Department of Bad Analogies

The government is really good at running the military-industrial complex, so there’s no reason not to enter into a similar arrangement with the auto industry, right? Here’s Steven Coll:

Another fallacy of the current debate, often a theme of op-ed essays from the right, but an argument not limited to conservatives, is the notion that the American system is, and should be, fundamentally biased against industrial policy—that is, the use of the commanding heights of the federal government to pick winners and losers in the economy, whether these are whole industries or companies within industries. In fact, we already have a massive industrial policy, funded by the federal budget—it’s referred to as defense contracting.

Why does the United States have one of the most robust aircraft-manufacturing industries in the world? The answer is not that pure free markets have, through the workings of a natural law, granted us such a bounty. Yes, Boeing has been disciplined and strengthened by global-market competition, particularly with Airbus, but large-scale federal spending on defense contracts has crucially strengthened Boeing’s position as a locus of human capital, design experience, and innovation. In 2006, the federal government spent more than sixty billion dollars on aircraft manufacturers. Boeing received $20.8 billion, according to Government Executive magazine. (Lockheed-Martin received $27.3 billion, and Northrup-Grumman $16.7 billion.)

Now I’m no expert, but I believe this is the sort of thing economists refer to as the “fallacy of not paying attention” (Wikipedia entry forthcoming). A few days ago, Megan McArdle helpfully explained why implementing a massive clean energy “Manhattan Project” was pretty unrealistic. One critical distinction: there was no market for building a massive atomic bomb; renewable technology, on the other hand, is hugely profitable. Similarly, there’s no demand for infantry fighting vehicles, massive tanks, fighter jets, and aircraft carriers outside of the public sector. It’s not that the government is particularly good at industrial policy – it’s just that we don’t have much of a choice when it comes to the defense industry. National security demands we publicly finance at least a few products that would otherwise go unfunded.

So yes, under certain carefully prescribed circumstances, industrial policy is probably necessary. As far as the Big Three are concerned, however, there’s a clear market incentive for automotive manufacturing. So why is government a better steward than private investors? Coll’s argument seems to be that Boeing is flush with cash, ergo government-run industries are successful. While undoubtedly great news for Boeing’s shareholders, I’m not sure that this proves his point. The failure of several high-profile military projects in recent years – the much-vaunted Future Combat Systems, the F-22, the Zumwalt-class destroyer – strongly suggests that the defense industry’s products are frequently subpar (not to mention incredibly expensive). The government, of course, can afford a string of expensive failures, but I’m not sure the auto-industry has that luxury.

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