Author: conversableeconomist

On January 29, a commercial flight collided with an Army helicopter over the Potomac River in Washington, DC, killing 67 people. Less than two months earlier, on December 12, 2024, the US Senate Committee on Commerce, Science, and Transportation held a “Subcommittee Hearing on U.S. Air Traffic Control Systems, Personnel and Safety.” The testimony offered at the hearing makes for grim reading, even if you didn’t know that a tragedy was around the corner.

For example, Kevin Warsh of the Government Accountability Office described a just-published report called “Air Traffic Control: Urgent FAA Actions Are Needed to Modernize Aging Systems.” Here’s a flavor of the report:

After a shutdown of the national airspace in 2023 due to an aging air traffic control (ATC) system outage, the Federal Aviation Administration (FAA) conducted an operational risk assessment to evaluate the sustainability of all ATC systems. The assessment determined that of FAA’s 138 systems, 51 (37 percent) were unsustainable and 54 (39 percent) were potentially unsustainable. Of the 105 unsustainable and potentially unsustainable systems, 58 (29 unsustainable and 29 potentially unsustainable systems) have critical operational impacts on the safety and efficiency of the national airspace … FAA had 64 ongoing investments aimed at modernizing 90 of the 105 unsustainable and potentially unsustainable systems; however, the agency has been slow to modernize the most critical and at-­risk systems. Specifically, when considering age, sustainability ratings, operational impact level, and expected date of modernization for each system, as of May 2024, FAA had 17 systems that were especially concerning. The investments intended to modernize these systems were not planned to be completed for at least 6 years. In some cases, they were not to be completed for at least 10 years. In addition, FAA did not have ongoing investments associated with four of these critical systems.

Or here’s a sample of commentary from Dean Iacopelli, Chief of Staff of the National Air Traffic Controllers Association:

FAA telecommunications are the backbone of the air traffic control system. The FAA needs extensive telecommunications services and networking capabilities to support the operation of the NAS [National Airspace System] and other agency functions. The FAA Telecommunications Infrastructure (FTI) program currently provides these services and networking capabilities through a service-based contract, in which the service provider continually updates the underlying technologies. The majority of FTI’s telecommunication lines function on an aging copper wire infrastructure, which is an outdated and no longer readily supported, as many local phone companies are discontinuing service to copper wire equipment throughout the country. As a result, air traffic controllers throughout the U.S. are experiencing a steady increase in unexpected outages of air traffic systems. Recent ground stops at airports in the New York and Washington, D.C., areas highlight the risks and consequences of telecommunication network failures. To date, there are over 30,000 services at over 4,600 FAA sites that must transition away from copper wire and onto a fiber optic cable network in order to avoid severe service disruptions and extensive flight delays. …

Even before the FAA’s telecommunications crisis, the FAA was working to mitigate the risks associated with its faltering Notice to Airmen (NOTAM) system, which has been the source of significant disruptions throughout the NAS. The NOTAM system is vital for sharing and disseminating safety-critical flight information between both air traffic controllers and pilots. However, in early 2023, a complete failure of the NOTAM system caused nationwide ground stop causing significant flight delays. … Much like the FAA’s looming telecommunications crisis, the NOTAM crisis was not at the top of any F&E [facilities and equipment] priority lists until after the 2023 collapse resulted in cascading nationwide delays and ground stops. …

Automation platforms such as ERAM and STARS deliver flight plan and surveillance information to air traffic controllers on a real-time basis. These platforms are the foundational systems that keep our NAS operating safely 24-hours a day, 7-days a week, 365-days a year. Over the past four years, air traffic levels have continued to grow at a rate of 6.2% per year post-COVID, excluding new entrant operations. Air traffic automation systems have components reaching end-of-life that need to be replaced. Due to historically flat F&E funding, as a result of the FAA requesting less than it needs to maintain the system, air traffic automation has been unable to meet the growing needs of the NAS reducing the efficiency of the system. In the near future, controllers will have to rely on this inadequate technology to maintain the safety and efficiency of the NAS.

Or here is one example from David Spero, representing the Professional Aviation Safety Specialists who “install, maintain, repair and certify the radar, navigation, communication and power equipment that comprises the U.S. National Airspace System (NAS).”

[T]he results of the survey [of PASS members] indicate top concerns are related to aging equipment, cumbersome procedures, parts that are unreliable or unavailable, system complexity, and staffing and training of the workforce. At the rapid pace with which technology changes, the FAA is getting further behind in replacing aging systems. … The biggest challenge is a lack of vision on behalf of the agency. The length of time it takes the FAA to implement new systems is directly related to the fact that current NAS systems and equipment are becoming obsolete. … For instance, many facilities are still relying on an aging communications technology known as Time Division Multiplexing (TDM). TDM is a method of combining multiple data streams into a single communication channel by allocating specific time slots for each data stream. Use of this antiquated technology is not only inefficient, but it is unnecessarily costly. Telecommunication companies now use carrier ethernet and are not required by the Federal Communications Commission to support TDM technology. … Unfortunately, the FAA is still relying on TDM and is being charged a premium by communications companies that no longer regularly use the technology.

There are many additional complaints. The underlying issue here may be a structural one: the FAA is the provider of air navigation services, but it is also responsible for overseeing its own performance. In addition, the FAA budget goes though a political process, so instead of deciding what needs to be done, raising the money, and doing it, the FAA is at the mercy of the budget churned out by Congressional committees. Marc Scribner, Senior Transportation Policy Analyst at the Reason Foundation, points out that many other countries have decided in recent decades that this model doesn’t work. Instead, these other countries set up the provider of air traffic navigation services as a separate company: sometimes government-owned, sometimes a nonprofit, sometimes a for-profit. The company is a separate financial entity: it has the power to charge fees to airlines and airplanes, and the power to sell bonds to raise capital if needed. The role of the government is then limited to overseeing this company. Scribner argues:

The United States was once the global leader in airspace management. However, in recent decades, we have fallen behind peer countries that have modernized their air traffic control practices and technologies. … The status-quo ANSP [air navigation services provider] model in the United States was historically the dominant model globally, whereby air traffic control was provided by a civil aviation authority within the transport ministry. That model has undergone major change since 1987 outside of the United States, starting when the government of New Zealand removed its air traffic control system from the transport ministry by restructuring it as Airways New Zealand, a self-supporting government corporation. Within 10 years, more than a dozen other countries had followed suit.

