Conversable Economist

Many years ago, I learned that “dilatancy” is a stage in the build-up before an earthquake, when rocks have been pushed together as tightly as possible under the pressures of shifting tectonic plates. Antitrust regulation may be experiencing its own dilatancy before an earthquake.

The underlying problem here is that the actual antitrust laws (the Sherman and Clayton antitrust acts) lay out general guidelines, but not in a level of detail that necessarily offers clear guidance in specific cases. Thus, since 1968 the federal antitrust authorities at the Federal Trade Commission and the US Department of Justice have spelled out more detailed guidelines for what mergers will be deemed acceptable and which ones may be challenged by the regulators. However, FTC and DoJ don’t have a blank slate for writing these guidelines; instead, the guidelines are strongly shaped by past court decisions, which in turn are influenced by legal and economic arguments. Thus, the guidelines are updated from time to time, maybe every 10-20 years or so.

The guidelines now come in two parts: the Horizontal Merger Guidelines published in 2010 look at mergers happening between two firms in the same industry. The Vertical Merger Guidelines published in 2020 look at mergers happening between two firms where one is “upstream” and another is “downstream” in the same supply chain.

However, the FTC antitrust regulators under Lina M. Khan withdrew support of the vertical merger guidelines in 2021, although the US DoJ antitrust regulators did not officially do so. Then in January 2022, the FTC and DoJ antitrust regulators announced plans to “modernize” both sets of antitrust guidelines. But here we are, 18 months later, without a concrete proposal for these new guidelines. The talk is that the current antitrust regulators would like to shift the existing guidelines quite substantially, but because the existing guidelines are built on decades of actual court precedents, they are struggling with how to phrase the rules they prefer in a way that has a chance of passing judicial muster.

In broad terms, what’s at stake here? Timothy J. Muris was chair of the Federal Trade Commission from 2001-2004, and thus writes as (on the whole) a defender of the existing approach in “Neo-Brandeisian Antitrust: Repeating History’s Mistakes” (AEI Economic Policy Working Paper Series, January 30, 2023). Here are a few of his points that struck me in particular.

1) Beware of oversimplified histories of how antitrust regulation has developed.

A standard and often-repeated story is that the antitrust regulators used to be “tough,” which was good, but then a bunch of free-market ideologues (many based at the University of Chicago) ensorcelled the courts and academia and made antitrust “weak,” which was bad. According to this story, it’s time to cast off the ideological blinder and go back to the good old days.

This story has a certain rhetorical appeal, but even a cursory appreciation of US history suggests that it has some severe holes. Back in the 1950s, when giant firms like General Motors, Ford, US Steel, Exxon, AT&T, General Electric, and DuPont were dominating markets across the US, this is supposed to be the timeframe of exceptionally aggressive antitrust enforcement? Sure doesn’t look like it. I wrote about a more nuanced history of the evolution of antitrust doctrine at the start of this year in “Complexifying Antitrust.”

Muris adds the additional useful point that while University of Chicago scholars were certainly involved in critiquing the prevailing antitrust in the 1960s, they were neither the first to do so, nor were they the ones who led the way in actually formulating the new rules. As Muris writes: “The Chicago scholars, like the revolutionaries of 1776, agreed on what they opposed, but not on what the world post- revolution should look like …”

I guess the names of antitrust critics who predated the University of Chicago critique won’t mean much, unless you read the Muris paper about their arguments, but for the sake of naming some names, the earlier critics of antitrust in the 1950s and 1960s include Fred Rowe (Yale), Morris Adelman (MIT), Donald Turner (Harvard), Robert Pitofsky (NYU), Milton Handler (Columbia), Thomas Kauper (Michigan) ,and a critique from the American Bar Association published reports in 1956–among others. Muris also points out that the leading legal treatise on antitrust doctrine starting in the late 1960s was Philip Areeda of Harvard, who was later joined as a co-author by Herbert Hovenkamp of the University of Pennsylvania, which through multiple editions remains what Muris calls “by far the most influential source on antitrust law for courts, scholars, and practitioners alike.” Former Supreme Court Justice Stephen Breyer, appointed by Bill Clinton in 1994 and usually regarded as leaning toward the left side of the court, was generally a prominent advocate of the antitrust that has been conventional for the last half-century or so.

2) Will we see the return of Robinson-Patman antitrust arguments?

Lina Khan at the FTC has repeatedly praised the Robinson-Patman Act of 1936. In contrast, as Muris notes: “Virtually all antitrust enforcers, commentators, and practitioners have condemned this statute for over 50 years.”

For some insight into the issues here, it’s useful to consider the the A&P grocery chain, which started in the mid-19th century and became the largest retail chain store in the US for over 40 years. Muris quotes Mark Levinson, a biographer of the company, with this reminder:

By 1929, when it became the first retailer ever to sell $1 billion of merchandise in a single year, A&P owned nearly 16,000 grocery stores, 70 factories, and more than 100 warehouses. It was the country’s largest coffee importer, the largest butter buyer, and the second-largest baker. Its sales were more than twice those of any other retailer.

How did A&P get so big? It set up its own purchasing and distribution network, buying directly from farmers and cutting out wholesalers and middlemen. It bought in large and predictable volumes, and thus got good prices as a buyer–which were passed along to consumers. It set up the most efficient distribution system of its time: for example, the same trucks that delivered bread from A&P-owned bakeries to A&P stores were also used by the company for other distributions. It used its massive sales data to reduce the share of unsold products and spoilage. It also customized products for varying tastes across the country: for example, Philadelphians like their butter with less salt and a lighter color than do most New England markets.

In short, A&P expanded its markets by selling high-quality groceries at lower prices. Of course, it was cordially hated by the both the wholesalers/middlemen and by the smaller stores it drove out of business. In general, A&P was the leader of a rise in chain stores during the 1920s and 1930s, driving out smaller single-store businesses. Many states imposed special taxes to limit chain stores; some states proposed laws to block them altogether. Indeed, references to “monopoly” or “anticompetitive behavior” in this time frame often refer to bigger stores attracting customers with low prices, high quality, and improved selection.

As Muris notes, the Robinson-Patman Act of 1936 was originally titled the Wholesale Grocer’s Protection Act; in fact it was drafted by lawyers for the Wholesale Grocers Association, which represented the wholesalers and smaller retailers who were losing market share to the chain stores. Patman famously said: “Chain stores are out. There is no place for chain stores in the American economic picture.”

In 1944, the federal government indicted A&P and its executive for violating the Sherman antitrust act. The company was essentially convicted of expanding its sales though more efficient methods of operating and lower prices, and thus of causing harm to competitors. The government also advanced a theory of “predatory pricing,” which was that although the A&P prices had been lower for decades, this was all part of a longer-run plot where–after driving out competitors–A&P would then be able to charge much higher prices for decades into the future. To block the theoretical scenario of higher future prices, it was necessary to prevent actual current prices from being so low.

