The Unfulfilled Promises of Industrial Policy

Industrial policy is currently experiencing renewed interest among policymakers, particularly as a strategy for government intervention in “strategically important” industries. Advocates justify such interventions primarily on the basis of national security and the need to enhance a nation’s economic competitiveness. Over the decades, governments have engaged in numerous industrial policy initiatives, from the New Deal of the 1930s to the Obama administration’s stimulus efforts in 2009 and the recent enactment of the CHIPS and Science Act. However, history is replete with lessons from past failures in government-directed industrial policy, suggesting that current lawmakers should exercise caution before repeating well-documented mistakes. Critics note that while certain factions on the left and right promote industrial policy, its track record raises significant concerns about effectiveness and sustainability.

A historical perspective reveals that extensive experiments with industrial policy have yielded disappointing outcomes. Examples include high tariffs in the 19th century, which American manufacturing survived rather than thrived under, as well as unsuccessful attempts to stimulate strategic industries in developing nations, such as those in Africa, India, and the Middle East. Moreover, centrally planned economies, such as those in the Soviet Union under Joseph Stalin and China under Mao Zedong, illustrate the severe consequences of attempting to dictate economic outcomes. These regimes faced monumental failures, resulting in economic disaster and widespread suffering. The problems associated with industrial policy are not confined to the national arena; state-level initiatives have similarly struggled to achieve their goals, leading to economic inefficiencies and public discontent.

The experience of Michigan serves as a cautionary tale of state-level industrial policy gone awry. Early on, Michigan attempted to prioritize certain industries through government support, only for such efforts to culminate in near bankruptcy and a constitutional amendment that restricted state involvement in choosing industries to promote. This pivotal moment arguably led to an era of entrepreneurship in Michigan, contrasting sharply with later attempts to stimulate the auto industry through substantial taxpayer-funded incentives. Despite investing billions of dollars over the years to prop up the auto sector, Michigan has witnessed a significant decline in automotive jobs since 2000, while states not burdened by such interventions have prospered.

In recent years, policymakers in Michigan have undertaken yet another ambitious initiative, hoping to establish the state as a hub for the emerging battery industry with a $1.4 billion grant intended to create tens of thousands of new jobs. However, history has shown that promises made in the name of industrial policy frequently go unmet. A retrospective review indicates that only 1,677 jobs were created from previous endeavors that similarly aimed to rejuvenate the auto sector, representing a mere 4 percent of projected employment goals. This pattern reflects a broader trend; evaluations of Michigan’s economic development programs reveal that a scant two percent of supported firms achieved their projected job growth.

The inconclusive results of Michigan’s industrial policy highlight a common thread among various initiatives: they often fail to produce the anticipated economic benefits. Analysis indicates that states heavily engaged in industrial policy do not exhibit the robust economic growth typically expected from such investments. Instead, they often experience stagnation or decline. Politicians addicted to the media spotlight and eager to showcase job creation have continued to push similar programs even as lessons from history are ignored. This suggests that the need for accountability and careful examination of past policies is imperative, especially when taxpayer dollars are involved.

Despite the historical failures and the lack of evidence supporting the efficacy of government-directed industrial policy, current political and public sentiment seems undeterred. The allure of quick, headline-generating projects linking governmental interventions to job creation continues to capture the attention of lawmakers. As seen with initiatives centered around railroads in the past and current endeavors involving semiconductors and data centers, the ongoing cycle of misguided expectations persists. Therefore, rather than focusing on how to better execute industrial policy, policymakers must confront whether engaging in such policies is prudent or necessary, ultimately recalling that true economic success often emerges from bottom-up entrepreneurship rather than top-down mandates.