Rosalie Loewen, Research Economist, Potomac Institute for Policy Studies
Robert Hummel, Chief Scientist, Potomac Institute for Policy Studies
Advances in science and technology present key moments for economic growth. Technological breakthroughs represent opportunities to make targeted public investments and introduce policies that accelerate time to market and incentivize market uptake, maximizing benefits for the domestic economy. The nation should capitalize on these opportunities through strategic investments and policies.
This is “industrial policy.” Industrial policy can be defined as “targeted government interventions aimed at supporting specific firms, industries, or other narrowly defined economic activities to achieve national objectives.”
This paper identifies three technology areas with potential for significant returns if supported by appropriate US industrial policy. These areas were chosen based on criteria for when public interventions are more likely to have beneficial outcomes in a market economy for new technologies.
In a perfect economic world, industrial policy might never be required because it leads to inefficiencies in production in both theory and practice. However, in our real-world context—characterized by inefficient and distorted markets, unsatisfactory distributions of benefits, geopolitical tensions, and competition between national adversaries—the question is not whether to engage in industrial policy, but rather how to do it wisely.
The challenges associated with using industrial policy include: Determining when to use industrial policy (i.e., when the benefits are likely to outweigh costs), and understanding the distribution of those costs and benefits; and understanding which policies and interventions are likely to have better outcomes compared to other possible policies and interventions.
Technology innovation creates an environment in which industrial policy becomes more compelling. Industrial policy can accelerate the adoption of innovative products to increase total benefits. For example, public investment in a faster vaccine development cycle, despite its higher costs, can save more lives. Technological advances can provide high first-to-market payoffs and can create winner-take-all markets for which nations can compete. National security applications might also require government intervention to ensure control over new technology. Whether for national security or economic benefit, industrial policy is particularly tempting in an adversarial global environment when nations are willing to pay a price to ensure relative advantage over rivals.