As innumerable commentators pointed out, then and now, consumers were clearly better-off for decades as a result of A&P. But that was no defense under the antitrust doctrine of the time. Indeed, under the antitrust rules that prevailed up through the 1960s, a company that used efficiency gains to compete with lower prices would often deny doing so. Muris writes:

Lawyers arguing for mergers certainly performed handstands 60 years ago to avoid claiming their mergers reduced costs and prices. They feared they would be accused of planning to lower prices, therefore taking market share from competitors, harming rivals, and thus committing the paramount sin of the era: increasing concentration. Both the harm to rivals and the increased concentration could themselves have been enough to jeopardize a merger, and they thus prompted such vigorous denials from the merging parties. Will such arguments be the new requirement for merging firms, de jure or de facto?

But under pressure from a wide array of critics, the idea that efficiency and price-cutting should be considers as anti-competitive was fading by the early 1960s. As Muris notes:

In 1977, this growing criticism led the DOJ to publish a major attack on Robinson- Patman, finding the act “protectionist” with a “deleterious impact on competition” and, ultimately, on consumers. The FTC, which had issued nearly 1,400 Robinson- Patman complaints over the preceding four decades, was reaching the same conclusion: The agency dramatically slowed enforcement in the 1970s and all but ended it thereafter.

3) Protecting competitors or consumers?

The official mission of the Federal Trade Commission is “Protecting America’s Consumers,” which may seem straightforward. But in a prominent essay about Amazon back in 2017, Lina Khan argued for the possibility that while Amazon might seem to be benefiting consumers in the short run, it maybe possibly might be setting consumers up to be worse off in the long run. This is the Robinson-Patman logic resurrected and brought up the present in a different context.

Indeed, the underlying logic of the Robinson-Patman arguments as antitrust legislation and practice evolved into the 1950s and 1960s was that a reduction in the number of competitors in a market was an antitrust violation–even if competition in that market still seemed quite robust.

The Brown Shoe case is one of many prominent examples. Two shoe companies, Brown Shoe and GR Kinney, wished to merge. Muris describes the state of competition in the shoe market at the time:

Brown Shoe was the third-largest retailer nationwide, and it made about 4 percent of all shoes. Kinney was the eighth-largest retailer and manufacturer, although it accounted for less than 2 percent of retail sales and was the manufacturer of only 0.5 percent of all shoes. Moreover, manufacturing overall was not concentrated, as the four largest firms made 23 percent of the country’s shoes and the 24 largest firms accounted for only 35 percent of all shoes manufactured. At retail, the two combined for 2.3 percent of all stores selling shoes

Notice that both companies made shows and also had retail outlets. The idea was that the retail outlets could offer shoes from both companies. However, the government antitrust regulators argued that having one company one company producing 4.5% of shoes was excessive concentration. Moreover, it argued that greater efficiency from the merger would allow the prices for shoes to be cut–which would disadvantage other shoe companies.

Again, this old-style argument seems to support a version of competition in which no firms lose out–and especially that firms do not lose out because they are less efficient or have higher prices. The old-style theory is that consumers benefit from having lots of places to shop, but that consumers do not benefit if many of them choose to shop at places with lower prices, and thus drive some firms out of business.

4) How does resurrecting these older and discredited theories of antitrust relate to the modern economy?

Many of the current issues in antitrust are about digital companies: Amazon, Google, Facebook, Netflix, Apple, and others. Other topics are about large retailers like WalMart, Target, and Costco. Still other topics are about mergers in local areas: for example, if a small metro area has only two hospitals, and they propose a merger, how will that affect both prices to consumers and wages for health care workers in that area? Another set of topics involves how to make sure that when drug patents expire, generic drugs have a fair opportunity to compete. Another topic is about tech companies that pile up a “thicket” of patents, with new patents continually replacing those that expire, as a way of holding off new competitors.

None of these issues require returning to the old antitrust argument that passing along efficiency gains to consumers in the form of lower prices should be prosecuted by antitrust authorities. None of them imply that the goal of antitrust should be to protect competitors, rather than consumers. If the antitrust powers-that-be at the Federal Trade Commission and the US Department of Justice try to revise the existing merger guidelines back to the 1940s, 1950s, and 1960s, it will be a seismic shock to this body of law. Such an effort would almost certainly be blocked by the courts. Perhaps the cynical prediction is that the new horizontal and vertical merger guidelines, if and when they emerge, will involve a blast of old-style populist rhetoric but relatively few major substantive changes.

For those interested in the more discussion of antitrust policy, and especially how in certain areas a more activist antitrust policy might help consumers and workers without a need to return to Robinson-Patman, some useful starting points on this blog include:

• “The Case for a More Activist Antitrust Policy” (March 10, 2021).
• “The Google Antitrust Case and Echoes of Microsoft” (October 21, 2020)
• “Antitrust in the Digital Economy” (July 19, 2019)
• “Three Questions for the Antitrust Moment” (July 9, 2018)
• “A Skeptical View in Favor of an Antitrust Push” (March 15, 2018)
• “Limits for Corporate Bigness on Acquisitions, Patents, and Politics” (August 13, 2019)

When Silicon Valley Bank failed in March 2023, the actual legal rule was that th Federal Deposit Insurance Corporation (FDIC) insured bank deposits only up to $250,000. This is plenty for just about every household. But a number of businesses had much larger sums on deposit at the bank, and when these businesses became concerned that the bank wasn’t financially security, they started pulling out those deposits–and this bank run then caused the bank to be shut down. For a more detailed discussion of these events, see my earlier post “An Autopsy of Silicon Valley Bank from the Federal Reserve.”

The federal bank regulators were concerned that other firms were showing signs of pulling out deposits from other banks, and they announced that to stabilize the US banking system, they would guarantee all deposits–even those above the $250,000 limit. Was that decision appropriate? Raghuram Rajan and Luigi Zingales make the case against in “Riskless Capitalism” (Finance & Development, June 2023). They write:

Did uninsured depositors in the failed Silicon Valley Bank (SVB) need to be saved? The argument is that even though everyone knew that deposits over $250,000 were uninsured, if uninsured depositors had not been made whole, panic would have coursed through the banking system. Large depositors’ withdrawals from other banks would have compromised financial stability.

Perhaps! But if large depositors are always protected in the name of financial stability, why aren’t they at least charged the insurance fee that burdens the insured deposits? There are many low-cost ways for corporate treasurers to mitigate the risk of having money in a transaction account at a bank. They can keep only the amount needed to meet payroll and other immediate transactions in a demand deposit (checking) account and put additional soon-to-be needed cash in liquid money market funds. Yet too many firms did not practice elementary risk management. Streaming device maker Roku had more than $450 million in deposits at SVB, according to Reuters. While shareholders in SVB were deservedly wiped out and management let go, large depositors enjoyed riskless capitalism as the government changed the rules to benefit them.

