It is ba-ack!

Is the industrial policy debate back in the U.S.?  A WSJ interview with Barack Obama would suggest so:

The heart of Sen. Obama's spending program is his plan to spend $15 billion a year for 10 years on energy technology. It would be funded by revenue collected from a separate Obama proposal to cap greenhouse emissions through a system of trading pollution permits. Sen. Obama would auction those permits to producers of carbon dioxide, such as electric utilities, and figures the sales would yield about $100 billion a year. Most of that would go to consumers as rebates on utility bills, he said.

He also would fund an "infrastructure reinvestment bank" that would finance $60 billion in high-speed railways, improved energy grids and other projects over a decade. He would double spending on basic research, subsidize investment in high-speed Internet hook-ups, and offer $4,000 a year in tuition credits for students who later perform public services.

To "capture some of the nation's economic growth," he said in the interview, "and reinvest it in things we know have to be done like science, technology, research and fixing our energy policy, then that is actually going to spur productivity."

...

Sen. Obama made the case in the interview for large-scale government intervention in the energy market, saying that although venture funds are investing heavily in energy technology, there was a gap in funding that should be filled by Washington. He called it supporting the "middle stage" between innovation and commercialization. "You have this point in time when things haven't quite taken off yet and still entail huge risks," he said.

...

Sen. Obama likened his proposal to a venture-capital fund, with the government seeking private investors to contribute. He lauded a Central Intelligence Agency project which helps fund technologies the CIA finds important, but which lack long-term capital.

And the predictable Republican response:

Douglas Holtz-Eakin, chief economic aide to Republican candidate Sen. John McCain, dismissed the Obama strategy as "classic industrial policy which shows a lack of faith in private markets."

Although it is difficult to be sure, Obama's comments in the interview suggest that he has thought these issues through more carefully than we are accustomed to with politicians and presidential aspirants.  I sense the outlines of a coherent and economically sensible strategy here. And it is too bad that Doug Holtz-Eakin is playing the role of party hack.

Comments

[frank]

His is a sensible proposal - trouble is what happens when millions of revenue from cap and trade go through Congress's giant sausage grinder.

We'll see then what congressmen make of industrial policy - solar power in Alaska anyone?

[Luis Enrique]

I'm puzzled why schemes like this aren't more mainstream. If anything suffers from public good, externality, co-ordination etc. problems, then surely large scale clean energy and and transport infrastructure is it. What am I missing?

I'm a Brit, and I'd like to see the UK government doing something similar. I don't know, building large solar banks in Morocco with cables under the Med to plug into the EU grid.

[Mr Punch]

It's Obama's description of the proposal that makes it sound like "classic industrial policy." Infrastructure, education, and basic research don't really fit that definition.

[DC]

"a lack of faith in private markets"

Says it all really!

[Matt]

Obama's industrial policy is not thought through very well at all. He knows from his four years in the senate that the legislature will impose substantial costs and minimize all the oportunities for real conservation.

One poster who asks, what am I missing?

What you are missing is that those who try to conserve energy still suffer from global warming regardless of how much energy they save. That is because the energy saved by conservation goes directly to the federal legislature.

The solution that will evolve is one in which conservation and efficient energy use will match up outside of the legislature.

If the legislature is involved, there will be no solution for the private sector. And I doubt that the government, which burns, indirectly, 38% of the gasoline has any motivation to make its own part more efficient, much less the remaining 62% of the economy.

All of the proposals I have seen from the legislature involve making fossil fuel use more inefficient.

[Peter]

This is discouraging news: for all his good intentions, Obama is heading off in the wrong direction. The right strategy would be to recycle all or nearly all of the cap revenues and look for R&D financing from the general budget.

There are many reasons for this.

1. Households will be hammered by the price increases stemming from the incidence of the cap. From a macro point of view, unless the government can spend all this income at a pace and with a continuity comparable to private consumer demand, we have a Keynesian problem.