Separating the provision of air navigation services from the civil aviation authority and putting the ANSP at arm’s length from its safety regulator, like all the other key players in aviation—airlines, business aviation, general aviation, airframe manufacturers, engine producers, pilots, mechanics, and so forth—is now the globally recognized best practice. For more than two decades, this has been International Civil Aviation Organization (ICAO) policy. The United States is among the last industrialized countries that have not taken this step to eliminate the fundamental conflict of interest of having an aviation regulator also operate a service it is tasked with regulating.

The revenue source for ANSPs operated as public utilities is globally accepted cost-based user fees in accordance with the airport and air traffic control charging principles promulgated by ICAO. Prior to the conversion of these ANSPs to public utilities, those revenues were nearly always paid by airlines and other airspace users to the respective national governments. In most cases, once an ANSP has been converted to a utility, the user-fee revenue flows directly to the ANSP as its primary source of revenue. This makes it possible for the ANSPs to issue revenue bonds based on their projected revenue streams, just as airports do today in the United States and elsewhere. It is through their predictable streams of revenue that come directly from users that ANSPs outside the United States can successfully finance large-scale capital modernization efforts.

Globally, three ANSPs have been moved out of the government entirely under either an independent nonprofit user cooperative model or as partially privatized companies. Another 55 operate as wholly owned government corporations. Just 19—mostly developing countries, but also including the United States, Japan, and Singapore—operate as part of legacy civil aeronautics authorities that also regulate aviation safety. ANSPs that operate as public utilities funded by user fees now number 62 and serve 83 countries globally.

My understanding is that past efforts to reorganize the FAA on this alternative model have failed in Congress not because of opposition from large airlines, because of concerns from smaller airlines and those who fly smaller planes, who fear that running the FAA on user fees would increase their costs. Whatever the political reason, one would hope that the tragic mid-air collision over Washington could serve as a wake-up call. On this issue, it’s time to run over some special interests and create the organizational structure that will allow rapid modernization of America’s air traffic control systems.

The Survey of Adult Skills was carried out across 31 mainly high-income economies in 2003. It’s a survey that’s done by having actual interviewers meet people in their homes. For the US, the sample size was 3,765, which may not sound like much, but it’s worth remembering that a typical Gallup poll is only about 1,000 people.  As long as you remember that the results should be interpreted as plus-or-minus a few percentage points, you can can learn something from them.

The results of the survey were published by the OECD as “Do Adults Have the Skills They Need to Thrive in a Changing World? Survey of Adult Skills 2023” in December. Here, I’ll focus on putting some of the US results in context.

The survey focuses on three types of skills: numerary, literacy, and problem-solving. The skills tend to be correlated across categories: that is, if a country is good at one skill, it tend to be good at others. Here’s a figure showing numeracy and literacy scores. As you can see, the US falls well below average on numeracy scores, and slightly below average on literacy.

Perhaps more troubling is that within the US scores, the gap between the 90th and the 10th percentile is either widest, or close to widest, across countries. In other words, the US average score is made up of both exceptionally high-performing and low-performing scores. The bars in the figure show the gap between 90th and 10th percentile scores, and you can see the US bar graphs on the far left.

This matters. The world economy is evolving toward higher skills, which then can be combined with improved technology. A country in which adults are highly unequal in skills will be unequal in other ways as well. Here’s one more figure from the report, this one showing patterns of the tasks performed in US jobs over time. The intensify of “routine” tasks is falling. The intensity of “social” and “nonroutine analytical” tasks has generally been rising. Those who are only equipped for routine tasks are going to have a hard time in US job market.

I understand why the calendar adds an extra day to February every four years. The revolution of the earth around the sun is approximately 365 and one-quarter days. Every four years, that adds up to one additional day, plus some extra minutes. The modest rounding error in this calculation is offset by steps like dropping the extra day of leap year for years ending in “00.”

But my question is why February has only 28 days in other years. After all, January has 31 days and March has 31 days. If those two months each donated a day to February, then all three months could be 30 days long, three years out of four, and February could be 31 days in leap years. Every other month is either 30 or 31 days. Why does February only get 28 days?

(This post is republished, with minor changes, from February 29 a year ago.)

The answer to such questions leads to a digression back into the history of calendars. In this case, Jonathan Hogeback writing at the Britannica website tells me, it seems to settle on the Roman king Numa Pompilius back around 700 BCE, before the start of the Roman Empire. The ancient Roman calendar of that time had a flaw: it didn’t have nearly enough days. As Hogeback writes:

The Gregorian calendar’s oldest ancestor, the first Roman calendar, had a glaring difference in structure from its later variants: it consisted of 10 months rather than 12. In order to fully sync the calendar with the lunar year, the Roman king Numa Pompilius added January and February to the original 10 months. The previous calendar had had 6 months of 30 days and 4 months of 31, for a total of 304 days. However, Numa wanted to avoid having even numbers in his calendar, as Roman superstition at the time held that even numbers were unlucky. He subtracted a day from each of the 30-day months to make them 29. The lunar year consists of 355 days (354.367 to be exact, but calling it 354 would have made the whole year unlucky!), which meant that he now had 56 days left to work with. In the end, at least 1 month out of the 12 needed to contain an even number of days. This is because of simple mathematical fact: the sum of any even amount (12 months) of odd numbers will always equal an even number—and he wanted the total to be odd. So Numa chose February, a month that would be host to Roman rituals honoring the dead, as the unlucky month to consist of 28 days.

This discussion does explain why February would be singled out, since it was the month of rituals honoring the dead. In Numa’s calendar, the 355-day year would be made up of 11 months that had the lucky odd numbers of 29 or 31 days, plus unlucky February.

The discussion also explains why months that start with the prefix “Oct-” or eight, “Nov” or nine, and “Dec-” or ten, are actually months 10, 11, and 12 in the calendar. Those names were originally part of a 10-month calendar year.

But questions remains unanswered: Why did the Romans of that time view odd numbers as lucky, compared with unlucky even numbers? I suppose that explaining any superstition is hard, but I’ve never seen a great explanation. A Dartmouth course on “Geometry in Art and Architecture” describes Pythagorean feelings about odd and even numbers. For those of you keeping score at home, Pythagoras lived about two centuries after Numa Pompilius. The Dartmouth course material summarizes aspects of “Pythagorean Number Symbolism”:

Odd numbers were considered masculine; even numbers feminine because they are weaker than the odd. When divided they have, unlike the odd, nothing in the center. Further, the odds are the master, because odd + even always give odd. And two evens can never produce an odd, while two odds produce an even. Since the birth of a son was considered more fortunate than birth of a daughter, odd numbers became associated with good luck.

