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Economists Reconsider Industrial Policy

In the past, economists assessing the performance of industrial policies often focused on indicators such as import tariffs, capturing only limited dimensions of such measures and conflating their objectives with others. A new generation of research efforts takes a more productive approach – and reaches very different conclusions.

CAMBRIDGE – As policymakers around the world embrace industrial policy in pursuit of a wide variety of objectives – supply-chain resilience, green technologies, geopolitical advantage, good jobs – the debate over its effectiveness is reaching fever pitch. Typically, this debate is portrayed as one where sound economics is squarely on the skeptics’ side. “There is a strong case against industrial policy in economics,” intoned one recent commentary, and embracing it “just wastes money and distorts the economy.”

But this is an increasingly outmoded view. While it is generally true that mainstream economists have responded to industrial policy with knee-jerk hostility since at least the 1970s, things have been changing fast, owing to new academic research that is less driven by ideological hostility to government intervention and better grounded in rigorous empirical methods.

This recent crop of research provides more authoritative evidence on how industrial policy really works, improving the quality of debates that in the past shed more heat than light on the issue. And researchers’ more nuanced and contextual understanding of such policies yields a generally more positive assessment.