Everytime I see "shortfall" or "shortage" without the disclaimer of "temporary" (like a mere 'delay' e.g., maybe for retraining time) I suspect that an industry is just leveraging a common cognitive bias to change the frame from in which they are simply complaining about the market-clearing high wages they don't want to pay (not a socially acceptable excuse) to one in which they are they helpless victim of forces beyond their control (a socially acceptable excuse) which justifies getting special help or changes of policy from the state.
Yes, there is a point at which higher wages would make any business non-viable because the elastic quantity demanded for the higher priced output would be much lower. But businesses are very reluctant to merely come out and say that a domestically-produced X would be Y% more expensive than the international price.
While I share your skepticism, I think the particular case of chip manufacturing is a real shortage. The Chip Act created a lump of demand for qualified workers. It will take time for training to produce them. You could go with less training, but chip manufacture seems pretty sensitive and uses weird chemicals. So that seems inadvisable, meaning that there is probably some of that demand that simply can’t be met at any wage.
Any wage? Maybe for 3-6 months, but more than a year- Ridiculous. 80k, 160k, 250k a year? With a crash course on training, and no calculus required, there’s plenty of trainable folk at the 160k or so level, 80/hr. The company decision makers, elites at more than 160k (most if not all), don’t want to pay the current high market clearing wages.
You are over reading my point. If there are literally zero workers with the required experience or training, then no amount of wages can produce them tomorrow. It can only produce them with a lag. I don’t know enough about chip production to know how long that lag would be. Sure you can find workers to enroll in training, but that’s a totally different thing.
Amusingly, and perhaps predictably, Noah Smith just published a piece lauding industrial policy: https://www.noahpinion.blog/p/a-few-economists-are-starting-to . I suspect yours is the more accurate and historically informed view on this topic, though I am sure he'd disagree.
I can buy the idea that we need domestic chip manufacturing for military security reasons, and I say that as a dove that doesn't want to start WWIII like the current liberal establishment seems to think is a good idea. Military security is probably the strongest argument for industrial policy.
Whether the USA currently has the political ability to make it work is another thing.
The rest of it, the green new deal bullshit, I could do without.
I don't have much of a problem with modest tariffs. The USA had modest tariffs during its entire high growth industrialization (as did most of the European countries). Modest probably means something like 30%. If you can't overcome a 30% tariff, you don't have any kind of revolutionary productive advantage going on.
Excellent economics. But it's only misallocation if you are reasonable. Govt. always abused redistribution to buy votes and pay off cronies. It's who they are and what they do.
I totally agree about government policy creating economic inefficiency. The decision making processes by government bureaucrats who require great political sensitivity, not fundamental technical/economic/managerial knowledge, to reach the position of decision making power often don't include a rational view of the real world.
My direct knowledge and observations of decision making processes by VC's, Angel Investors (AI), and government grant making organizations supports your position on Industrial Policy being unworkable. One of the Angel groups my friend is involved in, everyone has real skin in the game and a project that get advanced to funding has supporters but not a consensus of the members and these supporters provide mentoring and money to the proposed new venture.
In contrast, the government grant groups that I have been involved with often end up supporting projects that have an extremely high probability of working with marginal real benefits. However, their probability of failure from management incompetence, personal greed, and lack of mentor-ability along with lack of flexibility of the financing and business plan creates Solyndra type disasters, but not the high risk Google, Amazon, and Space X type huge winners that change the world. These government groups operate more on consensus and veto power and often include activists as "stakeholders" who will upset the apple cart to advance their political positions.
I also just observe Industrial Policy around the world. China had a policy in the 80's to take over the world shrimp market, but copied all the characteristic of Taiwan's industry (#1 in the world) that caused it biosecurity failure. Japan dumped billions in it 5th generation project to dominate CPU production and put Intel out of business. France dumped billions in skipping a generation on memory chips and failed. The USA dumped billions into Corn Ethanol only to decrease the efficiency of our cars with near zero net decrease in CO2 emissions (including CO2 from soil carbon, ammonia synthesis, etc.) and unmeasurable impact on atmospheric CO2 levels and climate.
