Thread by @michaelxpettis

1/12
"The new elite project is industrial policy, with a focus on creating national champions," Raghuram Rajan says, adding that "countries will have to relearn the lesson that governments are not good at picking winners."

Neither claim is true.

ft.com/content/73bf74…

2/12
US industrial policy, for example, is not about creating national champions but about protecting domestic industries from very aggressive beggar-thy-neighbor policies implemented elsewhere. The US share of global manufacturing has declined sharply over the past few...

3/12
decades, even as other advanced (and less-advanced) economies have used very successful industrial policies to increase their shares, directing massive subsidies to their manufacturing sectors even as they externalize the cost by running large, persistent trade surpluses.

4/12
In that case the point of industrial policy in the US is mainly to reduce the extent to which the US must absorb the costs of industrial and trade policies implemented elsewhere. In fact this is a very important point that Rajan misses.

carnegieendowment.org/chinafinancial…

5/12
Because of its role of great absorber of global savings imbalances, the US is not able to choose to reject industrial policy. As long as imbalances in one part of the world must be balanced in another, the US is already subject to industrial policy, like it or not.

6/12
That's because when a large economy forces its consumers to subsidize the domestic production of its manufacturers, by dumping the resulting excess savings into the US economy, this cannot help but force an opposite adjustment in the US economy.

7/12
This means US manufacturers are forced by these inflows to subsidize US consumers, so that the global economy balances. The US, in other words, is already subject to industrial policy, except that instead of one designed by Americans, it is designed by US trade partners.

8/12
It is also not true that governments cannot "pick winners". While it is easy to find cases of industrial policy that did not succeed in advancing development and economic growth, it is just as easy to find cases in which it succeeded spectacularly.

9/12
The US, Germany, Japan, South Korea, China and many other countries have benefitted enormously from clever industrial policies implemented at the right time. In fact you can reasonably make the case that the US invented successful industrial policy.

10/12
That leads to a more general criticism of Rajan's claims. To say that industrial policy – or, for that matter, that trade deficits, tariffs, closed capital accounts etc. – are "bad", strikes me as being statements more of economic faith than of economic history.

11/12
They are just too general to be true. What economists should be doing, rather than encouraging the faithful, is to examine and explain the conditions under which such policies are likely to lead to development and growth and the conditions under which they aren't.

12/12
The US economy should not simply balance industrial policies abroad. Continuing to lose global manufacturing share simply because Germany, Japan and China want to increase their shares strikes me as exactly the kind of industrial policy we should stop implementing.