Resolved: To promote prosperity among all income groups, the U.S. government should adopt an industrial policy.

Oren Cass, executive director of American Compass
Scott Lincicome, Senior Fellow at the Cato Institute

Full Transcript

Gene Epstein: Oren, you’re first up to defend the resolution. You’ll have 17 and a half minutes. Jane, please close the initial vote, and take it away, Oren.

Oren Cass: Well, thank you, Jean and Soho Forum, so much for hosting this, and Reason Foundation as well. I enjoy reading what you guys put out, even if I don’t necessarily agree with it all the time. And thank you to Scott for this debate. The last time I debated Scott, we were in Dallas, and it turned out he was from Dallas and he shouted, “Go Cowboys,” and pumped his fist, and that was sort of the end of the debate. So, I’m grateful we’re in cyberspace this time. And I’m very excited to talk about industrial policy. I think a good starting point is probably to define industrial policy. And it’s a pretty simple concept, in my mind anyway. It’s the idea that we should have public policy that encourages investment in particular sectors of the economy. That is, at the end of the day, we would like to see investment occurring in some pattern other than what would happen in the absence of any policy involvement at all.

And I’ll try to take a fairly structured approach to laying out the case for this. It seems to me there are two key things that you have to believe if you want to believe that industrial policy is a good idea and that the United States should adopt one. The first is that we care. That is, that it matters to us where the investment occurs in the economy. And then the second is that we could do anything about it. Obviously, you could have a situation where there’s a problem, but either there is no solution or we don’t think government could do anything that would improve matters. But in my view, anyway, there is a problem here, and while certainly, government will not get everything right, there is an opportunity to do better than we’re doing now.

So, why do we care? Why does it matter where investment goes in the economy? I guess my argument comes down to a quote attributed… I think he actually said it, but it’s attributed to Michael Boskin, who was the chair of the Council of Economic Advisors for George H. W. Bush. And he said one time in discussing America’s strength, but also its challenges in high technology: “Computer chips, potato chips, what’s the difference?” And the core of my argument is that there is a difference. That it actually matters to America as a nation, it matters to people at the end of the day, and the health of our economy; the extent to which we are doing well in something like computer chips, as opposed to something like potato chips.

Another good example is Christina Romer, who was the Obama economic advisor. And her quote was, “Consumers value haircuts as much as hairdryers.” And I don’t doubt that’s true. I think it’s the case that if all we ask about is consumers at this moment in time, do they care how much investment is in one part of the economy or another? Obviously, they don’t. But over time, if you think about the trajectory our economy is on, and as producers and workers, as well as consumers, as people who are hoping that there will be a healthy economy and robust industries in their area, where they and their neighbors can contribute productively, find good work, support their families, for all those reasons, I think these things do matter.

So, why do they matter? Well, first they matter for issues of national security and resiliency. And sometimes I almost feel bad bringing up this piece of the puzzle because it is such an obvious case for industrial policy. But it is worth noting that America cares that it can, for instance, produce the things that its defense base needs. And obviously, we do that in the defense industry. We have very aggressive policies to ensure that we can make things like fighter jets domestically, but as everyone knows, and as I assume Scott will be emphasizing, our supply chains are complicated. If you can design and assemble the jet, that’s great, but you also need the semiconductors, you also need the steel. At the end of the day, you also need a supply of engineers who understand aeronautics. And so, if we want to have a strong industrial base, we need to make sure our economy is one that is, in peacetime as well as wartime, maintaining a strong domestic capacity and capability in a whole host of areas.

Obviously, that’s not something that markets are going to take into account. That’s not something that price signals are going to ensure. And so, if we want it to happen, there’s going to have to be a role for policy. The same goes for resiliency, more generally, and I think the pandemic that we’ve seen this year is a good illustration of this; there are concerns that we might want to have in our society, beyond just how much we can buy on a particular nice day, the resilience of our supply chains, our insulation from foreign actors who might have a different attitude toward our wellbeing, those things matter. And we have a national interest in ensuring that we can protect our supplies of those kinds of things, that we have resilience, rather than fragility.

And again, that’s not something that the market is necessarily going to consider. You’ll hear me returning to this point a lot, but that this is not something the market takes into account because it’s such an important one. I think economists talking narrowly in terms of market failures. And certainly, as I go through my case here, I could define each of these things as a market failure, but ultimately, I think it’s important to step back and realize that the issue here is a little bit broader; that there are some things that markets and price signals do and are designed to do, and we trust to do well, and there are some things that they don’t. And thinking about what investments today are going to be to the benefit of the nation over the long-term, it’s just not something markets are for. It is not something investors are going to consider or are incentivized to consider.

So, if we think there is anything worthwhile in trying to consider it, we’re going to have to do that some other way. So, first was national security and resilience. The second point, and in my mind, probably the central one, is innovation and productivity. It is a problem for the economy, that what we can make today, in many ways, determines what we can make tomorrow. And that decisions made today about what appear efficient and satisfy consumer needs, have a lot of consequences for the trajectory that our economy will be on, over time. And there are a few different ways of looking at this. One I really like is work done by Harvard’s Ricardo Hausmann and MIT’s César Hidalgo, looking at just the diversity of capabilities and technologies within an economy. And of course, the traditional model of comparative advantage says the more you can specialize the better.

And what they find is that, actually, at the level of the national economy, the opposite is true. And this is just… I like quoting The Economist’s write-up of them because it’s clearest: “The products a country makes today determines which products they will be able and likely to make tomorrow, through the evolution of their capabilities.” So, we need to think about that trajectory if we care about what we make tomorrow. A really concrete example of this comes from Andy Grove, the longtime chairman and CEO of Intel, who wrote, I think, a very important article about a decade ago, talking about what had happened to investment in innovation, and lamenting, in a sense, the death of Silicon Valley. Obviously, Silicon Valley as a developer of apps is as robust as ever, but as an actual innovator of the kind that is generating new knowledge and engineering prowess, it really isn’t anymore.

And what Grove wrote was describing what had happened in the semiconductor industry in particular: “Our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs, we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.” And so, again, we could describe this narrowly as a market failure, that there are spillovers from manufacturing and engineering to upstream innovation in research. But we could also just say more generally, that we care about the health of our industrial ecosystems, and the decisions that individual companies are going to make about where to locate production are not going to take that into account.

The reality is that we’ve seen the result of America ignoring this. We have seen, in recent years, arguably, recent decades, significant declines in the rate of productivity growth, therefore, significant declines in the rate of economic growth. And while it’s more subjective, I would argue, quite significant declines in the rate of engineering and innovation capability. And that’s something that harms us all, both as workers and consumers, in the long run.

The third area, and the one that I think people get most—what’s a polite way?—people get their backs up about this one, is that there’s a concern for employment here, that I think is worth considering. Going back to the computer chip/potato chip example, the kinds of jobs created in the computer chip industry and the kind created in the potato chip industry may be quite different. Even more so, the kinds of jobs created in the hairdresser and hairdryer industries are going to be different. And one thing that you see over time and over a place, is that manufacturing industries, and by manufacturing, I don’t just mean the assembly of things, I’m including resource extraction and infrastructure-related work, and real work in the physical economy, in a sense, that causes things to move, turns out to have some really important properties. One of those properties is it’s a place where men with relatively less education tend to have a comparative advantage and tend to earn relatively higher wages. And so, if we see social value in having those kinds of jobs available, again, the market doesn’t care.

A second way that they’re important is that those are actually the place where we get a lot of our productivity growth over time. And I think the hairdresser example is really illustrative here. At the end of the day, a barber today is not all that much more productive than a barber a hundred years ago. It still takes a certain amount of time to cut a head of hair. And generally speaking, that’s true for a lot of the service sector that people otherwise celebrate jobs shifting into. What allows those jobs to be good jobs with rising wages at the end of the day, is that they are providing services to people who are themselves more productive. If there is no underlying source of rising productivity, it’s very hard to get that out of an overly service-based economy, and especially for low-wage service workers. So, I think making stuff matters in that respect. I think making stuff also matters because of where it gets made.

