Rethinking Industrial Policy
2022-05-16 · Guest: Scott Lincicome (Scholar at Cato) · 52:16
The resurgence and flaws of industrial policy
Bob Zadek and Scott Lincicome discuss the resurgence of industrial policy in the United States, examining its definition as government-directed microeconomic intervention. They explore the inherent flaws of such policies, including the knowledge problem, temporal delays, and the distortion of market signals through political lobbying and protectionism.
Topics: Industrial Policy, Globalization, Protectionism, Market Failure, Public Choice Theory, The Knowledge Problem, F.A. Hayek, CHIPS Act, Jones Act, Steel Tariffs, Buy American
Speakers: Bob Zadek, Scott Lincicome
Introduction [00:00]
Voiceover: You’re listening to the Bob Zadek Show, a full hour of libertarian discussion with the smartest guests on radio. Live, spontaneous, and thoughtful, it’s the show of ideas, not attitude. Now, your host, Bob Zadek.
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running libertarian talk radio show on all of radio. Thank you so much for joining us this Sunday morning. This morning, we will discuss an insidious, somewhat stealthy governmental policy that affects each and every one of us every moment we put money into or take money out of our bank account, every moment we touch a credit card, every moment we make an economic decision. This governmental policy will affect what we buy, to whom we sell, and how much we pay for it. And it is a policy that usually results in making our life less pleasant, more expensive, makes our earnings more difficult to grow in many instances. It affects, in short, all of us all the time, and nobody knows it’s going to happen—that is, until now.
This morning, we will discuss industrial policy. Industrial policy sounds as “big government-y”—that’s my word—as a policy can possibly be. It’s a phrase that doesn’t really tell you much about what it is; it just is there. Unless you understand industrial policy—what it is, what are the hallmarks of it—only then will you be able to use the ballot box, use your political power, to do what you can to limit the adverse effects of industrial policy on all of our lives.
To help us understand industrial policy, how it works, how it affects us, and most importantly, why you must care about it, I’m happy to welcome to the show Scott Lincicome. Scott is a scholar at Cato. He has written extensively on industrial policy. He writes at Cato at a blog called The Dispatch. More about that in a moment. Scott has studied industrial policy, written extensively about it, explained to audiences throughout the country how it works and what to look for. And Scott has been generous enough to spend an hour with us this morning to explain this important instrument of our government. Scott, welcome to the show this morning.
Scott Lincicome: Thanks for having me. Good to be here.
Defining Industrial Policy [02:41]
Bob Zadek: Now, Scott, we are going to talk about maybe two somewhat opposite policies, policies that seem to contradict each other. The policies are globalization on the one hand and industrial policy on the other. Now, industrial policy in the big picture—we will drill down, of course—but in the big picture, what is industrial policy?
Scott Lincicome: Well, in the simplest sense, industrial policy is the government picking winners and losers in the market. More specifically, if you look throughout the history of industrial policy—the United States has had a lot of it in our history, a lot of other countries have implemented industrial policies over the world—if you look at it more specifically, beyond the just picking winners and losers stuff, you see a few elements.
One: it’s in manufacturing. So we’re focusing on manufacturing. We’re not really focusing on services or agriculture; we’re not growing corn. It’s about boosting or focusing on the manufacturing industry. So next, it’s about targeted and directed microeconomic support. So we mean firm-specific or industry-specific, and that’s opposed to horizontal or sector-wide or economy-wide policies. So, for example, we’re going to impose tariffs to protect the steel industry, as opposed to we’re going to eliminate corporate taxes or something like that. Corporate tax reduction—that’s very broad and horizontal, applies to everybody pretty equally. Steel tariffs—well, that’s just to protect the steel industry.
The third element is the government is trying to fix what it believes to be market failures. So there are things like negative externalities, or not getting enough manufacturing jobs, or there’s not enough investment in manufacturing. And they’re trying to achieve commercial outcomes. So you’re using these targeted microeconomic policies, you’re using these tariffs or whatever, to achieve some sort of measurable commercial outcome: more jobs, better products, more output—more steel output, for example. And you’re doing that not just to recreate what the market is doing; you’re specifically—the government is trying to beat the market. So you’re trying to achieve market-beating outcomes because, again, there is this market failure that necessitates government action, so we hear.
