Industrial Policies: Even Modest Intervention Creates Market Distortions

Jeffrey Miron

Industrial policy — government efforts to favor certain sectors, technologies, or firms — has a long history. Far from a fringe idea, politicians across the spectrum have promoted such policies for centuries. But the results are far more problematic than its current popularity suggests.

The pattern appeared early. Federal land grants built the transcontinental railroad and delivered real economic development — alongside spectacular corruption, fraud, and overbuilding. That combination has recurred often. Republican administrations have imposed tariffs and subsidized fossil fuels; Trump’s 2018 steel tariffs protected a narrow producer class while raising costs across industries that use steel, on net destroying jobs. Democratic administrations built the Tennessee Valley Authority — which brought electricity to rural Appalachia but became a major coal-burning polluter — and invested in green energy under Obama, producing high-profile failures like Solyndra alongside modest successes at considerable taxpayer cost. Biden’s CHIPS Act commits hundreds of billions to semiconductors; it is too soon for a full verdict, but early reports show significant cost overruns. 

Proponents point to South Korea, Japan, and Taiwan as proof that industrial policy can work. But for every South Korea, there is a Brazil or India, where decades of protection have produced inefficiency rather than competitive industries. Some economists question the Korean case even more directly: the industries the government subsidized were not the ones most correlated with growth, suggesting the policy may have targeted the wrong sectors. Economists also debate how much credit belongs to government direction versus stable macroeconomics, high savings rates, and openness to foreign technology.

It helps to place industrial policies on a spectrum, with targeted subsidies and trade protection at one end and fully planned economies at the other. The Soviet Union and Maoist China were the paradigmatic examples, and their failures were catastrophic — chronic shortages, misallocation, and collapse. Defenders of modern industrial policy argue that targeted interventions are different from central planning, and formally, that is true. But the underlying problem — that officials lack the information markets generate and face political pressures that distort allocation — does not disappear because the intervention is more modest. 

Cross-posted from Substack. Emily Bronckers, a student at Harvard College, co-wrote this piece.