Jan 12th 2017

Trump’s Defective Industrial Policy

by Dani Rodrik

Dani Rodrik, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.

CAMBRIDGE – US President-elect Donald Trump has yet to take office, but his brand of flawed industrial policy has been on full display since his surprise win in November.

Within weeks of the election, Trump had already claimed a victory. Through a mix of inducements and intimidation, he prevailed on the heating and cooling firm Carrier to keep some of its operations in Indiana, “saving” around 1,000 American jobs. Touring the Carrier plant subsequently, he warned other US firms that he would impose stiff tariffs on them if they moved plants overseas and shipped products back home.

His Twitter account has produced a stream of commentary in the same vein. He has taken credit for Ford’s decision keep a Lincoln plant in Kentucky, rather than move it to Mexico. He has threatened General Motors with import tariffs if it continues to import Chevrolet Cruzes from Mexico instead of making them in the United States.

Trump has also hounded defense contractors for cost overruns, berating the aerospace giants Boeing and Lockheed Martin on separate occasions for producing planes that are too expensive.

Trump’s policy style represents a sharp break from that of his predecessors. It is highly personalized and temperamental. It relies on threats and bullying. It is prone to boasting, exaggeration, and lies about actual successes. It is a type of public spectacle, staged on Twitter. And it is deeply corrosive of democratic norms.

Economists tend to advocate an arm’s-length relationship between government and business. Public officials are supposed to insulate themselves from private firms, lest they be corrupted and engage in favoritism. This is a prized principle in the US – but one that is more often breached than observed. An obvious example is the undeniable influence over US government policy exercised by finance moguls during the last three decades.

Yet close business-government interactions also lie behind many of America’s successes. The history of US economic development is one of pragmatic partnerships and collaboration between the public and private sector, rather than arm’s-length relationships and rigid rules. As historically minded economists and policy analysts such as Michael Lind, Stephen Cohen, and Brad DeLong have reminded us, the US is heir to a Hamiltonian tradition in which the federal government provides the investment, infrastructure, finance, and other support that private enterprise needs.

US technological innovation owes as much to specific government programs, such as loan assistance or government purchases as it does to American entrepreneurs’ and inventors’ ingenuity. As Harvard Business School professor Josh Lerner notes, some of the most dynamic technology companies in the US, including Apple and Intel, received financial support from the government before going public. The electric carmaker Tesla was a beneficiary of the same public loan guarantee program as Solyndra, the solar cell company that went bust in 2011 in a spectacular public collapse.

As the Solyndra example illustrates, many public initiatives fail. But the ultimate test is whether the social return on the portfolio as a whole is positive, taking successes together with the flops. Such broad evaluations tend to be rare. But one analysis found that US programs to boost energy efficiency had produced positive net benefits. Interestingly, the bulk of the benefits were attributable to three relatively modest projects.

Sociologists Fred Block and Matthew Keller have provided perhaps the best analysis of the US “developmental state” – a reality that they say the reigning market-fundamentalist ideology has obscured. Block and Keller describe how a “decentralized network of publicly funded laboratories” and an “alphabet soup” of financing initiatives, such as the Small Business Innovation Research (SBIR) program, work with private firms and help them commercialize their products. They and their colleagues have documented the extensive role of both federal and state governments in supporting the collaborative networks on which innovation rests – whether in biotech, green technologies, or nanotech.

Such industrial policies, based on close collaboration and coordination between the public and private sectors, have of course been the hallmark of East Asian economic policymaking. It is difficult to imagine China’s transformation into a manufacturing powerhouse – and the attendant success of its export-oriented model – without the Chinese government’s helping and guiding hand. It is ironic that the same people who extol Chinese gains from globalization are often alarmed that a US administration may copy the Chinese approach and explicitly endorse industrial policies.