Various mentions of the luckiness of odd numbers recur over time. A few centuries later in the first century BCE, the poet Virgil has the character Alphesiboeus (a shepherd who sings about love rituals) say in Eklogue VIII (from the A.S. Kline translation):

Bring Daphnis home, my song, bring him home from town.

First I tie three threads, in three different colours, around you

and pass your image three times round these altars:

the god himself delights in uneven numbers.

Bring Daphnis home, my song, bring him home from town.

Or leaping ahead a millenium-and-a-half, at the start of Act V of the The Merry Wives of Windsor, Shakespeare has Falstaff say:

Prithee, no more prattling. Go. I’ll hold. This
is the third time; I hope good luck lies in odd numbers.
 Away, go. They say there is divinity in odd
 numbers, either in nativity, chance, or death.
Away.

While I acknowledge this history of a belief in odd numbers, as a person born on an even day of an even month in an even year, I’m not predisposed to accept it. But it’s interesting that modern photographers have a guideline for composing photographs called the “rule of odds.” Rick Ohnsman at the Digital Photography School, for example, describes it this way:

This is where the rule of odds comes into play, a deceptively simple yet powerful tool in your photographic arsenal. It’s all about arranging your subjects in odd numbers to craft compositions that are naturally more pleasing to the eye. Unlike more static guidelines, the rule of odds offers a blend of structure and organic flow, making your images both aesthetically pleasing and impressively compelling.

The revised calendar of Numa Pompilius couldn’t last. With only 355 days, it didn’t reflect the actual period of the earth revolving around the sun, and thus led to further revisions which are a story in themselves.

But when you think about it, the question of February having 28 days all goes back to Numa Pompilius and the superstitions about odd numbers. The modern calendar has 365 days in a typical year. You might think that the obvious way to divide this up would be to start off with 12 months of 30 days, and then add five days. Indeed, the ancient Egyptians had a calendar of this type, with five “epagomenal” or “outside the calendar days added each year.

The preference over the last two millennia, at least since the time of Julius Caesar, is to have 12 months, with a few of them being a day longer. But even so, why not in a typical year have five months of 31 days, and the rest with 30? The “problem,” I think, is that most months would then have unlucky totals of an even number of days. By holding February to 28 days rather than 30, you can redistribute two days from February and have 31 days in January and March. Thus, you can have only four months with an even total of 30 days every year (“Thirty days hath September, April, June, and November …”), and seven months always with the luckier odd total of 31 days. In leap years, when February has 29 days, then eight months have an odd number of days. I think this makes February 29 a lucky day?

The GATT, formally known as the General Agreement on Tariffs and Trade but informally known as the Gentleman’s Agreement to Talk and Talk, was first signed by 23 countrie back in 1947. Over the decades, all that talking led to a substantial decrease in tariffs all around the world. By 1994, the GATT morphed into the World Trade Organization. At that time, it has about 125 countries, accounting for about 90% of world trade. From a free trade perspective, it was a considerable success.

Here’s my hypothetical question: Would the GATT have been able to expand the parameters of free trade around most of the world if it had also included the USSR?

Of couse, this did not actually happen. The old Soviet Union perceived GATT as a club of geopolitical and capitalist opponents. In 1949, it started COMECON, the Council for Mutual Economic Assistance, as its counterbalance to the GATT. The original members were in eastern Europe: along with the Soviet Union, it included Bulgaria, Czechoslovakia, Hungary, Poland, Romania and later expanded to include Albania, East Germany, Mongolia, Cuba, and Vietnam. The Soviet Union had its own notion of “comparative advantage” and “gains from trade,” which was that it would organize global trade with non-Soviet countries having only a few major export industries, thus making it harder for those countries to become independent.

Back in the day, the US had a fairly small amount of trade in a fairly small number of goods with the old Soviet Union: for example, we bought Soviet oil and sold them grain. But even though some prominent economists argued back in the 1960s and 1970s that the Soviet economy would outgrow the US economy, I don’t know of a time when American manufacturing workers felt as if their jobs were endangered by a flood of lower-cost imported cars or appliances or steel from Russia. The US worries of the 1970s and 1980s were about trade with Japan, or maybe Korea, but not the Soviet Union.

Nonetheless, imagine an alternative global economy in which the USSR was part of the GATT during the Cold War: say, after Russia invaded Hungary in 1956, or after the Sputnik launch in 1957, or after the Cuban missile crisis in 1961. Would it have been politically possible to sustain a global free trade movement with a growing global membership, like GATT, with the US and the Soviet Union both as members?I suspect not.

Now make the leap to the current day. The US and China have not yet had the equivalent of the old Soviet invasion of Hungary, nor a Sputnik moment (although the recent DeepSeek AI from China may come close), nor a direct confrontation like the Cuban missile crisis. But s the the level geopolitical confrontation rises, the pressures on international trade are rising as well.

Indeed, there’s evidence that for many Americans, worries about international trade in general are actually worries about conflict with China in particular. Germany has had enormous trade surpluses for decades, and Japan has continued to have substantial trade surpluses as well, but it is China’s trade surpluses that have gotten the attention.

In survey data on feelings about trade, Americans are something of a muddle. The answers we give depend on the questions that are asked. For example, a national survey last summer found that a strong majority of 63% favor increasing global trade, and a similarly strong majority of 58% believes that Americans favor having US firms “manufacture and make everything that we need within this country.” However, Americans don’t want to pay substantially higher prices for US products, if imports are cheaper. A majority of Americans are worried about the trade deficit, but if told that the trade deficit represents money invested in the United States, they are OK with it.

In particular, Americans are likely to report that trade with China is “unfair.”

In her own surveys, Laura Alfaro at Harvard Business School has also found that when trade with China is mentioned, any other positive attitudes about trade more-or-less vanish, because all people think about is loss of jobs.

Back in the early 1990s, when Vice-President Al Gore was defending the propossed North American Free Trade Agreement in a prime-time televised debate with Ross Perot, one of the arguments was that Mexico’s economy was just so much smaller than that of the United State, so that fears of trade with Mexico were overblown. Back in 1980, when China began its economic reforms, the US economy was 15 times as large as that of China; by 2001, when Cina became as a member of the World Trade Organization, the US economy was about 8 times as large as that of China; in 2023, the US economy is now less than twice as large as China’s–about 60% larger (measured by current US dollars).

