Ian Fletcher, co-author of Industrial Policy for the United States, published by Cambridge University Press, joins the show to argue free trade does not always serve national interests. Fletcher defines industrial policy as government intervention to support better industries, emphasizing that some industries are inherently more valuable. Fletcher highlights successful industrial policies in Japan, Korea, and Germany. He also discusses the role of tariffs in protecting domestic industries, using the example of U.S. electric vehicle tariffs on Chinese imports.
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About this episode’s guest: Ian Fletcher
Ian Fletcher is an Advisory Board Member for Coalition for a Prosperous America. He is the author of Free Trade Doesn’t Work (2010) and a co-author of The Conservative Case Against Free Trade. He was Senior Economist at the Coalition for a Prosperous America and a Research Fellow at the US Business and Industry Council. He was educated at Columbia and Chicago.
Timestamps for EP271
- Introduction (0:00)
- Defining Industrial Policy (3:31)
- Ian Fletcher’s Journey into Industrial Policy (6:48)
- Better Industries and Manufacturing (11:27)
- Arguments Against Free Trade (18:10)
- Case Studies and Successes of Industrial Policy (28:07)
- Tariffs and Modern Industrial Policy (48:21)
- Taiwan’s Success Story (51:46)
- Conclusion and Final Thoughts (53:51)
Takeaways
- Industrial Policy Defined: Industrial policy focuses on nurturing high-value industries that provide higher wages and foster innovation.
- Free Trade Critique: While free trade reduces consumer costs, it can lead to job losses, regional economic disparities, and reliance on foreign manufacturing.
- Global Lessons: Successful industrial policies in countries like Taiwan and Germany show strategic government intervention can be successful in some instances, while failures in the UK and India underscore the risks of mismanagement.
- Technology Pipeline: Ian Fletcher argues that a robust pipeline connecting scientific research to commercialization is critical for maintaining competitiveness in manufacturing and innovation.
Links relevant to the conversation
Ian’s book “Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries”:
https://www.amazon.com.au/Industrial-Policy-United-States-Competition/dp/1009243071
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Transcript: Industrial Policy vs Free Trade w/ Ian Fletcher, Coalition for a Prosperous America – EP271
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Ian Fletcher 00:03
People’s mobility from job to job is not frictionless. It’s not frictionless for people to move where the new jobs are. People’s entire lives, friends, family, support systems are in one place. If they pick up and, you know, try to move someplace else just to get a job. There’s reasons why people don’t do that. When you have the economy collapse in some Midwestern factory town, the real estate market collapses with it. So anybody who lives there wants to move someone else is trying to sell a house that is now worth very little there’s not worth enough money to buy a house in the place they’d have to move to, where there are jobs, where real estate prices are high because people have money. There are all these factors, which, when you look in detail at what happened, you discover that the Ricardian free trade story is just full of holes in gene,
Gene Tunny 01:04
welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host. Gene, Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode, I’m joined by Ian Fletcher an advisory board member for the Coalition for a prosperous America. Ian’s previously served as senior economist at the coalition and as a research fellow at the US Business and Industry Council. He holds credentials from Columbia University and the University of Chicago. In this episode, we talk about Ian’s latest book, industrial policy for the United States, published by Cambridge University Press, this book explores both the rationale and the practical steps for implementing industrial policy. Ian and his co author lay out their blueprint for developing high value industries, fostering innovation and boosting economic growth in the US. If you’ve listened to this podcast before, you’ll know that I’ve made some criticisms of industrial policy, criticisms that many economists share. There’s often a fear that governments, by trying to pick winners, might end up picking losers instead. That’s why I’m especially keen to hear Ian’s take, even if I disagree with him on certain points. His views come from a deep understanding of economic history and a careful examination of how policies have worked in the real world, whether you’re skeptical of industrial policy or all for it, I think you’ll find plenty of insights here before we dive in. I want to thank Lumo coffee for sponsoring this episode, economics explorer, listeners can enjoy a 10% discount on their premium organic coffee from the highlands of Peru. You’ll find the details in the show notes. Now let’s jump into the episode. I hope you enjoy it. Ian Fletcher, welcome to the program.
Ian Fletcher 03:18
Thanks for having me on your show gene, of course,
Gene Tunny 03:21
you’ve written or co authored a real weighty book on industrial policy, industrial policy for the United States, winning the competition for good jobs and high value industries, published by Cambridge University Press. Can we start off Ian by understanding your definition of industrial policy. When you talk about industrial policy, what do you mean, please. Well,
Ian Fletcher 03:51
industrial policy is about three basic facts. The first fact is, is some industries are better than others. They can pay higher wages, their output is worth more. They can provide higher profits, the more fruitful for producing growth in other parts of the economy and a bunch of other things. Anyway, some industries are better than others. All industries are not created equal. Second idea is the free market. Our beloved free market will not, on its own, give any particular country, the US, Australia, Taiwan, you name it, will not give any particular country the best industries that it could hypothetically acquire. Free markets are great, but they’re not the whole story. And the third idea is that judiciously chosen government policies have and can make a difference in terms of getting a country better industries than it otherwise would have, which means that the workers get. Paid more, your capitalists are happy. They make more profit and a bunch of other advantages. So that’s the basic idea of industrial policy, right there.
