EastView Supplement to Rebuilding Poseidon’s Sid ...

Understand the EastView Concept

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Wise people throughout history have warned against the stubborn human tendency of repeating the same methods and aspiring for a different result. Einstein referred to it as the very definition of stupidity. Warren Buffet has offered an aphorism of his own stating (and I’m paraphrasing) – if you find that you’ve dug yourself into a hole, the first thing to do is to stop digging!

We also have a tendency to prefer control and fear lack of control. Perhaps as a result, we tend to overestimate our ability to control outcomes, even when it comes to systems as complex as the economy. 

These tendencies have given life to proponents of industrial policy for decades, even after the idea keeps proving itself to be suboptimal (and even dangerous) time and again. 

By “industrial policy,” I am referring to any significant government intervention into the marketplace, whether in the form of arbitrary trade restrictions and quotas, protections for certain industries, government stimulus or investment into specific industries, etc. 

Any time the government extends its massive and clumsy hands into the private sector, interfering with the invisible hand that should be handling it, the marketplace becomes distorted and regular people suffer.  

Industrial policy has a track record of failing because the government is both very powerful and not omniscient. 

This means that when the government decides to become more meaningfully involved in the economic process, it tends to wield outsized influence on how resources are moved within the economy, and it tends to allocate those resources inefficiently. This is true even if the involvement appears relatively benign and uncorrupt, like making investments broadly into a “sector” rather than investing in individual firms. 

The natural competition which drives the healthy evolution of industry, allowing more efficient and market savvy firms to amass more resources over time, gives way to a distorted, managed competition that ultimately falls short of realizing the full potential of the economy. 

Rational, profit-seeking firms begin to use up resources trying to comply with regulations, or focus more on circumventing government restrictions, or try to gain access to cheap government money rather than making their operations more efficient and improving the quality of their products. 

Industries that are protected from competition by the impenetrable shield of the government lose the incentive to improve themselves and become atrophied and sclerotic over time, passing on their higher costs to consumers. 

The government, which is itself immune to market competition of any sort, has no incentive to make its processes more efficient. The bureaucracy which is created to implement the growing set of industrial policies simply adds more costs to the system. And those costs always increase, ultimately affecting the taxpayer. 

And when a culture of significant industrial policy sets in, wealthy firms are able to influence politicians and ensure the government continues to act in ways that will preserve their wealth and dissuade competitors. 

The people, who may sense the injustice of the situation, but have become used to government involvement in every aspect of the economy, don’t even know how to voice their displeasure. 

Nobody benefits from this dynamic except the tiny cabal of business and political interests who wield economic power. 

Proponents of the Jones Act, who are aware of its myriad failures, seem to think that the remedy for this century-old failed piece of industrial policy, is more industrial policy. 

In Rebuilding Poseidon’s Sidearm, the author argues that the failures and costs of the Jones Act can be traced back to its inflationary impact on the cost of building and operating ships in the U.S. However, he then goes on to suggest that the remedy to this cost inflation is not to roll back those restrictions, but for the government to get even more involved in the industry. 

The government would set up a new entity (i.e. more bureaucracy) to buy non-essential, ocean-faring vessels from commercial shipyards. However, he does not explain how this new entity would avoid adding excess inefficiency and costs, or how it would avoid the risk of corporate capture. 

In general, the author fails to explain why his proposed piece of industrial policy will somehow escape the unfavorable fate that has befallen so many of its historical counterparts.

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The above represents a potential critique of the policy proposed in Rebuilding Poseidon’s Sidearm. I have done my best to steelman the general case against industrial policy. Below I provide a response to the above critique by specifying where I 1) agree with it and 2) what I feel is false, exaggerated, or missing from the critique. If I am convinced in the future that I am wrong about anything written below, my policy proposal will need to change to reflect that. 

Analysis

Where I agree:

Industrial policy is risky and there are many ways in which it can fail and even have harmful effects. 

Obviously, the Jones Act itself is an example of industrial policy that has failed to achieve its objectives and has had a harmful effect on the overall economy by restricting the use of water-based shipping domestically which nature has deemed the more efficient mode of transportation. 

The risks of greater industrial policy can come in the form of corporate capture, inefficient allocation of resources due to incompetence, distorting the priorities of private firms, bloated and expensive administrative bureaucracy, and, perhaps most importantly, the vague, yet all-pervading risk of greater government control over various aspects of our lives – a direct threat to individual liberty. 

Indeed, it is difficult to avoid these risks to make industrial policy successful.

Where I disagree:

However, the critique underestimates the risk to national security posed by a repeal of the Jones Act. 

It also suffers from a kind of frantic, nightmarish fear of industrial policy which doesn’t acknowledge that there are historic examples of industrial policy having succeeded in promoting its economic goals, even here in the U.S. 

It is also important to recognize that the policy proposal in Rebuilding Poseidon’s Sidearm is meant to be one among many, not a silver-bullet to the issues of the Jones Act. 

A comprehensive set of policies will be needed to reform the Act and in some areas, loosening restrictions may make sense, as long as it does not credibly undermine our essential national interests. 

Relative to other forms of industrial policy, the proposed policy is not that large. 

Its size can also be limited by law. Moreover, unlike the Jones Act, this policy does not seek to further protect the American shipbuilding industry from competition. 

Rather, it seeks to induce more competition by incentivizing builders to learn how to become more efficient. The goal of the policy is to catalyze the adoption of more efficient technologies and techniques wherever possible so as to make our builders more efficient and bring down costs. 

Policymakers should consider the various risks mentioned above and try to design the policy to address those as well as possible.

 As the purpose of the policy is to catalyze efficiency gains so that the industry can eventually attract demand on its own, a sunset clause can be embedded into the policy that dissolves the buying entity after a set number of years