And then finally, that you need these market-beating outcomes have to be generated within national borders. So there is an express protectionist element to this. We do not, for example, just want solar panels from anywhere; we want American-made solar panels. To achieve a national climate strategy, we’re going to protect and subsidize our domestic solar panel industry. We’re not just going to give consumers a $500 coupon to go out and buy a solar panel. So that’s, I think, a very, very important distinction through the literature. And like I said, we have tons of these industrial policies throughout the years. There are several of them in place right now, and they all tend to have those elements. But going back to my beginning of my spiel, it really is again about the government deciding a sector is very important and that we’re going to pick the winners and losers in the market, whether it’s steel or semiconductors or whatever.
The Knowledge Problem and Market Failure [06:01]
Bob Zadek: Now, when you say the government “picks” winners and losers—I’m focusing on the verb “picks”—it doesn’t just say “you win.” “Picks” means the government, having decided—as if government decides things, but we’ll get into that—but when government decides as to who a winner ought to be, the government then acts on that decision by providing one form or another of economic support. That is, government takes the people’s money and redirects it from where it might otherwise go by a bunch of individual citizens or companies spending their own money. The government, in a two-step process, it first takes the money away. Think of it like the government saying, “You are not—you, a company or a citizen, will be deprived of your right to vote,” albeit with your dollars. “We are taking away the suffrage, the franchise, which a dollar bill gives you, and we are going to vote that dollar for you, not in the way that you would vote for it, but in the way that we decide is in your best interest.”
I use that analogy because I think it is apt. When Americans—we’re talking about our country—when our citizens or businesses spend money, they are voting. They are saying the recipient of the money has been the one selected to satisfy a need that the business or the person has. A need is established, and you pick who satisfies it. And that’s voting with your dollars. And the reason voting is important is that, just like an election, a large number of voters acting in concert will vote, and their collective wisdom will select somebody. Well, spenders acting collectively will tell everybody which are the products that deserve to live and which not. But, and Scott, is this an appropriate metaphor? But when government does it, we have one voter—one voter, not many. And we’ll get into Hayek and the knowledge that large numbers of people have collectively that the government doesn’t have, and I’ll ask you to speak to that because that’s an important part of our discussion. But now we have one voter, the government, betting the ranch, betting a whole bunch of money on its decision, imperfectly made—we’ll get into that—on a product or service. Now, how does that tell us about, A, the skill, the knowledge by which the government makes its decision versus the skill or the knowledge by which the marketplace makes its decision? Because that’s what we’re talking about today. And tell us about the distortions that result from the government depriving us of the right to vote and it exercising that right for us.
Scott Lincicome: Yeah, and I think—so let’s just go back a bit to what you were saying. I think it’s important to establish that, yeah, the reason the government is taking our tax dollars or redirecting our consumer dollars via tariffs—where that actually, oftentimes, you’re not giving the government your money, you’re just being forced to buy from a certain producer—but the reason the government does that, so it claims, is that we as consumers are not spending our dollars correctly. And that is the market failure: that we, left to our own devices, left to our own decisions, are doing things that are not in the national interest or defying some grand national strategy. We are foolishly buying Chinese solar panels, for example, and that’s harming our own domestic solar industry and boosting the Chinese Communist Party and the rest. And so we are foolish consumers, the market is failing, and the government has to step in and redirect those dollars, redirect our actions to serve some national purpose. So that, I think you’re exactly right, is the kind of general premise behind industrial policy: the market simply is failing at its job.
And you’ll hear industrial policy advocates, I should note, they always give a bit of a nod to the market. They always say, “Well, look, normally I like free markets. Normally markets, they do work. But, but, but, but, in this case, the market has failed.” In this case, for example, we have underinvestment in semiconductor manufacturing in the United States. We, again, don’t make enough solar panels. President Biden is big into renewable energy; we have to subsidize and protect our green energy sectors here in the United States. That kind of stuff, right? Like you said, a really central element to industrial policy. And then one that advocates nod to, but there’s always that “but.” There’s always the exception. And as I’ve noted in various columns, the thing though, when you start documenting the exceptions, the exceptions tend to swallow the rule. You start to get exceptions in all sorts of sectors, anything ranging from steel to shipbuilding to ethanol to green energy and so on and so on and so on. And we’re really not left with much of anything. I mean, maybe industrial policy advocates would let us buy t-shirts from Malaysia or Sri Lanka, but beyond some of these very basic consumables, you’re going to have the “but” is going to arrive.