Unlike China, of course, the US purports to be a democracy. And industrial policy in a democracy requires transparency, accountability, and institutionalization. The relationship between the government and private firms has to be calibrated carefully. Government agencies need to be close enough to private enterprises to elicit the requisite information about the technological and market realities on the ground. For example, what are the fundamental reasons for the loss of manufacturing jobs in, say, automobile production, and how can the government help, if at all? But they cannot get so close to private firms that they end up in companies’ pocket, or, at the other extreme, simply order them around.

And that is where industrial policy à la Trump fails to pass the test. On one hand, his appointments to key economic positions indicate he has little intention of severing government ties to Wall Street and big finance. On the other hand, his policymaking-by-tweet suggests he doesn’t have much interest in building the institutionalized dialogue, with all the required safeguards, that sound industrial policy requires.

This means that we can expect the Trump administration’s industrial policy to vacillate between cronyism and bullying. That may benefit some; but it will do little good for the overwhelming majority of American workers or the economy as a whole.


Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is the author of Economics Rules: The Rights and Wrongs of the Dismal Science.

Copyright: Project Syndicate, 2017.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Aug 21st 2019
EXTRACT: "Climate change is real, and it is a problem. According to the IPCC, the overall impact of global warming by the 2070s will be equivalent to a 0.2-2% loss in average income. That’s not the end of the world, but the same as a single economic recession, in a world that is much better off than today.  The risk is that outsized fear will take us down the wrong path in tackling global warming. Concerned activists want the world to abandon fossil fuels as quickly as possible. But it will mean slowing the growth that has lifted billions out of poverty and transformed the planet. That has a very real cost. "
Aug 20th 2019
EXTRACTS: "It is no exaggeration to say that Johnson has lied his way to the top, first in journalism and then in politics. His ascent owes everything to the growing xenophobia and English nationalism that many Conservatives now espouse................Johnson has chosen a government of like-minded anti-European nationalists. His principal adviser, Dominic Cummings, was described by David Cameron, Britain’s prime minister from 2010 to 2016, as a “career psychopath.” Cummings is, alongside Johnson, the most powerful figure in the new government; he is an unelected wrecker who earlier this year was ruled to be in contempt of parliament. Fittingly, if depressingly, he now is masterminding our departure from the EU with or without parliamentary approval."
Aug 19th 2019
EXTRACTS: "Back in May, a jury found Patrick Syring, a former State Department official, guilty of 14 counts of making threats against my life and my staff at the Arab American Institute. This week, a federal judge sentenced Syring to five years in prison to be followed by three years of court-ordered probation.................It gives me no pleasure to see this man going to jail for a long period, but it does provide us all with a sense of enormous relief. I've been threatened before. My wife, my children, and I have received death threats for the past 50 years – owing to my advocacy for Palestinian rights and the rights of the Arab American community. My office was fire-bombed and an Arab American colleague, whom I hired, was murdered. Two individuals who, in the past, made death threats against me and my children were convicted and sentenced to prison terms. But this case was different."
Aug 15th 2019
EXTRACT: "Gaslighting typically refers to intimate relationships. It’s a way of controlling someone by creating false narratives – for example, that they are irrational or crazy. If such lies are repeated constantly, victims may get confused and start believing there really is something wrong with them. Confusion, diversion, distraction and disinformation can similarly be used to gaslight an entire society. So how can you tell if you are being gaslighted, and how do you avoid it in the first place?"
Aug 14th 2019
EXTRACT: "Trump has once again painted himself into a corner. Since the latest massacres, he’s been at pains to present himself as a reasonable fellow who can get behind gun reform (and perhaps mollify suburban women, his most dangerous foes on this issue). But he’s also noticeably (and typically) anxious to maintain the loyalty of the rural voters who form an important part of his base. Trump has also taken the gamble of using racial politics and white supremacy as instruments for winning in 2020. When faced with the dilemma of trying to assuage suburban voters or keeping the base close, time after time his instinct has been to shore up the base. (That didn’t work very well in 2018.)"