Gene Tunny 05:11
Got you. And in terms of the policy measures, we’re talking things that it may be grants for support for innovation, R and D. It could be tariffs, it could be concessional loans, a whole bunch of things, procurement policy, just, just so we just set out what, what’s involved. It’s a there’s a broad range of policies. Is that correct?
Ian Fletcher 05:33
For sure, some people who criticize industrial policy think it’s about nothing but tariffs, which are one part of it or one tool. Other people who criticize it think it’s nothing about subsidizing industries. You just shovel money out the government store. Industrial Policy is a package of about three dozen different tools, all sorts of things. You mentioned some of them, for example, most technologies are developed by the private sector, but there are some technologies that are too speculative, too risky, too long term, or they’re difficult to patent and keep to yourself. So they work a lot better when they’re developed by the government. The Internet is the most famous example. The internet was not invented by some company trying to make money. It was invented by government scientists to share data, and people figured out later that you could do all these wonderful things with it, and the private sector on its own is kind of unlikely to have developed it, yeah.
Gene Tunny 06:36
Okay, so there’s a I think we’ll I’d like to explore that later. What are the boundaries between science and innovation policy and industrial policy? I think that would be good to discuss so that, I think that’s a good introduction. But asking, How did you get interested in industrial policy in the first place?
Ian Fletcher 06:53
What happened was I wrote my first book, which is called free trade doesn’t work, because I got interested around 2007 in the fact that America was supposedly doing everything it was supposed to do economically, and yet we had all these problems. So I went looking on Amazon to see if I could find a book that could explain to me the critique of free trade, why this might not be the best idea, and I didn’t find it. There was no such book. So in order to read the book, I had to write it myself. So I had some help from a friend of mine who was working at a Washington think tank. At the time, he got me some sponsorship, and I had some philanthropic support. So that’s how I wrote the first book. And when I wrote free trade doesn’t work, it came out in 2010 and for the first month after it came out, I was terrified that I was going to get an email, what day suddenly, and someone’s going to say, hey, Fletcher, I read your book. Nice try, but you’re completely wrong. And free trade really is best because of x. And I didn’t know what X was going to be, but there’s a true story. I was afraid that somebody was going to come up with something, and it’s now 15 years since the book came out, and that isn’t what happened. Instead, an idea that was very much on the fringe when I wrote about it, has now become mainstream in in both political parties, in the US and in some other countries around the world. So you actually asked about industrial policy. Well, industrial policy, which is the current book, it’s the next step after you repudiate free trade. If you say, okay, free trade isn’t best, well, then you’ve also repudiated the whole globalist model of successful economics, because what they tell you is that free movement of goods, free movement of capital, privatization, fiscal austerity and a bunch of other deregulation. They tell you, that’s the way a country gets economic growth. Now, if you take free trade out of the picture, the rest of it, one you become skeptical of it, because if the free trade component is wrong, what else could be wrong? And the other thing is, the model starts to fall apart in practice. So the question then becomes, okay, smart guy, if you don’t want free trade, what do you want? What is your recipe for national economic success? And that’s really what industrial policy is. It consists in saying that a successful economy, a high wage economy, a wealthy country, it comes from having productive industries and. The market will do a lot to get you there, but it won’t do everything for some very deep seated reasons, so governments need to step in. Now, historically, this is what happened in all the countries that became rich, starting with Great Britain in the 19th century. And it goes back even earlier than there the United States, France, Germany, Japan, most recently, you’ve seen it in East Asia. But when you dig into the real economic history of these things, you discover that industrial policy has kind of a huge but largely ignored role in the success of lot of industries, and therefore of a lot of countries and the US is in a situation now with its own economic decline, particularly in manufacturing, and with the geopolitical threat posed by China of having to get its Economic act together again. And that, pretty much by definition, means you’re going to have to be doing industrial policy, but you want to be doing it right, because there are many, many ways to screw it up, and people who criticize it on grounds of, yes, this screws up all the time. They’re correct, and that’s part of why we wrote the book, is to avoid that happening here.
Gene Tunny 11:22
Yeah, yeah, okay, yep, yep, good point. Okay. Now there are lots of things I want to explore, but I want to go back to the when you defined industrial policy, you mentioned there some industries are better than others in your view. What are those better industries?
