Adopt clear evaluation criteria for industrial policies
Joe Biden signed the Inflation Reduction Act into law. The new legislation goes beyond the goal of price control stated in its name. The Inflation Reduction Act works in tandem with other new legislative proposals such as the American Rescue Plan and the CHIPS and Science Act to pivot the US towards active government intervention in industry, through direct investments, tax credits, subsidies and some import tariffs.
A senior economist in the Biden administration has written a lucid policy brief to mark the first anniversary of the Inflation Reduction Act. There are four salient points in her note. First, US industrial policy is very tightly focused on three areas: infrastructure, semiconductors and clean energy.
Second, the government will intervene with a combination of direct investments as well as incentives for companies. Third, the ultimate test for the success of these public investments will be whether private investments flow into the three areas that the government is focused on. Fourth, the report card for the new industrial policy should not be based on just shreds of descriptive data about how private investment is picking up, but on more rigorous causal analysis as evidence piles up over the years.
Washington’s industrial policy in the US is barely a year old. In contrast, Beijing’s ‘Make in China 2025’ programme is nearly a decade old. It was launched in 2015 as part of a larger strategic goal to guide the Chinese economy up the value chain, from being a developing country that was a cheap provider of industrial capacity to an advanced economy driven by innovation.
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