The Failure of Industrial Policy

Beacon readers will not be surprised by Wharton Professor Howard Pack’s verdict on of industrial policy: it doesn’t work. (Perhaps surprised only that a Wharton Professor holds this view.) Pack provides a concise summary of the academic literature on Japanese industrial policy:

Knowledge@Wharton: What does the empirical evidence show? Does it show that interventionist industrial policy makes sense?

Pack: I feel the empirical evidence is pretty clearly against it. [Interventionist industrial policy assumes] that the government—government officials—know the pattern of productivity growth in various sectors, which they can’t possibly know because the participants in the sector don’t usually know, and the government can’t predict these things. We know that that’s pretty much impossible. The usual examples of good industrial policy come largely from Japan in the 1960s, 1970s and 1980s, when it was asserted that the rapid growth of the Japanese economy was attributable to government intervention helping some sectors and not others. But the empirical evidence pretty overwhelmingly shows that the sectors that were targeted positively by the Japanese government were often sunset sectors, not sunrise sectors—sectors that were declining, which political forces tried to protect....

At the same time, in the 1980s, there was a fairly widespread demand [in the U.S.] for efforts to counter a Japanese resurgence in the semiconductor industry. It was beaten back by a variety of forces, and since then ... the Japanese firms have basically had to abandon the field to either Korean firms or American firms, in this case Intel and AMD. So the evidence is pretty weak—and there has been a large amount of research on this—on whether industrial policy can be a positive force for most economies.

Unfortunately, there are continued calls for a US industrial policy, even from people like Ned Phelps who should know better.