Ian Fletcher 11:41
Well, you’re talking about industries like in the US, manufacturing, cars, manufacturing, computers, manufacturing, aircraft, manufacturing pharmaceuticals. These are industries which have, above all, they have a high value added per man hour. Now how much can pay your workers depends on how much value they produce. Otherwise you’re going to lose money. You can’t pay somebody $10 an hour if they produce $9 an hour of value, but if you’re producing $20 an hour of value, maybe you can pay them $15 an hour and still make a profit. So that means you have to have certain industries in your country. If the only jobs out there are tiny number of people working on farms in every developed country, and then local service industries, which is the bulk of the jobs in any developed country. But those are, you know, things like working at McDonald’s or working in Walmart, those kind of jobs don’t have a potentially very high value added because the value of a cheeseburger is just not even remotely as high as the value of an automobile. So you want to get into these high value added industries now they’re difficult because you require technology that doesn’t grow on trees. You require supply chains, skilled labor, large corporate organizations that can administer these complex companies. So these industries are hard to get, and in the face of international rivalry, they’re hard to keep, but they’re very lucrative to have.
Gene Tunny 13:22
Is it the manufacturing per se, or the manufacturing itself, or is it the design of the products, actually developing the products, doing the R and D? I mean, think of Apple. I mean, it doesn’t do the manufacturing in the United States, does it? But yet it designs high value products. Do you have any thoughts on that? How do you how do you define manufacturing?
Ian Fletcher 13:45
Yeah, the first thing I want to tell you is that Apple and the iPhone, which people love to talk about, are just about the worst case study example for understanding how modern economies do and should work, because Apple is a very exceptional company, starting with the fact that they’ve managed to prevent the Chinese from just stealing all their intellectual property and flooding the market with copycat iPhones. It’s a mistake to think that an entire nation can specialize in simply design and just outsource the manufacturing elsewhere. That’s been a very popular idea in the United States, and that’s probably a recipe for having enough high value jobs to keep the San Francisco Bay area where I live, Silicon Valley, keep that going nice. But the United States has a population of over 300 million people. Most of those people are not going to be computer chip designers. They’re not going to be iPhone engineers. They don’t have the skills. They’re not going to acquire them. They also don’t live in places that have the headquarters of giant international computer companies. This is why the. So we have the problem in America, flyover country is the term Some people use to describe the vast interior between the two glamorous centers of power and money on the East Coast and the West Coast. You need manufacturing if you push high value added technologically rich jobs, down to the bulk of your population and across your national geography. The other problem is, when you outsource the manufacturing, you often end up outsourcing the production as well. There’s a long list of companies in the US that started by sending simple bits of fabrication to the Far East and more advanced bits, then they’re making the whole thing there. And then, lo and behold, they’re surprised to find that they now have competitors in that part of the world who are making a product similar to theirs and competing with them. And when you lose the manufacturing capability, you lose a lot of the innovation capability, because a lot of innovation doesn’t consist in scientists discovering things in a lab or even engineers drawing up a blueprint on computer aided design machine. It’s stuff that emerges from the factory floor. It merges from the experience of what’s called manufacturability. There are whole classes of expertise that really don’t exist in the US very much anymore, because nobody manufactures the product here. The US would love to have people here who can manufacture carbon fiber aircraft wings, which we currently get from the Japanese Boeing outsource something like 30% of the 787. Is foreign. And if you don’t have that manufacturing, you’re not going to have the expertise needed to develop the next better form of it. And you have to remember that manufacturing does not mean these images we have from 1950s black and white movies of you know, barely literate proletarian labor, hammering at metal objects going down an assembly line. I suggest anybody who’s listening to this and is skeptical. Find some modern manufacturing plant in your vicinity that occasionally lets people have a tour. Some of them do. I’ve visited some on this basis, and take a look at what’s going on you inside, you find these incredibly advanced precision operations, these computer controlled pieces of machinery, lasers, you You name it, and you have people milling around, keeping the machinery working and doing a few things that it can’t do. But modern factories have far more in common with the Starship Enterprise than they do with Dickensian mills. Yeah,
Gene Tunny 17:58
yeah. I agree with you on that one. I mean, I’ve visited various factories, the Coca Cola factory. Just go to any Coca Cola Bottling plant or manufacturing facility. Now, it’s just extraordinary. The level of automation. You hardly see anyone on the factory floor. You just see all these conveyor belts with all these cans whizzing by. It’s incredibly impressive. Okay, right? Just on free trade. I just want to go back to that. So I guess the traditional argument for free trade is that it does result in lower costs, lower prices for consumers, so consumers are better off, lower input costs for industries, and that should, yep, okay, look, I would understand your where you’re coming from, that what that that should result in, you know, improved, uh, improved output. Higher GDP is the argument, higher welfare for consumers. What are your arguments against free trade? Please. Ian, okay,
Ian Fletcher 18:59