An economy that has a more diverse industrial base and more different industries with investment flowing to more different places, is likely to also see a greater geographic dispersion of prosperity. And that’s something our country is really struggling with as more and more investment flows into finance and tech, in a more concentrated set of metropolitan areas. EIG, the Economic Innovation Group, has done excellent work looking at the concentration of job creation, really since the great recession, and showing the extent to which, essentially, all of it has been in the top 20% of zip codes. And essentially, half of it was in just five metropolitan areas. And that’s a real problem for the most people who live somewhere else. And if we want to have a country that allows people to live where they want to live, and supports them in their ways of lives and connection to their families and their communities, we need to think about the geographic distribution of economic activity as well. The final point I’ll make about why we care so much about this…

Gene Epstein: It’s five minutes to go.

Oren Cass: …Employment and geography, in a sense, is that, for local economies to thrive, they have to make something that they can sell to the rest of the world. And I’m not even talking about internationally, I’m talking about even nationally. Your local community has to make something that other people want, and it can send to them in return for the cars and electronics and medicine and everything else it wants. And while manufactured goods are not the only tradable goods, they’re certainly the largest category of them. And when you erode your manufacturing base and you celebrate a aggressive shift into services, you end up with communities doing what I call exporting need, which means, at the end of the day, if they don’t have anything to sell outside of their own community, they end up needing influxes of transfer payments to support them.

And so, for instance, the occupational therapist serving people on disability becomes, technically, the community’s exporter. He exports to the rest of the country his care of people on disability in that community, for which government disability payments flow in. And that’s not a good economic model. I don’t think any of us would say that is. Now, manufacturing, obviously, has not collapsed entirely in this country, but it has faced serious challenges. It’s true that we would expect it to decline as a share of the economy over time, but the absolute decline in manufacturing jobs by the millions, over the past couple of decades, is not something we would necessarily expect. It’s not something a lot of other developed economies like Germany, Switzerland, Japan have faced.

And likewise, whereas they see much higher compensation levels in manufacturing, we’ve seen a total stalling out of productivity. In fact, productivity in the manufacturing sector has fallen in five of the last six years, for anyone who thinks that automation is what’s really going on. It’s not. So, I think we should do something about this if we can. I think there are important industries that are at the cutting edge of a future development, there are industries that are important to the health of a diverse economy, that are not receiving the kind of investment that they need, and that we could do something to help guide investment toward.

Now, what would that look like? The first caveat I’ll give is, obviously, it wouldn’t be perfect. I’m not here to say there’s some perfect flawless industrial policy. The question is whether we could do something better than the status quo. And there, I think we could. Now, what we shouldn’t do, we shouldn’t do venture, we shouldn’t have the government playing the role of venture capitalist. I’m not talking about having the government decide how many screws each factory should make, but there are some things that I think would work, and there are some things that we’ve seen work over time and over place. It is in fact, the American tradition to do this. Adam Smith, in the very paragraph where he introduces the invisible hand, talks about the focus on domestic industry as the type of investment that is going to be happening. Alexander Hamilton, obviously, who’s, in many ways, seen as the father of the modern industrial economy, was a strong advocate of industrial policy in the American system which dominated economic policy in the first century of the Republic, was essentially an industrial policy.

Even Reagan had aggressive industrial policy in semiconductors, on cars. The reason that the Japanese moved a significant share of auto manufacturing to the American South was because we had affirmative government policy that recognized that that would be a good thing. So, what kind of things do I think we should do? I’ll give four ideas and we can talk more about these as we go along. One is the concept of pre-competitive consortia, which is the idea that the various companies within an industry essentially joined together to create a research center, and they put up their own money, and then the government matches what they’ve put in.

Gene Epstein: You have one minute to go.

Oren Cass: So, we test for it being a good idea because we make them put their money where their mouth is, but we support it as well. And whatever innovation comes out of it, everyone in the industry can share. A second is education, and recognizing that our support for education should be focused in the kinds of degrees that support industry. And we should not be shy about putting more support into engineering degrees than dance degrees.

A third is what I call local content requirements, which means, for really important supply chains in, say, advanced communications equipment, semiconductors, actually requiring that the supply chains, source a certain element of their component domestically, creating the demand for more domestic supply.

And then finally, I think we need to think about trade balances and recognize that a big piece of what’s happened is that our demand that could have been fulfilled by domestic producers, instead we build elsewhere, and instead we ship our assets overseas. And I think discouraging the foreign acquisition of assets, so that it’s relatively more attractive to buy from American producers, would benefit our economy in the long run. So, thank you very much. And looking forward to hearing you, Scott.

Gene Epstein: Thank you, Oren. Just 13 seconds over. So, a very minor misdemeanor. Scott, you’re going to get an extra 13 seconds over and above your 17 and a half minutes. Scott, speaking for the negative. Take it away, Scott.

Scott Lincicome: Well, thank you, Oren and Gene. Great to be here even if it is only virtually. And I’ve got to say, great timing, I actually have a new paper on manufacturing, industrial policy, and national security coming out in a couple of weeks. So, this is excellent marketing for that. And I hope everybody will click that link in the future. Now, look, I’d like to spend my time probing some questions that the debate resolution we have here; to promote prosperity among all income groups, the US government should adopt an industrial policy in most discussions of industrial policy raise. So, my hope is that, in asking these questions, we’re really going to crystallize the issues at play and make for a more productive discussion. Instead of y’all just watching Oren and me talk past each other for another hour. Now, since it’s my time, I’m also going to try to answer these questions or at least offer some possible answers. And in the process, show why I think the resolution in here today, and industrial policy, more generally, should be rejected. So, with that, let’s get started.

So, first, I mean, I think it’s imperative to first ask; what are the problems that exist right now in America that could possibly be solved by industrial policy, or enhance it, some of this? But I really want to get into the weeds about what these problems are. And since this debate is about industrial policy, I think we should start with manufacturing. So, first, is the manufacturing sector really in need of saving? We hear this a lot from guys like Marco Rubio, President Trump, Bernie Sanders, Elizabeth Warren, and the rest, that we’ve had massive de-industrialization that requires a total rethink of economic policy. But is that really true? Well, yes, as Oren mentioned, we’ve lost manufacturing jobs in the early 2000s, although we’ve gained about a million since. And the sector share of the economy has declined, but is that an issue?

Well, it turns out there are problems with these supposed problems. In particular, both declining manufacturing sector jobs and the declining share of GDP, primarily reflect long-term global trends that are disconnected from specific economic policies, whether these policies are free market or interventionists. So, in terms of jobs, for example, the long-term decline in US manufacturing jobs actually coincided with rising sector output—we’ll get to more on that in a sec—and was mirrored in developed countries around the world, including economies more centered on manufacturing. Those with long-standing trade surpluses in goods, or with more aggressive and more comprehensive industrial policies. And in fact, the US actually lost a smaller share of manufacturing DEC jobs over the last few decades, than countries like Japan and Germany. And I can get in the weeds of those studies if you want, but the fact is that there’s very little to indicate that altering the trade balance or implementing industrial policy will change the overall trajectory of US manufacturing jobs, particularly as a share of the workforce.

In terms of GDP share, our share of the economy, the story is really similar. Manufacturing’s declining share of total US GDP reflects broad secular trends that are largely disconnected from government policy, and thus can’t be fixed by them. For starters, the change in the industrial sectors’ GDP reflects relative strength of services, not the actual weakness of manufacturing. It’s simply that the service sector expanded more quickly than the manufacturing sector, which actually also expanded too. And second, the relative growth of services manufacturing, again, reflects fundamental shifts, not in trade balances or industrial policy, but in consumption patterns in the United States and other countries, away from goods and towards services. So, for example, US consumers back in the 1960s, allocated about half of their annual budgets to goods, but by 2010, it was only 33%.

And these relative consumption trends coincided with the manufacturing sectors’ decline in share of US GDP. Trends that economists have found to be really strongly linked, and which, again, are seen in countries all over the world; again, those with strong industrial policies like Germany or South Korea. It turns out this is just a standard story of economic development. We all bought relatively fewer goods, and more services as we get richer. So, it’s not a problem that demands industrial policy, or could be fixed by it. Indeed, we’re actually seeing this right now. The onset of COVID-19 in United States actually reinforced the link between consumer spending and manufacturing sector performance. Manufacturers in the United States are actually booming right now. And why? Because we’re all trapped in our houses, buying goods instead of services. And so, the sector’s relative growth has really only occurred because Americans can’t buy the services that we typically do.

