Why Are U.S. Politicians Copying China’s Mistakes? by Dan Mitchell

Industrial policy is when politicians use subsidies, mandates, protectionism, and other forms of intervention to provide unearned benefits to a specific companies and/or specific industries.

The politicians claim that the free enterprise system somehow is too inefficient or too short-sighted to produce the ideal outcome, so they have to intervene.

Some of them may even believe those words (based on my decades in Washington, I think the truth is that they like industrial policy because it’s a great way of swapping favors for campaign cash).

For purposes of today’s column, their motives don’t matter. Our goal is simply to show that industrial policy does not work.

We know that because industrial policy failed in Japan, leading to several “lost decades.”

And now it is failing in China, as explained by Eric Boehm for Reason.

China’s economic model—which has leaned strongly into industrial policy and top-down investments directed from Beijing—”is broken” and has left the country “drowning in debt and running out of things to build,” Lingling Wei and Stella Yifan Xie explain… As in the U.S., bridges to nowhere and useless high-speed rail projects are a sign of infrastructure policies driven by politics rather than economics. …government is scaling up another round of industrial policy focused on semiconductors, artificial intelligence, and direct government spending on cultural items such as sporting events. …the bill eventually comes due in the form of higher debt and wasted resources. …More attention should be paid to the weaknesses in China’s economic model, which are becoming more difficult to ignore on both sides of the Pacific. China’s leaders have bet heavily on the misguided notion that government-directed investment is the key to greater economic growth.

Boehm is correct. More attention should be paid to the failures of industrial policy.

Unfortunately, there’s a problem with Joe Biden’s attention span, as noted in a Wall Street Journal editorial on August 25.

Bidenomics is fast becoming a study in the contortions of industrial policy. Consider the Commerce Department’s decision late last week to slap tariffs on solar imports from Southeast Asia, raising the costs of U.S. solar-energy projects that the White House says are the vital future of U.S. energy. …the Inflation Reduction Act (IRA) provides hefty handouts for U.S. solar-panel manufacturers. First Solar expects to pocket as much as $710 million this year in tax credits—nearly 90% of forecast operating profit. …The solar follies reveal the contradictions of the Biden Administration’s industrial policy. Its labor, climate and anti-China agendas conflict in their combination of subsidies, mandates, bans and taxes. Subsidies lead to tariffs, which lead to more subsidies as government becomes the allocator of capital and decides which companies win or lose. The biggest losers, as usual, will be American taxpayers.

The Wall Street Journal also opined on the issue on August 21.

It’s ironic, to say the least, that the U.S. is seeking to imitate China’s economic model at the moment that its industrial policy fractures. Look no further than its collapsing electric-vehicle bubble, which is a lesson in how industries built by government often also fail because of government. …About 400 Chinese electric-car makers have failed in the past several years as Beijing reduced industry subsidies while ramping up production mandates. Scrap-yards around China are littered with EVs whose technology has become outdated, redolent of its unoccupied housing developments created by government-driven investment. …Now comes the destruction that invariably follows the government creation, which may be a harbinger for the U.S. as the Biden Administration emulates China’s EV industrial policy. …Business failures are inevitable in a dynamic economy, but government will be mainly responsible for the destruction that results from its force-fed EV transition—and the damage may only just be starting.

But Biden isn’t the only politicians with a problem. Donald Trump suffered from attention deficit disorder during his years in the White House.

The Washington Post has a report by Jeanne Whalen about Foxconn, which Trump gushed about during his time in the White House.

A 30-minute drive from…Milwaukee stands a mysterious glass globe that has come to symbolize the failure of one of Republican front-runner and former president Donald Trump’s big promises. …The orb and the three partially used buildings nearby are nothing like the giant manufacturing campus with 13,000 high-tech jobs that Trump and Foxconn promised five years ago, when Trump — wielding a golden shovel for the groundbreaking — called the project the “Eighth Wonder of the World.” Instead, the orb is the butt of local jokes. …It might be funny, …except that local and state governments spent roughly $500 million to buy land, bulldoze houses and build infrastructure for an unfulfilled manufacturing megasite that was supposed to include dozens of futuristic buildings and a factory… The ill-fated project, backed by heavy state and municipal spending, comes as the federal government is pouring tens of billions of dollars into subsidizing domestic manufacturing, hoping that the funds will help spur projects that might otherwise not happen.

Since I live in Virginia, I’m relieved that Wisconsin taxpayers were pillaged for that boondoggle.

Unfortunately, that’s the exception rather than the rule.

Taxpayers all across the nation usually bear the cost for industrial policy schemes, such as Biden’s ill-fated subsidies for the semiconductor industry and his mis-named Inflation Reduction Act.

Remember, by the way, that the indirect costs of industrial policy (misallocated resources, foregone growth) almost surely are greater than the direct cost on taxpayers.