the package of ideas you just presented forms a complex known as the theory of comparative advantage. And it goes back about 200 years to David Ricardo, who is a British economist who kind of first worked this out. And I’ll say straight up that a lot of these theories are in fact true, which is why neither I nor the organization whose advisory board I’m on, which is Coalition for prosperous America, which you can find at prosperous america.org none of us are in favor of abolishing Trade. We’re against free trade. We’re not against trade. Nobody here favors autarky, which is what completely crazy countries like North Korea try to achieve. But that theory of free trade is, I don’t know if it’s 75% true or what number. You want to put on it, because there are huge gaps in the theory, huge holes in the theory, huge exceptions that are big enough that taken together, it’s very expensive to ignore. For a start, you talked about low consumer prices. Low consumer prices are not the only good thing in an economy you want low prices, you also want high wages. Okay? And if you look into this theory, the problem with it is it depends intellectually on a lot of unstated assumptions that range from dubious to obviously false. One assumption. It assumes, and this is more aimed at the economists watching than most non economists, it assumes that there’s no international capital mobility. It assumes that what are called factors of production don’t migrate internationally. It assumes that there are no what are called externalities, that is social costs like pollution or the social damage due to job loss. The other interesting thing is this theory doesn’t even say, even if it is true, which it isn’t even if it were completely true. It doesn’t say a lot of the things that people who cite it think it says. For example, a lot of people think that Ricardo proved that a rising tide lifts all boats, as I say, that free trade is good for everyone. No, even Ricardo didn’t think it said that a lot of people think that free trade is a long term strategic answer for how to develop a country or keep it prosperous if it already is. Well, the theory doesn’t even say that. The theory only tells you what the right thing to do right now, you know, if you have coconuts and an island next to you has oranges, you exchange coconuts and oranges and you end up better off. It doesn’t say anything at all about economic growth. It doesn’t say anything at all about long term development trajectories of countries, but that’s what really counts. One of my favorite quotes on the subject, which is in both of my books, and I can’t remember where I saw it first, or I would claim originality, is that economic growth is about turning from Burkina Faso into South Korea. It is not about being the most efficient possible Burkina Faso forever that cuts through a lot of sophistry in the economic discipline, where people forget what a narrow concept efficiency is. I mean, efficiency is great. You don’t want to be inefficient, but it’s not the only thing that counts in economic life. It’s not the only thing that’s good for you.
Gene Tunny 23:05
Okay, can you talk about, or you know that this idea the rising tide lifts all boats? What? What’s the concern, what boats didn’t get lifted with? I mean, I presume you’re sort of talking about NAFTA China entering into the WTO what? What are the concerns that you’ve seen there? What boats weren’t lifted? Ian, is that part of your argument, one
Ian Fletcher 23:27
of the assumptions that was made when the United States entered NAFTA, when the United States led China into the World Trade Organization and opened up its markets, was that sure you’re going to lose certain jobs because you’re going to start importing things. But people lose their jobs all the time. People find new jobs all the time. It’s going to be okay if you have an economy that’s growing overall, people just go from one job to another job. Now it’s now being studied in detail. The key paper on this is called the China shock by a gentleman named David Autor at MIT. That’s a U, T, O R, for those of you want to look it up. And basically what was discovered is that’s not what happened to vast areas of the United States, secondary and tertiary urban centers where jobs were destroyed. People’s mobility from job to job is not frictionless. It’s not frictionless for people to move where the new jobs are. People’s entire lives, friends, family, support systems are in one place. If they pick up and, you know, try to move someplace else just to get a job. There’s reasons why people don’t do that. When you have the economy collapse in some Midwestern factory town, the real estate market collapses with it. So anybody who lives there wants to move someone else is trying to sell a house that is now worth very little. It is not worth enough money to buy a house in the place they’d have to move to where there are jobs, where real estate prices are high because people have money. There are all these factors, which, when you look in detail at what happened, you discover that the Ricardian free trade story, it’s just, it’s just full of holes. There are a number of things that are just wrong with it, even though, at some level, yeah, it’s an okay generalization about 75% of the time. Maybe,
Gene Tunny 25:37
yeah, I guess. What I’m wondering is, was there the potential for, I mean, there was there were gains from from NAFTA, or there were, well, I mean, China’s another story. When we chat about chat that a bit later. I mean, that’s a very controversial one, but I’m just wondering it was there the prospect for redistributing some of these gains, because I look at Australia and the story we tell ourselves in Australia, I used to be in the treasury here, and the story we we would tell ourselves, is that we had a high tariff wall up to the late 80s, and then we started bringing the tariffs down. We were trying to protect our car. Have a car industry. We protected it. We had a 57% tariff. At one time. We had high tariffs on textile, clothing and footwear, and we gradually reduced them. And then the story we tell ourselves is that that was good for consumers. We ended up with cheaper cars, cheaper clothes. In real terms, we had a period of strong productivity, strong economic growth in the from the like sort of second half of the 90s into the early 2000s and that allowed us to catch up. We went from the bottom third of the OECD to the top third of the OECD. We had job losses too, and I think because we had a Social Security system, we had a public health system, Medicare, then that sort of ameliorated or or meant that a lot of these problems you’re seeing in the United States. We didn’t see them as much here in Australia, and so we see the story as more of a positive story. Do you have any thoughts on that? Ian, yeah,
Ian Fletcher 27:11
for your international viewers, I just want to remark that it’s a myth that the United States doesn’t have a welfare state like other developed countries, it does, it’s just not quite as extensive. One of the things that’s different about the kind of economics that I and people who think as I do espouse and the consensus we’ve been living under, is the consensus generally gives the same answer for every industry, for every country, for every circumstance, it’s always the market. The market is always right, and we tend to come up with different answers based on different facts in an industry, in a country, a moment in historical time and so forth. So the problems that Australia has faced from free trade are quite different from those that the US has faced. For example, you talk about your car industry, by which I presume you mean Holden motors, the old Australian GM subsidiary, yeah,
Gene Tunny 28:13
we had Toyota and and also Mitsubishi. And I forget, sorry, a silly me, a toy Ida were here. Yep, for a while. Yep, yep, right.