The Knowledge Problem and Temporal Delays [13:05]
Scott Lincicome: Now, what’s the problem with this? That’s the second part of your question. Well, like you said, there is a really huge knowledge obstacle in industrial policy. And this goes back to good old F.A. Hayek, the Nobel Prize-winning economist, who said, “Look, the problem with central planning is that it is a single planner, or at least a very, very small handful of planners.” And that planner simply lacks the knowledge to implement some grand economic plan because the planner simply lacks the decentralized decision-making that is the market process. The market process involves millions and millions of us acting in our daily lives in completely self—not completely, but mostly self-interested ways, in ways mostly disconnected from our fellow consumers and our fellow actors, but we collectively are very wise. And in general, we tend to pick the right stuff. We tend to pursue the most productive and the most innovative products and services to our own benefit and to society’s benefit.
Well, unfortunately, the planner lacks that type of knowledge. It’s simply, again, impossible for any one person or any group of people to know precisely what industry, for example, is going to be the next big innovative one, what company is going to actually be the company that will produce that innovation we want, and so on and so on and so on. And what you see over and over again is in industrial policy failing to surmount the knowledge problem. So, for example, in the 1990s, we thought we knew that we needed to subsidize and protect semiconductor memory chips—so semiconductor, what we call DRAMs, dynamic random-access memory, memory chips. We thought we had to protect our American DRAM producers from Japan. Well, it turned out that we not only picked the wrong country—Japan was not the threat, it was South Korea, which we actually helped grow—but also we even picked the wrong product. It turns out that companies were innovating away from memory chips; they were not going to be the future of the industry, and they were moving to logic chips. And so you simply see again and over again, especially in the high-tech area, you see the government just simply cannot surmount the knowledge problem.
So not only do you have a problem of picking the right product, picking the right industry, picking the right mechanism, that kind of stuff, but there’s also, I think, a big problem with time—a temporal problem. And this is something I don’t think industrial policy critics talk enough about. And what I mean by this is that even when industrial policy advocates, even when politicians can pick the right sector and can actually identify a potential market problem, by the time they get around to acting on it, the market has moved on in most cases. The market has seen the problem, probably well in advance of the politicians seeing it, and market actors are working to solve that problem, motivated by profits and the rest. And so you end up seeing that the problem industrial policies are targeting has disappeared by the time those industrial policies are put into place. And then it changes again by the time those industrial policies are actually being implemented by some executive branch agency after the regulations have been issued and so forth. Because let’s face it, for better or worse—I would say for better—Washington takes a long time to implement stuff. It has to go through legislation, the President has to sign it, you have to get an executive agency to implement it, there’s all this notice and comment and all that kind of stuff. It’s a very slow process. And so, you know, I think a great example of that is semiconductors.
Two and a half years ago, now almost three years ago, a bunch of congressmen decided that we needed to subsidize the domestic semiconductor industry again. So they’re just repeating the 1980s and ’90s; nobody remembers their history. And because they said, “Look, there’s this new model out there that has really caused a lot of offshoring of semiconductor manufacturing to Korea and Taiwan. China is subsidizing the heck out of its semiconductor industry, so we need to provide $10 billion in subsidies for people to produce semiconductors here.” Now, never mind that we actually did produce a lot of semiconductors. Never mind that we actually are world leaders in a lot of chip technology. What happened in the meantime is a global pandemic. And that global pandemic convinced a lot of market actors, both on the consumer side—so companies like Apple or Ford or GM—and on the producer side—TSMC in Taiwan, Samsung in Korea, Intel here in the United States—to say, “You know what? We should probably have more semiconductor investment in the United States or closer to the United States, out of Asia, because there are these supply chain problems because of this pandemic.” Now, semiconductor manufacturers have pledged about $80 billion in new investment in the United States to produce semiconductors. Yet, our politicians are still debating semiconductor subsidies. They act as if those plans, that those capital expenditures—they act as if that never happened. And not only that, the tab has gone from $10 billion, now it’s $52 billion. And oh, by the way, the senators from Michigan, they got a hold of the bill and they added several billion dollars, not for the newest, most innovative chips, but for old chips. Why? Well, because automotive manufacturers like Ford need these old chips. So the Michigan senators, guess what they do? They act for the benefit of the auto industry and the Big Three in Detroit, and we get this behemoth bill that’s still sitting around in Congress and looks like it’s still going to pass. And of course, the crisis is over, but we’re still going to do it anyway because once these trains kind of get going, it’s very, very hard to stop.