One of my favorite recent disasters was the government "algae to oil" projects funded by ARPA-E. The objective of this program and policy was to obtain an "crude oil" free alternative for transportation fuel (sounds good and green). It turns out that the government already did a massive project back in the 70's when we also has an oil price increase. The government funded lots of institutions and organizations and none produced economically viable results.
We just funded a bunch of rent seekers again. I was consulting for a group that had one of the 70's algae farms purchased from bankruptcy who were dreaming the same dream on the 70's funding binge. I shifted their dream to mass production of spirulina algae using CO2 from a power plant for fish feeds with a 5 million ton market at $1500/ton where algae to oil would be less than $200/dry wt ton.
ARPA-E had big money on the table and everyone who had any algae capacity and all the big government technology contractors all when on rent seeking adventures dropping actually economically viable projects (opportunity costs??). Most of the money when to the big previous government contractors with beautiful math models and fantastic computer simulations with a technical staff that had never grown more than a flask of algae. As an independent consultant I was also involved with some of these "winning" companies so I knew their details and capacities and I couldn't see how they could succeed and they didn't. They were excellent rent seekers who could push all the correct buttons.
"Now let’s imagine that the advantage that accrues to British labor is due to the fact that hourly wages are lower and working hours longer than in Portugal. The factories are equally the same, but you can get 60 hours of British labor for the cost of 35 hours of Portuguese labor. Let’s also imagine that Britain and Portugal have deepened their union such that financial investments can flow freely between the countries. Obviously, what happens is that the Portuguese investors invest their capital in Great Britain, where they can take advantage of the cheap labor. Many high-paying Portuguese jobs vanish as the capital flight causes the factories to shutter. This is, of course, exactly what has happened between the US and China."
Now let's imagine about what would happen if Portugal and the Britain were not in a union, and the Portugese were not allowed to invest in British factories or workers. However, the countries of France and Germany exist, and THEY are allowed to invest in British manufacturing. What do you think will happen to Portugese workers and investors?
The trendy line behind industrial policy is that broader reform is not needed, and that narrow protectionism is equivalent to the industrial policies pursued by postwar Germany, Korea, and Japan. Part of what made those policies work was taking advantage of America's fiscal-monetary predicaments and its military policies also. They gave the US something that it needed very badly, and facilitated US government profligacy at the same time.
If protectionism by itself was magical, there is a long list of Latin American and Eastern European countries that should be world-striding collosi right now that are not.
I would argue that the financial sector has become bloated because of regulation. Very high compensation existed in fin services industry well before all the increased regulation. Like in Hollywood, the managers and talent get paid and shareholders returns are meh.
Industrial policy/CHIPS Act: Maybe sensible if the industry could not on its own attract capital, but such is not the case for today's semiconductor industry.
An interesting question for me is this: Can the finance industry be too large or too small for a given economy that is in its mature stage, and when one thinks of the finance industry it seems to me that maybe the analysis should look at the various components of the industry: banking; venture capital, etc.
In any event growth which is sorely needed over the long term requires a robust industry to fund entrepreneurs .
Lastly, the finance sector is to serve the growing needs of an economy and is more the tail of the dog; seems in many ways it is not, but instead the driver which suggest it entails far more risk than should be the case.
I am sympathetic to many of Dr Kling’s points, but it remains that there is already “industrial policy” of a kind if there is the possibility of regulatory arbitrage between countries on environmental and labor rules.
It seems reasonable for the government to hold imports to the same standard as domestic manufacturers and it seems like a practically achievable goal.
Wish I could say you were wrong about this, but I doubt you are. I can see the national security benefits from onshoring, although I also think there are deterrence benefits from trading with adversaries.
