President Trump more than any President in decades has embraced industrial policy. He not only wants government to favor manufacturing, but vows to use the tax law to prevent manufacturers who are here from shifting factories overseas. And auto manufacturing seems to be his particular focus. To be sure, in this respect his policy has some continuity with the Obama administration, which intervened in extraordinary ways—including bending the bankruptcy laws—to bail out U.S. auto companies.
Industrial policy fails to reckon with the ignorance of government. Central decisionmakers lack the information to choose the best services and products in which Americans should specialize. The past shows that what is best produced here tomorrow will not be what is best produced here today: many of our most productive lines of work did not even exist 20 years ago, let alone 50 years ago. An industrial policy that puts up barriers to companies from moving factories abroad creates a more static economy here at home, one less responsive to the seizing of future opportunities in an era of technological acceleration.
That policy clearly makes American consumers and American shareholders in American companies worse off, because companies will fail to locate where they would be most profitable and to deliver products to consumers at the lowest possible cost. But a government-directed industrial policy is also not good in the long run for the American worker, because the industries that can provide good jobs for the long run change over time, and change faster as technology speeds up.
For instance, in a recent discussion sponsored by the Federalist Society, a panelist suggested that the Trump administration would renegotiate NAFTA so that it would strongly encourage auto factories to open here rather than in Mexico. Such a revision rests on the proposition that the auto industry is going to be a source of many good jobs for years to come.
There are many reasons to doubt this premise. First, manufacturing in general is becoming more high tech and less labor-intensive: the auto factories of the future will employ fewer people than those of the past. Second, we are likely on a cusp of an era of self-driving cars. This means fewer cars, as drivers can summon a ride whenever they want one rather than buying cars for themselves. Third, the legacy auto makers on whom the President is leaning may well lose out to more technologically nimble startups.
Luring workers into a declining industry does them no favors. By distorting market signals it also misleads our young people about what skills to learn and what employment to pursue. Devising policies that help Americans take advantage of those signals rather than muffling them provides a better future for shareholders, consumers, and workers alike.