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Public policy needs to make some hard choices about priorities and strategies.
September 15, 2021
With Responses From
Sep 15, 2021
6 Min read time
Public policy must make hard choices about priorities and strategies.
Mariana Mazzucato has been one of the leading critics of the premise that government should not “pick winners” using industrial policies. She has demolished this argument by reference both to theory and to history. The market fundamentalism of the so-called Washington Consensus, she has demonstrated, has produced disasters more often than gains. She has also shown in her previous work that the entire history of economic development is filled with governments intervening constructively—not just in Asian developmental states, but also in countries that are supposedly more libertarian, such as the United States.
The most urgent questions we face today aren’t at the level of general principles but at the level of concrete details.
Now Mazzucato and colleagues, wary of too much top-down planning, propose a kind of middle ground: not quite picking winners, but intervening to lead “market-shaping missions” using a wide range of policy tools. This strikes us as exactly right as a framework. Our only quibble is that the essay is at a fairly high level of generality. The most urgent questions we face today aren’t at the level of general principles but at the level of concrete details.
Indeed, the Biden administration has already shown an admirable willingness to jettison the conceits of the Washington Consensus. The next step is getting highly specific in terms of which sectors of the advanced economy to target, using what means, and for what ends. A June 2021 White House report produced by the departments of commerce, energy, defense, and health and human services identifies a strategy for creating resilient domestic supply chains in a few key industries: semiconductors and advanced packaging, large-capacity batteries, critical minerals and materials, and pharmaceuticals. The 250-page report is ostensibly concerned with supply chains, but reading between the lines, it is also unmistakably about picking winners—the industries that are central to our national security and competitiveness in key industries of the future.
Take semiconductors, addressed in one of the report’s excellent case studies. A shortage of semiconductors arose during the pandemic, and it is hobbling the auto industry worldwide. At least 169 U.S. industries—including consumer electronics, appliances, and the entire range of goods vital to the national defense—have semiconductors in their products. Yet the U.S. share of global semiconductor production has declined from 37 percent in 1990 to 12 percent today.
The White House report recommends at least a $50 billion investment to advance domestic manufacturing of state-of-the-art semiconductors. In June the Senate passed the U.S. Innovation and Competition Act, which will invest $200 billion in scientific and technological innovation, including $52 billion to rebuild manufacturing capacity in semiconductors. The competition will be stiff—TSMC, a Taiwanese semiconductor manufacturer that produces about 70 percent of the microcontroller units used in cars, is making a three-year $100 billion investment in advanced chip manufacturing to meet world demand.
Are these the sort of policies Mazzucato and colleagues have in mind? Or, if they are too “top-down,” what are the alternatives? Mazzucato has already won the argument on the general point that governments need to intervene. It would be worthwhile to have her insights on where and how.
One reason we need more concrete thinking is that the answers are far from obvious. Mazzucato and colleagues point to Germany’s Energiewende, a comprehensive strategy for a renewable energy transition, as a model, but they don’t address the complexities and contradictions that emerged in implementing this long-term policy with its broad environmental, economic, and social goals. Through Energiewende, Germany has made impressive progress on transitioning to renewables in a bottom-up way that allows small players to be part of the green economy. But Germany has not achieved its emissions reduction targets, particularly in the heating and transport sectors. Heating accounts for half of Germany’s energy consumption and it still relies mostly on natural gas, 94 percent of which is imported.
Mazzucato has already won the argument on the general point that governments need to intervene. It would be worthwhile to have her insights on where and how.
To promote renewable energy production, Germany uses the feed-in tariff. This policy requires utilities to purchase all the renewable energy that is produced at a relatively high price that goes down over time. The idea is to create a stable investment environment so that renewable producers can become price-competitive with fossil fuel sources. Further, the goal was to support “energy democracy” by creating a decentralized and more democratically organized power system.
The results have not been an unmitigated success. The feed-in tariff started in 2000, and in terms of production it worked well, increasing renewable energy output severalfold by 2015. As prices got lower, however, the tariff was gradually replaced with lowest-bid auctions in 2014 and completely ended in January 2021. (The idea was to let the market determine pricing once renewables became price-competitive.) The move to auctions benefited bigger players, compromising the viability of the smaller installations.
Electricity costs are high partly because Germany has so little solar resource, so it has to maintain fossil fuel–produced electricity for cloudy days. Since Energiewende started in 2000, average electricity cost per kilowatt-hour has doubled to 34 cents, compared to 13 cents in the United States. As more big players dominate and the “energy democracy” aspect lessens, public support for high costs is waning.
These costs might be more palatable if solar were creating jobs and innovation; after all, Energiewende is supposed to be both an energy strategy and a program for economic development. But Germany’s dominance in solar production has declined due to the same forces affecting U.S. producers—mostly the predatory trade and industrial practices of China. Employment in German solar panel manufacturing declined from more than 150,000 in 2011 to about 36,000 in 2018. Once a leader, Germany does not have a single company among the world’s top ten solar manufacturers. Like the United States, Germany is completely dependent on China for solar cells.
As we see it, both the United States and Germany need policies to target solar manufacturing and its entire supply chain. In a recent American Prospect article, one of us argued that we need to re-shore solar manufacturing on national security, environmental, economic, and ethical grounds. China currently dominates in manufacturing all components of solar modules—the polysilicon, wafers, cells, and the completed module. Indeed, China is achieving a long-term strategic vision for dominating essential industries by using a combination of subsidy and free land provision to attract U.S. and other companies while stipulating that they can’t sell their products in China, violating free trade principles. China started developing its own solar industry and dumped products on the world market at below-cost prices in violation of trade law. At the same time, China has imposed stiff tariffs on U.S. and South Korean polysilicon, which means the growing Chinese solar panel production sector uses domestic polysilicon. By 2011 prices began falling dramatically and many U.S. and German producers couldn’t compete. The result is Chinese domination in all aspects of solar production.
There are inevitable tradeoffs that need to be faced, industry by industry.
Both the German and the U.S. experiences teach us that the energy transition requires a strong domestic solar (and wind) manufacturing industry, which in turn requires changes in trade policy, coordinated procurement to build a domestic solar supply chain, and R&D for accelerating the development of more efficient panels. If this is “picking winners,” so be it. But there are inevitable tradeoffs that need to be faced, industry by industry.
Another key sector targeted in the Biden supply chain report is battery storage to support renewable energy and electric vehicles. Just as with solar, the United States is far behind on batteries. China and the European Union are competing for dominance in the global market with government-led industrial policies. The European Commission launched the European Battery Alliance in 2017, and China is taking the same approach it uses for solar to expand battery production.
Mazzucato and colleagues have offered many good ideas at the level of heterodox principles. Thankfully, and partly because of Mazzucato’s own pioneering work, industrial policy is no longer a forbidden term. But public policy needs to make some hard choices about priorities and strategies, and there is no substitute for getting down to cases.
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September 15, 2021
6 Min read time
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