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Monday, July 12, 2021

Industrial policy as 'casino economics' | TheHill - The Hill

Roll the dice at a casino enough times, and you are bound to win a few games. But knowing the odds are not in your favor, how much are you willing to risk losing by continuing to gamble?

This is the same issue governments confront when they gamble taxpayer dollars on industrial policy efforts, which can best be described as targeted and directed efforts to plan for specific future industrial outputs and outcomes. Throwing enough money at risky ventures might net a few wins, but at what cost? Could those resources have been better spent? And do bureaucrats really make better bets than private investors?

These questions are increasingly pertinent as the United States embarks on its most audacious government-led gambling spree in decades, with both parties lining up to make some very big industrial policy wagers.

In June, the Senate passed a massive 2,300-page bipartisan bill, the “U.S. Innovation and Competition Act,” with a $250 billion price tag. Fifty-two billion dollars would go to subsidize the semiconductor industry, and billions more would be spent to “regional innovation hubs” and other new ventures. The bill also included dozens of unrelated amendments, including prevailing wage requirements for chip manufacturers and limits on global shark fin sales. There was something in it for everyone, prompting Sen. John KennedyJohn Neely KennedyMORE (R-La.) to call it an “orgy of spending porn.”

Meanwhile, the Biden administration has proposed new subsidies and released a 250-page report on reorganizing industrial supply chains.

A generation ago, America was panicking about the supposed superiority of Japanese-style industrial policies, prompting calls for comparable planning efforts. Today, China captures everyone’s attention. While China is a more formidable threat to U.S. interests than Japan ever was, many forget how the “Japan model” of industrial policy was a costly fiasco that the country largely abandoned. In 2002, the Japanese government itself concluded that, “[t]he Japanese model was not the source of Japanese competitiveness but the cause of our failure.”

That’s partly because promoting innovation is not a precise cocktail with an easy-to-follow recipe, but instead an ongoing process of trial-and-error. Unfortunately, governments tend to make a lot more errors than private entities when it comes to making bets on future technologies. Entire books have been written about America’s “Technology Pork Barrel and the many failed industrial policy ventures of the past, including supersonic aircraft and synthetic fuels programs.

How much tolerance should the public have for government industrial policy gambling? Generally speaking, “basic” support (broad-based funding for universities and research labs) is wiser than “applied” (targeted subsidies for specific firms or sectors). With basic R&D funding, the chances of wasting resources on risky investments can be contained, at least as compared to highly targeted investments in unproven technologies and firms. But even defenders of basic government investments note that “R&D money is just as easily misspent or misappropriated as any other type of government largess.” This is even more true for more targeted initiatives because “costs can be purposefully inflated by private investors to win support for government funding.”

Some industrial policies are unavoidable, including many in defense, space and public health programs. But even with these, we should not overlook the associated costs and failures. Mike Watson of the Hudson Institute notes that defense contracting today is “plagued by the same kind of political engineering and its associated cost overruns” seen throughout American history. Cronyism often takes precedence over efficient investment as policymakers steer taxpayer money to favored interests as far and wide as possible to reach a deal. 

Regional economic development is also an understandable goal, but as Wisconsin’s recent experience with Foxconn Technology Group illustrates, local industrial policies tend to over-promise and underdeliver. In 2017, the state promised $3.6 billion of support for a Foxconn plant to produce liquid crystal display panels and 13,000 jobs. The deal went off the rails almost immediately, and the state’s gamble now looks like a loser with overall investment dropping to $672 million instead of the $10 billion promised. The number of new jobs associated with the plan will fall to just 1,454, assuming any get created at all.

The riskiest bets on new technologies and sectors are better left to private investors. America’s venture capital industry remains the envy of the world because it continues to power world-beating advanced technology. According to CB Insights, from 2010 to present, the United States has created 53 percent of global “unicorns” (firms with $1 billion valuations), compared with 20 percent for China. While U.S. unicorn creation has exploded, China peaked in 2018 and has fallen since.

While some government investments will always be necessary, policymakers engaging in casino economics means bad industrial policy bets and taxpayer money squandered on risky ventures best made by private actors. We need to keep Uncle Sam’s gambling habits in check.

Adam Thierer is a senior research fellow at the Mercatus Center at George Mason University and author of “Evasive Entrepreneurs and the Future of Governance.”

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