Ah, bitcoin: to add to the utter lunacy, we actually have the fun of paying extra for its destabilizing effects, as in June when ERCOT paid bitcoin miners in Texas millions to shut down their valueless operations.
Here's the easily googled quote: "Riot Blockchain, the largest cryptominer in Texas, made around $9.5 million from ERCOT's demand response curtailment program during the July 2022 heat wave – more than the $5.6 million it made from actually selling Bitcoin that month."
There's setting your hair on fire, and there's paying to set your hair on fire.
But yeah, back to the regularly scheduled programming about the evils of renewables.
Lots of good points in that piece but I have no idea why you say today's solar panels will be worn out or obsolete in a dozen years. Is it an exaggeration or do you know something I don't?
The examples of how the private sector occasionally misallocates resources, crypto and finance, wouldn't have gotten so many resources were it not for the government. Crypto would have been of little interest if we didn't have governments that overspend and print new money to pay bills. Finance always exists and serves a useful purpose, but when people suspect that eventually fiat currencies will hyperinflate, they are more focused on maneuvering to get ahead of the tsunami. During the Victorian age in the UK, where the government was small and the currency was sound, most people with liquid wealth were happy to hold consol debt their whole lives.
Then there is the fact that everything the private sector does, in the absence of subsidies, is market tested. Those who allocate capital to areas where future demand for the output exceeds supply will make money for providing the needed capacity. Those whose capital allocation encourages supply that isn't needed will lose money. Government subsidized capacity expansion has no such reality check.
So you believe that doubt about the long term value of the dollar is not a factor in the interest in crypto? Uh-huh.
If people trusted the dollar to maintain its value, why would anyone want to own crypto or gold, for that matter? Keep in mind the dollar has gone down steadily in purchasing power since the late 1800s, so one would have to be a weird crank to think that will change. That is why the interest in crypto is not unreasonable, not some inherent flaw in the free market that it exists.
Government policies of intervention (CHIPs, etc.) are indeed irritating but I hadn’t really thought of the “misallocation of resources” effect, even though it is obvious. While the government is chockfull of examples of policies and programs contributing or causing resources to be squandered, the private sector, as you point out, is also guilty. Often instigated by government policy, business regularly embraces these policies because of incentives (carrot or stick). DEI and sustainability are current instances where administrative bloat is formed in private enterprise. A small illustration in my own career was the quality craze. Deming’s principles are effective and useful, but government, as one of the largest buyers, began emphasizing quality in its procurement standards and this created a trickle-down effect, especially in the auto industry. For example, ISO9000 and its derivatives, intended for quality assurance and customer satisfaction, became a blanket requirement for all suppliers mandated by the auto makers. Suppliers had to divert funding for it; ISO9000 registration required heavy, sustained documentation workload, and the registration process to be certified required considerable effort and time. I asked whether by getting registered we would acquire more business or increase profits and received blank looks. The cost/benefit didn’t make sense, but if you wanted to stay in the game, you had to spend extra resources.
Everytime I see "shortfall" or "shortage" without the disclaimer of "temporary" (like a mere 'delay' e.g., maybe for retraining time) I suspect that an industry is just leveraging a common cognitive bias to change the frame from in which they are simply complaining about the market-clearing high wages they don't want to pay (not a socially acceptable excuse) to one in which they are they helpless victim of forces beyond their control (a socially acceptable excuse) which justifies getting special help or changes of policy from the state.
Yes, there is a point at which higher wages would make any business non-viable because the elastic quantity demanded for the higher priced output would be much lower. But businesses are very reluctant to merely come out and say that a domestically-produced X would be Y% more expensive than the international price.
While I share your skepticism, I think the particular case of chip manufacturing is a real shortage. The Chip Act created a lump of demand for qualified workers. It will take time for training to produce them. You could go with less training, but chip manufacture seems pretty sensitive and uses weird chemicals. So that seems inadvisable, meaning that there is probably some of that demand that simply can’t be met at any wage.
