Global foreign direct investment (FDI) flows fell by 35 per cent in 2020, r...
2021-07-06 2 ENGLISH REPORTS
Some industrial policy advocates argue that these seen and unseen costs are an expected but necessary part of backing ventures too risky for private capital and are worth the expense if the project ultimately supports one big winner (e.g., Tesla Motors). Even assuming that Tesla’s story is fully written or that electric vehicle proliferation benefits average Americans, however, this argument must have limits: would government-backing of Tesla be worth 1 trillion dollars worth of waste, failure, and cronyism? Two trillion? Surely, some amount of “losers” – individuals and the economy overall – would be too much, even if the government picked one “winner” in the process. Costly public failures might also undermine public confidence in the government and support for future federal policies, industrial or otherwise – jeopardizing the next Tesla (or more worthwhile targets) rather than nurturing it.
Solyndra did this very thing.Although there are cases where government intervention coexists with success, there are many instances where industrial policy has failed to yield any gains. The most difficult issue is that relevant counterfactuals are not available. Consider the argument that Japan’s industrial policy was crucial for its success. Because we do not know how Japan would have fared under laissez-faire policies, it is difficult to attribute its success to its industrial policy. It might have done still better in the absence of industrial policy—or much worse. Given this basic difficulty, only indirect evidence can be obtained regarding the efficacy of industrial policy. Direct evidence that can “hold constant” all the required variables (as would be done in a well-specified econometric exercise) does not exist and likely never will.
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