On per capita basis, the US per capita GDP is still about six times as large as per capita GDP in China. But China’s population if of course much larger, and in global affairs, size matters. At least some of the official pronouncements from China suggest that it would like to jolt its economy out of the doldrums with a renewed surge of exporting. But a rate of Chinese export growth that was possible back in 1980 or 2001, given the relatively small size of China’s economy at that time, would be wildly disruptive to the rest of the global economy today. Moreover, the size of China’s economy is correlated with its military spending and defense posture.

I’m in general a big supporter of free trade, as readers of this blog know. But economics happens against a backdrop of politics. I don’t think the GATT could have survived back in the 1950s and 1960s and 1970s if it had included both the US and the USSR. Perhaps if China took steps toward emphasizing domestic-driven economic growth, took steps to enforce intellectual property agreements, and backed off on threatening sounds about the China Sea, then trade agreemement including the US and China could be sustained. But that feels unlikely.

Looking ahead, it seems like advances for free trade will be driven by technology, both ongoing reductions in transportation costs and in particular how the internet has both connected buyers and sellers around the world and made it possible to buy and sell services across national borders. When it comes to trade agreements, China’s presence in the World Trade Organization is one more difficulty for an organization that already was hobbled. Thus, trade agrements seem likely to be regional and bilateral, instead–and the agreements may be as full of rules and restrictions as they are attempts to reduce barriers to trade.

It’s well-known that when a couple has a child, the average woman experiences a “child penalty” in labor market outcomes, while outcomes for the man are largely unchanged. For a discussion of this pattern using US data, here’s an article by Jane Waldfogel from back in 1998 in the Journal of Economic Perspectives. As that paper points out: “As the gender gap in pay between women and men has been narrowing, the ‘family gap’ in pay between mothers and nonmothers has been widening.”

This pattern is widespread around the world. Henrik Kleven, Camille Landais, and Gabriel Leite-Mariante consider data for 134 countries in “The Child Penalty Atlas^* (published online in The Review of Economic Studies). For those who don’t have enough caffeine in their system at present to tackle the academic paper, the authors have set a “Child Penalty Atlas” website, with a useful overview of method and findings.

Here’s the data problem they face. For a number of countries, there is fairly comprehensive annual data on labor market outcomes and births. Thus, a research can track a basic labor market outcome like whether someone is in the labor force or not, and how the pattern shifts when a couple’s first child is born. Here’s a relatively common pattern using data from Chile. In the years leading up to a first child, both men and women are more likely to be holding jobs (perhaps becasue they are leaving school). But when the first child is born, the employment rate for women drops off, while that for men continues rising a bit, but mainly levels off.

However, many countries do not have annual data. Instead, they have occasional data from a government census or household survey. The researchers then take this approach:

In those cases, we know the age of people’s oldest child, so we know what happens to women and men’s employment after having children. But because we do not observe the same people over time, we do not know what their outcomes were before they had children. How do we address this? In a nutshell, we ‘match’ each observed individual who has just had a first child (i.e., they are at t=0) to a childless person with similar characteristics who is n (n varying from 1 to 5) years younger. We then assume that this childless person will have a child in n years from now. Effectively, we create a population of “future parents” from the population of people who don’t have children and who are very similar to the actual parents we observe.

Is this approach a sensible one? You can check it. Take the countries like Chile that have both kinds of data: annual data and occasional census/survey data. Apply this method of choosing people who are similar in observed characteristics based on the occasional data. Then look at the annual data and check whether this method offers accurate projections. It turns out that the method works pretty well.

The result suggests that child penalties vary a lot across countries. As the map shows, the reduction in women’s labor force participation after a first birth is very low in parts of Africa as well as China and parts of east Asia; intermediate level in the US, Canada, Russia, and parts of Europe like France; and higher in Latin America, parts of the Middle East, and parts of Europe.

in many high-income countries the child penalty explains nearly 100% of the gap of the gap in labor force participation between men and women: for example, it explains 84% of the gap in the United States, 95% in Canada, 97% in Germany, and more than 100% of the gap in Sweden. For many other countries around the world, the child penalty is only part of the labor force participation gap: in some cases, because the child penalty is so small (as in certain countrie in Africa and Asia), and in other cases because the gender gap in labor force participation is so large (as in Latin America and the Middle East).

There is of course an ongoing argument in the United States over the extent to which government programs that support first-time parents, from work leave to child care, might reduce the gender gap in labor force participation. The evidence here doesn’t speak to that point directly. After all, many countries across Europe have considerably more extensive parental leave policies and child care support than the United States, but also a greater child penalty. Policies to support new parents probably have a different effect depending on broader social expectations: if the social expectation is that most mothers will return to the labor force, these policies might help the transition out of the labor force and back in; but if the social expectation is that mothers not return to the labor force soon, or at all, then parental leave and other supports may just smooth the path out of the labor force.

Friedrich von Hayek won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1974. For the 50th anniversary of the prize, the IEA published a short collection of essays called Hayek’s Nobel: 50 Years On, edited by Kristian Niemietz. It Includes Hayek’s speech upon acceptance of the Nobel Prize, “The Pretence of Knowledge,” with three essays placing the essay in historical and modern context by Bruce Caldwell, Peter J. Boettke, and Donald J. Boudreaux.

Hayek is perhaps best-known today for the line of argument famously laid out in his 1945 essay, “The Use of Knowledge in Society,” which is also the focus of his Nobel address. He points out that the operation of prices in a market offers a way of coordinating actions. One example focuses on the price of tin. He wrote:

Fundamentally, in a system where the knowledge of the, relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose-and it is very significant that it does not matter- which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere, and that in consequence they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin, but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all

Thus, the coordinating action of a market is tightly related to how the price provides signals to producers and users. But Hayek’s point about markets and information operates at a more subtle level as well.

Imagine that an economic planner observes that a supply of tin has been eliminated, and want to adjust economic outcomes accordingly. Presumably, there should be some mixture of efforts to expand production of tin in some ways, and to reduce the use of tin in other ways. In turn, those who reduce the use of tin may with to turn to other materials, and so production of those other materials should be increased as well. But what would be the appropriate mixture of these (and other) changes?