Any wage? Maybe for 3-6 months, but more than a year- Ridiculous. 80k, 160k, 250k a year? With a crash course on training, and no calculus required, there’s plenty of trainable folk at the 160k or so level, 80/hr. The company decision makers, elites at more than 160k (most if not all), don’t want to pay the current high market clearing wages.
You are over reading my point. If there are literally zero workers with the required experience or training, then no amount of wages can produce them tomorrow. It can only produce them with a lag. I don’t know enough about chip production to know how long that lag would be. Sure you can find workers to enroll in training, but that’s a totally different thing.
Yeah things like the CHIPS act can make sense as trading off economic well-being for some genuine geostrategic consideration.
Selling it as an economic win is a sign of BS.
I am not seeing how what you said relates to what I said. Perhaps you are over-reading my point as being broader than it really is?
Amusingly, and perhaps predictably, Noah Smith just published a piece lauding industrial policy: https://www.noahpinion.blog/p/a-few-economists-are-starting-to . I suspect yours is the more accurate and historically informed view on this topic, though I am sure he'd disagree.
I can buy the idea that we need domestic chip manufacturing for military security reasons, and I say that as a dove that doesn't want to start WWIII like the current liberal establishment seems to think is a good idea. Military security is probably the strongest argument for industrial policy.
Whether the USA currently has the political ability to make it work is another thing.
The rest of it, the green new deal bullshit, I could do without.
I don't have much of a problem with modest tariffs. The USA had modest tariffs during its entire high growth industrialization (as did most of the European countries). Modest probably means something like 30%. If you can't overcome a 30% tariff, you don't have any kind of revolutionary productive advantage going on.
Excellent economics. But it's only misallocation if you are reasonable. Govt. always abused redistribution to buy votes and pay off cronies. It's who they are and what they do.
I totally agree about government policy creating economic inefficiency. The decision making processes by government bureaucrats who require great political sensitivity, not fundamental technical/economic/managerial knowledge, to reach the position of decision making power often don't include a rational view of the real world.
My direct knowledge and observations of decision making processes by VC's, Angel Investors (AI), and government grant making organizations supports your position on Industrial Policy being unworkable. One of the Angel groups my friend is involved in, everyone has real skin in the game and a project that get advanced to funding has supporters but not a consensus of the members and these supporters provide mentoring and money to the proposed new venture.
In contrast, the government grant groups that I have been involved with often end up supporting projects that have an extremely high probability of working with marginal real benefits. However, their probability of failure from management incompetence, personal greed, and lack of mentor-ability along with lack of flexibility of the financing and business plan creates Solyndra type disasters, but not the high risk Google, Amazon, and Space X type huge winners that change the world. These government groups operate more on consensus and veto power and often include activists as "stakeholders" who will upset the apple cart to advance their political positions.
I also just observe Industrial Policy around the world. China had a policy in the 80's to take over the world shrimp market, but copied all the characteristic of Taiwan's industry (#1 in the world) that caused it biosecurity failure. Japan dumped billions in it 5th generation project to dominate CPU production and put Intel out of business. France dumped billions in skipping a generation on memory chips and failed. The USA dumped billions into Corn Ethanol only to decrease the efficiency of our cars with near zero net decrease in CO2 emissions (including CO2 from soil carbon, ammonia synthesis, etc.) and unmeasurable impact on atmospheric CO2 levels and climate.
One of my favorite recent disasters was the government "algae to oil" projects funded by ARPA-E. The objective of this program and policy was to obtain an "crude oil" free alternative for transportation fuel (sounds good and green). It turns out that the government already did a massive project back in the 70's when we also has an oil price increase. The government funded lots of institutions and organizations and none produced economically viable results.
