Economics, Energy and the Environment

Industrial Policy: Deja Vu All Over Again

industrial-policy1I should like to add my voice to the reservations Ken Green expressed on the report, Post-Partisan Power, that our colleague Steven Hayward produced in conjunction with scholars at Brookings and the Breakthrough Institute. This note is put forward in the same spirit that guided Ken’s comment: to wit, that scholars at AEI share common values but often differ on details and policy prescriptions. In my own case, as a now-ancient warrior in the battles over “technology policy” and “industrial policy” from the 1980s and 1990s—and a recent debater with Rob Atkinson, one of the policy researchers cited by the study—my concerns center on the federal role beyond basic and applied research in the commercialization process. While eschewing by declamation earlier examples of government “picking winners,” the study actually ends up very close to previous assumptions and policies. Harking back to earlier claims, the study assumes that there is a persistent and insurmountable “valley of death” between applied research and commercial demonstration—this in a nation with the most advanced venture capital sector (not perfect, and certainly hit by the financial crisis) in the world. To remedy this and other purported market failures, the report recommends a vast new array of funding and institutions—a network of “energy innovation institutes” funded at an annual rate of $5 billion; a large increase in the budget of ARPA-E (the Energy Department’s energy technology arm); and an enhanced DOD role (a DARPA model) for commercializing new energy technologies.

All of this, we are told, will work seamlessly:

Over time, this program would establish a robust network of roughly two dozen energy innovation clusters of varying sizes that would leverage federal funding by securing significant additional state government, university, and private sector investment. These institutes would anchor the emergence of dozens of high-powered regional energy innovation industry clusters. Such clusters would help foster the fluid flow of ideas, personnel, and financing between universities, private labs, spin-off and start-up companies, and major private firms.

As with earlier technology policy proposals for large-scale public intervention, the report assumes that detached but savvy “philosopher kings” will choose the particular technologies and guide them to commercial maturity. Alas, we still live in the “interest group” capital of the world—both private and public (NGOs). Can one imagine Ohio getting an innovation center and Indiana being denied—or Virginia and not Maryland.  Further, once launched, inevitably each energy technology would draw a different kind of “cluster,” that is, a cluster of groups committed to, and invested in, perpetual public largesse—see the classic study of public demonstration projects by economists Roger Noll and Linda Cohen. Finally, beyond the political barriers, there are daunting technical questions: famously, Nobel laureate Robert Solow lamented regarding industrial policy (given the potential high payoff when one struck gold with first-mover advantage and scale returns): “I know there are lots of industries where there are four dollars worth of social output for one dollar of private input: my problem is that I do not know which ones they are.” To which, somewhat later, Jagdish Bhagwati added: “It is very hard for policy makers, and very easy for lobbyists, to decide which industries have the externalities.”

Let me end on a note of agreement: though the report doesn’t develop the point, I fully concur with the passing recommendation that the federal government fund more targeted basic research, or what the report labels “use-inspired basic science.” And, of course, who would disagree with recommendations to reorder wasteful energy subsidies? Though the ethanol story should be a daunting example for the kinds of public interventions espoused by Post-Partisan Power.

For more on these issues as of 2010, check out my review of Gregory Tassey’s study, “Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D Strategies.”

Image by Wayne National Forest.

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