Public Choice and Market Failure [20:00]
Bob Zadek: You used a phrase that pops up all the time in the discussion of, or in the defense of, industrial policy, and that is “market failure.” It’s a fascinating phrase in my opinion, because “failure” means—it doesn’t mean, Scott, that you and I have not been given cheap stuff that’s exactly what we want. To us, that’s a market success. We got cheap stuff that’s exactly what we want. But to government, which doesn’t have as the goal the happiness and well-being of citizens—its goal is more specific and focused and political, if you will—if the government’s desires is political, to favor those people with political power. So what is to you and I a market success—Uber, profound market success—well, government declared war on Uber because to them it was upsetting certain established political players, such as taxi cab medallions and taxi cab cartels and the like, car manufacturers perhaps, all these politically powerful people. So a market success to us was a market failure. But when industrial policy proponents use “market failure,” they act as if the failure is absolute; everybody would agree it’s a failure. It’s only a failure to those people who wanted a different result. So to us, it’s a success.
And also, Scott, before I ask you for some examples, another observation is that the weakest lobby in government, in my opinion, is the lobby representing you and I as boring, faceless, nameless citizens who just want to be happy and prosper. There is no lobby that I’m aware of that represents us. So industrial policy is directed to benefit the few, always at the expense of the many. It’s—and you’ve mentioned this in your writing when you talk about the unseen, Frédéric Bastiat’s reference—we are, among our other ignominies, we are the unseen insofar as government is concerned. Now, and speak to—give us examples, if you would. Government policy is not the policy of a benign actor, some god-like being that is looking out for our well-being. Government—understand, government policy is the direct result of influence: actors persuading government to help them, individual rent-seekers, if you will. So it’s not a benign government; it’s simply private actors using the force of government to accomplish a private result. There’s no inherent goodness in what government does. It may or may not be good, but it’s not by design; it’s individual actors. Now, give us examples, if you could, about how you and I, Scott, and all of our friends out there who have given us their time to listen to us, how we have been directly harmed so that others can benefit under the guise of industrial policy, which sounds like it’s good for everyone. I now want you to speak to the many, because that’s who our listeners are, and explain to them how they are harmed by the few who benefit.
Scott Lincicome: Sure. So before I get to the examples, I do want to note one thing what you said about market failures. I think every economist worth his salt will acknowledge, even the most libertarian will acknowledge, that market failures do exist. You know, the obvious classic example is air pollution: that when you have a system that—you can have a system that individuals will pollute and pollute and pollute because they produce negative externalities that don’t affect them at all, that can affect others. So I think the kind of classical economics, even libertarian economics, will acknowledge that these types of market failures exist, particularly in the environmental space.
The problem, as you said, is translating that into action, into political action, is incredibly difficult. The first problem is that politicians have very, very short-term memories and short-term time horizons. They might see a problem in a market that is really not a failure; they lost jobs, for example. But the market is consistently adapting and is going to, in a lot of cases, fix itself. So I talked about semiconductors; jobs are another good example. A lost factory job today is a gained job in services tomorrow.
