The Perils of Inaction
In his exploration of how American economic policy might be guided or misguided, Samuel Gregg worries that the populist right is now aping the left’s willingness to redistribute to their favorite demographic group. For progressives, that would be racial, ethnic, and sexual minorities; for the nationalist right, those left behind by de-industrialization, such as the China Shocked Rust Belt.
Gregg offers some worthwhile reminders about inescapable tradeoffs. But if industrial policy advocates sometimes fall victim to a misplaced nostalgia for backbreaking factory jobs, Gregg’s framework downplays the cost of doing nothing. Part of the point of a modern welfare state is precisely to provide a form of social insurance for those caught on the wrong side of economic trends. After all, not every working- or middle-class parent is an aspiring entrepreneur—many just want a steady paycheck and a sense of stability, and feel that an excessively laissez-faire approach to trade and economic growth has undermined their ability to achieve those goals.
Two major objections come to mind in response to Gregg’s wide-ranging essay. The first, more in the tradition of a Pat Buchanan, is that a properly conservative approach to trade would be more incremental and more concerned with ramifications on community and family life. The second is that a government that turns a blind eye to the existence of positive externalities, or is indifferent to developing a comparative advantage, will find itself on the receiving end of economic trends, rather than driving them. We might categorize this argument along the lines of the type of industrial policy advanced by American Affairs editor Julius Krein or a vision of “state capacity libertarianism” often associated with by Silicon Valley thinkers like Peter Thiel.
In the first argument, Gregg is on heavily trodden ground. There is, I think, broad agreement among all but the most hardened barista socialists that capitalism has helped bring billions in developing nations into a higher standard of living. A global citizen might rightly cheer that accomplishment. But an American who saw his industry outsourced, his small town drained of economic vitality, and his ability to contribute to society hollowed out, might understandably wonder what costs we ignore in citing those abstract global numbers.
For instance, Gregg contends that it is “simply false” to say America is de-industrializing because the value of manufacturing is going up. But it is, of course, not that simple; knowing that we now produce higher-value outputs may be small comfort to the 4.7 million workers who saw their manufacturing job disappear over the past two decades. To put it bluntly, the political effects of perceived stagnation in Indiana are not ameliorated by pointing to the success of poverty alleviation in India.
Gregg’s analysis is a straightforward application of neoclassical economics, which tells you that yes, trade creates winners and losers, but gains that from trade will make everyone better off so long as the ‘losers’ are compensated. With the hindsight of history, it seems evident that the neoliberal revolution in policy, highlighted by NAFTA in the 1990s and granting China Most Favored Nation status in 2000, seemed to treat the compensation of those harmed by freer trade as an afterthought.
Take, for example, the Trade Adjustment Assistance (TAA) program, intended to help manufacturing workers who suffered a trade-related job loss by providing compensation and reemployment services. A major evaluation of TAA conducted by the research group Mathematica for the Department of Labor found that not only did the program not lead to better labor market outcomes for impacted workers, but “participation in TAA as the program operated under the 2002 amendments had a negative effect on total income.” TAA participants not only had lower wages and fewer benefits than in their prior career; they did worse than non-participants.
Not to worry, the researchers added – TAA may have left individual workers affected by globalization even worse off than they already were, but “if TAA made even a relatively modest contribution to the ease of enacting free-trade policies, the program’s benefits [to society] would outweigh its costs.” In other words, if paying lip service to the concerns of factory workers through programs that proved ineffective (or actively harmful) was what it took to secure trade liberalization, well, you can’t make an omelet without breaking a few eggs now, can you?
Of course, it would be a mistake to place the entire blame for shuttered factories and declining mill towns at the feet of Third Way Clintonites and their allies. Gregg and other laissez-faire advocates are correct to point out that some degree of globalization was inevitable as communications and technology continued to improve. NAFTA or no, what economists call skills-biased technological change would have continued apace.
But the concerns of manufacturing workers, and the communities they used to be the backbone of, were undeniably given short shrift, leading to the backlash that concerns Gregg. A Burkean approach to trade would suggest that we give greater deference to its potential impact on towns and families, instead of racing headlong into a future where greater liberalization would solve the problems it itself was creating.
If one critique of Gregg’s stance is that he is willing to countenance too much destruction, another is that he is too unwilling to invest in creativity.
We both recognize the importance of risk-taking and entrepreneurship in a dynamic, market-driven society. We would certainly agree on the importance of eliminating regulatory hurdles that can make it difficult for new products to come to market. But from Alexander Hamilton to Henry Clay, Abraham Lincoln, and Ronald Reagan, policymakers have always recognized the desirability of investing in internal improvements, from canals to colleges to computers. Again, economic theory suggests that it is sometimes prudent for government to invest in public goods, from roads to research, that have positive externalities for innovators and entrepreneurs.
This is not to say, in the style of President Obama, “somebody invested in roads and bridges,” and therefore “if you’ve got a business, you didn’t build that, somebody else made that happen.” It’s simply noting that the government is already in the business of creating a steady status quo. Markets function more efficiently when the state takes a hand in creating a stable money supply, the 30-year fixed mortgage, or the national highway system. If the new ideas of the 21st century will be processed by microchips – and especially if wars will be fought over them – there might be similar justifications for taking steps to ensure that foundries are built domestically.
Gregg is right to note that industrial policy runs the risk of becoming a form of crony capitalism, though I think its smarter adherents are willing to admit as much. (We might note, too, that even the harshest critics of “hyphenated capitalism” had no problem handing out millions of dollars of taxpayer-funded subsidies to businesses when their own political fortunes were on the line.) The arguments he wields against industrial policy or other policy-directed economic goals are just as applicable to conventional policy tools like R&D tax credits, economic development incentives, or preferential tax treatment for certain types of investment. Accepting government interventions in the economy need not be all or nothing. But once we have accepted certain practices to support the economy, pursuing industrial policy, in a sense, becomes a question of which tax breaks or provisions would be most effective, rather than a question of principle. If policymakers intervene in markets to boost economic growth, they need not remain agnostic to how that growth evolves.
Although the Buchananite and Thielist critiques differ in important respects, they help illustrate the hollowness of an economic approach that errs on the side of being too hands-off. My preferred approach would be to invest in basic and advanced R&D, as in the bill formerly known as the Endless Frontier Act, while at the same time exploring what effective place-based policy might look like in disinvested regions. If conservatives believe, as many will avow, that a healthy family is the core unit of a flourishing society, it will not be enough simply to take our hands off the wheel. The family itself can be threatened if left unprotected against the relentless churn of a market economy.
Competition, rightly ordered, is good, necessary, and healthy. Investing in public goods can drive the sort of innovation and advancement Gregg wants to see happen. But when it comes to the median worker, policymakers cannot let themselves be blinded by quarterly GDP growth reports, losing sight of their obligation to the body politic to balance competing claims of growth and stability. A firm may certainly grow faster by optimizing labor costs through practices such as just-in-time scheduling, for example, but that may leave families with unpredictable hours and pay.
Investing in innovation while prioritizing workers surely requires an approach to policymaking that is cognizant of its own limits. But avoiding the “the hubris of wishful economic-thinking” need not entail a government that sits on its hands.