What is meant by "industrial policy," and what are its strengths and weaknesses? Macro 3 ECON by McEachern Chap 8

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The term “industrial policy” is used to refer to a government’s policies that are meant to promote certain specific industries.  If a government engages in industrial policy, it takes a variety of actions that are meant to help certain industries grow.  The United States is generally somewhat reluctant to engage in industrial policy.  By contrast, many European countries, as well as other countries like Japan, believe strongly in creating and pursuing industrial policies.

It is important to distinguish between industrial policy and broader macroeconomic policies.  For example, if a country decides to lower taxes on businesses as a way to promote economic growth, it is not engaging in industrial policy.  Instead, industrial policy is focused on specific industries.  If a country gives tax breaks to a particular industry, or if it eases regulations on only one industry, it is engaging in industrial policy.   

In McEachern’s text, the main benefit cited is the benefit of clustering.  McEachern says that some industries benefit from having large clusters of similar firms in a given area.  He mentions examples such as software makers in Silicon Valley.  If industries benefit from clustering, it can make sense for governments to try to promote the creation of such clusters.  While McEachern does not mention this, many people would argue that industrial policy helps to make a country more competitive.  They would say that government help makes certain industries stronger and allows them to create jobs and economic growth in their countries.

However, McEachern warns of two weaknesses of industrial policy.  First, he argues that the private sector does a better job of allocating resources than the government does.  He mentions how Intel was able to develop a certain kind of computer hardware on its own even though other firms were getting government money to develop that hardware.  He also mentions the Solyndra affair, in which government money was pumped into a solar panel firm which then went bankrupt.  He believes (and so do many economists) that this shows that the government should not engage in industrial policy.  Second, he argues that industrial policy turns into corporate welfare.  The government starts to give money to industries that have political clout, not those that really need it or to those who have the best ideas.

Thus, some people believe that industrial policy is a good way to help a country’s industries compete.  However, economists tend to believe that it is inefficient and that it tends not to achieve its goals.