A haircut could have been imposed on SVB’s large depositors. Based on past interventions by the Federal Deposit Insurance Corp (FDIC) this would have cost uninsured depositors about 10 percent of their balances. A few red-faced corporate treasurers would have justifiably lost their jobs. And if there were signs of contagion to other banks, the government could have announced a blanket implicit guarantee for all deposits, as US Treasury Secretary Janet Yellen eventually did. But the FDIC would have saved $20 billion and retained the principle that at least some of those who took risks paid the consequences. SVB would then be seen as capitalism penalizing the incompetent, rather than as an aberration—setting a precedent that will likely engender more attempts at riskless capitalism.

More generally, as the Federal Reserve’s own investigation put it, SVB failed “because of a textbook case of mismanagement by the bank.” If so, flighty uninsured demand deposits can be a feature, not a bug, in the system. If uninsured depositors pay attention, they can shut down incompetent or greedy bank management quickly, saving the taxpayer immense sums. If they are anesthetized because regulators invoke the tired argument that “this is not the time to worry about moral hazard,” uninsured depositors will not pay attention in the future.

The government decision was made after immense lobbying, including many cries for help from venture capitalists. David Sacks, of Craft Ventures, tweeted, “I’m asking for banking regulators to ensure the integrity of the system. Either deposits in the U.S. are safe or they’re not.” 

It’s important to remember that the choices here were not all-or-nothing. The federal regulators could have saved $20 billion by imposing losses of 10%–and provided some useful incentives for large bank depositors to pay attention to their corporate cash, as well. In addition, the payments that banks make for deposit insurance could be scaled so that banks with a greater share of very large deposits would pay more.

But the final paragraph I quoted from Rajan and Zingales crystalizes some of the key issues. Rules aren’t supposed to be changed after-the-fact to benefit businesses. Venture capitalists are supposed to know something about finance. When they start saying that “either deposits are safe or they’re not,” they seem to be stating that they were unaware that deposit insurance, by law, only went up to $250,000.

It’s perhaps useful to consider a hypothetical scenario: Say that a venture capital fund has done all of its due diligence, and determines that investing $50 million in a certain company is a good idea. In this hypothetical, the money is being sent to the company in an armored car, when it is suddenly hit by a passing disintegration ray from an alien spaceship. The money is gone–but it’s a sunk cost unrelated to the business prospects of the company. If it was previously worthwhile to invest $50 million in this company, it’s still worth making the same investment. It’s not a surprise that the venture capitalists wanted to rewrite the rules avoid any losses at all in the Silicon Valley Bank debacle. But venture capitalists like to pride themselves on providing useful oversight for the firms in which they invest, and in the basic task of managing corporate cash jammed into large accounts at Silicon Valley Bank, they badly fell down on a basic aspect of the oversight they claim to provide.

David A. Price serves as interlocutor in an interview: “Daron Acemoglu: On Henry Ford, making AI worker-friendly, and how democracy improves economic growth” (Econ Focus, Federal Reserve Bank of Richmond, Second Quarter 2023, pp. 22-26). The preface to the interview offers this summary: “Today, Acemoglu says hurray for economic growth — but is also concerned that choices made by policymakers and companies are channeling the gains from that growth away from workers. And as he sees things, the powerful AI technologies that have come to the fore in the past several years, embedded in products such as ChatGPT, should be regulated with the economic interests of workers in mind.” Here are a few of Acemoglu’s comments that caught my eye:

What type of AI do we want? What are the technologies of the future that would be most beneficial to society, particularly workers? I cannot imagine any technology that would be harmful to workers for a long period of time and yet would be beneficial for society. And therefore, my view is that right now we are going in the wrong direction in the AI community. We are going in the wrong direction in the tech community, because there is no regard paid to what these technologies are doing to workers’ jobs, democracy, mental health, all sorts of issues. So we really need to ask, can we redirect these technologies? …

[O]f course workers need to adapt as well. And I think workers who have skills or choose to specialize in things that one way or another are going to be done by machines are not going to do well. So I think social skills, social communication, teamwork, adaptability, and creativity are going to be rewarded by the labor market. The way that machines augment humans, humans should also augment machines.

But make no mistake, it’s not just those skills. Today, and I believe in the next 10 years, the United States economy is going to need a huge number of carpenters, electricians, plumbers, lots of people who do very valuable, very meaningful skill-requiring, expertise-requiring combinations of manual and cognitive work. It’s a mistake for us to think everything is going to be digital. And it could be very beneficial for us if we tried to make new machines, including AI, in such a way that they complement electricians, plumbers, carpenters. I think that complementarity is really critical. …

 If you want to think about workers benefiting, you have to think about what new tasks they can perform. And the key thing about electrical machinery — and the Ford factory in the early 20th century is a great exemplar of this — is that it generated a whole series of new tasks.

With the introduction of electrical machinery, production became more complex. So you needed workers to attend to the machinery and then you needed a lot of supporting occupations: maintenance, design, repair, and a whole slew of engineering tasks as well as many other white-collar occupations. So what really was beneficial both from the point of view of the workers and from the point of view of productivity wasn’t the fact that those factories were substituting electrical power for some other kind of power. They were completely reorganizing work in a way that made it more complex and thus created more gainful activities for workers.

Not everything was rosy. It was hard work. Compared to today, workers were worn out. They found it very difficult to keep up with the pace. It was still much noisier than the kind of factories that we would see later. And Henry Ford himself, especially later in his career, became zealous for anti-union activity. So it’s not like saying Ford was a visionary in every dimension. But Ford exemplified a new type of industrialization, which created new tasks and thus opportunities for workers.

I am perhaps less optimistic than Acemoglu about the ability of economists and social scientists to predict the current direction and effects of new technologies, and to propose ways of redirecting these technologies. Even if such analysis can be carried out in broadly persuasive ways, I am downright skeptical of the ability of the political system to implement such policies. Moreover, while the US and perhaps a few other countries are debating about what technology might become, other countries around the world will not be waiting for the results of this contemplative process, but will be moving ahead on the cutting edge of these technologies.

