A year ago, Congress passed the Inflation Reduction Act (IRA), contrary to predictions that President Biden’s program would fail. This law is something like the Holy Roman Empire of legislation in that it is neither holy nor Roman nor empire. That means it really has nothing to do with reducing inflation; This is mainly a draft climate law that aims to promote the transition to a low-carbon economy through tax breaks and subsidies.
And it’s important. With the CHIPS law (Creating Useful Incentives for Semiconductor Production), the federal government is suddenly pursuing a large-scale industrial policy that promotes individual sectors and not the economy as a whole.
In any case, the new turn to industrial policy was met with a lot of backlash from political analysts, much of which boiled down to saying, “Oh no, it’s the return of the Atari Democrats.” So it’s important to clarify that this has nothing to do with it.
Here’s the story: In the 1980s, when Japan’s economic growth was still a source of awe and concern, some American observers attributed Japan’s success to government sponsorship of key industries. And there were congressmen who wanted the United States to support what they believed to be top companies, including those that make video games.
That faction all but disappeared when Japan stopped being a role model and became a cautionary tale (although Japan did better than most people think), and Atari himself saw his business implode. But now I see that critics of Biden’s policies are making many of the same arguments that many economists, myself included, made against industrial policy in the 1980s: governments cannot pick winners; the positive effects of industrial support are difficult to see; and special interests can hijack any policies that favor certain sectors. Therefore, it is very likely that industrial policy will slow down economic growth instead of accelerating it. In addition, Biden’s industrial policy provisions provide for the purchase of American products [Buy American] could hurt world trade.
Applying this critique of Biden’s policies seems to overlook, sometimes intentionally, what is going on. Their policy is not to pick winners and try to accelerate growth. It is about dealing with threats that are not taken into account in conventional economic measures, such as the threat of climate change or the strategic risks posed by an unpredictable and autocratic China.
Why counter these threats with subsidies instead of, for example, a tax on greenhouse gas emissions? political reality. Carbon taxes would not be approved by Congress; the IRA was, albeit with the smallest margins. And the influence of industries likely to receive subsidies was an incentive, not a detriment. In fact, it was the only thing that made the measure possible.
This political logic remains the main justification for the turn to industrial policy. But a year later, it’s becoming clear that Biden’s policies have an additional positive consequence that I don’t think many anticipated. And it has already spurred a huge wave of private investment in manufacturing, despite very little federal funding to date. Because?
A new blog by Heather Boushey of the Council of Economic Advisers argues that Biden’s industrial policies are helping to solve what she calls the “chicken and egg problem,” in which private actors are reluctant to invest when they are sure that others will do the necessary complementary investments. The simplest example is electric cars: consumers won’t buy them unless they think there will be enough charging stations, and companies won’t install enough stations unless they think there will be enough electric vehicles. But there are similar coordination problems in many other areas, such as the complementarity between the manufacture of batteries and that of vehicles.
I had similar thoughts before I saw Boushey’s post. The current investment push in particular reminded me of a very popular concept in development economics: the big push. It has been argued that an active role for government in development is needed as companies will not invest in developing countries unless they are sure that many more companies will also invest. This claim fell out of favor for a long time, partly because economists at first did not know how to state it clearly, partly because they later realized that it was valid only under limited circumstances. But it was always an idea that made sense under the right conditions, and now it appears that Biden’s industrial policies actually created those conditions.
I continue to argue that the primary justification for the US turn to industrial policy is political economy: We urgently needed action on climate and national security, and those actions needed to take a form that could be passed by Congress, regardless of whether or not It was the solution recommended in economics textbooks. But Biden’s policies also appear to be generating a “Great Green Push” and triggering a much larger surge in private investment than would have been expected given the level of government spending.
Paul Krugman He is a Nobel laureate in economics. © The New York Times, 2023. Translated from news clips.
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