Aug 5th 2019
Extracts: "it is impossible to model many of the most important risks. Global warming will produce major changes in hydrological cycles, with both more extreme rainfall and longer more severe droughts. This will have severe adverse effects on agriculture and livelihoods in specific locations, but climate models cannot tell us in advance precisely where regional effects will be most severe. Adverse initial effects in turn could produce self-reinforcing political instability and large-scale attempted migration........Achieving a zero-carbon economy will require a massive increase in global electricity use, from today’s 23,000 TW hours to as much as 90,000 TW hours by mid-century. Delivering this in a zero-carbon fashion will require enormous investments, but as the Energy Transitions Commission has shown, it is technically, physically, and economically feasible......Added up across all economic sectors, however, it’s clear that the total cost of decarbonizing the global economy cannot possibly exceed 1-2% of world GDP. In fact, the actual costs will almost certainly be far lower, because most such estimates cautiously ignore the possibility of fundamental technological breakthroughs, and maintain conservative estimates of how long and how fast cost reductions in key technologies will occur. In 2010, the International Energy Agency projected a 70% fall in solar photovoltaic equipment costs by 2030. It happened by 2017."
Jul 31st 2019
Extract: "I admire the US for its culture, entrepreneurialism, and universities, and I have many American friends. Furthermore, I know how grateful the rest of the world has to be for US leadership after World War II. Never before had a victorious power behaved so generously toward others, including the defeated. We owe so much to US policy in the second half of the twentieth century. But although I am no declinist regarding American economic, intellectual, and military power, the country’s soft power has certainly decreased, and its positive influence around the world has declined. The reason for this is simple: US President Donald Trump is a bad man surrounded by a bad team of incompetent and dangerous ideologues."
Jul 30th 2019
Extract: "This pattern holds true in every extremist movement I have studied, whether from the past or the present, or the West or the East. This abuse of religion that provides security and certainty to those who are experiencing a loss of control is a universal phenomenon. If merely left there, it would not be a danger. But when it masks a political agenda or when it justifies violence either by groups or state actors, it becomes a danger."
Jul 30th 2019
Extract: "......the day before Mueller testified, the current FBI director, Christopher Wray, told the Senate Judiciary Committee, “The Russians are absolutely intent on trying to interfere with our elections.” And the day after Mueller testified, the Senate Intelligence Committee issued a report stating that Russia would be involved in the next presidential election, and that countries like Saudi Arabia, Iran, and China have the capacity to interfere in US elections as well. Despite these warnings, Senate Majority Leader Mitch McConnell blocked Senate consideration of two bills aimed at strengthening US election security,....."
Jul 15th 2019
".....one of the most accurate recession indicators, known as the yield curve, has recently been flashing warning signs. Every postwar recession in the US was preceded by an inversion of the yield curve, meaning that long-term interest rates had fallen below short-term interest rates, some 12 to 18 months before the outset of the economic downturn."
Jul 6th 2019
Extract: ".........growing poverty even when working, the collapse of stable and safe social identities linked to work, the increasing instability of employment security, and the rapid change of local communities due to emigration, migration, collapsing housing affordability, and redevelopment initiatives that displace communities. These provide precise and urgent electoral rallying points. They are particularly effective given that so many mainstream politicians ignore these basic grievances. In recent years, the lineup of politicians opposing the New Right – Hillary Clinton, the Remain campaign, Emmanuel Macron and Matteo Renzi – have been unwilling to even recognise these structural problems. This provided the New Right the opportunity to appear credible, simply by acknowledging them."
Jul 6th 2019
".........an openly Russophilic administration in the US may be one reason why Putin’s domestic support has been declining so sharply."
Jul 3rd 2019