Now, meanwhile, other measures of US industrial performance show a sector that is healthy, productive, and in many areas, thriving. Indeed, as I show in my paper, the US manufacturing sector actually remains among the most productive in the world and has expanded in real inflation adjusted terms since the 1990s, continuing earlier trends in output, investment, and profitability, as one of my colleagues at Cato documented back in 2007. For example, not to get too much in the weeds, the United States ranked second in the world in 2018 before the trade wars began. In total, manufacturing value-added at $2.3 trillion. Second in the world of merchandise exports. Our manufacturing centers’ performance was stronger on our per worker basis in terms of productivity, far outperforming China, Japan, South Korea, and other top manufacturing countries.

In terms of investment, United States is the top recipient of manufacturing foreign direct investment in the OECD, more than doubling the second-place nation. In fact, in 2018, total FDI inflows into the US manufacturing sector, at about 167 billion, we’re larger than total FDI inflows into China for the same year, at only 138 billion. Inward FDI stocks during that year hit 1.77 trillion. This is not a sector that is dying, or in which people do not want to invest. Historical data on the sector also show it to be diverse and growing overall. Real manufacturing value-added and gross output, were up significantly over the last two-plus decades, as were investment, capital expenders, expenditures, R&D and foreign direct investment, financial performance, revenues, post-tax income, and assets. Indeed, manufacturing R&D, and CapEx, each hit around $260 billion before the trade wars began.

Meanwhile, US durable goods production, where the best paying jobs are, has been particularly impressive since the 90s; posting gains in real value-added, real gross output, of 109% and 36% since ’97. And contrary to some claims, this is not merely about computing power. Even if you move those sectors, you see substantial gains in durable goods output over the last two decades. And based on these other data, we talk about national security, the last two Defense Department reports on the defense industrial base and its production capabilities, concluded that it is profitable and expanding overall. Now, that said, look, the top-line bad data do certainly hide significant changes in the sector of the past two decades in response to various economic forces. It’s not some big monolith. Some industries expanded, particularly in things like aerospace, transportation, metals, computers, medical equipment, and so on, but some industries, particularly non-durable goods and low labor intensive goods like textiles and tobacco have contracted since the ’90s in response to either globalization or changing consumer tastes.

But however, the changes in these non-durables have been offset by gains in other more advanced and capital-intensive non-durable industries like pharmaceuticals or energy. And overall, data on the sector performance shows a flexible dynamic and healthy sector that’s responsible to market forces. And this is a flexibility that can actually prove quite critical in times of unexpected national emergency. And in fact, again, recent experience bears this out.

A new report from the International Trade Commission examined trade and domestic production of essential medical goods during the pandemic and found that manufacturers responded quickly to boost supplies or make new products. In other words, the market responded and it worked pretty well. Surely not everything was perfect. Demand was absolutely insane and there were massive shots to both domestic and import supply, but overall, our supply chains proved pretty resilient, a testament to not only the hard work and ingenuity of US retailers and manufacturers, but also the United States economic dynamism and our industrial capabilities more broadly.

Now, Oren mentioned national security, so I’ll just mention again that manufacturing sectors that are most closely associated with national security have not been in decline. This includes not just defense sectors like aerospace or tanks or missiles or munitions, but it also includes things like metals and semiconductors and motor vehicles, energy, chemicals and the rest. Certainly some output falls and some output rises over time, but the overall picture is one of stability and health, not decline.

But, okay, so what about manufacturing jobs? Maybe these are something really special to target. Well, as already discussed, it’s questionable to assume that certain key trends in manufacturing could have been reversed via industrial policy, but changes in manufacturing jobs alone really provide little insight into the state of American manufacturing and the need for industrial policy. But, look, US policy might be able to in theory produce a one-time increase in manufacturing employment. Is that really though worth doing? Well, is American prosperity, in other words, broadly defined, really dependent on adding say a couple of million manufacturing jobs in a pre-pandemic workforce of 165 million people? Well, probably not.

As my Cato colleague, Ryan Bourne, documented last year, there’s really little to indicate that US manufacturing jobs are so particularly special as to warrant even more direct and specific government support. First, they’re not significantly more secure, especially for low-skilled manufacturing workers whose jobs have been disappearing for decades and are most exposed to automation and trade. For example, it took, back in 1980, about 10 man-hours to produce a ton of steel. Today, it takes about two. The newest steel plants just needed 14 employees to make 500,000 tons of steel. Unless demand for steel is unlimited, and it is not, this is not a good jobs program. Of course, we could try to slow down productivity or reshore monotonous and low-skilled manufacturing activities, but the economic implications of doing that, lower wages and higher prices, can’t possibly be considered prosperity.

Second, US manufacturing jobs tend to be highly productive, that’s true, and due in part to the aforementioned R&D, but this productivity again caps employment, because the higher productivity means you need fewer workers to produce widgets or whatever you’re making. And it beggars belief that more government intervention will make the industries leaner and meaner. In fact, it would probably do the opposite.

Okay, well, maybe boosting nominal manufacturing employment would solve labor force participation. Well, probably not. Again, the labor force participation rate hit about 63 and a half percent before the pandemic, and that’s right where it was in 1979 when manufacturing jobs were at an all-time high. So again, there’s little to think that targeting manufacturing jobs is going to fix that problem.

Other data suggests that labor force participation problems are really not about a worsening job market in manufacturing, but really about reduced patterns of job seeking. In other words, research shows that most prime edge men not in the labor force report that they’re disabled.

Gene Epstein: Five minutes, five minutes to go. Go on.

Scott Lincicome: …That they’re disabled or not in the labor force, so that probably won’t work either. Now, leaving aside what’s driving those trends, what’s to think that industrial policy is going to fix them? In fact, there’s a lot of evidence that shows that even in the hottest job market in a generation, there were tons of job openings and manufacturers were having problems filling them.

So finally, that brings us to wages and benefits, and once again, manufacturing jobs reveal little specialists to warrant some grand industrial policy. I mean, for starters, contrary to conventional wisdom, incomes and wages have not been stagnant over the last few decades. In fact, median production supervisory wages are up about 30% since the early 1990s. Wage in total compensation up 61%. And the wage stagnation that did occur happened long before things like globalization or deaths of despair took off or male marriage prospects declined and the rest. So the connection between manufacturing these trends is pretty weak.

So the idea that there is a large manufacturing wage premium, it turns out that median base pay for manufacturing is still pretty good, but these days, there’s actually better pay found outside the manufacturing sector. In fact, there are a lot of manufacturing jobs that have lower pay than the average job in the services sector and so forth.

Now, if you actually look at some of these professions, these are not just simply in soft skills jobs. There are a lot of manly blue collar jobs out there paying quite well, whether it’s logging or wholesale trade or construction or transportation and warehousing and utilities. Wage growth has also been faster in these areas, and unlike manufacturing, most were expected to grow in the future. This is all quite good and thus indicates that there’s no special benefit to having more manufacturing jobs.

Now, my favorite recent example of this is warehouse jobs, which have unsurprisingly exploded this year. And during the e-commerce era, we’ve seen substantial wage increases and jobs that now pay quite a serious premium, a significant premium over blue collar manufacturing jobs.

And finally, it’s essential to note that the United States has been trying to increase manufacturing jobs for decades with little avail. As the Congressional Research Service put it a few years ago, although Congress established a wide variety of tax preferences, direct subsidies, import restraints, and other federal programs with the goal of retainer or recapturing manufacturing jobs, only a small proportion of workers is now employed in factories.

So what about prosperity more broadly? Well, there’s a lot of evidence to indicate that prosperity in terms of consumption, I know Oren doesn’t think that matters pretty much, but that’s going really, really well. The share of American households with telephones, electricity, automobiles, stoves, refrigerators, and the rest is approaching a hundred percent. The gains for below medium income families are particularly impressive.

You also see that the time we need to work to get these things has also improved. The average amount of time that an unskilled worker needs to buy a long list of everyday items has declined by about 72% since the ’60s. So we’re working less and getting more for our money. That’s great.

Now, I want to move on to the next question. So what do we mean even by industrial policy? Now, Oren has listed some examples and I think that’s great, because sometimes industrial policy is couched as these broad macroeconomic programs, but I think it’s good that Oren has talked about things like boosting semiconductors or—

Gene Epstein: One minute to go.

