Saturday, April 05, 2008

Control Freaks

Industrial policy could be coming back to a government near you. A faddish idea in the late 1980s and early 1990s, it holds that free market participants frequently collectively make wrong decisions, causing resources to flow to bad industries and away from good ones. Some excerpts from a recent interview Sen. Clinton gave with USA Today:

In an interview with USA TODAY, she proposed stripping tax benefits from sectors such as the oil industry and using government policies to boost industries such as automakers, wind turbine producers and steel companies. And she rejected criticism that her plans amounted to a form of industrial policy that would represent a dramatic departure from traditional U.S. practice.

She offered few details of how business incentives would be reshaped other than to vow to preserve auto manufacturing and steelmaking capacity and promote alternative energy industries. But she insisted that government subsidies are needed to counteract the market's tendency to "punish" investments that don't deliver swift returns. The interview came amid a global credit crunch that has the U.S. economy stumbling like a sailor on shore leave. Signs of financial weakness are evident at home — where house prices, consumer confidence and jobs are all sliding — and abroad, where the value of the U.S. dollar is down more than 17% against the euro since early 2006.
"We subsidize the oil companies. We think it's important that we give them our tax dollars so they can go out and explore and extract and produce oil. That's a clear decision right along the lines of an industrial policy," she said. "We subsidize all kinds of industries. We don't call it that. But we've made a decision we're going to subsidize them. I think that what we subsidized in the past is not what we should be subsidizing right now."

In her comments, Clinton made it clear that she regards the free-market doctrine that has held sway in Washington for a generation to be both inequitable and ill-suited to the sharp-elbowed global competition the U.S. now faces. Leaving economic outcomes to the market has resulted in stagnant incomes for the typical family and special treatment for the well-connected, she says.
"People say all the time, 'We can't pick winners and losers.' Well, then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of all of it. … Let's have a real level playing field where nobody gets a penny in subsidy," she said. "Then see what happens. You'd hear the squeals of protest from Wall Street to Houston to Silicon Valley."

"We have to adjust our view of this. … What is it we really believe the United States should continue to make? I would put certain defense items in that category. I would put certain basic goods in that category, like steel," she said. "If you look at every other country, they make such judgments like that. We are competing against countries that directly and indirectly subsidize what they have concluded to be in their national interest."

Would that we were all so smart as Sen. Clinton is so well-known to be. Tens of millions of people betting their own money every day on where resources will command the highest return, and not one of them as smart as Sen. Clinton (who as president would be spending other people’s money with, presumably, much more care than others spend their own) is in solving this problem.

Industrial policy was a fad when it was credited with the seeming rise to economic dominance of Japan in the 1980s. (It was seldom blamed by those so infatuated with it when Japan had a lost decade of economic depression in the 1990s.) It is certainly true that there are any number of countries that “directly and indirectly subsidize what they have concluded to be in their national interest,” but it is also true that those countries are poorer than the U.S. Industrial policy is based on the premise that a bunch of really clever people in the federal Department of Omniscience can survey a land of 300,000,000 people and know the opportunity costs and social value of every resource-use decision. But as Friedrich Hayek taught us long ago, we are in most of our economic decision-making astonishingly ignorant. We simply do not know whether our speculations will be as profitable as we hope they will. We do not know the consequences of our choices for other people. It is the job of competition, working through the price system, to make us aware of these things by rewarding successful experiments and punishing failed ones. In the absence of these things, mistakes flower instead of wilt, which then leads to calls for ever more control and regulation. (Go here for a poignant example of other people paying the costs because politicians fail to predict the unintended consequences of their choices.)

When governments override the price system because, for example, it is too shortsighted, that supposes that public officials know things that collectively all the people do not know. And this means, in turn, that what one person, Sen. Clinton, “thinks” about the likely economic future becomes a binding shift in incentives for all of those 300,000,000 people. Industrial policy of this type is an act of astonishing arrogance.

But maybe it sounded better in Russian.



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