One of the biggest political upheavals in America over recent years has been a resurgence in economic nationalism. Given the amount of regulation with which it is burdened, America’s economy can hardly be described as laissez-faire. But what’s not in doubt is that skepticism about free trade and free markets has grown across the American political spectrum.
This is especially evident on the right. Just pick up a copy of your nearest conservative magazine and I guarantee you’ll find a conservative politician or thinker arguing for greater use of tariffs and more extensive use of industrial policy across America. Such shifts away from free market positions, we’re told, are necessary if America is to address challenges like saving blue-collar jobs or competing with China.
Much of this is dressed up in the language of patriotism. Only a soulless globalist, it’s argued, could oppose greater use of tariffs. Real Americans, the argument goes, should buy American, favor protection for American businesses and demand that government act to do what market forces apparently can’t in the American economy.
The problem with all this rhetoric is that it legitimizes policies that raise living-costs for millions of American consumers, incentivizes rampant cronyism on the part of American politicians and business leaders and gradually undermines America’s international competitiveness.
Take, for instance, industrial policy. This is when the government intervenes in a sector of the economy on the assumption that, by some combination of subsidies, tax breaks, below-market interest-rate loans and other measures, it can engineer more optimal results than would otherwise occur absent such intervention.
What industrial policy advocates won’t tell you is that industrial policy assumes that political leaders and technocrats possess the knowledge to comprehend all the technical details, possible production methods, range of incentives, actual and future prices, unintended consequences and alternative uses of resources (to name just a few data points) that they would need to know to enable them to decide accurately the most optimal resource-allocation and course of action.
But no one can know all these things about a given economic sector (let alone an entire economy). Policymakers cannot know either the optimal allocation of capital and labor in any industry or the ever-changing preferences of millions of consumers and producers at any one moment in time.
Even those attempting to implement industrial policy on a relatively small scale have to confront the fact that all the information which they need is dispersed among thousands of people and is constantly changing. Some of the information that they need does not even exist yet. How, for instance, do we know which technologies will be valuable in the future and which won’t?
Then there are the mountains of ever-growing and changing tacit knowledge possessed by humans which undoubtedly exists, even if it is difficult to articulate or measure. Moreover, the more knowledge we accumulate, the more we become aware of the importance of other datapoints we did not previously know about.
All of this helps to explain why industrial policy — whether in Europe, Japan, Asia or America — has such a lousy track record in delivering on its promises and ends up costing taxpayers billions of dollars in failed investments. But even worse is the cronyism that industrial policy breeds.
A good example was the Obama administration’s attempts to promote clean coal and carbon capture technology via the 2009 American Recovery and Reinvestment Act. The overwhelming majority of energy technology demonstration projects went to coal-related projects. Technologies like nuclear power, renewables, and gas-fired electricity plants went largely ignored. Why? Because the coal lobby was more powerful and politically connected than the others.
A similar dynamic manifests itself with protectionism. Tariffs and import quotas are designed to make American consumers pay more for foreign-made goods. The objective is to push consumers into buying American-made products at a higher price than they otherwise would in the absence of a tariff.
So if consumers don’t benefit from this, who does? The answer is that tariffs quotas directly benefit those businesses who resent the disciplines of competition and are determined to make it harder for competitors to enter “their” markets.
Unlike consumers, such businesses have the resources, political contacts and incentives to lobby legislators and governments for preferential treatment. Ergo, special interests tend to prevail in trade policy debates, even if most people happen to favor greater trade liberalization.
Nor are tariffs very proficient at saving American jobs, it turns out. Consider the Trump administration’s imposition of steep tariffs on steel and aluminum in March 2018. Analysis of a Federal Reserve study released in December 2019 estimated that, on balance, these tariffs resulted in a net loss of 75,000 jobs.
The reason is that, as a 2020 Brookings Institution study illustrated, “any gains in importing-competing sectors appear to have been more than offset by losses in industries that use imported inputs and face retaliation on their foreign exports.”
Incidentally, those 75,000 jobs lost as a consequence of the March 2018 tariffs were mostly blue-collar jobs located in largely blue-collar towns.
I could provide literally hundreds of other examples of how protectionism increases costs for American consumers, contributes to job losses and breeds unhealthy relationships between privilege-seeking CEOs and crony legislators anxious to get support from some of their most economically influential constituents at everyone else’s expense.
The more you look at these policies, the more you realize that they are not about promoting the nation’s common good. On the contrary, economic nationalist policies cannot help but promote sectional and special interests because that is what they are designed to do.
America needs economic policies that promote the United States’ well-being. But let’s not kid ourselves that economic nationalism is the way forward. In the long term, it is bad for American business, American consumers and the American economy’s health. What is patriotic about that?
This article originally appeared in The Detroit News on July 21, 2021