Ian Fletcher 28:24
Well, the thing is that there’s a minimum efficient scale for a modern car plant, which means you need a minimum sales base if you’re going to be able to produce cars at the level of productivity comparable to the global standard, which is what you need to have pricing competitive with the rest of the world, and Australia is probably too small to support an auto industry on its own. So to go from having an autarkic auto industry to saying, okay, that’s not the right industry for us to be in, we’re going to let that go. Okay, that could have been a winner for you. But what I would point out is that Australia, throughout its modern history, is written on a succession of commodity booms, and your Australian listeners will know what the commodities involved were, as well as anyone right now, iron ore, coal, aluminum used to be, what did they say? Australia rides on a sheep’s back? Yeah, saying back in the day. Well, the problem with living off of commodity booms, a couple of problems. One is commodity booms come, they also go, I mean, coal, for example, given climate change concerns, eventually, either mankind is going to stop burning coal or it’s going to be so hot that nobody has to burn the stuff to stay warm. Okay, and I don’t know what’s going to happen with iron ore. I mean. Eventually China will finish building out its urban infrastructure and so forth. So commodity booms are not the best thing to stake your national prosperity on, from a global perspective, from an economic perspective, the other problem is, if you’re lucky to have commodities good for you if you don’t, well, you can’t create them the way you can create an auto industry. And what you basically got in Australia selling off non renewable commodities is you think you’re producing wealth. What you really have is an existing stock of wealth that was deposited under your country’s landscape by God, and you’re kind of extracting that and gradually selling it off bit by bit. It could work for as long as it works. Mean, you can look at the Petroleum Exporting Countries, they have a commodity that is in such huge demand that you can you can live off it, but there are problems with having a resource centered economy. What the better thing for Australia to do, I think, is to be a bit more like what Canada used to be, though Canada has kind of gone in that direction as well Canada, before NAFTA took the view that, yes, we have a huge quantity of natural resources as a large land mass country with a small population, but we don’t just want to end up a resource colony for the British Empire in the United States, so We are going to make the effort to develop manufacturing here. And for those of you who know Canada, Southern Ontario, which you can find on a map, used to be a very highly industrialized place, and still is, to some extent, and Canada was well integrated into the American automakers and and so forth. And the reason for that is it enables you to penetrate these high value industries with the high value added per man hour, among other things. If your best industries are going to be mining coal and iron ore, well, they don’t do that in suburban Sydney, they don’t do that in Brisbane or Melbourne. You can have manufacturing jobs in these other places. And I think the correct thing to do, if you face the fact that Australia is not big enough to have its own auto industry, say, is you specialize. That’s what a lot of successful countries have done. If you look at small countries like Singapore, they don’t have their own car industry either, but they specialize in, for example, electronics for automobiles. So you could be the people who make the computer chips that go into automobiles, the electrical harnesses for automobiles, and you ship them around the world to be assembled into cars or some other specialty, but that’s the way a country like Australia would get a desirably significant share of the really high value added industries.