We just funded a bunch of rent seekers again. I was consulting for a group that had one of the 70's algae farms purchased from bankruptcy who were dreaming the same dream on the 70's funding binge. I shifted their dream to mass production of spirulina algae using CO2 from a power plant for fish feeds with a 5 million ton market at $1500/ton where algae to oil would be less than $200/dry wt ton.
ARPA-E had big money on the table and everyone who had any algae capacity and all the big government technology contractors all when on rent seeking adventures dropping actually economically viable projects (opportunity costs??). Most of the money when to the big previous government contractors with beautiful math models and fantastic computer simulations with a technical staff that had never grown more than a flask of algae. As an independent consultant I was also involved with some of these "winning" companies so I knew their details and capacities and I couldn't see how they could succeed and they didn't. They were excellent rent seekers who could push all the correct buttons.
...remember the accolades given the 2016 "Great Green Fleet" of SecNav Mabus?
Where is it now? I cannot find any info more recent than 2016, although there was this, in Proceedings:
https://www.usni.org/magazines/proceedings/2017/september/sink-great-green-fleet
The only demagogues on "free trade" are the free trade advocates. Free traders are laboring under numerous bad assumptions. I could list all of them, but I only need one: Free trade advocates assume everywhere and always non-hostile trading partners. One very recent example (of dozens, if not more) in point: https://www.zerohedge.com/personal-finance/rare-earth-elements-and-national-security-reclaiming-us-control-amid-chinas
If you wish to avail yourself of all the counter-arguments of "free trade", Ted Beal has an exhaustive list here https://voxday.net/tag/free-trade/
Russia is currently benefiting mightily from a relatively high degree of autarky, every nation should be working to maximize it.
"Now let’s imagine that the advantage that accrues to British labor is due to the fact that hourly wages are lower and working hours longer than in Portugal. The factories are equally the same, but you can get 60 hours of British labor for the cost of 35 hours of Portuguese labor. Let’s also imagine that Britain and Portugal have deepened their union such that financial investments can flow freely between the countries. Obviously, what happens is that the Portuguese investors invest their capital in Great Britain, where they can take advantage of the cheap labor. Many high-paying Portuguese jobs vanish as the capital flight causes the factories to shutter. This is, of course, exactly what has happened between the US and China."
Now let's imagine about what would happen if Portugal and the Britain were not in a union, and the Portugese were not allowed to invest in British factories or workers. However, the countries of France and Germany exist, and THEY are allowed to invest in British manufacturing. What do you think will happen to Portugese workers and investors?
And all because taxing net CO2 emissions is not popular!
My favorite thing about this Substack is that it's never a knee jerk reaction, and you always teach me something I can use later. Thanks Arnold kling.
The trendy line behind industrial policy is that broader reform is not needed, and that narrow protectionism is equivalent to the industrial policies pursued by postwar Germany, Korea, and Japan. Part of what made those policies work was taking advantage of America's fiscal-monetary predicaments and its military policies also. They gave the US something that it needed very badly, and facilitated US government profligacy at the same time.
If protectionism by itself was magical, there is a long list of Latin American and Eastern European countries that should be world-striding collosi right now that are not.
I would argue that the financial sector has become bloated because of regulation. Very high compensation existed in fin services industry well before all the increased regulation. Like in Hollywood, the managers and talent get paid and shareholders returns are meh.
Industrial policy/CHIPS Act: Maybe sensible if the industry could not on its own attract capital, but such is not the case for today's semiconductor industry.
An interesting question for me is this: Can the finance industry be too large or too small for a given economy that is in its mature stage, and when one thinks of the finance industry it seems to me that maybe the analysis should look at the various components of the industry: banking; venture capital, etc.
In any event growth which is sorely needed over the long term requires a robust industry to fund entrepreneurs .
Lastly, the finance sector is to serve the growing needs of an economy and is more the tail of the dog; seems in many ways it is not, but instead the driver which suggest it entails far more risk than should be the case.
