In the past decade, there has been a significant increase in the number of national industrial policies worldwide. This is driven by various challenges such as the pandemic, the cost of living crisis, and the need for climate change mitigation, which have prompted governments to take a more active role in shaping their domestic economies. Additionally, geopolitical tensions have led to a push for strategic autonomy in sensitive sectors like defense. This shift towards government intervention is in contrast to the previous decades of globalization and free trade.
According to a survey by the World Economic Forum, most experts believe that this change in economic policy will become the new norm in the years to come. However, more than two-thirds of these experts also express concerns that this approach will hamper competition and lead to an increase in sovereign debt. Very few believe that it will result in greater global economic activity or resilience.
Adam Posen, president of the Peterson Institute for International Economics, has strongly criticized this rise of what he calls “zero-sum economics.” In an op-ed, he outlined four fallacies of agendas such as the US’s Inflation Reduction Act (IRA). These fallacies are the belief that self-dealing is smart, self-sufficiency is attainable, more subsidies are better, and local production is the most important factor.
In our conversation, we discussed the resurgence of government interventionism, the flaws of programs like the IRA, and what a more effective approach to industrial strategy and climate change mitigation could look like. Posen also shared his thoughts on how the UK should shape its long-term economic agenda.
When asked about the reasons behind the mainstream acceptance of a more interventionist role for governments, Posen highlighted the delegitimization of excessive reliance on market outcomes, which was evident after the 2008 financial crisis. He also mentioned the rejection of austerity measures and the recognition of the need for fiscal spending due to secular stagnation and low interest rates. However, he attributes this shift primarily to political self-delusion, with many falsely claiming that the downsides of activist industrial policy can be avoided and blaming foreign trade as the main problem.
Posen acknowledged that recent shocks like the pandemic and the cost of living crisis, which required state support, have contributed to the narrative favoring government intervention. He emphasized the urgent need for a joint public-private effort in addressing the climate transition.
Regarding the current wave of industrial policy, Posen pointed out several issues. First, he criticized the view of industrial competition as zero-sum, as it rarely works and invites retaliation. Second, he expressed concerns about the combination of industrial policy efforts with anti-trade measures, such as tariffs and barriers to investment. He warned that these measures could lead to a fragmented and slow adoption of green technologies, similar to what happened with vaccines. Lastly, he highlighted the open-ended nature of subsidies in programs like the IRA, which can be costly and distorting.
When discussing the potential consequences of this new approach to industrial policy, Posen emphasized the negative impact on productivity growth. He predicted reduced diversification, competition, and innovation, along with restrictions on migration, foreign investment, and the flow of information and technology. Ultimately, he painted a bleak picture of average global growth if the trend of decoupling continues.
In conclusion, the rise of national industrial policies reflects a paradigm shift in economic policy, driven by various challenges and geopolitical tensions. However, there are concerns about the impact on competition, sovereign debt, and global economic activity. Posen’s analysis highlights the fallacies of these agendas and the need for a more effective and sustainable approach to industrial strategy and climate change mitigation.
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