The greatest trick industrial strategy ever pulled was to convince the world that industrial strategy did not exist.
Take Chrystia Freeland’s Fall Economic Statementwith its call for a “robust industrial policy,” backed by a raft of new investment tax credits, a new government investment fund called the Canada Growth Fund, a Canadian Innovation and Investment Agency, and so on.
The idea – stop me if you’ve heard this – is for the government to use public funds to make investments in particular technologies, firms and industries. What kind of investments? Why, “smart investments,” of course. What kind of industries? Glad you asked. The “industries of tomorrow.” You know, the “globally competitive” sectors. The ones that can’t survive without subsidies.
It was all drearily like every budget or economic statement from every government ever. Every government thinks it can steer the economy to greater heights – or wants you to believe it can, at any rate – via the judicious application of public funds, which is why year after year the government shovels tens of billions of dollars out the door to tens of thousands of businesses (they’re all listed in the Public Accountsin hundreds of pages of six-point type).
It’s why the Income Tax Act is festooned with all manner of tax credits and tax deductions and accelerated depreciation allowances for every industry under the sun. It’s why the government has literally dozens of programs already on the books to stimulate innovation and agencies to stimulate investment – the federal government, I mean. The provinces all have subsidies and tax breaks and innovation and investment agencies of their own, none of which has made a dime’s worth of difference to our famously sluggish rate of productivity growth.
Yet every time some new proposal is made to repeat past failures, it is promoted – and received – as if it were the dawning of a new age, as if the laws of economics have been, if not repealed, at least rewritten. While “the notion of an industrial strategy has been kicking around for a while in Liberal circles,” the Toronto Star’s Heather Scoffield noted“the concept used to be taboo, thought of as clumsy government getting in the way of efficiency and free markets.”
When? When was it taboo? When did governments, Liberal, Conservative or NDP, ever stop talking, even for one minute, about their multiple grand strategies to shape and direct the economy? What, for example, are the seven regional development agencies and five “Global Innovation Clusters,” tea Business Development Bank of Canada and the Canada Infrastructure Bank and Export Development Canada and on and on – what are they forif not precisely that?
Or take the Public Policy Forum’s latest addition to the canon, entitled “The Urgent Case for a Supply Rebuild,” with its bold proclamation that “government is back.” When, pray, was it ever away? Nevertheless, its authors burble happily about the “swing back from the laissez-faire orientation of recent decades to a co-dependency between the public and private sectors in joint pursuit of national interests.”
Those are defined as nothing less than abolishing scarcity: “moving society interests from a limits-of-growth, scarcity model to the fulfillment of the long-standing liberal vision of abundance, inclusion and personal expression.” This expansive new philosophy, which they refer to as “productivism” but I prefer to call “supplyism,” is not about “eking out a bit more economic growth in a world of secular stagnation; it is about aiming to break out of scarcity and stagnation through a renewed commitment to building and production across the economy.”
Whew! There is a kernel of truth somewhere in this. It is the same kernel discovered, or rather rediscovered – for there are no big new ideas in economics, no matter how many times it may be claimed – by the supply-siders in the 1970s: that repeated applications of stimulus to aggregate demand were of no benefit if the supply side of the economy could not respond with higher output, and that indeed the reliance on demand stimulus to paper over the effects of policies that inhibited supply had contributed to that decade’s malign combination of higher inflation and slower growth.
But if it is unexpected to boost demand for things the economy cannot supply, neither is there much to be gained by boosting the supply of things for which there is no demand. The authors’ manic enthusiasm for “building stuff” is infectious – “we need to increase the supply of everything from housing to hydrogen, from IP to ICUs, from quantum computing to the next mRNA, from long-term investments in critical minerals to longer -term investments in human capital” – but it is not actually sound economics.
The giveaway phrase, as always, is those two words: “we need.” Every time someone writes about the economy using those words, what they really mean to say is “I want.” It is the unconscious substitution of the author’s preferences for those of tens of millions of people, each with their own needs and wants, that signals a train of thought that is in danger of going off the rails.
What “we” need is not to replace the preferences of individual members of the public with those of state planners, but rather to bring those individual preferences into harmony with each other: to match buyers with sellers, demand with supply, in such a way that each must ration his use of scarce resources to take account of others’ claims. We might call the mechanism through which these buyers and sellers exchange with each other a “market,” and the instrument that signals to each the relative scarcity of things, “prices.”
What “we need,” in short, is not more demand or more supply, but as much demand and as much supply as are required to match with the other, in the places and quantities they are required. As far as supply is concerned, that does not mean adding more artificial incentives to build a lot of things for which there may or may not be any demand, but removing those artificial impediments that now prevent producers of goods and services from reaching willing consumers. What is required in housing, for example, is neither First-Time Home Buyers Incentives (demand) nor massive public housing programs (supply) so much as reforms to municipal zoning regulations that currently prevent enough new homes from being built. As is now widely acknowledged.
This involves, it is true, a lot more than just cutting tax rates, the traditional supply-sider’s answer to everything – though cutting tax rates is part of it! The “modern supply-side” movement is right to stress other measures to liberate supply, from increasing immigration to correcting for failures in the market for “human capital” (education) to funding basic research and development – the kind whose benefits, far from being restricted to any particular firm or sector (if they were they could pay for it themselves), are spread across the economy.
That kind of supplyism I could get behind.