Gene Tunny 33:20
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Gene Tunny 33:54
now back to the show. I think the point you make about the extraction of resources and well, yep, you’re depleting your wealth at the same time as you’re you’re selling them. That’s that’s a fair point. So the issue for the community is, how do we make sure that the community gets the right compensation for that? And so there’s a we’ve had a long standing debate about whether we’re doing that the right way royalties versus a resource rent tax. And then we look to you, look to Norway, and you see they’ve done something, you know, that looks pretty extraordinary in terms of what they’ve managed to do with with North Sea oil, and the wealth that they’ve managed to accumulate. So yeah, that they’ve really set a high standard there. So I think, yeah, that’s a I think so those points, I think they were, they were good to eject in the conversation. You know, I’d like to ask, what, what do you see as the tools of industrial policy that have the most merit, or the or, what are some case studies around the world that we should look to? I what I like about. Your book is, you’ve got some studies of different countries. You’ve got you look into the detail, the institutional detail, yep, the you know what’s happened? I like you talk about Taiwan. Well, I like the discussion of Taiwan and how that sort of, what are the agencies there that help foster some of some innovative businesses there? Can you tell us about what do you see as some of the successes? Yeah, we
Ian Fletcher 35:23
have a whole bunch of case studies in the book. We have success cases of Japan, Korea, China, Germany. We have France as a kind of half success case. Then we have failure cases of the UK, India and Argentina, partly to prove that we’re intellectually honest about the limitations of industrial policy, partly to show that when it does go wrong, it does not go wrong because the very idea is doomed. It does not go wrong because governments are too stupid or corrupt to do it right. It goes wrong because nations make what are upon examination fairly obviously elementary errors. Now getting back to your your actual question in terms of the policies that have the biggest impact, and this is going to vary from country to country, but for a country like the United States, you absolutely have to get your trade in balance, which means that your imports and your exports are approximately equal. Right now, the United States runs a trade deficit in goods that is physical stuff of over a trillion dollars a year, and only about a quarter of that is offset by services exports. So we have this gigantic trade deficit. So you want to have strong exports, creating jobs, if you’re going to have massive imports destroying jobs. So you want to get your trade in balance, which means tariffs, but it also means managing the price of your currency, because international currency rates are a gigantic sleeper issue that nobody is really talking about, but it’s incredibly important. The single biggest reason the US is running giant trade deficits is the US dollar is and has been significantly overvalued. I don’t know the status of the Australian dollar, so
Gene Tunny 37:21
not at the moment. Yeah, go ahead. You
Ian Fletcher 37:24
want to get that under control with policies like taxes or limits on international capital flows, because it’s foreign investment money flowing in the United States, buying existing assets and purchasing debt from Americans that pushes the dollar up too high. So when you get your trade in balance, I think the other thing you have to worry about is you need to have a good technology pipeline. That is to say, companies invent products, and sometimes companies invent technologies. But the most important, most fundamental technologies have a long history of coming from government, not just the internet, but jet passenger planes, for example, it all derives from military technology that was developed for reasons of the Cold War. Pharmaceuticals are almost entirely based on governmental research and then commercialized all sorts of humble things from a laser pointers, lactose free milk, I mean, all sorts of stuff derives from governmental technology research. So you need to push that hard. Or if you’re a small country, you need to figure out how to commercialize it early when it comes out of places like the US, Europe and China, which are doing it as large countries. And then you need a pipeline leading that to commercialize products. Because one thing that’s happened over and over in the United States is that we invent something, and then 20 years later, it turns out that all the jobs producing that something, all the corporations making profit producing that something, are in another country, for example, the flat panel displays that you’re probably watching this podcast on, that’s based on what’s ultimately American technology, but almost all of those displays Are Made in China, Japan, Korea, and part of why that happened is because the predecessor technology, the liquid crystal display, which you probably remember from digital watches, and you still see them around, that was also an American developed technology that ended up being produced abroad in. Yeah, and the reason for that is that these other countries have a much better pipeline between invention and production than the US does. There’s an assumption in the US, and as far as I know Australia too, that pure science just naturally turns into new products. And that’s not true. So there’s all sorts of institutions that you need in between. For example, in the US, under Barack Obama, they established a thing called a National Network for Manufacturing Innovation has since been renamed manufacturing USA, and this is a very small attempt at the US to solve this problem, because it’s a network of research and development institutions around the country, specialized according to different industries, where companies can go to work with government and also universities to develop new technologies. That it’s partly funded by the companies themselves to keep these institutions focused on things that are genuinely useful, but it’s also partly funded by the government in recognition of the fact that a lot of these ideas, when they are discovered, no one company is going to be able to keep that to itself. So why should they want to pay for something that everyone can use. This is an example of what you can do in the United States. And we do do these things. It’s just what we have is It’s a tense the size of the network the Germans have for an economy less than a quarter our size. I mentioned Germany before. They are European country that has, or has had, I mean, recently they did really stupid things, like becoming dependent on Russian natural gas and getting rid of their nuclear power stations. But Germany, and by extension, Germanic Europe, that is the countries that also follow the German example, which includes Austria, Switzerland, Poland and Scandinavia, they’ve had good industrial policies. The UK, for example, in Europe, has very much not had good policies.