But the other big thing, as you note, is politics. And this raises the second big problem with industrial policy: that even if we’ve identified a real market failure, even if we’ve identified the right industry or the right product, politics then intervenes. And what you see in case after case after case is domestic producers getting together because they benefit so substantially from industrial policy—subsidies, tariffs, and the rest—and because we taxpayers, we consumers, are harmed so little, well, we don’t pay attention at all, whereas the producers, because they get such a big benefit, they do pay attention and they lobby, and they lobby heavily. And politicians, with their being self-interested and their desire to be re-elected, so they’re acting in their private interest, not in the public interest, they will respond to the squeaky wheel. They will give it the taxpayers’ oil.
And when you see this, you—for example, let’s use the environment. I think there are a couple good examples there. During the Obama administration, for example, we had a lot of carbon capture projects funded by government subsidies through the Department of Energy. Well, look, carbon capture can be a perfectly legitimate innovation, perfectly legitimate to address carbon emissions and the rest. The problem was that the projects that were picked tended to be far more about politics than about actual scientific innovation. The biggest example is a huge carbon capture project in Illinois, which just so happened to be President Obama’s home state and one that he promised would receive government funds while on the campaign trail back in 2008. Another big project went to ethanol producers. Now, of course, ethanol is another highly subsidized, regulated industrial policy boondoggle, and that happened because, of course, ethanol producers lobbied heavily to be involved in yet another government scheme to get government money.
Bob Zadek: Scott, if I could just interrupt for a moment, only because you mentioned ethanol equals Iowa equals the first primary. That’s not a coincidence. That’s the best example. I’m so delighted you picked that.
Scott Lincicome: Yeah, so ethanol is great. Also, you know, I’ll talk about in a second another reason why ethanol is so great is that it sticks around forever, even though we know it’s a terrible program and a terrible product. And that’s another problem with industrial policy.
So another—I’ll give one more example for now in the renewable energy space. Again, in the last stimulus bill in 2009, we wanted to subsidize renewable energy through a Department of Energy grant and loan program. Well, studies have now shown that projects that won the majority of these contracts got the contracts because of lobbying dollars. So there was a very close connection between the amount of lobbying money spent and the contract being awarded. Contracts actually did not go to small startups that might need the government’s help to get going; they went to big, established corporations that spent tons of money to win these contracts and win the subsidies. So you can go throughout the history of industrial policy, and you’ll find in case after case after case that the preferred industry, the preferred company that wins, is politically connected very, very often. And the program is modified, either during the legislative process or during implementation at the agency level; it’s modified to satisfy those politically connected companies. That last part is important. What happens at agencies via public choice model is that agencies that start out with a perfectly altruistic intent, right—they were started to benefit the public—well, over time they become captured by the industries that they’re trying to regulate. And because of that, they become simply de facto arms of the industry itself. And so you see that with the Department of Energy, you see that with the Department of Commerce. The Department of Commerce is effectively part of the steel industry. Our maritime regulator is effectively an arm of our shipbuilding sector, which benefits from the Jones Act, which restricts domestic shipping to American-made ships. And you can go down the list of these agencies being captured. So again, even when you identify a market failure, even when you surmount the knowledge problem and pick the right industry, politics always gets involved. Again, you know, we’re seeing this play out right now with respect to these semiconductor subsidies that Congress is debating.
National Security and Protectionism [30:42]
Bob Zadek: Now, two observations, if I may, Scott. First of all, I think it’s true that industrial policy is like—imagine a quiz show and the question is, “What’s the opposite of economic freedom?” Answer: industrial policy. Industrial policy, as I said in the opening of the show, takes away our right to select what we choose to purchase. All of a sudden, we are discouraged, if not prevented, from purchasing an inexpensive t-shirt that is perfect but happens to be made in a country which is competing with a domestic manufacturer—the apparel industry, which used to be all in North and South Carolina and Georgia, now it’s in third-world countries. So to rebuild that industry, we impose tariffs, which you pointed out. So what’s the opposite of economic freedom? Answer: industrial policy. Just an observation.
Now, show us, if you can give us a real solid, tangible example of how consumers—voters, if you will—are directly hurt either by having to pay more or denied an opportunity to buy the product we want the most as a direct result of industrial policy. And I’m asking you to do that so everyone listening can understand that industrial policy, as you pointed out, benefits the few at the expense of the many. I now want you to speak to the many, because that’s who our listeners are, and explain to them how they are harmed by the few who benefit.