That said, it’s interesting to contemplate what kinds of technologies are encouraged by present economic and institutional arrangements. Technology often chases market size. Thus, investments in health care technologies that might be desirable to consumers in high-income countries will tend to be larger than those that could save lives in low-income countries. In addition, a health care technology aimed at a new market of consumers with health insurance may be a more attractive investment than a technology which, say, cuts an existing expense by 10%. Similarly, investments in agricultural technology that affect crops and farmers in high-income countries are likely to be larger that those that would improve the situation of crops and farmers in low-income countries. As Acemoglu suggests, business executives in high-income countries may be more likely to prioritize technologies that can replace workers, rather than technologies that empower workers. Venture capitalists may be more likely to support digital companies that can start up with relatively few employees, rather than supporting companies in industries that would require building factories and hiring more workers. A common criticism is that government tends to want research projects that are pretty likely to show a positive result, and thus tends to emphasize research that offers predictable but modest gains, rather than research that offers unpredictable but sometime much higher gains. There’s a lot of useful thinking to be done about whether the underlying incentives built into the existing eco-system technological investment.

In 2019, Acemoglu and Pascual Restrepo wrote “Automation and New Tasks: How Technology Displaces and Reinstates Labor” in the Spring issue of the  Journal of Economic Perspectives. Interested readers might turn there for more detail. From the abstract of that article:

We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past. At the center of our framework is the allocation of tasks to capital and labor—the task content of production. Automation, which enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, automation always reduces the labor share in value added and may reduce labor demand even as it raises productivity. The effects of automation are counterbalanced by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation and new tasks—can be inferred from industry level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in previous decades.

One of the repelling magnets of the subject matter of economics, at least for many encountering it for the first time, is the assumption that people are self-interested. In the telling of this assumption, what listeners seem to hear is that economists believe that people are always selfish. Any distinctions are lost: for example, the notion that self-interest can be viewed as a working assumption rather than as a claim about the essential nature of people; or that self-interest might be important in certain settings, while being fully compatible with altruism in other settings; or that self-interest can easily co-exist with many forms of cooperation; or that self-interest can be viewed as another way of saying “freedom to make your own choices for the reasons you see fit; or that that self-interest fully understood is not a license to disregard the interests and desires of others.

Alexis de Tocqueville wrote about the distinctively American relationship with the idea of self-interest, which he just calls “interest,” in the second volume of Democracy in America, published in 1840. In particular, I’m thinking of Chapter VIII in volume II, section II, titled: “The Americans Combat Individualism By The Principle Of Interest Rightly Understood.”

Tocqueville writes about how, in earlier times, wealthy and powerful individuals often liked to talk about how they were guided by virtue, and by the greater public good, rather than by self-interest. A common implication was that ordinary people should do what they were told, and follow the path allotted to them, because this virtuous path led to the common good. But Americans were different, Tocqueville argued. They instead were excited about the idea that pursuing self-interest (well-understood!) was the most useful way for a society to pursue the common good. Here is a part of Tocqueville’s meditation on the subject:

[T]he inhabitants of the United States almost always manage to combine their own advantage with that of their fellow-citizens … In the United States hardly anybody talks of the beauty of virtue; but they maintain that virtue is useful, and prove it every day. The American moralists do not profess that men ought to sacrifice themselves for their fellow-creatures because it is noble to make such sacrifices; but they boldly aver that such sacrifices are as necessary to him who imposes them upon himself as to him for whose sake they are made. They have found out that in their country and their age man is brought home to himself by an irresistible force; and losing all hope of stopping that force, they turn all their thoughts to the direction of it. They therefore do not deny that every man may follow his own interest; but they endeavor to prove that it is the interest of every man to be virtuous. I shall not here enter into the reasons they allege, which would divert me from my subject: suffice it to say that they have convinced their fellow-countrymen.

Montaigne said long ago: “Were I not to follow the straight road for its straightness, I should follow it for having found by experience that in the end it is commonly the happiest and most useful track.” The doctrine of interest rightly understood is not, then, new, but amongst the Americans of our time it finds universal acceptance: it has become popular there; you may trace it at the bottom of all their actions, you will remark it in all they say. It is as often to be met with on the lips of the poor man as of the rich. In Europe the principle of interest is much grosser than it is in America, but at the same time it is less common, and especially it is less avowed; amongst us, men still constantly feign great abnegation which they no longer feel. The Americans, on the contrary, are fond of explaining almost all the actions of their lives by the principle of interest rightly understood; they show with complacency how an enlightened regard for themselves constantly prompts them to assist each other, and inclines them willingly to sacrifice a portion of their time and property to the welfare of the State. In this respect I think they frequently fail to do themselves justice; for in the United States, as well as elsewhere, people are sometimes seen to give way to those disinterested and spontaneous impulses which are natural to man; but the Americans seldom allow that they yield to emotions of this kind; they are more anxious to do honor to their philosophy than to themselves. …

The principle of interest rightly understood is not a lofty one, but it is clear and sure. It does not aim at mighty objects, but it attains without excessive exertion all those at which it aims. As it lies within the reach of all capacities, everyone can without difficulty apprehend and retain it. By its admirable conformity to human weaknesses, it easily obtains great dominion; nor is that dominion precarious, since the principle checks one personal interest by another, and uses, to direct the passions, the very same instrument which excites them. The principle of interest rightly understood produces no great acts of self-sacrifice, but it suggests daily small acts of self-denial. By itself it cannot suffice to make a man virtuous, but it disciplines a number of citizens in habits of regularity, temperance, moderation, foresight, self-command; and, if it does not lead men straight to virtue by the will, it gradually draws them in that direction by their habits. If the principle of interest rightly understood were to sway the whole moral world, extraordinary virtues would doubtless be more rare; but I think that gross depravity would then also be less common. … I am not afraid to say that the principle of interest, rightly understood, appears to me the best suited of all philosophical theories to the wants of the men of our time, and that I regard it as their chief remaining security against themselves. Towards it, therefore, the minds of the moralists of our age should turn; even should they judge it to be incomplete, it must nevertheless be adopted as necessary.

I do not think upon the whole that there is more egotism amongst us than in America; the only difference is, that there it is enlightened—here it is not. Every American will sacrifice a portion of his private interests to preserve the rest; we would fain preserve the whole, and oftentimes the whole is lost. … No power upon earth can prevent the increasing equality of conditions from inclining the human mind to seek out what is useful, or from leading every member of the community to be wrapped up in himself. It must therefore be expected that personal interest will become more than ever the principal, if not the sole, spring of men’s actions; but it remains to be seen how each man will understand his personal interest.

There’s a lot to chew on here (as is so often true with Tocqueville). I might emphasize the insight that self-interest well-understood may help to build “habits of regularity, temperance, moderation, foresight, self-command,” and the insight that how people learn to understand their self-interest may be of considerable importance. But perhaps the biggest question is that if people are not to act in their work and civic lives in the ways that they personally perceive as in their own self-interest (well-understood!), then who instead gets to decide how people should act?