Scott Lincicome: And here, I think the record is really clear. Whether it’s semiconductor production or machine tools or steel tariffs or the Jones Act, I can go on and on and on, the results of these industrial policies are not, not good. It turns out that we have been doing this for decades, and it really beggars belief that we’re going to be able to do a really good job of doing it in the future simply because we have better planners, more altruistic people in charge.

I think the other thing to note here is that there’s a lot of evidence that we don’t need the industrial policies in the first place. Now, Oren mentioned consortiums. There’s actually good evidence, for example, that past semiconductor consortiums by the government actually weren’t needed and did not achieve anything near to what the private market could have done. And there’s examples as well that, for example, ARPA-E funding hasn’t actually improved clean tech startups as compared to what, again, the private market can do.

Gene Epstein: Scott, you’ve exceeded your extra time limit. Thank you, Scott. And now we get to the rebuttal portion, five minutes a piece for this. Oren, I’m going to give you an extra eight seconds because Scott went over. So Oren, take it away with your five minute rebuttal.

Oren Cass: Great. I’m going to start with something a little bit in the weeds, but I think it’s important that we be talking from the same data as we have this debate. And frankly, I disagree pretty strongly with the picture that Scott just presented. So let me just kind of run through some of the data points and explain my perspective on them.

So the first is that Scott emphasized that output in the manufacturing sector is up. It’s in total up very, very slightly, but has essentially been flat for two decades. And there’s a very strange accounting quirk in the way we account for the number of transistors in semiconductors that accounts for essentially all of it. If you look at our manufacturing sector excluding the electronics and semiconductors segment, manufacturing output has actually been declining for the last two decades. And I think it’s important to ask compared to what, because of course what we should expect in a healthy growing economy would be a significant increase, so that in absolute terms, if not as a percentage of GDP.

And so the fact that actually our manufacturing sector has failed to grow now for two decades I think is certainly a problem. I think if we talk about manufacturing productivity, Scott mentioned a bunch of countries that are as productive or that we are as productive as, he skipped Europe though. And the reality is that the productivity of the manufacturing sector, or certainly the wages earned by workers in the US manufacturing sector is far, far below what you see in a country like Germany or Switzerland. The most recent BLS data I have is from 2012, but at that point, the hourly cost of a US manufacturing worker was 35.67 as compared to 45.79 in Germany and 57.79 in Switzerland. So there’s an extraordinary gap there.

The third point I would make is that Scott mentioned foreign direct investment and the idea that all of this investment is flowing into US manufacturing. It’s important to understand that foreign direct investment is almost entirely just foreign companies buying US companies and US assets. It’s not actually greenfield investment. In fact, of more than $200 billion in foreign direct investment last year, only 4 billion was actually the investment increase of any new capacity, and I believe about 1 billion of that was in manufacturing. So it’s not actually an area attracting new investment of that kind.

And then finally, I think it’s very important when we think about labor force participation, keep in mind that, again, we’re talking about labor force participation for particular groups. And if you look at labor force participation in particular for men without college degrees, that’s where you see a significant decline. And essentially, what you see is a pattern where in each recession, we see a significant dip, and then there’s no subsequent rebound. And so there’s sort of like a series of downward steps that has left those share of men in the labor force significantly lower.

So I think when you put all those things together, what you see is a manufacturing sector that is by no means dying, I don’t think I suggested that, but is not performing as well as some of our peer economies, and it’s certainly not performing as well as it could be. As I mentioned also, productivity growth has been declining for five of the past six years.

So in my mind, the question is not is manufacturing gone. Obviously it’s not. It’s not did some particular set of public policies destroy manufacturing. Obviously they didn’t. It’s whether public policy could improve upon what we have. And so that’s where we have a question, well, do we think more investment into this sector would be constructive? And I think there’s an obvious case that it would be.

The last piece I want to add to the data conversation that I think is really telling is Scott described this shift in consumption—

Gene Epstein: One minutes to go. One minute.

Oren Cass: —to services, but of course that’s in relative terms. In absolute terms, the amount of manufactured stuff we consume continues to grow. And the way you can tell is because we have a skyrocketing trade deficit in goods. We continue to buy more and more goods, they’re just not being made here. They’re being made somewhere else.

And I think especially troubling to the point about innovation, is if you look at the balance in advanced technology products and we track that separately, in 2000, we actually ran a slight surplus in the production and export of advanced technology products, and by 2019, we were running a $133 billion deficit.

So that’s the sort of trend that I look at and say there’s certainly no reason that needs to be the case, and we should ask if policy can do something about it. Now, as Scott didn’t really get into any of the policies I suggested, I’d love to get his reaction to those. And then maybe we can talk more about whether or not they’d be likely to go to do good.

But to summarize, output is flat to down in manufacturing, productivity in the US manufacturing sector is much worse than Europe, the FDI in new capacity is virtually zero, labor force participation for young men is in serious decline, and we see a significant demand for more manufactured goods in the US, it’s simply not being produced here.

Gene Epstein: Thank you, Oren. Scott, a little over five minutes for you to give you a rebuttal. Take it away, Scott.

Scott Lincicome: Yeah, perfect. So first just to say, trade deficit in goods has only skyrocketed in nominal terms. As a percentage of GDP, it’s actually been flat since the 1980s, meaning that we aren’t actually, again, consuming more goods overall.

But I don’t want to get into a data fight. I think that, again, Oren has raised the right question: Can real legitimate US industrial policy improve where we are today? And again, I think that’s where history of US industrial policy is really quite clear. Now, I go through a lot of this in my paper, but I’ll just give you a couple examples.

Again, let’s talk semiconductors. Well, the last time we tried to boost semiconductor output in the 1980s, it was a debacle. The United States semiconductor trade agreement with Japan which regulated DRAMs was plagued by high costs for American computer companies. It was plagued by picking the wrong product. It turns out that people were exiting the market for chips that they targeted and they were entering other markets for other types of chips. In fact, things got so bad that there were reports of Japanese firms which were forced to buy American semiconductors just dumping them in the Tokyo Bay. That is not a good use of productive resources.

And again, the research and development consortium, SEMATECH, which has been praised occasionally, was found to not only be captured by certain domestic interest and certain chip producers actually harming other smaller chip makers, but really didn’t actually produce anything much of value, particularly that could not be produced by the private sector.

Well, why didn’t this work? And this is just a classic example of why industrial policy in the United States has been just so unsuccessful. First, the planners picked the wrong products to subsidize. It’s a classic case of the knowledge problem. Second, there was politics. DRAMs were the focus because that’s where the lobbying energy was. SEMATECH had these producers because that’s, again, the established companies that lobbied for them. So this is public choice in action.

Now, this exact thing could be happening again with new US subsidies, but we’ll talk about that another time, or we can talk about Trump’s steel tariffs. Unfortunately, I have a lot of personal experience with this. I mean, here, you had a US steel industry that had captured the Department of Commerce and had former colleagues in the Trump administration providing tariff protection for an industry that not only had received billions in subsidies and tons of tariffs before, but did not need it at all. It had a 70% market share.

Things were so ridiculous in that case, that Defense Secretary Mattis said at the time, “Hey, we don’t need tariffs at all. We don’t need this national security protection. We only need about 3% of steel production.” And it turns that again, his advice was totally ignored.

So time and time again, I can’t go through all the examples of the Jones Act, for example, Trump-era subsidies to Carrier and Foxconn. Ethanol mandates, machine tools restrictions, textile and apparel production subsidies, Japanese automobile quotas, Anti-dumping duties, and so forth. Time and time again, they run into the same problems, high costs, failed objectives.

And that gets I think to the other point. We have a ton of experience with this stuff, and it keeps showing massive amounts of unintended consequences, whether it’s the fact that past industrial policy for semiconductors and machine tools actually boosted new competitors in Korea or China. We have costs and hidden costs, and that’s even admitted by supporters of industrial policy, for example, at Brookings and elsewhere. And that’s just direct costs. It doesn’t look at the opportunity costs. It doesn’t look at the political costs. It doesn’t look at the malinvestment. And speaking of that, there’s substantial misallocation of resources or subsidies—

Gene Epstein: One minute.