Gene Tunny 42:12
Yeah, yeah. Exactly, exactly, yeah, okay, just on the UK. What? What went wrong in the 60s and 70s, with what the the UK was doing. I mean, we had some spectacular failures, like Concord, ultimately, which didn’t end up being commercial. What? What were the what was the problem in the UK? Well,
Ian Fletcher 42:31
I would actually trace the decay a little bit earlier than that. If you look at the Second World War when the American economy expanded 70% because the US was able to build plants at scale before entering the war, the British were fighting from the start, so their economy only expanded 17% and yet, because of wartime propaganda, people believed that they’d had a production miracle. They thought the British economy had done well during World War Two as a result, unlike in France, where, after the war was over, the country went through a very severe bout of frequently very honest self criticism, and they said, we just got defeated by Germany. Our economy wasn’t up to the military industrial complex we needed our wages weren’t high enough to keep the communists at bay. We’ve got to figure out what was wrong with our pre World War Two economy in this country and change it. And they did. The British thought after World War Two that their economy was fine, and the big thing they were worried about was, how do you transition to democratic socialism, which seemed like a nice idea to share the wealth of the workers without having some crazy communist revolution with storm troopers in concentration camps, etc, etc. So in the 1950s Great Britain had the opportunity to change fundamental things about its economy, but it didn’t. They thought they’d been doing well. And in fact, as late as 1950 with the rest of the world in ruins, it looked like Britain was doing well. I mean, exports had more than doubled since the end of the war. Britain, in 1950 was the world’s largest exporter of automobiles. They were pioneering new technologies like jet aircraft. I mean, they built jet passenger planes before, before the Americans, they had the world’s first nuclear power station. They thought they were doing well, but that meant that they never criticized their traditional ways of doing things. And in Britain, the traditional way of doing economics was very liberal in the old fashioned, 19th century sense of the government really doesn’t get involved. The government assumes that the private sector. Here can do everything. The government doesn’t see the need for a national economic strategy, so they just coasted on what they thought was a successful economy. And at the same time nations all around the world, because you got to remember the incredible shock of Japan being defeated, that caused them to think very hard about how to rebuild their own country from scratch, let alone Germany, which was, you know, utterly wiped out and politically discredited. So the Brits just kind of sat on their laurels and you asked specifically about Concorde? Well, Concorde was the result of building an aircraft based on simply the mindless extrapolation of one performance parameter, namely, speed. I actually used to work for an airline, so I can tell you that airlines are in the business to make money, which means that aircraft doesn’t just have to be fast, it has to be able to carry a large number of people and not be a horrendous gas guzzling so the Concord had a very narrow fuselage because it was supersonic, so It had to so it had low passenger capacity, and because it flew at twice the speed of sound, it had extremely fuel hungry engines, so it had terrible economics. It was only kept in service with British Airways and Air France for prestige reasons, and you could have thought that through at the beginning and realized this was a mistake. Interestingly enough, the United States actually made that call correctly. In the late 1960s the federal government was subsidizing Boeing to build a plane called the Boeing 2707 which was going to be a supersonic plane, kind of like the Concord. You can look up pictures of it on the internet. And at the outset of that project, somebody talked to the airlines, and they worked out what the parameters of range, payload, cost, passenger capacity, so on and so forth you would have to have for the thing to be commercially successful. I mean, they figured this out, and the project progressed for a few years, and got a certain amount of government money, but eventually Boeing wasn’t willing to go any further without a huge increase in the subsidy, and that’s when it was put to a vote. Was when Richard Nixon was president, and it was voted down in the Senate. They killed it. And the interesting thing is that none of the designs that Boeing had proposed for the plane that they said we could build this, we can build this. We can build this. None of those designs even promised in theory to meet the required parameters that have been set at the outset. So that’s one of the ways you make mistakes. That’s one of the ways you get things right in industrial policy, is you have to face the need for commercial viability, and you have to be disciplined about your objectives, rather than being distracted by the politics or distracted, which is equally as big a thing, by the difficulty in admitting you were wrong and you just spent a billion pounds doing something that’s better off abandoned before you spent 5 billion pounds on it.
Gene Tunny 48:35
Yeah, yeah. Okay. Can I ask before we go, what’s the role of tariffs in a modern industrial policy? In your view, Ian, are they a legitimate tool? Are they beneficial? In your view? Could you tell us, please,
Ian Fletcher 48:50
it depends what you’re doing, because tariffs can do a lot of different things. The tariffs that Trump imposed on China were about driving China to the bargaining table so that they would, for example, let our exports into the country. And if China is not going to do that, you want to reduce imports from China, which those tariffs have indeed done. The other thing that tariffs do, and the great virtue of tariffs is their industry specific, is, if you want to have a certain industry in your country, it’s got to sell product. And there’s only two ways to sell product. You either sell it domestically or you export it. And in order to export it, you need to have access to foreign markets, which is what we didn’t have in China, and that’s what I just mentioned. But you also don’t want to see your own domestic market taken away from your own producers by foreign imports, and that’s where tariffs come in. So in terms of whether President Biden would. Is right to impose a prohibitive tariff on imports of Chinese electric cars, which he did last year. Yeah, he’s absolutely right. Because if you don’t do that, there will not be an electric vehicle industry in the United States. There just
Gene Tunny 50:16
won’t right, yes, yes, yes. So the argument is that they were they’re subsidizing their their cars. Is that? That’s the argument? Is it what charge they’re
Ian Fletcher 50:27
subsidizing? But it doesn’t even really matter why their cars are cheaper than ours, whether it’s because of subsidies, whether it’s because they got there first, because of all the policies they used to push the country into electric vehicle adoption that were much more aggressive than the US and Europe, or the cheaper because they’re employing exploited labor, or whatever. Those are legitimate issues. But the bottom line is, if you have a massive flood of imports, you’re not going to be able to have this industry in the United States, and these are the kind of industries that you want. There are a limited number of industries that have the potentially high value added per man hour that you should be going after.