Hayek argues that it is literally impossible for an economic planner to answer this question. The reason is that consumers of tin literally don’t know how much they might conserve on tin (or switch to substitutes) until they are actually forced experiment with different methods of doing so. Similarly, alternative producers of tin (or substitutes) literally don’t know about how they might adjust production in response to a shortage of tin that happens elsewhere until they actually try to do it. The knowledge of how future adjustments might take place if conditions change is predictable in terms of broad patterns–that is, in response to a shutdown of a supply of tin, users of tin will try to conserve and alternative producers of tin will try to increase output–but specifically who will be able to take these steps most easily and cost-effectively is not known in advance.

In Hayek’s Nobel address, he writes:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.

There is much to be said about the strengths and weakness of Hayek’s theory, which I won’t try to do here. But I will point out one consequence of his theory, which is that it is common for politicians to speak as if economic outcomes are just a matter of political will. Maybe the discussion is about saving a factory at risk of closing down, or saving or creating an industry, creating more well-paid jobs, making housing more affordable, reducing the price of eggs, cutting interest rates, and so on and so on. The language of politics often makes it sound as if these and other economic outcomes are just a matter of whether your favorite politician or party is “fighting” for you. It’s just a matter of whether they “want it enough,” as the sportcasters say of the winning team, suggesting that losing and other unwanted outcomes are just about a weakess of desire.

In his 1988 essay, Hayek referred to this belief in the malleability of economic outcome as The Fatal Conceit: he wrote of “the fatal conceit that man is able to shape the world around him according to his wishes.”

More to the present point, Hayek argued that many people have a tendency to emphasize the role that government plays in economic outcomes, because government actions are large-scale, associated with prominent leaders, and commemorated by writers. The actions of government are the facts that we have written down. But we typically don’t write down, or even observe, the myriad small-scale reactions of individual consumers and producers across an economy as they continually react to changes and shift. Hayek wrote:

The role played by governments is greatly exaggerated in historical accounts because we necessarily know so much more about what organised government did than about what the spontaneous coordination of individual efforts accomplished. This deception, which stems from the nature of those things preserved, such as documents and monuments …

Government economic policy, whatever its announced goals, doesn’t create outcomes. Instead, it changes the context in which economic actors make decisions, which in turn leads to economic outcomes. The distinction matters.

In arguments over industrial policy, there’s often a moment where someone makes an assertion like: “Every nation has industrial policy. Even not having an industrial policy is a type of industrial policy. The only relevant question is what kind of industrial policy we should choose.” In my experience, the people who make this argument then jump immediately to why a specific kind of industrial policy should be very aggressive indeed, including tools like subsidies and constraints on imports aimed at assisting specific domestic industries or companies.

It’s true, of course, that every nation has some type of industrial policy, if that term is very broadly understood. But I find it usefult think of economic policy and its effects on industry in layers.

The most basic layer is an economy with a legal system that enforces contracts, a functioning financial system, functional bankruptcy laws, low inflation, moderate government borrowing, good transportation and communications infrastructure, and a solid educational system from K-12 up through colleges and universities, workforce training for adults, and so on. These features surely support a more robust development of industry, but without taking sides in which industries will emerge.

As a next step, one can imagine the insight that long-run growth in the standard of living has, in the last 2-3 centuries, been closely related to advances in science and technology. It’s a standard belief among economists that an unfettered free market will tend to underinvest in innovation, in large part because innovations can be copied, and much of the benefit of an innovation goes to users rather than to the inventor. Thus, high-income countries subsidize innovation in a number of way: through protection of patents and intellectual property rights to help raise the reward for successful innovators, through tax breaks for research and development done by firms, and through direct funding of science and innovation at research institutions. These kinds of steps seek to to shape the direction of an economy toward a greater emphasis on technology-based growth. I have argued that despite a recent moderate increase in US R&D spending, there is a plausible case for increasing these incentives with an aim to doubling US research and development spending.

However, one can draw a conceptual line between general support for R&D and targetted support by industry. For example, a society might identify certain technological priorities: say, carbon-free energy production, anti-cancer drugs, stronger domestic production of semiconductors, artificial intelligence, and others. A certain amount of government support of R&D might be aimed at the desired areas. In addition, government might take other steps: perhaps prizes for certain kinds of inventions (think Operation Warp Speed for creating the COVID vaccines), or allow firms to cooperate, without fear of antitrust laws, to fund research jointly, or to build up joint ventures with the highest-performing firms in other countries. But all of these steps are focused on support for research and development of knowledge.

The next level is direct support for industries, or even for certain specific companies. This support might take the form of direct government subsidies or tax breaks for certain firms and/or industries. It might also involve government becoming involved in transportation infrastructure or workforce training that is aimed quite specifically at industrial development in a particular location.

The final layer of “industrial policy” is not just to build up domestic firms and industries with subsidies, infrastructure, and workforce development–as well as support for the underlying technological and scientific expertise–but to hinder international competition with tariffs and import quotas.

There are probably other sensible ways to divide up these categories, but the point I’m trying to make is that using the term of “industrial policy” to refer to all of these steps seems to me to stretch the term so far that it stops being useful. My sense is that most of the economists who would view themselves as against “industrial policy” are also supporters of at least the first two or three levels of policy above–that is, the basic underpinnings of a strong economy including support for research and development. Instead, I would focus th term “industrial policy” on subsidies or trade barriers aimed at certain companies or industries.

Sometimes this kind of industrial policy has worked. There are plenty of local examples where support (or at least not active opposition) from government was necessary for a large-scale firm to thrive, including specialized training for workers, infrastructure investment, making land available, a local research center, local tax breaks (“tax-increment financing”) and so on. Of course, there are also plenty of cases where local government tried to roll out the red carpet for a firm, and blew a lot of money without much success. As one of many examples, some will remember back in 2018 when President Trump announced to m much fanfare that Foxconn was going to build a giant manufacturing facility in central Wisconsin, which never happened.