Scott Lincicome: …push resources to the wrong places. So instead of, for example, providing hundreds of millions of dollars in loans to viable companies that produce pharmaceutical inputs, we ended up subsidizing Kodak like we did last year, a former camera company, and that turned into a just absolute mess. And that, again, cost capital to flow away from what could have been productive manufacturing enterprises.

And there’s distortions upon distortions. There’s just pressed economic activity that arises from all these types of economic nationalism, including local content measures, which, by the way, are banned by world trade organization rules. And that gets to another problem we have, there’s potential trade disputes that arise, and that creates not only uncertainty and potential trade conflict, but also can present potential duties and tariffs on US exports. That also goes for targeted subsidies that are also disciplined by these global trade rules.

Now, of course there are high prices, and that also includes for American manufacturers due to the globalized nature of the sector. When you put tariffs on steel and aluminum, you end up actually depressing output in the automotive sector.

Gene Epstein: Your time’s up, Scott, although you’ll both have an opportunity to pursue your rebuttals now that we are going to the Q&A portion of the evening. You both will have the opportunity to ask each other a question or two or three questions right now or later on. We can give it to audience questions. Oren, and would you like to put a question to Scott at this point?

Oren Cass: Sure, I guess just one to start with. I think he gave good examples of things that were not my proposals that didn’t work, and I would agree with many of them, but it seems to me that a lot does work. And I would just be curious to get his reaction to this observation from economist David Goldman, which is that every important technology of the digital age began as with a DARPA or NASA subsidy, the semiconductor, SEMA’s manufacturing of semiconductors, the graphical user interface, semiconductor lasers, optical networks, LED, plasma displays, and the internet itself. And I’m curious if, in Scott’s view, either those programs are better than the ones he’s condemning, or if he believes that we would have made more progress faster on all of those things if government had just gotten out of the way?

Gene Epstein: Scott?

Scott Lincicome: Yeah. So I think the general answer is precisely what I was saying in the first part, and that is that these policies, they don’t exist in a vacuum. And so when you say, “Ah, the government policy created X, Y, or Z,” well, the reality is that we don’t know what would have happened in the absence of those programs. We also know that there’s a lot of evidence out there that precisely these types of programs do not achieve better outcomes than what are achieved in the absence of the programs and by private market.

Now, look, that’s not to say that there’s no market failures out there or that there’s no role for government at all, but what it’s saying is that when you get into the weeds of specific US industrial policies of the type, yes, that Oren has proposed, whether it’s local content restrictions and buy American rules, or whether it’s R&D consortia like SEMATECH, the results there are not very good. And, oh, by the way, they also tend to run into and morph into things that are worse, things like the Jones Act or the Semiconductor Trade Agreement. It is not the fact that these things can just exist in a vacuum.

So overall, yes, I think that the government and government policy can achieve certain outcomes. And I think that basic funding for R&D or whatever is different very much from industrial policy. And what I mean, industrial policy is picking specific winners and losers in the market to achieve specific industrial outcomes. And that I think is where there is tons of history. And unfortunately, two decades of my life as a trade lawyer in the weeds of the anti-dumping program and the steel tariff exclusion program, it shows that these things tend to produce massive distortions and costs.

Gene Epstein: Thank you. Scott, do you have a question you would like to put to Oren?

Scott Lincicome: Yeah, I do. So, Oren, in your book and related writings, you’ve appeared to be half supportive of the Foxconn deal in Wisconsin, which I think everybody can agree has been kind of a total debacle.

Gene Epstein: Could you clarify what that deal was?

Scott Lincicome: Right. So Wisconsin gave billions of dollars to Taiwan producer Foxconn to create an LCD factory there. And the whole thing has been really plagued. And the idea was to create a bunch of high-tech manufacturing jobs, right? Precisely the type of stuff that Oren said earlier that we want, right, that the nation needs. Now Foxconn, of course, this deal has proven to be an absolute mess, not only in terms of the high cost, but in terms of all sorts of distortions and basically the whole thing has fallen through. So I just want to know, I mean, are you supportive of that, or not? Or I guess the better way to put it is if you could choose between a Foxconn style deal, which is what we get a lot, or nothing, which would it be?

Gene Epstein: Oren.

Oren Cass: Well, I’m just not sure where I’ve ever said anything supportive of the Foxconn deal. In my book, what I wrote… I’m just quoting: “Wisconsin’s approach is half right. Paying for jobs makes sense. How they’ve gone about it, however, does not.”

Scott Lincicome: Right.

Oren Cass: And so I believe I’ve always said that I thought the Foxconn approach was a mistake. And as I said, in the caveats to the policies I was proposing, I think playing venture capitalist or trying to allocate to specific firms is a mistake. So I’m not sure why you say I’ve been half supportive of it.

Scott Lincicome: Well no, I’m sorry. I said half supportive. Exactly that point that look, the idea of government subsidizing jobs is good, but they just should do it differently. Well my question though is, let’s say you don’t have a choice, right? That look, the—

Oren Cass: No, no. I understand your question. I understand the question.

Scott Lincicome: …policy, given that unfortunately it’s not you in charge of either the government of Wisconsin or sitting in Congress. Let’s say that’s the only thing out there. Is that something worth doing?

Oren Cass: So I’ll just clarify, I’m not half supportive of Foxconn. The chapter was about wage subsidies and I was giving a wage subsidy as an example of something that is a good idea. And giving money to Foxconn is something that is bad. So I’m, again, not at all supportive of Foxconn long before it became a complete disaster. To your question, if my only choices are nothing or Foxconn, then my choice, I would vote for nothing. But I don’t understand why those are my choices any more than if I asked you if my industrial policy or becoming communist China were the only two choices. Which would you prefer? I mean, fortunately there are other options out there, and I think that’s what we should be focused on.

Scott Lincicome: Okay.

Gene Epstein: At this point, do you want to give it to audience questions, Oren and Scott, and waive your own questions for the moment?

Scott Lincicome: Sure.

Gene: Yep. Okay. Well, we’re getting questions focused at Oren. I guess one of the related questions would be, can you, Oren, cite a country that has had a beneficial industrial policy? And then questioners latch upon the classic case of Japan, the MITI in Japan, where research has apparently shown that MITI chose the stagnant industries. There was a lot of political corruption. And then when Japan was riding high as the big planning economy, that’s when stagnation set in when its lost decade ensued. So if Japan was supposed to be the best example of industrial policy and it turned out to be one of the worst, could you address some of those statements, in any way you want?

Oren Cass: Yeah. I wouldn’t have cited Japan as the best example. I think Japan, in the structure of its society and economy, is uniquely sclerotic in ways that have done it a great disservice. The examples I would point to in East Asia are Taiwan, South Korea and Singapore, all of which have pursued industrial policy and essentially chosen industries in which they wanted to win. I mean, there’s no reason that Taiwan has a natural comparative advantage in semiconductors, nor that Korea does or Korea in shipbuilding. But through government-led policy, they built or supported the development of very successful industries.

I think elsewhere in the world, in Europe, I think Germany is probably the best example of a company, excuse me, a country that has a range of policies designed to support its manufacturing sector, in terms of education, in terms of what it calls its manufacturing institutes, which have a very long German name that I won’t try to pronounce, that essentially are public-private partnerships to commercialize technology into the manufacturing sector. I think Israel is a very interesting example of a country that has focused intensively on defense and IT and obviously become a world leader in both, and so those are some of the examples I would point to.

Gene Epstein: Yeah, Israel, Germany, Taiwan, Singapore, Korea. Could you comment on that, Scott?

Scott Lincicome: On their successes and their failures?

Gene Epstein: Well, Oren has made the statement that he does believe that those five—Israel, Germany, Taiwan, Singapore, Korea—are good examples, role models for the US to pursue its own industrial policy, that those five have pursued successful industrial policies. Could you comment on what I believe was Oren’s claim?

Scott Lincicome: Sure. So I think there’s really just a couple responses. First is that I’m always skeptical of cross-country comparisons for the sheer fact that we are not those countries. And again, to go back to the United States’ experience with industrial policy, just simply isn’t very good and thus, I think there’s a reason to be skeptical.