Twenty years ago, Edward Tufte published The cognitive style of PowerPoint: pitching out corrupts within, an essay that still speaks to many of us who have sat through presentations where bullet points are read aloud to us, one by one by one, and where the speaker feels a need to race through the last two-dozen slides in the final five minutes of allotted time. Tufte studied thousands of slides from actual presentations, and offers detailed and precise analysis of concrete examples. But for a sense of his overall argument, I’ll quote only some of his broader themes:

The fans of PowerPoint are presenters, rarely audience members. Slideware helps speakers to outline their talks, to retrieve and show diverse visual materials, and to communicate slides in talks, printed reports, and internet. And also to replace serious analysis with chartjunk, over-produced layouts, cheerleader logotypes and branding. and corny clipart. That is, PowerPointPhluff.

PP convenience for the speaker can be costly to both content and audience. These costs result from the cognitive style characteristic of the standard default PP presentation: foreshortening of evidence and thought, low spatial resolution, a deeply hierachical single-path structure as the model for organizing every type of content, breaking up narrative and data into slides and minimal fragments, rapid temporal sequencing of thin information rather than focused spatial analysis, conspicuous decoration and Phluff, a preoccupation with format not content, an attitude of commercialism that turns everything into a sales pitch. …

Many true statements are too long to fit on a PP slide, but this does not mean we should abbreviate the truth to make the words fit. It means we should find a better way to make presentations. With so little information per slide, many many slides are needed. Audiences consequently endure a relentless sequentiality, one damn slide after another. When information is is stacked in time, it is difficult to understand context and evaluate relationships. Visual reasoning usually works more effectively when the relevant information is shown adjacent in space within our eyespan. This is especially the case for statistical data, where the fundamental analytical act is to make comparisons …

In day-to-day practice, PowerPoint templates may improve 10% or 2o% of all presentations by organizing inept, extremely disorganized speakers, at a cost of detectable intellectual damage to 80%. For statistical data, the damage levels approach dementia. Since about 10¹⁰ to 10¹¹ PP slides (many using the templates) are made each year, that is a lot of harm to communication with colleagues. Or at least a big waste of time. The damage is mitigated since meetings relying on the PP cognitive style may not matter all that much. By playing around with Phluff rather than providing information, PowerPoint allows speakers to pretend that they are giving a real talk, and audiences to pretend that they are listening.

Tufte is of course a genius at thinking about effective graphical presentation of data. Many of us are not going to live up to his standard. But many of us can do better, too. As he points out, a good image that presents a set of data relationships can convey a great deal, and breaking those messages into bullet-points can obscure so much.

Tufte quotes from perhaps the classic Powerpoint satire of all time, Peter Norvig’s “Gettysburg Powerpoint Presentation.” Notice that it manages to include six slides for a two-minute presentation. Before the more famous part of the text, Lincoln would begin:

Good morning. Just a second while I get this connection to work. Do I press this button here? Function-F7? No, that’s not right. Hmmm. Maybe I’ll have to reboot. Hold on a minute. Um, my name is Abe Lincoln and I’m your president. While we’re waiting, I want to thank Judge David Wills, chairman of the committee supervising the dedication of the Gettysburg cemetery. It’s great to be here, Dave, and you and the committee are doing a great job. Gee, sometimes this new technology does have glitches, but we couldn’t live without it, could we? Oh – is it ready? OK, here we go:

The speech that follows would be accompanied by six slides, which are perhaps not in the most useful order, but hey, the slides show professionalism and really help out the audience, right?

In a similar vein, Gokul Rajaram recently posted an anecdote about his experience in creating a set of slides for Eric Schmidt at Google:

In 2006, I helped Eric Schmidt [CEO of Google at the time] create a deck outlining Google’s strategy, for a presentation Eric was delivering to the company. It taught me a profound lesson on how to present.

When I showed up to my first meeting with Eric, he asked me to visit with every product team at Google, chat with them to figure out what they were working on, and then summarize it on one slide (for each team).

Easy enough, I thought. I would use 3-5 bullet points per slide.

“But”, Eric said, “I want no words on any slide”.

My well-laid plans disintegrated in an instant. How was I supposed to convey the key messages from each team, without WORDS?

Eric must have seen the panic on my face, and kindly gave me a hint. “Put the text in speaker notes”.

“But what goes on the slides, Eric?” I continued panicking.

That classic, gentle “Eric smile” fluttered on his face. “Why, images, of course!”

“You mean, you want each slide to just be comprised of images?”

“You got it. And use the title wisely. 7-8 words max. Let’s meet in a week to review progress.”

Rajaram suggests several lessons from his experience. For example, one of them is “The larger the audience, the fewer the words on the slide.” But my point here is not to reify Schmidt’s approach to slide-decks, or Tufte’s for that matter. (Tufte is a believer in detailed paper handouts to accompany slides, which might have been workable in 2003 when he wrote his essay, but is so countercultural in 2023 as to be from a different era.) I just think we would all be better off with slide presentations that have fewer bullet points, fewer pages jam-packed with words, and fewer detailed numerical tables that can’t be read by anyone more than 30 feet away. Presentations impose costs of time and attention on others. In successful presentations, your attention is attracted, rather than taxed, and the entire time feels well-spent.

A “population pyramid” is a graph that shows the number of people of each age group divided into male and female. Because the oldest age groups at the top of the figure have small populations, the graph will narrow toward a point at the top. But looking across population pyramids for different years, you can see the movements of larger and smaller generations as they age. Here’s are population pyramids for 2000, 2010, and 2020 from the US Census Bureau (“Age Profiles of Smaller Geographies Don’t Always Mirror the National Trend,” by Laura Blakeslee, Megan Rabe, Zoe Caplan and Andrew Roberts, May 25, 2023).

The authors write:

The pyramid was larger in 2020 than it was in either 2010 or 2000. This reflects the growth in the U.S. population: 331.4 million people in 2020, up 22.7 million (7.4%) from the 308.7 million in 2010. Between 2000 and 2010, the population grew by 27.3 million (9.7%) from 281.4 million people. The U.S. population also aged since 2000. The baby boom cohort moved up the pyramid, from 36-to-54-year-olds in 2000 to 46-to-64-year-olds in 2010 and 56-to-74-year-olds in 2020. The millennials were mostly in their teens and 20s in 2010 but young adults (in their 20s and 30s) a decade later. At the same time, the base of the pyramid representing children under age 5 got smaller in 2020, reflecting a recent decrease in the number of births in the United States.

Population pyramid diagrams have been around a long time. The authors also include one from a Bureau of the Census report in 1900. Again, each bar represents five years of age. You can see that the number of people in the 85-90 age group almost disappears in this diagram, and the bars for those 90 and over do disappear. You can also see that this is a true “pyramid,” in the sense the younger the age group, the bigger it is. Of course, this is the sign of a growing population.