Scott Lincicome: Let’s do three examples. First, let’s talk about investments again in renewable energy. So I talked about these big loan programs that the government in 2009 and 2010 became very much a big investor, quote-unquote, in renewable energy. Well, studies show that those investments actually crowded out private investment in the sector. Now, what happens when public investment crowds out private investment? That means that the people that work in the companies that did not get the government’s money end up without capital. They end up unemployed, or they end up struggling financially or bankrupt. So I think that’s one great way to show how industrial policy takes—it denies or deprives the private market and private actors who are acting perfectly legitimately and legally and gives to those that are politically connected.
I think a more direct one, one that I think everybody can understand, are tariffs. So steel tariffs have been imposed for a long time. President Trump implemented 25% tariffs on all sorts of steel. Well, this is an involuntary transfer of dollars from steel consumers, which is manufacturers, but also you and me eventually, because let’s face it, those costs are passed on, to the American steel industry. The American steel industry, the United Steelworkers union, lobbied heavily for these tariffs. Now, those tariffs, like I said, they increase the price of foreign steel. They make it essentially commercially impossible for American companies and manufacturers to purchase the foreign steel, so they purchase domestically. The domestic producers raise their prices and get windfall profits at the expense of their fellow Americans, being the steel-consuming manufacturers. So in this case, the government is quite plainly directing our dollars to its political beneficiaries, to its political benefactors.
And then I think another great example is the Jones Act. So the Jones Act, as I said, restricts shipping between US ports to American-made ships and ships that have to be owned by Americans and crewed by Americans. Maritime unions, of course, love that. Well, the Jones Act not only inflates US shipping costs, which again are passed on to us, but really acts as an effective blockade on trade between the United States and other parts of the United States. In particular, places like Puerto Rico, Hawaii, and Alaska that are essentially cut off from highways and train rail—I mean, they need ships, right? So studies show that the Jones Act increases prices in Puerto Rico, for example, substantially, while delivering windfall profits to the Jones Act shipping industry because they are suddenly monopolists in terms of the US market. So that not only taxes Puerto Ricans, for example, but it forces them to look abroad for products. For example, they buy their natural gas from Russia instead of from the United States, which is just crazy. And that in turn denies American companies that business. So American companies, like in the oil and gas industry, they’re a good example. Instead of being able to sell to Puerto Rico, the Jones Act blocks them from doing so, and so Puerto Rico turns to either Russia or Trinidad and Tobago or something like that. Northeastern refineries do the same thing because it’s cost-prohibitive to get oil from the Gulf of Mexico up to Boston. And case after case of this type of action. So again, it’s really just the government taking from consumers and giving it to producers.
National Security and “Buy American” [36:34]
Bob Zadek: Another principle of industrial policy—and Donald Trump was a major actor in this—is under the guise of national defense. We are too dependent upon those who may be our enemy, and we are vulnerable if we get all of our steel from China or from third-world countries. And if those third-world companies are our enemy—think oil from Saudi Arabia—if we are too dependent, then we are from a national defense standpoint, we are vulnerable. Think of energy dependence; we’ve heard that phrase. Now we are energy independent, except Biden is doing his best to undo that. So speak to, if you will, the political cover, which is incorrect, which politicians use to justify this obscene “Buy American” policy, which Trump advocated strenuously and Biden has also embraced. So speak to the fallacy of “Buy American,” which is a cornerstone of industrial policy.
Scott Lincicome: Sure. So “Buy American” laws have been around for about a century or more. Like you said, it’s really a classic example of American industrial policy. So, for example, when we want to build a highway with federal dollars, you have to use American steel, for example. Well, let’s first start out with—even Milton Friedman, even Adam Smith, have acknowledged that free trade principles can have exceptions for national security. That in times of war, or when it comes to national defense, there may be a time to restrict imports. The problem is that in practice—it’s always in practice—the government’s excuse for its national security turns out to be really bogus. What you see, for example, in the steel industry—I mentioned the steel tariffs earlier—the steel industry was begging for tariffs when it had about 70% market share in the United States. It had solid financials. It had had a bit of a downturn, but that’s because the global market had had a bit of a downturn when oil prices collapsed around 2015. So the whole national security justification in and of itself was bogus. In fact, Trump’s own Secretary of Defense, Jim Mattis, wrote a letter saying, “We only need—we, the Defense Department—only need 3% of all US steel production for national defense. We do not need global tariffs, we don’t need any of that, everything’s fine.” Trump, of course, ignored that and imposed global tariffs.
