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Do Oren Cass’s Justifications for Industrial Policy Stack Up?

August 15, 2019 in Economics

By Ryan Bourne

Ryan Bourne

Oren Cass wants the U.S. government to adopt a manufacturing-focused “industrial
policy.”

In a speech at the National Conservatism conference last month,
the Manhattan Institute scholar explicitly repudiated the view that
resources are usually best allocated by voluntary market trades
between consumers and producers.

No, said Cass, “market economies do not automatically allocate
resources well across sectors.” Some “vital sectors…suffer from
underinvestment” as a result and, though naturally imperfect, a
“sensible industrial policy” could improve on the outcomes we
currently experience.

A belief that there is such widespread “market failure” to be
corrected through the government thumbing the scale might sound
familiar to those with knowledge of the socialist economic planning
debates. Cass baulks at the idea the socialist label can be
thrown at him. But he has not yet answered the central questions
this analogy poses: Why is the government better placed to decide
the industrial composition of the economy than the interaction of
consumers and producers? And would the political system deliver an
economically-reasoned industrial policy in practice?

Some industrial policy advocates rightly state that
current policy is more interventionist than we would like, and
replete with incentives, subsidies, and tax breaks that could be
considered a de facto industrial policy for the economy
already.

But Cass’s case is not merely a criticism of how current policy
operates, or seeking to level the playing field. He explicitly says
that markets do not allocate funds effectively, thus
implying an explicit manufacturing-focused industrial strategy
from government would be desirable even if today’s current
distortions were eliminated.

Yet his speech gives no indication of how we might judge how
well or badly resources are currently allocated across sectors, nor
a measure of how we could judge whether there is indeed currently
“underinvestment” within them.

Oren Cass asserts that
markets cannot generally allocate resources efficiently by
industry. Yet he provides no meaningful metrics to show this is the
case, nor shows why his policies would deliver better
outcomes.

The closest he gets is a throwaway line about the size of
manufacturing in U.S. output (12 percent) being smaller than in
Germany (23 percent) and Japan (19 percent). No evidence is
presented for why these levels are optimal or even better.

Without this kind of information, how are we to judge Cass’s
industrial policy prescriptions and whether they achieve his goals?
Is economic efficiency his aim? Employment? Or something else?

In the absence of meaningful metrics for success, we must
instead assess the likelihood of what he foresees as the social and
economic benefits from a manufacturing-focused policy shift.

The Supposed Benefits of Manufacturing

Manufacturing, which he defines as making “physical things”
(traditional manufacturing, …read more

Source: OP-EDS

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