Similarly, there are some examples around the world of where countries used tariffs and import quotas–along with all the other technology, workforce, and infrastructure steps mentioned here–to help build a domestic industry, which over time became a global leader. But in the cases that seemed to work, like certain industries in South Korea, the government support for these industries was tied to the industry meeting certain goals for exports that would be cost-competitive in world market. If industries did not meet the goals, the subsidies were cut off. And there are many examples of countries that blocked imports simply to support domestic producers

But all of these types of industrial policy happen through politics, and thus are more likely to be responsive to a combination of powerful incumbent special interests and to wishful thinking (after all, politicians aren’t putting their own money on the line). A lot of prominent industrial policy efforts have turned out badly. I write a few years ago about my qualms about industrial policy:

For example, back in 1991 Linda Cohen and Roger Noll published a book called The Technology Pork Barrel, which was based on case studies of US attempts to build infant industries in supersonic planes, communications satellites, a space shuttle, breeder reactors, photovoltaics, and synthetic fuels. I remember back in the 1980s when Japan announced with great fanfare the “Fifth Generation” computer project, which then went away with out fanfare. I remember when Japan was the shining example of how industrial policy worked in the 1970s and into the 1980s, but somehow it abruptly stopped being a shining example when Japan’s economy entered three decades of stagnation starting in the Brazil decided that it would become a computer-producing power in the 1970s and 1980s, and when Argentina decide that it would become a global electronics superpower. I remember the economic disaster that was the industrial policy of the Soviet Union. I remember the places around the world that have tried to be the next “Silicon XXXX,” generally without success.

Ultimately, every proposal for industrial policy must grapple with the problem of political discipline. As the levels of industrial policy move beyond the basic steps like health institutions and support of research and development, and start to focus on particular industries and companies, how likely is the policy to work? What are the intermediate goals that will be used to judge whether the policy affecting the industry as desired? Will the policy be cut off if the intermediate goals are not being met? The closer that industrial policy can be captured by firms at a certain company or industry, the political tensions

There is often a heavy dose of irony in industrial policy. Back in the 1950s, the head of General Motors was nominated to become Secretary of Defense. The story goes that when he was asked if he could separate the interests of General Motors from the broader nation interest, he answered: “What’s good for General Motors is good for the country.” The line was quoted for decades to show as an example of an excessively pro-business attitude. (The story isn’t accurate, as I described here.) But when General Motors needed a government subsidy to survive during the Great Recession, a lot of people then argued that what was General Motors was good for the country. Similarly, current US industrial policy favords multi-billion subsidies directly for companies on Intel and TSMC, on the grouds that “the interests of domestic semiconductor manufactures are good for the country.”

There’s an old line that “government should steer, not row.” The idea is that the useful role is to set up policies like appropriate institutions, as well as incentive for innovation in general and for specific industries. But when government gets into the business of direct subsidies and tariffs, it has moved into rowing rather than steering, and the danger of political incentives starting to override sensible economic policy begins to become a greater risk.

These issues and others have been top-of-mind for me lately, because the most recent issue of the Journal of Economic Perspectives, where I work as Managing Editor, published a “Symposium on Industrial Policy” in the Fall 2024 issue. As with all JEP content and archives, the papers are freely available online:

• “Export-Led Industrial Policy for Developing Countries: Is There a Way to Pick Winners?” by Tristan Reed
• “The Political Economy of Industrial Policy,” by Réka Juhász and Nathan Lane
• “Industrial Policy: Lessons from Shipbuilding,” by Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur
• “Semiconductors and Modern Industrial Policy,” by Chad P. Bown and Dan Wang
• “Alexander Hamilton’s Report on Manufactures and Industrial Policy,” by by Richard Sylla

Want more? The most recent Annual Review of Economics also includes a couple of articles on industrial policy:

• “Industrial Policy and the Great Divergence,” by Réka Juhász, and Claudia Steinwender
• “The New Economics of Industrial Policy,” by Réka Juhász, Nathan Lane, and Dani Rodrik
• “Modern Industrial Policy and the World Trade Organization,” by Chad P. Bown

President Trump set off a wave of protectionist trade policies about seven years ago, back in 2018, and those policies were mostly extended and followed during President Biden’s term of office as well. But unsurprisingly to most economists, trade restrictions have done a poor job of producing the desired results.

Michael Strain provides a trenchant critique of the move to protectionism since the first Trump term in “Protectionism is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift toward Trade Wars and Industrial Policy.” The essay appears in a collection of six essays from the Aspen Economic Strategy Group titled Strengthening America’s Economic Dynamism, edited by Melissa Kearney and Luke Pardue, and published late last year.

As Strain points out, there are typically three concrete benefits claimed for protectionism: more US jobs in manufacturing, reducing US economic ties with China, and reducing the trade deficit. The author goes into these arguments in more detail, but here are some of the highlights.

First, here’s a graph showing manufacturing jobs as a share of total US employment since 1939. There’s a boom-and-bust in manufacturing jobs looking at World War II production, but after that, the line drops steadily until the last decade or so. In particular, the share of manufacturing jobs is falling well before the forces of globalization take hold in the 1970s or 1980s, and well before China joins the World Trade Organization and enters global markets in force in the earyl 2000s. A similar pattern of decline in the share of manufacturing jobs holds all over the world. The key underlying factors here over the decades seem to be steadily growing productivity in manufacturing (think automation and robotics, along with just-in-time inventory), along with a general shift to an economy more oriented around services than around goods. Those productivity gains flattened out for a few years after the Great Recession of 2008-09, and the decline in the share of US manufacturing jobs correspondingly eased off for a few years. But lower productivity growth isn’t a path to future prosperity.

As Strain points out, there are several effects of trade barriers on US manufacturing jobs: a certain domestic industry is protected against competition, but higher prices in that industry can lead to problems for other domestic industries, and foreign countries may retaliate by shutting out US-produced exports. Put these together, and Strain suggests that the Trump tariffs of 2018 may even have led to a reduction in US manufacturing jobs.

Second, consider the goal of reducing US economic ties to China. The US can trade with China either by directly importing from China, or indirectly by having China export to a country like Vietnam or Japan, and then having the US import from those other countries. In recent years, direct US trade with China has declined, but indirect trade through other countries has increased. A standard measure here is to look at “value added”–that is, what portion of US imports of manufacturered goods was created in China.

This figure is based on looking at overall US demand for manufactured goods, then calculating what share of that demand comes from foreign value-added, and finally what share of that foreign value-added comes from China. The upward trend levelled off somewhat after the Great Recession. But seven years of protectionism has not led to any meaningful drop in China’s value-added share.

Finally, consider the goal of reducing the US trade deficit. The graph shows the trade deficit since 1999. President Trump focused on the trade deficit in manufactured goods. This measure of the US trade deficit didn’t move much after about 2011 until the pandemic, when it dropped off and then partially recovered.