US spending on health care as a whole has famously expanded as a share of the US economy over time, from 5% of US GDP in 1960 to about 20% of US GDP at present. However, total US spending on treatment services or mental health has remained at about 1% of GDP since 1975. Moreover, the share of Americans receiving mental health treatment has increased ove rtime. These patterns can be explained by the shifts in how mental health treatment is delivered. Richard G. Frank and Sherry A. Glied. 2023. “America’s Continuing Struggle with Mental Illnesses: Economic Considerations” (Journal of Economic Perspectives, 37:2, 153-78). (Full disclosure: I’m the Managing Editor of JEP, and have been so for 37 years now.)

There are four main reasons for the difference in spending growth between mental health care and general medical care.

First, the main driver of cost growth in the general health care sector has been technological change, particularly through the introduction of capital-intensive devices and procedures (Chernew and Newhouse 2011). In contrast, the technology of treatment in mental health continues to rely on labor and prescription drugs. Newer treatments for mental health conditions have typically offered few gains in efficacy, although they have generated improvements in treatment adherence and outcomes by reducing side effects and increasing the tolerability of treatments (Insel 2022). While psychopharmacology experienced considerable innovation prior to 2000, relatively few new classes of drugs for treating mental
illnesses have been introduced since then. …

Second, over the past 50 years there has been dramatic, cost-reducing substitution for the human and institutional inputs that were previously used to provide mental health care. In 1975, 63 percent of mental health care spending was for institutional care in hospitals and nursing homes; today, 31 percent of expenditures occur in these costly settings (SAMHSA 2014; 2016). Treatment with prescription drugs has taken a central position in treatment of mental illnesses, often substituting for costlier psychotherapy for the most prevalent mental health conditions, depression and anxiety. … The cost of psychotherapy itself has also dropped sharply because the mental health sector has been far more accommodating of diverse types of health care providers than has general health care. Psychotherapy provision has shifted from treatment by psychiatrists and PhD-level psychologists to treatment by social workers, counselors, and MA-level psychologists. … Today over 90 percent of psychotherapists are trained below the doctoral level, a far higher share than in the 1970s and 1980s. The shift towards lower cost professionals with less extensive training has driven the costs of psychotherapy down, without any documented evidence of a reduction in quality—although no recent studies have directly compared the quality of services delivered by those with varied professional training …

Third, a much larger share of mental health care (just under two-thirds) is paid for by public funds (about one-third is paid by Medicaid) than is the case for general health care, and a much larger share—20 percent—is paid for by programs under fixed budgets. Public programs generally pay lower prices. …

Finally, mental health spending appears to be growing much more slowly than general health spending, in part because of a change in classification. In the 1970s and 1980s, when institutional treatment of those with serious mental illness accounted for a much larger share of mental health spending than it does today, all the expenses of institutional treatment—including the costs of whatever limited clinical treatment was provided as well as the costs of institutional room and board, often of poor quality—were counted as part of mental health spending. Today, the costs of housing and food for people with serious mental illness, who are not typically institutionalized, are no longer counted as part of mental health treatment
spending.

The authors also point out that support and services for mentally ill people end up being provided in a range of non-health-care contexts. They draw up on a wide array of evidence across studies and programs to compile the following table.

As the authors point out, it seems plausible that the US is investing too little in care for those who have serious mental illnesses, but too much for those with milder concerns. They write:

Current policy choices have led to a misallocation of resources in the delivery of clinical services. Too few people with treatable mental health conditions, including those with serious illness, obtain care that could help them. This situation may arise, in part, because the decisions of people suffering from mental illness to seek care may not accurately reflect the likely value of such care to themselves and to others, as well as because of underinvestment in treatment capacity for the most serious conditions. At the same time, moral hazard associated with insurance coverage of mental health services may lead to overuse (or inappropriate use) of some services within this category, either to address problems of living that cause relatively little impairment or because the quality and nature of treatments are so variable. Both overuse and underuse reflect the fundamental difficulty of matching people and treatments in the face of great heterogeneity and uncertain diagnosis.

Fifty years ago, Axel Leijonhufvud wrote “Life among the Econ,” an essay of satirical truth-telling in a style that is so often attempted and so seldom successful (Western Economic Journal, September 1973, 11:3, 327-337, available many places online with a quick search). The opening paragraph gives the flavor of what follows:

The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours, such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained–the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter–and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed.

The article is extraordinarily quotable, perhaps especially in its comments about “modls.”

The dominant feature, which makes status re­lations among the Econ of unique interest to the serious student, is the way that status is tied to the manufacture of certain types of implements, called “modls.” The status of the adult male is determined by his skill at making the “modl” of his “field.” The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making “modls,” and (c) that most of these “modls” seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe. …

Contrary to the normal case in primitive societies, the Econ priesthood does not maintain and teach the history of the tribe. In some Econ villages, one can still find the occasional elder who takes care of the modls made by some long-gone hero of the tribe and is eager to tell the legends associated with each. But few of the adults or grads, noting what they regard as the crude workman­ship of these dusty old relics, care to listen to such rambling fairytales. Among the younger generations, it is now rare to find an individual with any conception of the history of the Econ. Having lost their past, the Econ are without confidence in the present and without purpose and direction for the future.

Some Econographers disagree with the bleak picture of cultural dis­integration just given, pointing to the present as the greatest age of Econ Art. It is true that virtually all Econographers agree that present modi­ making has reached aesthetic heights not heretofore attained. But it is doubtful that this gives cause for much optimism. It is not unusual to find some particular art form flowering in the midst of the decay of a culture. It may be that such decay of society induces this kind of cultural “displacement activity” among talented members who despair of coping with the decline of their civilization. The present burst of sophisticated modi-carving among the Econ should probably be regarded in this light.

As an inveterate reader of mystery fiction myself, Leijonhufvud’s essay reminds me of a comment from Father Brown, the detective-figure in G.K. Chesterton’s well-known series. In the 1927 story, “The Secret of Father Brown,” Father Brown says:

Science is grand thing when you can get it; it its real sense one of the grandest words in the world. But what do these men mean, nine times out of ten, when they use it nowadays? … They mean getting `outside’ a man and studying him as if here were a gigantic insect; in what they would call a dry impartial light; in what I should call a dead and dehumanised light. They mean getting a long way off him, as if he were a distant prehistoric monster … When the scientist talks about a type, he never means himself, but always his neighbour; probably his poorer neighbour. I don’t deny that the dry light may sometimes do some good; though in one sense it’s the very reverse of science. So far from being knowledge, it’s actually suppression of what we know. It’s treating a friend as a stranger, and pretending that something familiar is really remote and mysterious.

Perhaps all the social sciences are subject to a similar critique, but for economics, it seems to me to have a particular bite.