But I think the other thing that we need to consider is whether these countries and whether their approach actually has been successful for the economy overall. For example, just to give you an example, there is a really disproportionate amount of investment in South Korea and Taiwan just for computer and electronics. So these are highly specialized nations in one area. Now look, maybe that’s good or maybe it’s better to have a more diverse, more stable economy like the United States that’s more dynamic and more responsive. So for example, we still do have, for example, a large semiconductor industry. We actually do produce a lot of high tech cutting edge semiconductors, but we also have pharmaceuticals and we have aerospace and transportation and the rest. And I think that is a much better approach than trying to kind of force certain sectors and certain industries in creating kind of a less diversified economy.

Gene Epstein: Thank you, Scott. Another question for you, Oren, related to that same point. With respect to the US history, you have a question that points out and acknowledges that you have said that government subsidy of computers, chips, the internet, that was successful industrial policy. Can you cite any other broad categories of US initiatives that you would regard as good precedent that they could build on for successful government investment?

Oren Cass: Besides the entire digital age? Sure, I can keep going. I mean, look, I think one thing I would just add specifically on the digital age technologies is that while some was kind of basic research and DARPA and so forth, a huge piece of the puzzle was the huge public-private partnerships between government, academia, and places like Bell Labs and IBM, all the way through the sort of applied research and commercialization of the technology. So I think that was a much more broad based effort than the sort of DARPA grant piece of it.

I think another fascinating example is health care. And I think if you look at what’s now happened with the vaccine program, I don’t want to get into a debate over what was or wasn’t to be learned from Operation Warp Speed. I’m sure Scott and I could go five hours on just that, but I’m more interested in backing up a step and noting that we had the technology and capacity and infrastructure to do something like undertake the development of a vaccine with that speed because of the investment, particularly in the US, but certainly in other countries as well. We’ve seen the role of the UK in Germany and so forth in investing in the biotech sector. I mean, what the US does through the National Institutes of Health, through its support of universities and medical schools, and then through creating the latent demand through public healthcare programs, is a huge piece of why we have the amount of investment in progress in the healthcare sector that we do.

And I think downstream in the consumer market, there obviously a lot of problems with the role that government plays in health care. But upstream in the innovation stage I think it’s an indispensable component of what has made the US successful.

Gene Epstein: Scott?

Scott Lincicome: Yep.

Gene Epstein: You want to comment on…

Scott Lincicome: Yeah, I think the vaccine’s point is awesome. And I think it’s a really excellent example of why so much of kind of the successes of industrial policy are a bit misguided or misleading, I think. Because, so here you have a perfect example of really the government staying out of the way of vaccine production, vaccine innovation, in terms of the BioNTech-Pfizer approach. You can look at Moderna and say, “Look, Moderna was with the National Institute of Health, Moderna was involved kind of with the government a lot. On the other hand, you have BioNTech, a German company, which got together with its research on mRNA, it got together with Pfizer, a American company, and they really did all of this themselves outside of Operation Warp Speed. Then they used Pfizer’s existing production networks in the United States and elsewhere. They used a global supply chain of inputs and workers, immigrants from all over the world and the rest.

And this was not planned by the government. Now, was there support along the way, whether it’s in patents or whatever? That’s fine. But the fact is that this vaccine was very much an effort that existed privately, but if it hadn’t existed, we could have looked at the Moderna approach and then, “Aha. We definitely needed government for this.” But again, because we have the BioNTech-Pfizer alternative, we can see the private sector doing it and doing it quite well and doing it actually a little bit faster.

Gene Epstein: Okay. Do you want to respond in any way, Oren, to that comment or waive?

Oren Cass: Yeah. I mean, I think obviously the massive purchase commitment was a factor in the investment of the Pfizer vaccine as well. As I said, I think the details of the Warp Speed project itself, we could fight about for days. What I’m more struck by though is the broader point about trajectory and that the idea that we wanted to have an innovative healthcare sector and the capacity to develop these things and the research going on at NIH and the work being done on mRNA to begin with. All of these things are not things the private sector was ever going to do itself because there were no price signals for them because that’s not what markets and price signals are for.

And so I agree entirely with Scott’s point about the incredibly important role of the private sector in all of this. And that’s why I’ve tried to take pains to emphasize every point here that this is not a proposal for a central planning approach that says government can simply, soup to nuts generate things in the economy better than the private sector could. It’s an effort to point out that there are certain things that markets don’t do on their own that I think government policy can play a role in and has proved its ability to play a role in across countries, across sectors. And we have a situation in the US where there’s a constructive role it could play in a sector that has really lagged and is really suffering ultimately by the competition from manufacturing sectors elsewhere that do get this kind of support.

Gene Epstein: Another question for you, Oren, picking up on the laundry list of failures that were enunciated by Scott. Others are adding the subsidy of Solyndra, which went bankrupt, the bailout of General Motors. It seems as though, as it’s been put by some of the audience, that you have a mixture of sort of corruption and incompetence. Incompetence, because the people in charge are not investing their own money, they’re investing somebody else’s money. The corruption, because the people in charge are listening to the corporations that dominate the economy already and that could be a prescription for stagnation. Is there anything that you could offer the audience to assure them that the combination of incompetence and corruption that seems to pervade government initiatives and industrial planning, that that combination can somehow be suppressed?

Oren Cass: Well look, I think the sort of case study approach to finding every failure along the way is an incredibly foolish one. I would be the first person to say a significant share of the investments that get made are not going to work, which by the way happens to be true in the private sector as well. I mean, if I were to go pull up the track record of any venture capital firm and start reading off the stupidest things they’d invest in, that would obviously not be a case against venture capital. I think the Solyndra example, that being said, is not the model I would support because I do think there’s a much higher degree of incompetence and corruption when you have government bureaucrats trying to pick the specific companies to essentially buy equity in, though I would note that that Tesla is something of a counter example to the Solyndra case at this point.

But the model that I find very attractive is one that forces the private sector to put its money where its mouth is. And so to just elaborate briefly on this sort of pre-competitive consortia concept, what I think is really interesting about it is industry has to go first. So Scott’s been saying that SEMATECH didn’t accomplish anything and so forth, but the reality is that all the semiconductor companies put 1% of their revenue into it and continued doing it. And it continues to exist today. Apparently the market has decided that there is something valuable here.

And so the model that I find appealing is to say, Look, if an industry group wants to get together and say, “We think that this kind of joint upstream research would have value to our industry and we are willing to put money into it,” then I’d like to see government matching.

And so that form of subsidy, yes absolutely it’s a subsidy, but it is a subsidy to fund an activity that has public benefits far beyond what the private players would capture themselves. And so that’s exactly where you would actually have to define the subsidy is efficient. It’s a situation where the bureaucrat has relatively less influence on who gets the money. And it’s a situation where you have an actual market check on whether money’s going to things worth investing in. And would some of those fail? Absolutely, but if even a small share of them succeed, that ultimately is huge net benefit for us just as a huge share of all of the investments made through the digital age probably didn’t succeed. But the net gains of all the incredible breakthroughs we did have are the reason that we do it. And that’s something that we understand when we think about how the private sector invests and I think it’s something we should feel comfortable with when we recognize that we would benefit from public sector investment as well.

Gene Epstein: Scott, any comments from you?

Scott Lincicome: Yeah. I mean, I think that I really like the distinction between private failure and public failure. Because in the private sector, when companies and investments fail, the investors lose and they learn from those losses. By contrast in the government sector, when the projects fail they’re oftentimes rewarded with more money or a change that actually makes things worse, not better.

If you look at the history again, of so many different programs, the result of failure is not terminating the program. It is expanding the program and making it worse down the line. And I don’t think for a second that it’s just this easy thing that, “Oh, we’ll just insulate them from the bureaucrats.” Time and time again, it shows that that’s really not the case. And again, I hate to kind of go back to things like the dumping wall, but the fact is that when you get in the weeds of these things, when you set up a bureaucratic agency or a program that is designed to work with certain industries, eventually the bureaucracy becomes captured or Congress gets involved and makes the law worse and the vehicle for providing whatever it is, the protection or the subsidy, actually becomes more distortionary over time.

And I think that that is a huge difference of course, between the private sector and the government sector. And I think the other thing again is when we talk about the net benefits, it is crucial to really consider all of the hidden costs to these programs, whether it’s political costs or opportunity costs or the capital misallocation and distortions. And the answer there are the additional costs from those things are really critical before you can say, “Aha, we created X, Y or Z, and that must be a net benefit.”