The “current account deficit” is a broader measure of the trade deficit. It includes trade in goods and also services, as well as certain income flows related to foreign investments or remittances across borders. This measure also doesn’t change much in the years after the Great Recession, and then gets much worse during the pandemic. In short, seven years of protectionism hasn’t “fixed” the trade deficit, either.

There is a lot more to say about tariffs and protectionism than this quick overview. Strain has more to say in his essay, and I’m sure I’ll have many excuses to return to the topic it the next few years. But for the moment, the main point is simply that judged in terms of its own main justifications, the surge of protectionism since 2018 has not been achieving its goals.

One can of course offer reasons for this failure. A common pattern in politics–and not just in trade issues–is that the failure of past policies to achieve their stated goals then becomes a new justification for more of the same. In this case, the failures of past protectionism become a reason for additional protectionism.

As one example. after Trump renegotiated the North American Free Trade Agreement (NAFTA) back in 2018, transforming it into US-Mexico-Canada Agreement (USMCA), he said in his press conference: “Once approved by Congress, this new deal will be the most modern, up-to-date, and balanced trade agreement in the history of our country, with the most advanced protections for workers ever developed.” Seven years later, Trump now apparently views the agreement that he renegotiated and lauded as a failure, and promises to dial up tariffs against Mexico and Canada–along with the rest of the world–to new heights.

Learning that a problem is widespread may, paradoxically, cause people to view the problem as less dangerous. Kasandra Brabaw offers a readable overview of this dynamic in “The ‘Big Problem Paradox'” (Chicago Booth Review, December 10, 2024). Brabaw writes:

 If you want to get people’s attention to address a problem, making it seem as big as possible is a nearly universal reflex.

But it’s almost certain to backfire, according to Northwestern’s Lauren Eskreis-Winkler, Cornell predoctoral scholar Luiza Tanoue Troncoso Peres, and Chicago Booth’s Ayelet Fishbach. In a study, they name this the “big problem paradox. Across more than a dozen experiments, they find that describing how big a problem is tends to lessen people’s estimates of its severity. “When you learn there are many people who don’t finish college, you say, ‘Probably it won’t affect their lives that much,’” Fishbach says. “When we remind you that air pollution is common, you say, ‘Well, I guess it’s not so bad.’” Big numbers often give you a false sense of security, and the way a problem is communicated is often at odds with the intended message, according to the study.

In their experiments, the researchers told participants the size of a range of problems, including city-wide building code violations; children who aren’t vaccinated against measles, mumps, and rubella; patients who don’t take their medications; drunk driving; adultery; and positive screenings for a breast cancer gene mutation. No matter the problem, people who learned it was prevalent inferred that it caused less harm.

The underlying research appears in “The Bigger the Problem the Littler: When the Scope of a Problem Makes It Seem Less Dangerous,” by Lauren Eskreis-Winkler , Luiza Tanoue Troncoso Peres, and Ayelet Fishbach (Journal of Personality and Social Psychology, online publication October 24, 2024). The research approach here is to do two surveys side-by-side: one asks about a problem, with no information about how common the the problem is; the other asks about the problem, and also provides quantitative evidence that the problem is widespread. It turns out that concern expressed about the problem is consistently lower with the additional quantitative data provided.

The authors offer this explanation:

Yet severity has two dimensions: breadth, which refers to the number of people the problem affects, and depth, or the harm felt by an individual experiencing the problem. We propose that, psychologically, these dimensions affect each other. Our main hypothesis is that people who consider the prevalence of a problem infer it causes less harm, a phenomenon we dub the big problem paradox. The bigger the problem, the littler.

The authors argue that when you hear about a very large number of people affected by a problem, one reflexive reaction is to think: “Well, how bad can it really be?” One of their examples discusses “medication nonadherance”–that is, not taking medications correctly. The potential harms here are enormous. But focusing on the overall number of people who don’t always take medications correctly is likely to make many people think about the time they forgot to take a pill on time, or took an extra dose by mistake, and nothing all that terrible happened.

To the extent that such a tradeoff exists between how people perceive depth and breadth of problems, it may be that when when trying to raise public concern over an issue, it may be more productive to focus on how it represents an especially deep problem for a smaller group of people, rather than how the problem “affects” in a milder way a larger number of people.

A word of warning here. These conclusions summarize the results of 15 different studies with a total of 2,636 participants– so on average, fewer than 200 participants per study. A number of the studies are based on participants from websites that recruit people to participate in online research, but others involve asking people on the street in downtown Chicago, a survey taken of participants at a pharmaceutical conference, and the like. As the authors note, there are issues of “external validity” here–that is, are the result from the kind of people who choose to participate in these surveys representative of the broader population? On the other hand, the fact that the “big problem paradox” seems to apply across a wide variety of settings gives it some credence.

The US Trade Representative has filed a “Report on China’s Targeting of the Maritime, Logistics and Shipbuilding Sectors for Dominance” (January 16, 2025). In the lingo of US trade law, this is a “Section 301” report, which comes from a 1974 law delegating the authority to the USTR to investigate “unfair” trade practices by other countries and to impose tariffs or other trade restrictions in response.

There is zero doubt that China has targetted its shipbuilding industry with major subsidies. But part of what is interesting in this case is that the US has not been a major player in global shipbuilding for decades. Thus, the USTR report reads strangely to me, because while it is phrased in terms of effects on US shipbuilding, hat industry has been dominated by Japan and South Korea.

Either fortuitious or thanks to excellent editorial decision-making, the Journal of Economic Perspectives, where I work as Managing Editor, published a paper on Chinese ship-building subsidies in the Fall 2024 issue as part of a symposium on industrial policy. Like all JEP papers back to the first issue, it is available free and ungated. Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur describe “Industrial Policy: Lessons from Shipbuilding.” 

They present a figure showing global patterns of shipbuilding. As you can see, the UK(blue) and other nations of Europe (red) dominated global shipbilding for most of the first half of the 20th century. The US has surges of shipbilding in each World War, but is generally not much of a factor. Then Japan (orange) takes a large share of the global shipbuilding market after World War II and Korea (green) enters the market in force in the 1980s. China’s share begins to rise rapidly in the early 2000s.

As the figure illustrates, it would be impossible for China’s shipbuilding to have affected the US shipbuilding industry before about 2000. Thus, when the USTR report discusses the low levels of US shipbuilding in, say, the 1970s or 1980s, the causes are necessarily elsewhere.

