Trade Policy: Zakaria Bumps Into Reality, If Not His Assumptions

A couple of days ago, I wrote about Apple and the need for an industrial policy. Coincidentally, I stumbled across this Time article by Fareed Zakaria about industrial policy in which he concludes (boldface mine):

In theory, I am deeply skeptical of government industrial policy. Government doesn’t know how to pick winners and losers, it will make mistakes, and the process will get politicized. All this is true. And yet when I look at China and South Korea and also Germany and Japan, I see governments playing a crucial role. They do make mistakes— their versions of Solyndra— but they seem to view them the way venture capitalists would. Their role is to seed many companies, only a few of which will succeed. Once these companies are identified, government helps them compete against big U.S. multi nationals. There used to be a joke about Marxist economists who would say of a deviation from pure communist economics: “It might work in practice, comrade, but it doesn’t work in theory.” That’s what industrial policy looks like these days. The theory doesn’t make sense, but it’s hard to argue with the result.

Zakaria makes a fundamental flaw: he assumes that private investors and corporations typically make intelligent decisions. They often don’t. Even Steve Jobs, who did some amazing things, let loose with some real stinkers (remember the Newton?). The recent self-inflicted Netflix kerfuffle? Does anyone think any cable company could survive but for de facto (and de jure) monopolies?

And, of course, there’s the housing bubble which is the single most ludicrous misallocation of resources in most readers’ lifetimes (and before you bring in Fannie and Freddie, they were late to the party–this was private investors). Many businesses and investors make a lot of mistakes. It comes with the territory. The reasons for their mistakes might be different: less cronyism, and more unwarranted risk-taking, especially when bubbles are forming, in the case of private investors. Why would we think the private sector is any better at “picking winners and losers?” Put simply, very few bets, private or government-backed, pan out–if it were easy most people would be doing this.

The second assumption is that Asian governments are protecting companies. While that is definitely part of the calculus, the other goal these governments are trying to achieve is low unemployment. So once a business takes off, any government that cares about unemployment should try to assist it (and, by the way, that historically worked well for the U.S. too).

That’s really the difference between the U.S. and the Asian governments industrial policies: both help corporations, but, unlike the U.S., the Asian governments are also concerned with unemployment. After all, consider the U.S. tax code which rewards corporations for moving jobs out of the U.S. Between the tax code, defense contracts, and ‘privatization’, there is lots of assistance for U.S. corporations. Unfortunately, it is often at the expense of the U.S. worker (and the environment. And the public sphere).

So what Zakaria is talking about isn’t a ‘theory’, it’s an ideology. At least recent events have made him consider its validity.

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1 Response to Trade Policy: Zakaria Bumps Into Reality, If Not His Assumptions

  1. Steve Jobs did some dumb things, but the Newton wasn’t one of them. He wasn’t even at Apple when the Newton was started, and he cancelled it soon after he took over as CEO.

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