Globalization is evolving, but it doesn’t actually seem that, as one sometimes reads, that globalization is in reverse. For an overview of some key facts, Steven A. Altman and Caroline R. Bastian have produced the DHL Global Connectedness Index 2022, subtitled “An in-depth report on globalization.” It’s a just-the-facts report. Here are some takeaways:

1) The world economy is at or near a record high in exports, foreign direct investment and migration. Travel was way down in 2021, but we’ll see in the next few year if the pandemic made a permanent or temporary change.

2) The upper-right panel of the above figure shows that exports as a share of GDP have levelled off in recent years–while remaining near the all-time high. However, global flows of data and information are dramatically rising. The first figure show the annual growth of international internet traffic. After a jump to 47% growth during the pandemic year of 2020, it seems to have gone back to the typical pre-pandemic growth rate of about 25% per year. The second figure shows the steady rise in the share of global phone calls (including calls over the internet) that are international. These patterns suggest that international flows of services (not counting tourism, of course!), rather than goods, have been rising substantially.

3) In general, the distance of international flows is up over the past 20 years and the share of trade happening within regions is down–although these patterns have leveled out in the last decade or so.

4) China and the United States are clearly experiencing conflicts that have reduced their international economic ties. But the economic relationship remains quite substantial.

On the effects of geopolitical tensions, there is clear evidence of the U.S. and China reducing their focus on flows with each other. Considering a sample of 11 types of trade, capital, information, and people flows, the share of U.S. flows taking place to or from China fell from 9.3% in 2016 to 7.3% in 2022 (or the most recent year with data available). Meanwhile, the share of China’s flows that were to or from the U.S. fell from 17.8% to 14.3%. Those are noteworthy declines relative to 2016 levels, but small changes relative to the U.S.
and China’s total flows with the world. And even after these declines, the U.S. and China are still connected by far larger flows than any other pair of countries that do not share a
border. Decoupling between the U.S. and China has not—at least yet—led to a wider fracturing of the world economy into rival blocs. There is very limited evidence of close allies of the
U.S. and China reducing their focus on flows with the rival bloc.

Indeed, it may be that the US-China conflicts end rearranging the patterns of world trade, with reduced flows between the two countries, but with those international flows being redirected to other countries rather than reduced.

4) There is considerable room for globalization to expand. The authors write:

[T]he world is less globalized than many presume. Most activity that could take place either
within or across national borders is still domestic, not international. Roughly 20% of global economic output is exported (in value-added terms), FDI flows equal just 6% of gross fixed capital formation, about 7% of phone call minutes (including calls over the internet) are international, and only 4% of people live outside of the countries where they were born.4 Surveys consistently show that most people overestimate these types of measures, and that such misperceptions exacerbate fears about globalization.

I would add that it’s always easier for politics to blame malignant foreigners for any issues faced by the domestic economy, rather than focusing on what might be done to make US workers and US markets more productive, innovative, and flexible.

For a more in-depth look at some of the underlying causes of and prospects for globalization, a useful starting point is “Is the global economy deglobalizing? And if so, why? And what is next?” by Pinelopi K. Goldberg and Tristan Reed (Brookings Papers on Economic Activity, Spring 2023). The authors confirm that “[d]ata on global trade as well as capital and labor flows indicate a slowdown, but not reversal, of globalization …”

The point out that policy choices have been leaning against globalization for a few years now, including the import tariffs enacted during the Trump administration and continued during the Biden administration, and also the global trade sanctions imposed on Russia after its invasion of Ukraine. The hot new word in international trade is “friend-shoring,” which refers to trading only (or mostly) with friendly nations. Countries around the world are placing greater faith in government subsidies to industry as a way of encouraging growth.

One point in particular in their essay, suggesting the difficulties of deglobalizing in the modern economy, struck me forcibly: the theory of “massive modularity.” Goldberg and Reed describe it this way:

[A] recent paper by Thun et al (2022) introduces a new concept, “massive modularity,” that characterizes many production processes today, and argue that the presence of massive modularity makes it extremely hard to “decouple,” “reshore,” and generally reorganize economic activity across borders. Massive modular systems involve several modules that are interconnected with each other, can experience innovation independent of each other, and can be broken into smaller, more specialized modules, each of which can again experience independent innovation. Different firms, located in different countries, specialize in different modules making production structures extremely complex. As an example, they cite the CEO of Pfizer, who once stated that the company’s Covid-19 vaccine “requires 280 different materials and components that are sourced from 19 countries around the world.” The vast complexity of modern production poses a challenge for policy as measures aimed at reducing risk or promoting domestic industries may have unintended consequences. In general, rebuilding massively modular industries in all their complexity on a national level is a Herculean task. Even if it doesn’t fail, it will certainly take many years to accomplish. Given that the sectors characterized by this high complexity are precisely those sectors that are key to innovation and growth, this effort will likely slow down growth in the US and global economy.

It often seems to me that US-based discussions of globalization are built on a presumption that the US gets to play the leading role in deciding how and whether globalization will happen. This assumption was a pretty good one for the second half of the 20th century. But as other economies around the world–notably China and India–have grown dramatically, their need to drive their own development by exporting into the US market has been reduced. Instead, such countries have a greater ability to depend on selling into their own growing domestic markets–or selling to markets in the rest of the world. The US can decide that it wants to be less exposed to the gains and costs and disruptions of global markets, but many other countries around the world will not choose to follow that US decision.

“Industrial policy” can be distinguished from a “business-friendly policy” by the amount of targeting involved. Industrial policy chooses the industries that will be favored with some some combination of subsidies, tax breaks, and trade protectionism–sometimes even the companies that will be favored. Common examples in a recent US context include attempt to favor cars, steel, semiconductors, electric vehicles, and solar panels. On the other side, a business-friendly environment seeks to create a set of education, infrastructure, tax, R&D, regulatory, and other possibilities that give many different kinds of businesses a chance to compete, innovate, and thrive, but steers away from picking either industries or firms.

The world economy seems to be entering an era of industrial policy, and Finance & Development (published by the IMF) has offered a couple of readable essays on the subject recently. Ruchir Agawal wrote “Industrial Policy and the Growth Strategy Trilemma” (published online March 21, 2023). Douglas Irwin has now followed up with “The Return of Industrial Policy” (forthcoming in June 2023 issue)

It’s perhaps useful to state what should be a obvious fact about industrial policy: It can’t be a simple way for governments to create economic prosperity. Otherwise, every country could just choose the industries in which it wants to succeed, and then use industrial policy to achieve prosperity. Thus, it’s no surprise that it’s easy to compile a list of industrial policies that went sideways.

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.

