally Helm. It was engineered by Valentina Rodriguez-Sanchez with help from Maggie Luthar. Fact-checking by Sarah Juarez with help from Emma Peasley. Our executive producer is Alex Goldmark. I'm Jeff Guo. This is NPR. Thanks for listening.
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