2. The implicit tax on households will be highly regressive. Recycling allows this to be offset; the simplest solution is an equal per capita rebate.

3. We are in this for the long haul -- generations in fact -- and policy sustainability requires majority support through times thick and thin. Recycling is essential for this.

4. Financing a massive R&D program through dedicated funds from a lucrative permit auction obscures the true opportunity cost of those investments. Given the political economy of Washington, it is a foregone conclusion that there will be a lot of waste.

5. Not only are there sufficient opportunities to find the necessary financing in other parts of the budget, we have an obligation to try to shift that spending. Vast sums are now spent on programs (subsidies for un-green technologies and producers, foreign adventures that make us less secure) that ought to be redirected, even if there weren't such a positive alternative like investment in post-carbon energy options.

[ivan janssens]

Obama lauds the CIA. Ehm, has the CIA some special expertise concerning technologies that lack long-term capital then? Even concerning it's core business the legacy of the CIA is one of ashes. (http://www.amazon.com/Legacy-Ashes-History-Tim-Weiner/dp/038551445X). The fact that Obama points to the CIA is reason enough to be very sceptical. And very afraid.

[Student]

Here are intelligent comments on the less flattering part of the article for Obama:

http://cafehayek.typepad.com/hayek/2008/06/true-progressiv.html

[FA]

In essence what Obama is proposing, tax the electric utilities who will then raise rates to cover the new tax, and use the revenue from the new tax to give back to the customers.

How can anybody call this sensible, it is sheer stupidity

[James]

Peter is absolutely right unless all of the revenue is recycled there is no way this proposal can be introduced. Tax incidence will mean that low income people will suffer the most and this at a time of rising inequality will be impossible to justify unless revenues are re-inbursed on a per-capita basis, this will mean important R&D and national infrastucture investment have to come from the general budget (although the budget is in a dire situation). Overall for this area of industrial policy to succeed will require consensus. Failure to make tough decision by politicians (the private market can't handle this problem on its own, this is self-evident) will have grim consequences for the future welbeing of not just America but the world as this is a global problem.

[caveat bettor]

What role was Austan Goolsbee playing with his NAFTA comments?

[William Perera]

I agree with "student" (3 posts above). The costs will just be pushed onto the consumer and then partially rebounded back again. Despite the apparent roundabout nature of the payment system, it would lower emissions. I think the real question is whether market forces are strong enough to motivate private industry to innovate on their own, and at the moment they seem reluctant to do so. I guess it also depends on how subjectively important the environment is to the taxpayers.

[Melvin]

I know you don't usually take requests, but I'd love to read your reaction to Tyler's piece on water privatization.

[don bumpass]

federal government efforts to support "energy independence" isn't new; see jimmy carter in the late 1970s with an industrial policy directed toward a synfuels program.

how did that go?

www.taxpayer.net/resources.php?category=&type=Project&proj_id=328&action=Wastebasket

jimmy carter = b. obama ??

1970s = 2000s

[Nathan Smith]

"If anything suffers from public good, externality, co-ordination etc. problems, then surely large scale clean energy and and transport infrastructure is it."

A public good is *non-excludable.* Seats on a train are excludable. High-speed internet is excludable, and no clear externalities. Anyway, a typical optimal response to an externality is to tax something and leave it to the market, not to adopt a full-fledged industrial policy.

The "party hack" line is unfair. Holtz-Eakin is being a *free-market* hack, which is a much more respectable role for an economist to play. In fact the free-market hacks have often been right. About communism, for example. Rent control in big cities. Price controls on gasoline.

And probably about this too.

[gordon]

US arguments about industrial policy seem to omit any references to the existing structure of tax breaks, subsidies and earmarks which already affect many industries - not to mention the huge ongoing military procurement spending. And at the State level there are a raft of subsidies, planning exemptions etc. designed to attract industry to particular States. Taken together, these measures amount to a substantial de facto industrial policy. Why are they never identified as such?

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