Japan’s Failed Experiment in Industrial Policy by Dan Mitchell

 I’ve expressed opposition numerous times to so-called industrial policy because I don’t want politicians and bureaucrats to provide special favors to certain businesses or industries at the expense of everyone else.

That’s a practice known as cronyism, and it is absurd to think that selfish, election-focused politicians somehow correctly identify and subsidize the technologies of tomorrow.

But there are still people who think government should try to steer the economy – including some supposed conservatives.

Let’s remind ourselves why this is a bad idea. Samuel Gregg of the American Institute for Economic Research has a new article about the topic for National Review.

…several polling outfits have indicated an uptick in the number of Americans who say they are disillusioned with capitalism and willing to consider socialism as an alternative. This, however, isn’t the most immediate threat to American capitalism. …It is best labeled “corporatism.” …Examples of full-blown corporatism include distinctly authoritarian regimes such as Mussolini’s Italy, Dollfuss’s Austria, and Franco’s Spain until the mid 1950s. …Following World War II, corporatism took on milder expressions. …whatever the form, corporatism creates serious political and economic problems. Even soft versions of corporatism provide established companies with political mechanisms to advance their interests over those of consumers, taxpayers, and new entrepreneurs… This undermines the ability of businesses to make necessary but often difficult changes. The chances of a business’s becoming complacent and disappearing, along with the jobs it provides, thus multiply. …The expansive versions of stakeholder capitalism favored by progressives and woke capitalists are almost indistinguishable from corporatism. …World Economic Forum chairman Klaus Schwab, for instance, wants a trinity of governments, businesses, and NGOs working together to pursue political goals that are always of the progressive variety. …Not every corporatist is a fascist, but every fascist is a corporatist. Authoritarian economics isn’t just economically foolish. It is also an affront to human liberty and dignity.

Writing in August for Reason, Michael Farren documented the failure of industrial policy.

The once-beleaguered CHIPS Act…reflect a cross-party shift toward embracing industrial policy—the idea that the government should jump into the economy with both feet and have fun getting wet. Facetiousness aside, the neoliberal era from the late 1970s through the 1990s—when economic thinking carried more political sway and resulted in massive deregulation of airlines, railroads, and interstate trucking and the privatization of the internet—is far behind us. …Whether it’s encouragement via subsidies or constraint via regulation, using the government to guide the economy is akin to thinking that just a little bit of cyanide won’t hurt. …Compounding the problem is that people, not some agnostic supercomputer, determine which industries and companies are considered worthy of a boost. Humans are subject to influence and pressure, turning industrial policy into a contest of who can secure the most government favoritism… Lastly, industrial policy motivates “unproductive entrepreneurship.” Some of the best and brightest minds inevitably withdraw from productive activities premised on voluntary exchange, and instead use their skills to find autocratic mechanisms to extract political payoffs… The crystal balls policy makers peer into are easily clouded by charlatans, and we all lose when they win.

For those who want real-world evidence, the unhappy experience of Japan is very enlightening. Adam Thierer wrote last year about the failure of industrial policy in that nation.

American pundits and policymakers are today raising a litany of complaints about Chinese industrial policies, trade practices, industrial espionage and military expansion. …In each case, however, it is easy to find identical fears that were raised about Japan a generation ago. …In 1949, the Japanese government created the Ministry of International Trade and Industry (MITI) to work with other government bodies (especially the Bank of Japan) to devise plans for industrial sectors in which they hoped to make advances. …By the late 1970s, however, U.S. officials and market analysts came to view MITI with a combination of reverence and revulsion, believing that it had concocted an industrial policy cocktail that was fueling Japan’s success at the expense of American companies and interests. …Just as Japan phobia was reaching its zenith in the early 1990s, Japan’s fortunes began taking a turn for the worse. The Japanese stock market crashed… The Nikkei Index peaked at 38,915.87 on Dec. 29, 1989, then began a dramatic fall. It has never reached that level since. …Japan suffered a brutal economic downturn that became known as the Lost Decade, which really lasted almost two decades. Microeconomic planning failures—including many missteps by MITI—were also becoming evident during this time. MITI had made a variety of industrial policy bets that were originally feared by U.S. pundits, only to become embarrassing failures a few years after inception. …by the late 1990s many scholars came to view most Japanese industrial policy initiatives as a costly bust. Marcus Noland of the Peterson Institute for International Economics noted in a 2007 study of Japanese industrial policy efforts, “Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. …Perhaps most notable in this regard was the Japanese government’s own admission that the MITI model had not worked as well as planned. A 2000 report by the Policy Research Institute within Japan’s Ministry of Finance concluded that “the Japanese model was not the source of Japanese competitiveness but the cause of our failure.”

Writing for Forbes, Stuart Anderson also debunks the notion that industrial policy helped Japan.

…it appears each generation must relearn the lessons of the past as today governments in China, Europe and the United States support industrial policy. Policymakers are convinced that government planning will make national economies better than market forces. “Industrial policy in Japan was not responsible for the country’s economic achievements in the post-war era or the international performance of leading sectors, including autos and electrical machinery,” according to a new study by economist Richard Beason for the National Foundation for American Policy. …He found Japanese industrial policy from 1955 to 1990 did not improve growth rates by sector, provide greater efficiency through economies of scale or result in improved productivity growth or “competitiveness.” …To conduct the research, Beason examined four measures of industrial policy used by the Japanese government during the 1955-1990 period: 1) subsidized government loans to industry, 2) subsidies, 3) tariff protection and 4) tax relief. …“Industrial policy tools generally also had no positive and significant impact on productivity growth (“competitiveness”) for the various sub-periods from 1955 to 1990. …Beason notes that policymakers in Japan abandoned industrial policy, viewing the policies costly, unsuccessful.

Sadly, many American politicians now want to copy those unsuccessful policies.

Will that make the United States as bad as today’s China? Or the former Soviet Union?

Fortunately not. Today’s industrial policy is cronyism, not full-fledged central planning. But it is nonetheless a bad idea to move in the wrong direction.

P.S. Both in the past and today, industrial policy is very vulnerable to corruption.