Beware the Bipartisan Folly of Industrial Policy

B ipartisan agreement is often cited as an unequivocal good. But sometimes we get an issue of agreement across the aisles that is ill-conceived and doomed to fail. Industrial policy is one such unfortunate area. As I’ve written here before, Biden and Trump have significant overlap in their support for harmful tariffs; this agreement continues in their attempts to move the economy toward centralized organization. The recent $52 billion CHIPS Act, intended to increase microchip production in the U.S., was one such attempt by the Biden administration. Doubling down on this strategy, Biden has been traveling the midterm circuit touting new factories and production “as a direct result” of his economic plan. We should be naturally skeptical of any stumping politician claiming credit for economic growth, and in this case, an extra dose of skepticism is warranted. Industrial policy is just another term for centralized planning, and as such, it is doomed to disappoint. The CHIPS Act and similar measures are either misguided attempts at centralized planning or corporate welfare disguised as such. Either way, they are harmful to our common good.

The problems inherent to centralized planning are the same now as they were in 1945, when Friedrich Hayek first wrote about the knowledge problem. Suppose that bureaucrats have an end goal they are trying to reach, a certain product or service of which they want to increase the supply. The moving parts in any economy are too complex for any single centralized mind to organize. Even apparently simple products have so many diverse inputs coming from all types of individual producers. Each of these individual producers has the knowledge to produce only one part of the final good, but no one person has knowledge of all the various parts at every stage of production. Now multiply that calculus by the millions of different goods in any economy. The wild diversity of goods prevents a rational mind from planning their production.

Yet in the previous example, there is one overlooked assumption. Even supposing that the experts knew how to produce a certain set of goods, this would not be enough. They would also need to know the types and quantities of goods that consumers want. The details of all the various, disparate needs that each of us has is known only to the individuals or perhaps their immediate circles. Even given the means of production, a centralized power would not have knowledge of which ends are preferable. While trying to produce economic “goods,” they would end up creating economic “bads” — products that no one asked for or needs.

Which brings us to the most recent attempts at planning. In 2020, some 932 billion microchips were produced. The Biden administration wants to shift production of some of those chips to the U.S. Within these 932 billion chips, there are many different types for different products. The administration does not and cannot know how many of each type to produce. Even though the act does not envision full centralized production, it does betray a movement toward it. Government entities are painfully slow to understand and react to new technologies. They will inevitably base their projections on already outdated data. This also ignores the opportunity cost of other goods that could be produced in the U.S.

But what if the CHIPS Act isn’t really full-on industrial policy? Recent legislation may not be industrial planning per se, but merely corporate welfare. While it is marketed as bringing production into the U.S., the Biden administration is handing over huge sums of cash to microchip producers such as Intel and Micron. We do not know whether the extra dollars will increase the number of chips produced in the U.S. over what it would have been without the handouts. In its absence, U.S. producers would still have made investments to protect their supply chains. Before the bill, Ford and General Electric banded together to invest in microchip production, including “bringing some chip development in-house.” If their customers demand it, Intel and Micron will shift production to less vulnerable locations. The cronyism aspect of industrial policy may explain why it is such an area of bipartisan agreement. Given the opportunity, business will certainly lobby the government for subsidies. Opening up the chance for them to influence market outcomes through lobbying all but ensures a shift away from consumer priorities and toward governmental whims.

And regarding the dragon in the room, the Chinese Communist Party is a real security threat to the U.S., but turning to the very same policies the Chinese government routinely employs is not the solution to our problem. We should consider options to mitigate security threats while remaining skeptical of centralized planning as a fix. By doubling down on industrial policy, we give away our clear advantage: economic dynamism. A savvy administration would make the required limits to trade based on absolutely necessary national-security interests, then let the markets sort out exactly where and how much production should occur. Such a solution balances security risks against the benefits of free-market forces.

The question of whether the U.S. should engage in industrial policy is one of the many debates influenced by the recent Covid-19 pandemic and public response. Reacting to the supply-chain tumult, politicians, international organizations, and even some economists have called for increased industrial policy to stabilize supply chains and help prevent future crises. This is precisely the opposite reaction we should have to the past two and a half years. The key to any crisis is not merely learning a lesson, but learning the right lesson. Because experts ignored the many facets of human life, they sought to find one centralized solution to keep everyone safe. That is how we ended up with governors such as Gretchen Whitmer (D., Mich.) attempting to define what is essential (gardening was out, but the lottery was in). They may have the best of intentions, but they simply do not have the information necessary to weigh the trade-offs inherent in each person’s life. Despite what Bernie might say, choice and variety is a great benefit of a market economy. Instead of doubling down on centralized planning, we need to embrace the factors that have made the U.S. economy vibrant for decades. If our goal is agile and adaptable supply chains, we need to lean on market forces, not centralized planning.