Gene Tunny 51:15
Yep. I mean, it’s look. I think these issues are certainly worth discussing. I mean, I just look at Chinese EVs. And I mean, they’re the popular EVs here at the moment the BYD, build your dreams. They’ve got a store down on Wickham Street and fortitude valley there. They’re incredibly popular. I think, you know people, people like the, the Chinese EVs, arguably, that, you know, probably because of the price that they’re cheaper, in a way, than a Tesla, I think, aren’t they? So, oh,
Ian Fletcher 51:45
sure, sure, yeah, I don’t take any position on what Australia should do. This is industrial policy United States, not for Australia. As I said, my way of thinking. Countries are different, industries are different, circumstances are different. I suppose I could look at Australia for a year and figure out what I think you should do, but as things stand, I have no opinion. Okay, that’s
Gene Tunny 52:13
fair enough. I mean, I think it’s, I think that’s a good point. I mean, every, every country is is different. So just before we go, I just want to go back to Taiwan, because I thought that was, that was something I found fascinating, because that’s a, that’s an success story. So they, I mean, I see industry policy as a bit of a or industrial policy as a bit of a gamble, right? I mean, sometimes you could have a success. I mean, economists tend to think most of the time, or there’s a, there’s a bias towards picking losers, but sometimes you do get some winners. And Taiwan is an example where they had an agency that helped out the major manufacturer of integrated circuits in the world. Is that correct? Yeah, you’re
Ian Fletcher 52:55
talking about it. Ri Yes, sure. They had, like all the East Asian countries have had very heavy handed, government centered policies that weren’t afraid to pick winners very explicitly, down to the corporate level, and do things that are relatively unlikely in any Western country. But you’ve also had strong industrial policies, as I mentioned, in Germanic Europe. So there are other ways of doing it. When I advocate industrial policy and I tell people what Japan did or Korea did, I’m not saying we should be like that. We don’t have to, you know, eat our food with sticks and eat cold fish for dinner. It’s about learning from what they did, which is more than just imitation. It’s about looking at the case study to see what underlying views of real economics. It reveals because the received laissez faire story that we were pretty much all brought up on is not true, and it’s becoming dangerously untrue, right? Okay.
Gene Tunny 54:01
Thanks for yeah, thanks for the conversation. Ian, I think this book, yeah, there’s a lot to think about. How many pages this is 700 or something, 700 and over 800 actually, yeah,
Ian Fletcher 54:13
it’s the reason it’s got reason it’s so big is because one, as I said, our way of thinking is very fact intensive. We view our opponents as just dishing off glib, ideological generalizations without bothering to get out of the classroom. The other thing is because what we’re saying is so controversial that every point we make is fastidiously footnoted, so that if economists want to argue with us about this stuff, we are prepared. And the third reason it’s so big is we don’t expect everyone to read all of it. It’s got a variety of content. So look at the table of contents and then pick out the bits that interest you. If you’re more interested in cars or you’re more interested. Interested in American history, or if you’re more interested in why economic theory is wrong, or so on and so forth, you pick out the bits. Maybe you’re familiar with the aircraft industry, I don’t know.
Gene Tunny 55:09
Yeah, yeah, exactly. I mean, I I agree with you. I mean, I think it’s you are you have been very fastidious. There are a lot of good references in there. And I mean, I’ve learned quite a bit from reading that you mentioned Danny Roderick. There was an interesting study that Danny Roderick did about how every his estimate was that every dollar gain from free trade for the US of GDP actually was associated with a $5 of redistribution or something of that magnitude. Yeah. What he’s talking
Ian Fletcher 55:43
about is that even if you assume that the conventional Ricardian theories of efficiency are true, the way that free trade makes your economy more efficient, it’s kind of like rearranging the furniture in your room to get more space, you have to move a lot of heavy stuff around to squeeze out a couple more square feet. So he’s absolutely right that well, he estimated that for every $1 in efficiency gain, free trade caused $5 of redistribution inside the economy that is changes in who gets wages, who gets profit, and so forth. I think that’s broadly true, though. I don’t have a quantification of my own to go up against his $5 figure. The highlight
Gene Tunny 56:35
of that in the book is I thought, Oh, that’s interesting. I’m going to look, look into that. Because, I mean, he’s a very if you want
Ian Fletcher 56:40
to, if you want to be in touch with him and ask him about that. I mean,
Gene Tunny 56:44
I’d be keen to, because he’s always been seen as someone who’s been very like as an economist. He’s someone who other economists look up to and think, okay, he’s saying some really interesting, clever things about industrial policy that really make us have to think about it. So I think, yeah, certainly be good to connect with him at some stage. But Ian Fletcher, I really appreciate the conversation. And again, learning to Yeah, talking about your new book, industrial policy for the United States. So I’ll put a link in the show notes. And yeah, certainly anyone interested in industrial policy, trade policy, with their innovation policy, they’re all related in a way I think would would get a lot out of it. So Ian, thanks so much for your time, and look forward to speaking with you in the future. Yes,
Ian Fletcher 57:30
thank you very much for having me on your show. Gene,
Gene Tunny 57:35
right? Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions. Please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
Obsidian 58:22
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Credits
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