Gene Epstein: Thank you, Scott. A question for you, Scott, at least let’s start with you, a simple question. What do you say to those who suggest that industrial policy should be done solely through R&D tax credits and to research and development?

Scott Lincicome: So there’s actually a lot of great studies in R&D tax credit. So I think this is a good example. First of all, let me say in general, government can change the level of something, whether it’s R&D or the rest. But R&D tax credits provide a really good example of problems that arise, because it turns out when the R&D tax credit was first provided, all of a sudden companies were reclassifying things as R&D. And so there’s a lot of question in the academic literature about whether these R&D tax credits were actually worth it in the long run. And again, this gets to all sorts of kind of questions about allocation of resources and when you provide that tax credit, all of a sudden it pays to hire a bunch of accountants and lawyers to figure out what is the best way to capture that rent. And that money, not only can you lead to possible ventures that didn’t need to be done, but it’s also just money wasted on again, lobbying and rent-seeking instead of on productive things like jobs and actual innovation.

Gene Epstein: So that means you oppose R&D tax credits? You oppose them?

Scott Lincicome: Yeah, I mean, generally yes.

Gene Epstein: Comment from you, Oren, on that question?

Oren Cass: They’re not my top priority proposal, among other things, because as Scott just noted, I think to a significant account they lead to just a significant extent they lead more to shifting around pools of money being spent already. I do think it’s important to note that the US in terms of the tax incentive it provides for research and development and investment, used to be near the top of the OECD and is now near the bottom. And so that is not per se an argument for it, but it is to say that this is not an area where we’re sort of throwing around money willy nilly. And at the end of the day, if it’s something that we want businesses to be doing more of, we should make it relatively more attractive than things that have less economic value.

Gene Epstein: Questions about productivity, in particular. Scott, do you agree that at least it’s a source of concern that conventionally measured productivity by the Bureau of Labor Statistics over the past 20 years, that productivity growth has slowed? Do you regard that as a source of concern since it was stressed by Oren?

Scott Lincicome: Well, I mean, I think that productivity is important and that it’s a source of concern, but I think that there’s two things. One, is can the government really fix that issue? And two, well actually three things, excuse me. Two is, are we today measuring productivity correctly? I think there’s a lot of debate right now among academics about whether there’s a lot of kind of hidden productivity gains that we’re not really seeing because so much of what’s being done in information technology and internet and the rest really is not stuff that is easily calculable, despite massive benefits for businesses and for consumers. And then third, is there’s a lot of speculation that we could be really on the cusp of quite a significant acceleration in productivity growth. And so those are the types of things, again, that I think caution severe changes to economic policy based on a snapshot or a single economic indicator.

Gene Epstein: A related question for you, Oren, you can comment on this question. But with respect to productivity, another question came in that the trajectory of productivity has been that it slowed in the seventies and eighties, accelerated in the nineties, slowed in the aughts. And so, the questioner is skeptical that this rise and fall, acceleration, deceleration has anything much to do with whether there was an industrial policy in place, or whether there wasn’t. Could you comment on that and comment on productivity generally?

Oren Cass: Yeah, and this was a reason that I focused specifically on manufacturing productivity as a measure. For one thing, I think it avoids a lot of the current concerns Scott was just describing about output because with services and the productivity of at Google is hard to say. When you’re talking about manufacturing output, I think you have a much more concrete and consistent over time measure of productivity in terms of the people doing the work and the amount of stuff that comes out. And in manufacturing, you don’t see that up and down. What you see is a fairly steady rate of productivity growth and quite strong through the first two periods that you just described. And then a real collapse over the last 10 to 15 years.

And so, I want to underscore that point as something that I think we haven’t been talking about. Well, it’s my fault for not talking about it more, I suppose. We’ve been talking about sort of manufacturing jobs and so forth, but I really want to underline again that the second of the three things that make us care about industrial policy, which is the innovation, and productivity, and the trajectory over time. And the stuff we invest in today, the stuff we’re good at now, affects what we can do tomorrow. And so if you pursue a policy for a long period of time that says we don’t care, potato chips, computer chips, what’s the difference? You can in fact find yourself in a position where you are less good at making less of the stuff where you are seeing the innovation, and you could have gotten the productivity gains. I think that is a quite good description of what we have in fact been seeing.

Gene Epstein: Any comment from you, Scott, on that?

Scott Lincicome: Yeah. I mean, two quick points. One, again, the data are really clear that we actually aren’t just simply making potato chips. That whether it’s aerospace, or transportation, or computers, or defense systems, or satellites, or the rest, the United States manufacturing sector is still producing a ton of stuff and still at the leading edge of those industries. So I think that’s the first issue.

The second, though, is—and this is I think a bigger issue I have with industrial policy—there’s a really big conflict, I think, between the encouraging innovation and productivity side of things and the use of industrial policy as a jobs program. Because they really, they’re in direct conflict. Because if you are investing in the most innovative and productive industries. For example, that steel company that only needs 15 workers to make 500,000 tons of steel, we are not really creating a measurable change to jobs, to having those manufacturing jobs that we apparently so desperately need.

On the other hand, if you start investing in low wage, low productivity jobs, the ones that would be more stable, and the ones that would be less susceptible to automation, and industrial robots, and all these things that manufacturing owners and factory owners say is the essential to advanced manufacturing, if you invest in those other low productivity jobs, well, you’re not really going to have, again, that productivity.

So it really strikes me as kind of the Veg-O-Matic of policies. It’s somehow going to create these large group of stable jobs, but also this kind of high productivity, high innovation, high churn industries as well. And that I think’s a bit of a problem.

Gene Epstein: Right. That concludes the Q&A part of the evening. We go into the summations. Oren, you’re the affirmative, so you go first. Seven and a half minutes for your summation. Take it away, Oren.

Oren Cass: All right. Well, thank you. This has been a fantastic conversation. I don’t agree with Scott any more than I did, but he’s given me a couple things to go read up on at least, so that’s always good. I guess I want to sort of walk briefly through the debate as it’s happened and at least describe from my perspective where we’ve ended up.

Scott’s opening statement really focused heavily on data and a whole set of claims about how well the US manufacturing sector is doing, and in particular, demonstrating that by comparing our performance to other countries around the world. Since then, when I went through what the data actually shows, he decided he didn’t want to get into a data fight and then shortly thereafter said that he was always skeptical of cross-country comparisons.

And so, in fact, we haven’t actually ended up talking a whole lot or resolving this question of whether there’s opportunity within the manufacturing sector beyond at least what I still see to be very clear, which is, one, that output growth has not kept pace with what we would expect, even for an economy of the US’s state, as compared to a lot of other developed economies like Germany and Japan, Switzerland, and the share of their economies that have good manufacturing jobs and high levels of manufacturing, innovation, and productivity. And that we, again, are not seeing the kind of productivity and innovation in that sector that we could, and that we should want. Instead it seems to me, the debate has become mostly a public choice debate, that is the question of whether government can do any of these things.

As I said, I certainly agree that the government’s not going to be perfect, and it’s going to make lots of big mistakes. But the question is whether we can improve on the status quo. And I think that’s a really important question to ask, and it’s a real trap that a lot of public choice arguments fall into, where they somehow hypothesized that if we don’t pursue the policy I’m proposing, we somehow will have fewer public choice concerns. And I think Scott sort of implied that when he posed the question about Foxconn, and whether if my only choices were nothing or Foxconn, what would I choose. In fact, even the nothing—

Gene Epstein: Five minutes, five minutes. Go ahead.

Oren Cass: … if we ask what nothing would be, the nothing of today is already an amalgamation of messy policies created over time by politicians with all of those interests that Scott has been raising.

So there is no sort of small government, no interference paradise to be had. And of course, if Scott could have his way and tried to implement one, he would have to go through Congress and face the exact same problems too and again end up with a mess. So an option of public choice not being a problem and all of these messes of government not being a problem isn’t on the table. Whether we do nothing, whether we do what he might propose, whether we do what I might propose, we are going to have that set of problems. And it seems to me that’s almost a baseline that we need to work within.

