When You Give a Government a Program

When it seems at its worst, government needed the most. Regional inequality and a dependency on global supply chains demands our government take an active role in architecting our economy.

---

Exactly 5.8 seconds before Griffin Linstra sent Manasquan to the state finals, he was picking the ball out of his own net, down one to a Camden team who was about to lose to a public school for the first time in five years. After inbounding the ball, Linstra beelined to the opposite basket. When a long three rimmed out, he was there for the rebound and game winning layup. Buzzer sounds, Manasquan wins! But wait, the ref called the shot after the buzzer. Camden goes on.

Social media had a field day with the refs for stripping these teenagers of their rightful win. Deep in the colorful comments, Manasquan may have found an unlikely sympathizer in economists. You see, when the ref decided the outcome of the game, he broke a core tenet of economists stating governments can't pick winners. Just like in a basketball game, the outcome of companies and industries alike must be determined by the players--competition, demand, and innovation--not the ref--government.

This isn't asking much. We oppose government picking winners, but we do need them to swing a game 20 points here and there.

Ex-NBA referee, Tim Donaughty, got canned for fixing games he bet on. In politics, this is called industrial policy and it's a necessary and growing function of government. Industrial policy is when government intervenes in our economy for the benefit of you and me. Now that the Biden administration passed the largest industrial policy spending in history, the dormant practice takes centerstage of American politics.

Industrial Policy

Industrial policy dates to James Madison. In 1816, our founding father voted for a tariff on British imports to protect American businesses. After winning the Second War of Independence in 1812, we kicked the British out of our markets and tried to build things ourselves. In hopes of regaining lost market share, Britain slashed their prices to undercut our infant industry. Madison knew that without the ability to build a country we wouldn't one. The tariff effectively raised the price of UK imports which fanned the flame to American industry. Although we've moved away from using tariffs, protecting new industry vital to our economic and national interest is still the most common rationale for industrial policy.

Industrial policy also gives government the power to act as a league commissioner, ensuring all teams gets the same resources to practice and perform. Basketball sneakers are a foundational input for all players to perform at their best. Now, imagine if no company wanted to invest in developing a more advanced sneaker because the research was too costly, or they feared their competitors would immediately copy their innovation without sharing the cost. This is where the government steps in to provide funding and incentives to ensure every team gets access to the latest sneaker technology, elevating the overall performance of the game.

Before we start talking about which teams to help, or equipment to implement, people first need a court to play on.

Unfortunately, today many Americans are left on the sidelines. Ours is a regional economy where someone's home goes a long way in determining their job, or lack thereof. Place based policy aims to bring good jobs to low-income areas. So begins the process of turning drugs and crime into duvets and croissants.Helping industries vital to our economic and national security, supplying inputs used by all but made by none, and fighting regional inequality are three reasons people discuss how, not if, industrial policy should be used.

World's Most Critical Tech

Biden's recent industrial policy is a behemoth. $80 billion dollars is apparently what it takes to transition to green energy, remedy COVID's economic fallout, and rebuild our middle class. The three big faces of this initiative are The American Rescue Plan Act (ARP), Creating Helpful Incentives to Produce Semiconductors (CHIPS), and the Infrastructure Investment and Jobs Act (IIJA). CHIPS is the crown jewel.

Accounting for over half the $80 billion, CHIPS brings the entire production of semiconductors within US borders. Semiconductors are as tiny as they are powerful. The electrical circuits that gave Silicon Valley its name are used in everything from microwaves to missiles. Unfortunately, in our 21st century Internet of Things economy, a small island whose independence John Cena is too scared to acknowledge provides one third our annual computing power. Taiwan is one of the few suppliers in a shockingly fragile and dispersed supply chain of semiconductors. COVID only expedited the long overdue on-shoring of this vital economic input. CHIPS is the blueprint to win the fight for the world's most critical technology. At least this is what Chris Miller argues in his Financial Times business book of the year, Chip War.

Prioritizing regional inequality is the common theme in today's industrial policy. An explicit objective of the CHIPS act is to help hurting communities. The implementation principles in Executive Order 14080 requires the act to, "Generate benefits for a broad range of stakeholders and communities." It continues to identify targets as "...rural businesses, local economies...linkages to underserved regions and populations to draw in new participants to the semiconductor ecosystem."Struggling communities are also invited to compete for their share of a $1 billion pot. The Build Back Better Regional Challenge (BBBRC) pairs low-income areas with needed industry. BBBRC, a program within ARM, invites communities to submit proposals of an economic development plan that demonstrates market fit. A newly mandated liaison confirms and maintains by in from the private, public, and NGO stakeholders. In the least shocking new yet, the litany of new requirements prioritizes equity. In the context of industrial policy, equity is providing jobs for "populations that have suffered from historical and systematic discrimination, disinvestment, and disenfranchisement." Twenty-one proposals were selected whose industries ranged from clean energy to new generation manufacturing.

Equity isn't unreasonable. During WWII, we propped up entirely new manufacturing plants for towns with no industry. The benefits were generational. Decades later, even the kids who grew up there proved to be better off than their neighbors. Industrial policy, and place-based policy specifically, goes a long way in setting the floor on American life.This all sounds too easy. Ohio, you're not doing great? Here's a semiconductor plant. Fresno, CA is emblematic of America with growing low-wage jobs and widespread instability? Produce our agriculture. However, a disappearing middle class and a Pulitzer Prize winning novel exposing rising structural unemployment paint a different, darker, picture.Nothing is more permanent than a temporary government program. Milton Friedman's timeless quote distills the myriad ways in which government fails into a simple sentence. Its truth, undeniable. For example, we still have COVID programs that were meant to expire along with our state of emergency that ended months ago.

The process of temporary becoming permanent:

1) A politician creates a programs

2) The program develops its own lobbyists

3) If these programs go away, workers lose their job

4) Politician who end programs are seen as weak

This is what happens when you give the government a cookie program.

When in Doubt, Talk it Out

So, what do we do? First, we can implement ideas proven to work in other countries.If ever you think public policy is complex, just know that advocating for more communication will solve some of our biggest problems.

In the mid-2010's Peru's economic minister, Piero Ghezzi, institutionalized public-private collaboration by creating roundtables to streamline the success of targeted industry. Tasks were divided between "Your problem" and "My problem". "Your problem" referenced tasks that specific investments firms needed to make while "my problem" referenced the bureaucratic red tape Peru needed to cut to clear a path for vital industry.

While not all roundtables were successful, the practice had undeniable benefits. Ghezzi quotes one businessman as saying, "more was done [in the forestry roundtable] than was achieved in the previous 200 years of Peru's republican history." Speaking with the private sector provides government the information they lack so they can streamline the removal of bureaucratic tape.

Second, take the decision out of bureaucrats' hands.

The most tragic part about the Manasquan game happened days after the final whistle. Grown adults who somehow comprise the governing body overseeing NJ sports sat down, watched the film, and decided it should be Camden that moves forward. That's absurd. If we can't ensure the winner moves on in HS athletics when there's a literal scoreboard, clock, and video evidence, I'm not confident we can do so at the federal level.

Reka Juhasz, Dani Rodrik, and Nathan Lake agree with me. The three economists advocate to institutionalize the removal of underperforming programs, so we're not left to rely on bureaucratic discretion. They recommend setting clear steps for termination up front. Then we monitor and identify underperforming programs. Like most things involving Uncle Sam, recommendations for improvement are shockingly simple. Going forward we concede maybe not being able to make the right call in real time, but our middle class hangs on our ability to retroactively state what the NJSIAA couldn't, Manasquan should be playing for the state title.