But another, I think, fundamental misunderstanding from the “Buy American” national security folks is that trade in many ways bolsters national security; it doesn’t undermine it. Again, there are exceptions—you know, we probably don’t want to be buying all of our tanks from China or whatever. But beyond those very, very, very narrow exceptions, the reality is that, first, trade and mutual economic interdependence tends to reduce the chance of armed conflict. Studies show that countries that trade together typically don’t go to war with each other. That makes a ton of sense, just like you wouldn’t want to blow up your neighbor’s house, you know, you probably don’t want to blow up your biggest customer. And there are, of course, cross-cultural influences and all that kind of good stuff, right? And then finally, nations that can trade with each other peacefully don’t have to invade to get natural resources or wealth; they can simply trade peacefully. It’s all great.
So first, trade tends to bolster national security, not undermine it. Second is that trade and diversity of supply—so having some domestic production, having some production abroad in a bunch of different countries—tends to increase national security when there is some sort of big economic shock. And we’re actually seeing that right now in the baby formula market. It turns out the baby formula market in the United States is highly, highly protected. There is essentially a tariff and regulatory wall around the United States such that US baby formula manufacturers represent about 98% of all sales in the United States. They have 98% market share. Well, what happens? We had a big recall at a manufacturing facility in Michigan, and because we have no other alternative suppliers outside of the country, the US market is collapsing right now. Store shelves are empty, moms are freaking out, and that’s because we don’t have a diverse supplier base; we have a—it’s basically autarky. It’s almost North Korea-esque how much it is reliant on domestic supply. So when you combine those things together, you see that “Buy American” is in practice a big problem and even in theory raises a lot more problems than it solves and should be, again, limited to extremely narrow examples of true national defense or times of war or actual armed conflict.
The Benefits of Competition [42:11]
Bob Zadek: As a business person, I observe, because I have such great insight into American business, that it is bad for business to kill your customers. It’s not a way to build market share. So it has been observed that when you trade with a country, they are less likely to want to kill you because you’re too good a customer. You’re better off alive with a checkbook than you are as a corpse. But when we speak about “Buy American,” which is the opposite of globalization, which means do not buy foreign-made goods, especially made by companies we’re not crazy about, that has, I think, Scott, a profound effect upon the cost. And putting aside the fact that, “Hey, I want to buy a Chinese t-shirt. Why should it be prohibited? Isn’t that, as I said earlier in the show, depriving me of economic freedom? I am capable of deciding the best use of my dollar bill. I don’t need it to be prevented or denying a choice.” So speak to the effect of “Buy American” on prices. And isn’t it also yet another form of income transfer from all consumers, a little bit from each, to a union member or a favored industry? It’s just a wealth transfer, isn’t it, Scott?
Scott Lincicome: Essentially correct. And you know, it’s funny, I talk so much about consumer costs when you talk about protectionism that sometimes I assume everybody in the audience knows about those consumer costs. But yeah, it’s excellent to start with: look, tariffs raise prices. So when you apply tariffs to steel or products made in China or whatever, you end up raising prices in the United States, harming consumers. So going back to the steel tariffs because there’s a ton of economic literature on this, we see that they imposed really major costs for American manufacturers and downstream to American consumers.
Now, it’s though important to note it is not merely the direct cost of those tariffs or the direct cost of higher prices. Industrial policies can raise unseen costs because, for example, the money that you used to save on that Chinese t-shirt or that piece of European steel now is going to buy American-made steel or an American-made t-shirt. Well, that money that you saved you used to be able to put back into the US market somehow. Maybe you paid for a service—maybe you went and got a massage or something like that. Maybe you put the money away for your child’s savings account or college fund. Maybe you blew it on some other fun activity, who knows? Maybe you invested it in the stock market. All of that economic activity disappears when you force American consumers to pay more for the exact same stuff—pay more for steel, pay more for a t-shirt. We call that deadweight loss. That deadweight loss is again shown to be quite significant, and that’s why protectionism and industrial policy tend to lower overall economic growth and lower overall economic activity.