As Scott’s described, we have all manner of economic policies already. And unfortunately, I don’t think they’re especially well geared to some of the priorities that we should have. And so, the argument I’m making is not that if I were czar of the world, here’s the perfect thing that would be done. It’s that in the policy making process as it exists in Washington, recognizing that we have an opportunity here, recognizing that we have an area where markets are not going to really address the situation at all. And therefore believing that at the margin, some efforts to do things like encourage research consortia and fund them. Another policy we haven’t talked about at all is on the education side, feeling comfortable acknowledging that engineering degrees are more valuable to us than dance degrees. Those strike me as the sorts of determinations that we actually could and should be asking our policymakers to consider.

And so when I step back and ask what am I actually hoping to accomplish here, I think Scott’s point about, was is it, the Vitamix or the Veg-O-something of industrial policy struck me because it highlights maybe that I haven’t been as clear about it as I should, which is I don’t see a conflict at all between the high productivity goal and the lots of jobs goal. Because for me, the goal isn’t necessarily lots of manufacturing jobs. The goal is a robust manufacturing sector and high levels of productivity growth and innovation.

And just to make that concrete, if you imagine a community that has a steel mill on the hill outside of town, in the world Scott’s describing where it becomes extremely productive and innovative and requires less labor in it, that’s actually still a really good outcome for that community. You’re going to have perhaps fewer but higher paying jobs, you might have more people coming in to do some of those jobs, you’re going to have more income coming into the community. And that can then among other things support a healthier services sector for people who are moving into the services sector.

What I worry about is when you say, well, we don’t care about whether or not we have a robust manufacturing sector, that plant can just close up and move somewhere else. And if that happens, the story is very different. If that happens, you don’t have the viability of the service sector or really that community at all. And so what we should be pursuing is not necessarily some arbitrarily high number of jobs, we should want a manufacturing sector and an industrial sector, which I said includes resource extraction and includes infrastructure development. We should want an economy that has that robust sector with high levels of innovation and rising productivity because of the benefits that that generates for the rest of the society in all of those spillovers I’ve been talking about in terms of resilience, innovation—

Gene Epstein: One minute, one minute.

Oren Cass: … and the kinds of employment in those industries and the spillovers for the health of the communities in which they operate. And if those are things we value, and I think they are, and if that’s not something the market’s going to consider, and I think we agree it’s not, then I think it’s something that policymakers should consider. And I’m not proposing a radical overhaul of public policy. Compared to most things the government does, these kinds of investments are actually quite small, and they can be tested and ramped up.

But as compared to our current attitude, which is to have no strategy at all, and what I take to be Scott’s preference, which is to expect that the market would deliver a better outcome with no public consideration of the direction investment goes, it seems to me that an effort to recognize there are certain kinds of investments that have high social value, and that public policy can play a role in encouraging them, is a sensible approach that’s going to address some real problems we have, take advantage of some real opportunities we have, and ultimately we’re down to the benefit of the American people.

Gene Epstein: Thank you, Oren. Scott, summation from you. Take it away, Scott.

Scott Lincicome: Yeah. I want to start again just by reiterating: the data on US manufacturing are really quite clear. And this is not, this is actually, I don’t want to go back into a data fight only because I only have seven minutes. But the fact is that if you look at what has happened in the US manufacturing sector, in terms of not merely output, particularly output in core sectors, we talk about resilience and all of these things, in durable goods and the rest, these sectors are up. R&D is up. Investment is up. And FDI is productive even if it is acquisitions. There is still creating value there. FDI also has, as we talked about, spill-over effects for local communities and the rest.

So these things, if you go into various financial metrics for the manufacturing sector, all of these things show a healthy sector, one that is still productive. Furthermore, on the resilience side, a few months ago, everybody was screaming about supply chain resilience, supply chain resilience. Well, again, we now have seen how these supply chains have reacted. And they actually, again, have worked out pretty well in the face of absolutely generational changes in supply and demand.

And so these factors, again, unless there is some arbitrary magical number in terms of R&D spending or the rest that I’m not aware of, there’s really little evidence to indicate we need an industrial policy however you want to and design it, however you want to describe it, to boost the sector overall. Particularly when you look at these very, very common trends in jobs, in manufacturing sector of the economy, in consumption and the rest, that simply argue that a lot of what is going on in the United States is going on everywhere and is going on not because of some problems with deindustrialization or resilience, but because this is a standard story of economic development, one that has been backed up by boatloads of economic research.

But again, I do think it is important to think about, the point here is should be we adopt an industrial policy? And again here, this is what really strikes me as the problem. Because when you look at the history of these industrial policies, it is not simply about, oh, I’m going to create this magical R&D consortia. The fact is that Oren and others want us to believe that their policies aren’t going to be like the others. They’re going to be designed just like it says in a policy paper or the rest, they’ll be insulated from the political cycles, whether it’s the Trump administration wanting heavy manufacturing or now the Biden administration wanting green manufacturing, they’ll be guided by smart altruists who know everything, know which sectors, they’ll invest in the right sectors and the rest.

And of course, that somehow economic policies are going to solve deep-seated economic and cultural problems that exist in America. Now as I’ve hopefully shown, there are a lot of reasons for skepticism, skepticism of the problems we supposedly have. The United States, for example, is making good jobs. Wages are up. Communities are adapting to seismic changes in technology, and trade, and the rest. We should be skeptical of the industrial policies we can feasibly implement—

Gene Epstein: Five minutes, five minutes.

Scott Lincicome: … and how those industrial policies evolve over time. We also, again, need to be skeptical of the ability of these policies to fix the problems we really do have, and importantly, do better what private actors, certainly not perfect themselves, could do. And again, I think the evidence there certainly weighs against adopting industrial policy.

In fact, I think that given the history I described, given books that have been written on these subjects, well, advocates of industrial policy need to marshal a lot of proof, a lot. That prosperity for all, of all Americans, really needs industrial policy, again, as opposed to other less targeted economic reforms that, again, are really feasible.

Advocates like Oren really need to prove that even if we have these things, even if we need them in theory, the same forces that have long plagued industrial policy efforts won’t happen this time. I don’t think that he’s come close to meeting this standard, and faith in the next generation’s ability to implement them really isn’t going to cut it.

And I think the real point here, there’s a common refrain we hear that my side of this is market fundamentalism. I’m a fundamentalist in my views on trade, or industrial policy, and the rest. Well, this really isn’t true. I mean, look, we’re guided by certain principles and versed in the economic literature, but my view in particular, and the negative position I take in this debate, is driven by decades of experience. I mean, I don’t reject that market failures exist. I don’t reject that government policies might correct them and help certain people in the process. But I reject that industrial policy, adopting these broad policies that we have in the past, will somehow make things better for the country and achieve, again, prosperity for all people. Not just certain groups of people, not just certain managers, and CEOs, or companies, but all Americans.

And it really doesn’t indicate that that would be the case. And again, having a long history, toiling in the bowels of the Commerce Department, and US antidumping law, and the rest, and seeing how the sausage is actually made, it really provides a real-world skepticism of our ability to tinker in the margins and produce better outcomes for the country, and again, given how well things are going right now.

So can we draw lessons from the past? Yes, I think we can. And I think again and again it shows that this position in the negative is driven not by any sort of fundamentalism, but by a pragmatic understanding of our history and the potential for these things to go very, very wrong, not just in direct costs, but in longer-term costs, in terms of encouraging even worse policy down the road. Thank you.

Gene Epstein: Thank you. Under your seven and a half, and that concludes the debate. And now, Jane, please open the final vote. Again, you’re voting finally on the resolution to promote prosperity among all income groups, the US government should adopt an industrial policy. The final vote is open, so please cast your final vote. …

The voting results. All right, the yes vote on the resolution gained from 12.73% to 18.18%. That was a gain of 5.45% on Oren’s part defending the resolution. So that’s the number to beat. The no vote gained from 60% to 74.55%, a gain of 14.55 points. So the Tootsie Roll goes to the no vote. Thank you very much, Scott, thank you very much, Oren, for a very informative debate. Again, that’s just a game we play. This debate will be available on video and on podcast for the larger audience. And so again, a great debate, a great exchange of ideas, and we’ll see you soon, hopefully in Florida on February 18th. Good night. Bye-bye.

Watch at The SoHo Forum
Oren Cass
Oren Cass is the executive director at American Compass.
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