"Extract: .........in a world of rapidly expanding automation potential, demographic shrinkage is largely a boon, not a threat. Our expanding ability to automate human work across all sectors – agriculture, industry, and services – makes an ever-growing workforce increasingly irrelevant to improvements in human welfare. Conversely, automation makes it impossible to achieve full employment in countries still facing rapid population growth........The greatest demographic challenges therefore lie not in countries facing population stabilization and then gradual decline, but in Africa, which still faces rapid population growth."
Jul 1st 2019
Trump’s personal style – vocal, expertise-averse, scandal-prone and driven by a focus on his partisan base – may be unusual, but aspiring Democratic presidential contenders may be making a serious error in allowing Trump’s “Wizard of Oz” act of big claims and small achievements to pass unchallenged. There is a massive gap between the pledges he made to voters and the reality of an outsider presidency thoroughly co-opted by its party. So far, the “Trump revolution” turns out to be an ordinary Republican presidency.
Jun 25th 2019
"Trump’s vindictive bluster has steamrolled economic-policy deliberations – ignoring the lessons of history, rejecting the analytics of modern economics, and undermining the institutional integrity of the policymaking process. Policy blunders of epic proportion have become the rule, not the exception. It won’t be nearly as easy to spin the looming consequences."
Jun 19th 2019
Solar energy is one of the fastest-growing energy sectors in the world, and has the great advantage of producing no carbon dioxide, a greenhouse gas that is raising the average surface temperature of the earth. India is now for the first time in history investing more in solar energy than in coal. There is a simple reason for this. Coal costs roughly 5 cents a kilowatt hour to generate electricity. India just let a bid for 1.2 gigawatts of solar energy and four companies scooped it up at 3.6 cents a kilowatt hour.
Jun 19th 2019
Extract: "Abe has reportedly nominated Trump for a Nobel Peace Prize – at the request of the US – for opening talks with North Korea. And he has offered to mediate in America’s dispute with Iran. (His recent visit to Tehran – where he reportedly asked Iran’s leaders, at Trump’s request, to release detained Americans – made clear that, even squeezed by sanctions, Iran has no interest in negotiating with a serial violator of signed agreements.) What Trump calls an “incredible partnership” is, in reality, a largely one-sided relationship. But, for Abe, appeasing Trump is not so much a choice as a necessity: he must prove to Japan’s people and their neighbors, particularly the Chinese, that he knows how to keep Trump on his side."
Jun 17th 2019
Extarct: "We know well the damage that corrupt leaders do to their people. We should therefore have much more to say about the quintessential corruption entailed by tolerating lies. Such tolerance allows the poison to spread through the body and soul of democracy, undermining democracy’s institutions by attacking the invisible norms and tacit understandings that support them."
Jun 11th 2019
Extract: "I noticed this dynamic firsthand a few years ago in Blagoveshchensk, on the Siberian border, just a half-mile from the Chinese town of Heihe. A century and a half ago, Blagoveshchensk was part of China. Then the Cossacks took control of it, along with many other territories in Chinese Outer Manchuria, on behalf of the Russian czar. Blagoveshchensk’s local history museum presents the development of the town after the Cossack takeover as a civilizing mission. The Russians, it seems, still view themselves as superior Westerners. As for Heihe, it got rich a quarter-century ago, after capitalizing on Russia’s post-Soviet disarray to sell cheap goods to then-starving Russians. Its own history museum presents the Cossacks as “hairy barbarians” (Lao Maozi) and lists the towns of Russia’s far east by their historical Chinese names: Blagoveshchensk is Hailanpao, Vladivostok is Haishenwai, and Sakhalin is Kuye. Local behavior reflects these perspectives. At the ferry port, the Russians sneer at the Chinese traders who bring Russian vodka and chocolate to Heihe, while the Chinese move past the Russians as if they do not exist."
Jun 5th 2019
Extract: "....the Constitution, which established the impeachment process as a check on the president’s behavior between elections, says nothing about using it only when politically convenient. Moreover, given the results in 2018, Democratic Party leaders might well discourage making the disposition of the president the key issue in the next election. Most important, a decision not to initiate an impeachment process against Trump could set a terrible precedent. If Trump isn’t impeached for his numerous criminal acts and abuses of power, would impeachment remain a viable check on the presidency? "