The other big thing that that does is it slows down economic dynamism. What we really just mean is the natural everyday churn of the economy, because there are fewer dollars to go towards productive and innovative enterprises. Again, we talk about investment. There are fewer dollars to go probe about and see what else might be out there. And so you’re slowing down innovation, you’re slowing down a lot of that unseen process that you can’t really put a dollar value on, you just kind of know it when you see it, right? And that type of slower economic dynamism over a long period really means lower living standards, less innovation, and just a worse life for all of us simply because we were forced to buy American steel or an American-made t-shirt.
And when industrial policy per se is the government saying, “No, the results of a free market—which means millions of people making billions of voting decisions every second of every day, and the products that are worth the money, in air quotes, will survive—this pure, the good will survive and the useless and the bad ideas will fail,” that’s the market operation. For sure, for sure, there are people who will suffer as a result. If you are providing a service that has no value to anybody and nobody wants to buy it, you will be out of work. You will be a victim. You will have to fix it yourself. Well, when the government intervenes with industrial policy, they artificially assign a value to something where we all have voted that has little or no value. We Americans, we don’t especially care who makes our products so long as it’s the right price and we like it. And if we do care, we can make a private decision focusing on “Buy American.” Everybody has a choice: let me see the label, “Made in the USA,” no matter what it costs, I support my country, I’m buying it. We have a choice. The government is simply unhappy with the choices we make, and the government says, “Okay, you have squandered your freedom by making the wrong choice. We have to correct that.” So once again, it is the government usurping our right to decide with their decision, and their decision is made in the self-interest of the politicians. It’s called, as you mentioned Scott, public choice theory. It’s their decision, not our collective decision.
Scott Lincicome: I would add that what you raised in there, I think there’s another important point buried in there, and that is that our threat of taking our dollars elsewhere is a tremendous motivator for those companies that might lose sales and might be out of work. And that competition creates a more dynamic, innovative industry in the United States as well. That is a really important part of creating a vibrant American economy that again the government short-circuits. And in fact, research shows that protected industries in the United States do not become lean, mean, innovative fighting machines. They become costly, bloated entities that really are wholly uncompetitive. And so when perhaps tariffs or subsidies go away, what do these companies do? They lobby for more tariffs. They are not suddenly globally competitive and very innovative. And that process again is bad not just for those companies; it’s bad for us, it’s bad for our economy overall.
You know, I think the ultimate example of this for those who, like me, lived through the 1980s, is to think back to American automobiles in the early 1980s or late 1970s and compare them to American automobiles today. And the difference is just astounding. You know, you had really garbage vehicles we were making here in the late ’70s and early ’80s. Then came along Japanese competition and German competition and Korean competition, and suddenly the Big Three had to get its act together. And now you see that when you look at things like Consumer Reports and the rest, that the quality standards are about just as good as the foreign-made brands, if not in some cases even better. And it’s that type of dynamic, competitive process that creates better—it even makes the domestic companies better, assuming they have to actually improve.
Bob Zadek: Scott, we have covered a lot in this hour. How can our friends out there follow your work and the work of Cato in this important area of industrial policy and globalization?
Scott Lincicome: Well, the most obvious place to go is to the Cato website, cato.org. You can find all of my work on my bio page there. My name’s Scott Lincicome, pretty easy dropdown, you can find me. You can also follow me on Twitter if you’re an addict like I am; you can follow me @scottlincicome, just @ my name. And then finally, I write a column at The Dispatch, the online publication. It’s called Capitolism with an ‘o’—C-A-P-I-T-O-L-I-S-M—Capitolism, which I write a weekly newsletter that you can catch as well. Those are the three main places.
Bob Zadek: Thank you so much, Scott, for helping our friends out there understand how industrial policy is nothing other than depriving us of our economic right to vote, and we have to get it back. Thank you to my friends out there for joining us. We’ll be back again next Sunday.