An Industrial Policy Revival?

Dani Rodrik proposes a new framework for economic policy he labels “productivism.” (Jamie Galbraith provides a brisk response.) It would use the state to stimulate high value-added production, also known as industrial policy (IP). Higher-value added means higher pay and better jobs, with a myriad of beneficial implications. He says it is “post-neoliberalism” in that it fails to vest markets with responsibility for addressing our most urgent economic problems.

Rodrik, whom I’ve never met, was among the early economist bloggers and noteworthy for his open-mindedness on economic theory and willingness to engage with amateurs on his website. In the post linked above, he scores some points on the manner in which economics is taught and practiced. He also found himself crossways with the authoritarian Turkish regime. I have multiple reasons to think well of him.

I’ve always thought industrial policy was worth pursuing. We have a version of that now in the Biden administration, most prominently in the Inflation Reduction Act and the “Chips Act.” It’s gotten good notices, though I haven’t delved into it myself. My beef with “productivism” is the prioritization implied by Rodrik, behind full employment and public provision (e.g., the welfare state).

Decades ago, the great Republican economist Herbert Stein remarked that people get interested in industrial policy when the economy is slow, but after it picks up they forget about it. My own career at the Economic Policy Institute began in 1990 with a sort of portfolio in industrial policy, but there as well interest in it evaporated.

There was a kerfuffle in the 1990s around the shrinkage of the defense budget during the Clinton Administrations. (It did shrink, as a share of GDP & the Federal budget.) It was feared that communities affected by the closure of bases and reductions in defense-related production would be devastated. Ann Markusen, presently at UC/Berkeley, and Seymour Melman (R.I.P.) used to write about this. The devastation never happened. The real devastation was the relocation of U.S. manufacturing to Mexico and Asia.

The implication for Rodrik’s proposal is that if the economy is doing well, by traditional criteria, there will be no political juice for big industrial policy. I would add that certain welfare state matters are much more urgent, especially fixing health care. At least in technical terms, if not politically, enforcing high employment is also simpler and arguably, a higher priority than IP.

Note that what is in question with IP is not increasing the level of employment, but changing its composition for the better. A common delusion on the left is that a “Green New Deal” and certain types of public spending “creates jobs.” It could, but not without eliminating other jobs. In and of itself, public spending does not create jobs in terms of the economy as a whole. The total level of employment depends on macroeconomic policy — government deficits and Federal Reserve setting of interest rates. No IP is a substitute for that.

Certain key sectors currently privatized need to be brought into the public sector. That is also industrial policy. First in importance is everything energy-related, in the interests of addressing climate change, among other concerns. I would add strengthening and expanding the US Postal Service, a potentially huge player in all things media.

Finally, “productivism” is a little bit like what has been called “productionism,” the stress on high employment and GDP growth. But there is more to life than work. The ability to increase leisure time — shorten the work week — is also something to strive for. In fact, rising productivity — producing more with less labor, relatively — makes more leisure possible. We would also like for definitions of “more” to factor in the environmental costs of expanded production.

Unfavorable GDP comparisons of European social-democracies and the U.S. typically gloss over the extra leisure enjoyed by the working class in Europe, longer paid vacations, sick time, and the like.

Decades ago even the AFL-CIO was interested in shortening the work week. Producing more with less labor. So was a dude named Karl Marx.