The USTR report has only a few mentions of shipbuilding in Japan and Korea, mostly in footnotes, but it does drop in an occasional sentence. For example, USTR (pp. 116-117) notes in passing: “For China to achieve its targeted dominance, including as demonstrated by explicit global market share targets, Chinese companies must displace foreign companies in existing markets and take new markets as they develop. Such displacement affects China’s current top competitors in Korea and Japan, as well as U.S. shipbuilders, which continue to see their smallmarket share decline and are unable to compete with China’s artificially low prices and massive scale.” At another point, USTR (p. 60) quotes an outside study stating: “Chinese yards often force ship buyers to source engines and other subcomponents in China when they order vessels. Otherwise, ship buyers interviewed by the authors indicate, they would favor Korean and Japanese made engines and other internal parts.” In short, this is not a case where a large or cutting-edge US industry is being challenged by China’s subsidies.

Shipbuilding has been a highly subsidized industry in Europe, Japan, and Koreaa before it became subsidized by China, as Barwick, Kalouptsidi, and Zahur point out in JEP. They write:

First, why do governments subsidize shipbuilding? Our narrative suggests a wide variety of reasons: the connection between trade, shipping, and shipbuilding; the development of heavy manufacturing as a strategy for promoting economic growth; employment; national security and military considerations; and the desire for national prestige (or “pride and machismo,” as Stråth (1987) puts it). Yet, in none of the historical cases is it self-evident exactly what mix of objectives led to industrial policy in shipbuilding.

Second, was industrial policy successful? It is challenging to evaluate if industrial policy worked. There are certainly examples of “apparent success” in Japan, South Korea, and China, where a country with a negligible initial share of the global industry embarks on a program of industrial policy and rapidly becomes a global leader. But the history of shipbuilding is also filled with examples of unsuccessful industrial policy, such as the long- standing US policy of protecting its shipbuilding sector through cabotage laws, European governments’ prolonged and costly attempts to subsidize their shipbuilders in the face of Japanese and Korean competition (Stråth 1987), or an earlier attempt by South Korea to promote shipbuilding in the 1960s (Amsden 1989). Other countries have failed to launch a shipbuilding industry as well, as in the case of Brazil’s failed attempt to launch its own shipbuilding sector in the late 1970s (Bruno and Tenold 2011). Even the apparent success stories required massive support, leading to the question (rarely answered in the literature) of whether the benefits from subsidizing shipbuilding are worth its large cost.

They seek to estimate the full range of China’s subsidies for the shipbuilding industry: cheap land near the ocean, cheap low-interest long-term loans, subsidized inputs (like steel), subsidies for exporting ships, subsidies for ship-buyers, and streamlined licenses. China opens literally hundreds of shipyard from about 2006-2013. They estimate that these government subsidies were equal to about half of total revenue for China’s shipbuilding industry during these years.

Should China’s shipbuilding subsidies be counted as a “success”? They write:

[A]lthough China’s shipbuilding subsidies were highly effective at achieving output growth and market share expansion, we find that they were largely unsuccessful in terms of welfare measures. The program generated modest gains in domestic producers’ profit and domestic consumer surplus. In the long run, the gross return rate of the adopted policy mix, as measured by the increase in lifetime profits of domestic firms divided by total subsidies, is only 18 percent, meaning that for every $1 the government spends, it gets back 18 cents in profitability. In other words, the net return when incorporating the cost to the government was a negative 82 percent, with entry subsidies explaining a lion’s share of the negative return.

They discuss how one might estimate a higher return. For example, if China had targeted its shipbuilding subsidies to larger and more efficient firms, rather than encouraging entry–as it eventually did–the return to its subsidies would have been higher. Also, if one takes into account that China’s massive shipbuilding program was probably large enough to drive down global costs of transportation, then China (and other exporters around the world) would have also benefited from being able to trade more cheaply.

The current situation in global ship-building is that if the US penalizes Chinese ship-building, most of the benefits will go to Japanese and Korean shipbuilders. But let’s try to look beyond that. Why has the US has played such a small role in global ship-building? What would be involved in changing that?

For most economists, the travails of US ship-building go back to laws in the 19th and early 20th century–for example, the Jones Act of 1920–which sought to protect US shipbuilding from foreign competition. The law requires that shipping between two US ports can only be carried by ships built in the United States. But when US shipbuilders no longer faced global competition, their efficiency fell behind. Current estimates are that the US cost for building a large ocean-going ship is about 300-400% higher than a ship built in Japan or Korea. Thus, the US ship-building industry has become focused on smaller ships for domestic purposes, not ocean-goign vessels. The USTR writes: “U.S. shipbuilders delivered 608 vessels of all types in 2020, including 15 deep-draft vessels and 5 large oceangoing barges. The majority of these 608 vessel deliveries were inland dry cargo or tank barges and tugs and towboats. U.S. shipbuilders delivered only four bulk vessels in 2024 …”

If US ships were much, much cheaper, the US transportation system could look quite different: for example, it would be much cheaper to transport cargo and bulk goods up and down the east coast and west coast, rather than using overland rail or trucks. For example, US lumber companies complain that they are at a disadvantage in shipping lumber between US locations compared to Canadian lumber firms–because the Canadian firms can use cheaper international shipping.

I struggle to imagine the US economy becoming an important global ship-building nation. In a big-picture sense, the country would need to develop the domestic expertise to drive down the cost of building large ocean-going vessels by, say, 75%. This would involve a building managerial and corporate expertise, along with worker expertise, and developing the supply chains of specialized products to support th is effort. But a more basic starting point, imagine the problems in a US context of acquiring land and permitting by the ocean or a large enough river to make launching hundreds of ocean-going ships possible.

It’s perhaps easier to imagine a newly board US shipbuilding industry focused on particular tasks, like top-level maintenance and repair of big oceangoing vessels, or focusing as a starting point on a particular part of the market. As the JEP authors point out: “The major types of ships currently produced include containerships, (oil) tankers, bulk carriers, as well as more niche products like cruise ships, liquefied natural gas carriers, and “Ro-Ro’s,” which are ships that allow vehicles to be rolled on and off the ship.” The USTR report also points out the specialized ships need to install offshore wind turbines.

I’m sure that shipmakers in Japan and Korea are perfectly happy for the US to take a stab at reining in Chinese subsidies for ship-building. But I confess that when I think of orienting the US toward key industries for 21st century prosperity, pouring in the government subsidies and attention to create a globally competitive shipbuilding industry would not be high on my list.