I am sympathetic to many of Dr Kling’s points, but it remains that there is already “industrial policy” of a kind if there is the possibility of regulatory arbitrage between countries on environmental and labor rules.
It seems reasonable for the government to hold imports to the same standard as domestic manufacturers and it seems like a practically achievable goal.
Wish I could say you were wrong about this, but I doubt you are. I can see the national security benefits from onshoring, although I also think there are deterrence benefits from trading with adversaries.
Ah, bitcoin: to add to the utter lunacy, we actually have the fun of paying extra for its destabilizing effects, as in June when ERCOT paid bitcoin miners in Texas millions to shut down their valueless operations.
Here's the easily googled quote: "Riot Blockchain, the largest cryptominer in Texas, made around $9.5 million from ERCOT's demand response curtailment program during the July 2022 heat wave – more than the $5.6 million it made from actually selling Bitcoin that month."
There's setting your hair on fire, and there's paying to set your hair on fire.
But yeah, back to the regularly scheduled programming about the evils of renewables.
Lots of good points in that piece but I have no idea why you say today's solar panels will be worn out or obsolete in a dozen years. Is it an exaggeration or do you know something I don't?
For sure corn ethanol seems like a net loss but DOE says it reduces life cycle GHG emission. Do you have evidence or just biases?https://afdc.energy.gov/vehicles/flexible_fuel_emissions.html#:~:text=A%202020%20analysis%20by%20Argonne,emissions%20on%20average%20by%2040%25.
And reduces urban smog too.
The examples of how the private sector occasionally misallocates resources, crypto and finance, wouldn't have gotten so many resources were it not for the government. Crypto would have been of little interest if we didn't have governments that overspend and print new money to pay bills. Finance always exists and serves a useful purpose, but when people suspect that eventually fiat currencies will hyperinflate, they are more focused on maneuvering to get ahead of the tsunami. During the Victorian age in the UK, where the government was small and the currency was sound, most people with liquid wealth were happy to hold consol debt their whole lives.
Then there is the fact that everything the private sector does, in the absence of subsidies, is market tested. Those who allocate capital to areas where future demand for the output exceeds supply will make money for providing the needed capacity. Those whose capital allocation encourages supply that isn't needed will lose money. Government subsidized capacity expansion has no such reality check.
"Eventually fiat currencies will hyperinflate."
Gold bugs been waiting a long, long time. Can't conduct fiscal policy to make John Birch Goldwater conspiracy cranks happy.
So you believe that doubt about the long term value of the dollar is not a factor in the interest in crypto? Uh-huh.
If people trusted the dollar to maintain its value, why would anyone want to own crypto or gold, for that matter? Keep in mind the dollar has gone down steadily in purchasing power since the late 1800s, so one would have to be a weird crank to think that will change. That is why the interest in crypto is not unreasonable, not some inherent flaw in the free market that it exists.
Government policies of intervention (CHIPs, etc.) are indeed irritating but I hadn’t really thought of the “misallocation of resources” effect, even though it is obvious. While the government is chockfull of examples of policies and programs contributing or causing resources to be squandered, the private sector, as you point out, is also guilty. Often instigated by government policy, business regularly embraces these policies because of incentives (carrot or stick). DEI and sustainability are current instances where administrative bloat is formed in private enterprise. A small illustration in my own career was the quality craze. Deming’s principles are effective and useful, but government, as one of the largest buyers, began emphasizing quality in its procurement standards and this created a trickle-down effect, especially in the auto industry. For example, ISO9000 and its derivatives, intended for quality assurance and customer satisfaction, became a blanket requirement for all suppliers mandated by the auto makers. Suppliers had to divert funding for it; ISO9000 registration required heavy, sustained documentation workload, and the registration process to be certified required considerable effort and time. I asked whether by getting registered we would acquire more business or increase profits and received blank looks. The cost/benefit didn’t make sense, but if you wanted to stay in the game, you had to spend extra resources.