Was the US economy in the 19th century an industrial policy success story? Irwin argues “no”:

The belief that richer countries were successful because they protected manufacturing gave respectability to industrial policy. That turned out to be a misreading of history. Despite high tariffs, the United States developed as an open economy—open to immigration, capital, and technology—and one with an exceptionally large domestic market that was fiercely competitive. Furthermore, the high-tariff United States overtook free-trade Britain in per capita income in the late 19th century by increasing labor productivity in the service sector, not by raising productivity in the manufacturing sector (Broadberry 1998). In Western Europe, growth was related to the shifting of resources out of agriculture and into industry and services. Trade policies designed to protect agriculture from low prices likely slowed this transition in countries such as Germany.

Was Korea’s economic success due to industrial policy? Irwin again argues “no”:

The experience of successful East Asian countries has given it a positive gloss, but even here standard history can mislead. In 1960, South Korea was saddled with an overvalued currency and exports of just 1 percent of GDP. The country’s ability to import depended almost entirely on US aid. After devaluing its currency in the early and mid-1960s, Korea’s exports became more competitive and exploded, reaching 20 percent of GDP by the early 1970s. The main policy involved setting a realistic exchange rate that allowed exports to flourish along with cheaper credit for all exporters, not targeted industries (Irwin 2021). Industrial policy did not really start until the Heavy and Chemical Industry Drive of 1973–79, which was later terminated because of its excessive costs and inefficiency. But Korea’s rapid growth had already been unleashed before the industrial policy era.

What about China’s efforts to create a domestic airplane industry? Agarwal writes:

However, the recent Chinese experience with the COMAC C919 aircraft shows that industrial policy is far from a silver bullet. Driven by the conviction that a great nation should have its own airliners, China has invested heavily in developing its commercial aircraft to challenge the dominance of Boeing and Airbus. Despite investing up to $70 billion in the Commercial Aircraft Corporation of China (COMAC), China’s state-owned manufacturer, the project has been delayed by more than five years as a result of regulatory, technological, and supply-chain hurdles. The delays were compounded by the special licensing requirements for technology parts exports to China imposed by the Trump administration in 2020. The C919 also hasn’t been certified yet by any major aviation authority outside China, partly due to safety issues. Thus, despite industrial policy success with its domestic high-speed rail network during the 2010s, China has not been able to replicate this achievement in the competitive global aviation industry.

Or China’s efforts to efforts to create a domestic shipbuilding industry? Irwin writes:

China illustrates how industrial subsidies can be an inefficient way of spending scarce resources. In 2006, China identified shipbuilding as a “strategic industry” and began massive production and investment subsidies, mainly through cheap loans. Evidence suggests that these policies did not produce large benefits but were wasteful (due to excess capacity) and distorted markets (forcing more efficient countries to adjust by reducing their output). China’s global market share grew at the expense of low-cost producers in Japan, South Korea, and Europe but without generating significant profits for domestic producers (Barwick, Panle Jia, Myrto Kalouptsidi, and Nahim Bin Zahur. 2019). The subsidies were dissipated through the entry and expansion of less efficient producers, which created excess capacity and led to increased industry fragmentation. The loans were political in the sense that state-owned enterprises rather than more efficient private producers received the bulk of the support. The shipbuilding industry did not generate significant spillovers to the rest of the economy, and there was no evidence of industry-wide learning by doing. … China did not get rich through industrial policy but by improving productivity in agriculture, allowing foreign investment in manufacturing, and unleashing the private sector. 

The problems with industrial policy are well-known. If an idea seems like a money-maker, entrepreneurs and existing companies will invest their own money to make it happen. Thus, industrial policy only comes into play when politicians–who are not investing their own money–decide that some idea that they do not believe the private sector is supporting sufficiently is nevertheless certain to be a money-maker and a job creator. Sure, sometimes a blind squirrel finds the acorn. But choosing among the leftover ideas that private capital doesn’t see as worth funding is not likely to be, on average, a winning idea. Sure, at least some private firms and sources of finance will react to government subsidies, and accept the cash. In doing so, such firms will be focusing on how to attract political favoritism, which is not identical with deciding how best to produce high-quality products at lower costs. And explicitly favoring some industries or technologies or firms will implicitly disfavor others.

Nevertheless, here we go again. Agarwal notes the recent effort to create US industrial policy around semiconductors and clean energy, which follow on the efforts of the Trump administration to practice industrial policy in favor of steel and aluminum. Agarwal continues:

Meanwhile, Japan is providing subsidies worth more than $500 million to 57 companies to encourage them to invest domestically—as part of its efforts to reduce reliance on China. Similarly, the European Union is scaling up its industrial policy—including by setting aside €160 billion of its COVID-19 recovery fund for digital innovations such as chips, batteries, and climate adaptation. In response to massive subsidies in the US Inflation Reduction Act, Italy’s economy minister recently called for a common EU approach to support competitiveness and protect strategic production.

The real challenge with industrial policy is to be hard-headed and selective: that is, not choosing industries where it might be nice to be a global leader, but choosing those where the conditions of the time and place and technology have all come together in a way where a certain country at a certain time is ready to take the next step.

Consider solar energy panels as an example: in particular, China’s leading role in the global economy as a producer of low-cost solar panels. Yes, China has favored its solar industry. But the US was favoring photovoltaics back in the 1970s and 1980s. Japan went through a stage of favoring solar panels in the 1980s and 1990s, and so did Germany in the 21st century. In other words, China’s industrial policy success as a provider of solar panels was built on research and investments in other major economies over a period of decades, which didn’t work out very cost-effectively at the time for those other countries, combined with China’s skills in low-wage, low-cost manufacturing. Conversely, China’s failed industrial policy in shipbuilding, airplanes, semiconductors, and others are examples of where China chose industries where it might have been nice to be a leader, but disregarded the signs that, given existing technology and realities of China’s economy, China was not well-positioned to be a leader in those areas.

I’ll give Agarwal the last word here:

Former US Treasury Secretary Lawrence Summers recently said he liked his industrial policy advisers the same way he liked generals. “The best generals are the ones who hate war the most but are willing to fight when needed. What I worry is that people who do industrial policy love doing industrial policy.” In this context, the Trilemma reminds policymakers to take a cautious approach to industrial policy—while focusing on long-term growth, stability, and international cooperation. … Just like salt in cooking, a pinch of industrial policy can be helpful, but too much can overpower, and prolonged excess can harm.

For those want more, here are some posts from the last few years about industrial policy:

• “An American Industrial Policy Experiment Begins” (March 28, 2023)
• “Clean Energy Industrial Policy: The US and EU Clash” (February 24, 2023)
• “Industrial Policy Lessons from South Korea” (April 6, 2023)
• “Lessons from a Half-Century of US Industrial Policies” (December 2, 2021)
• “The Economic Success of East Asia: Industrial Policy or Sound Fundamentals” (December 10, 2021)