Industrial Policy, for Better and Worse

The International Monetary Fund (IMF) publishes a wealth of information during its spring meetings, which took place earlier this month in Washington. The lion’s share of attention goes to the World Economic Outlook, the release of which is marketed heavily.

By contrast, the IMF’s Fiscal Monitor is low-key. But the most recent edition was worth reading. It focused, in part, on the increasing application of industrial policy around the world. This trend will have important consequences for growth, inflation and debt.

In classical economics, an “invisible hand” steers resources to their best use. Capital and labor migrate naturally to industries and occupations where opportunities are the best. Any attempt to interfere in the process creates “wedges,” areas of inefficiency which are costly to societies. Nonetheless, all governments engage in some steering of their economies.

The degree of government intervention in markets has escalated substantially since the pandemic. Centrally-directed efforts were critical to dealing with COVID-19: subsidies for medical research, testing and vaccination were essential to corralling the virus. Developments in this space might certainly have progressed naturally without Federal direction, but coordination proved much better than competition in speeding response.

The post-pandemic era has provided new openings for the broader application of industrial policy. Problems with far-away supply chains prompted a desire for more proximate options. Increasing stress between Beijing and the West has prompted the latter to reduce reliance on China. Governments have become heavily involved in “re-shoring” efforts.

Security has become more tenuous in the wake of wars in Ukraine and the Middle East. This has always been an area where government involvement is common, even desired. Policy support for the defense sector is increasing, and advancing investment in microchip fabrication has strategic as well as civilian foundations.