In his new digs (at Substack) economist Scott Sumner has a post I encourage you to read. It’s fairly lengthy post that might be summed up as “industrial policy doesn’t work”. Particularly, I wanted to share his list of prescriptions:
In a world of complexity, I look for simple rules:
- Wars of conquest are bad. Discourage them.
- Have mutual defense agreements of like-minded nations.
- Don’t try to do nation building.
- Avoid nationalistic policies like trade wars. Commerce doesn’t prevent wars, but it makes them less likely (and more costly for the aggressor.)
- Research subsidies might help, but by far the surest way of encouraging innovation is to attract talented people and give them an economic system where innovation is rewarded.
- The low cost solution of environmental problems is Pigovian taxes.
- The most effective solution for poverty is growth. Some redistribution can help, but it’s a distant second in effectiveness. Zoning reform helps the homeless more than “homeless programs”.
- Don’t do regional policies. Italy has proved beyond any doubt that they do not work. Do sound economic policy, and hope that these policies either help the region, help people move to better regions, or both.
I materially agree with those. I could nitpick his list but that’s what it would be—nit-picking.
My only observation is that I think that China is a special case and I think that tariffs, as blunt an instrument as they are, are our only way of coping with that case. It is very large. It has enormous industrial over-capacity. There is no practical way to measure China’s compliance with any bilateral agreement into which we might enter. It limits its imports by establishing quotas even when it does not make economic sense to do so. It systematically dumps goods to eliminate competition. It uses its economic influence to further its foreign and domestic policy objectives.
Consequently, I would extend Dr. Sumner’s “low cost solution of environmental problems” to include labor, health, and safety regulations and impose a Pigouvian tax on Chinese imports, i.e. a tariff, to offset the competitive advantage China achieves by emitting greenhouse gases, having low building standards, and locking workers in.
What can “industrial overcapacity” possibly mean. The fact is China has the most highly automated factories (and ports) in the world. China has two-thirds of the world’s factory robots, and buys an equal share of each year’s total world robot production. It makes many robot models, but exports none of them. Moreover, all China’s automated factories (and ports) are highly optimized using AI running on 5G and now 6G networks. Recently, China began forcing investment out of real estate and into manufacturing.
China currently has about one-third of the world’s manufacturing capacity, and is driving to have half of it, a situation not seen since the end of WW II, when Europe and Asia were devastated by war.
The real problems are that the US and EU have been pursuing anti-industrial policies, actually selling off industry, and that what manufacturing we have left is hopelessly obsolete. Germany destroyed its manufacturing with insane energy policies. VW is closing factories in Germany.
By the way, engineers work in factories and on infrastructure projects. Russia, with 40% of our population has as many engineers as we do, and possibly more. All of them are better trained than ours (50 years of grade inflation capped off with DEI). That strongly suggests Russia’s industrial sector is as big as ours, which would explain their success in Ukraine.
When you have automobile manufacturing capacity not just enough to supply domestic demand plus some export but have enough to satisfy total global demand for the foreseeable future, you are overbuilt. In China that is true for many sectors.
No argument there.
The only thing I would add to your comment is that senior engineers were once junior engineers. If there are no jobs for junior engineers, someday you will have no senior engineers.