Brookings and AEI will jointly release a proposal today that advocates as much as $25 billion spending by the U.S. federal government on clean energies. The motivation, as described in the NYT story, is that cap-and-trade provides inadequate incentives for firms to invest in new technologies, and that more substantial carrots are needed.
But wouldn’t this be industrial policy. Yes, of course, and so what? As David Leonhardt writes
history shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced.
But of course industrial policy can fail too, and much depends in practice on the institutional arrangements in place. See this debate between Josh Lerner and me.
If you want to learn more about the actual practice of industrial policy in the U.S., there is a great new book out edited by Fred Block and Matthew Keller. It describes in great detail the institutional designs behind both successful and unsuccessful programs.
In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced. After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong. But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.
But international trade and finance have both revived, and now we hear an even more ambitious version of the scenario. Developing countries, it is said, are headed for strong growth, regardless of the doom and gloom that has returned to Europe and the United States. More strikingly, many now expect the developing world to become the growth engine of the global economy. Otaviano Canuto, a World Bank vice president, and his collaborators have just produced a long report that makes the case for this optimistic prognosis.