Targeted industrial policies: theory and evidence

At some point in the next decade, the U.S. will probably adopt an explicit industrial policy. This policy may include general incentives for capital formation, R&D, retraining of labor, and so on, but it will also almost surely involve "targeting" of industries thought to be of particular importance. By targeting I mean an effort to change the allocation of investment-as opposed to its overall level-so as to favor particular industries in which the private market is believed to underinvest. There may be other.concepts of targeted industrial policy , but the question of the government's role in the allocation of investment is surely the most important and controversial one. Support for some kind of targeted industrial policy comes from a remarkably wide political spectrum. The idea is favored by nearly all Democrats and many Republicans, nearly all liberals and many con-servatives, nearly all unions and many businesses. The only fairly unified opposition comes from professional economists. It is a tribute to the force of free-market ideology that we have resisted industrial targeting as long as we have. The breadth of support for targeting is, however, partly a consequence of the fact that the specifics have not yet been defined. Which industries are to be targeted? Many advocates of targeting are, to put it bluntly, slippery on this point. They call for a coherent industrial strategy backed by new government institutions, but do not define the substance of that strategy. Presumably the details are to be worked out later. Yet there is a wide range of opinion about which industries should be targeted, and very little agreement about the criteria to be used to settle these disputes. If we can agree in advance, in more or less academic forums, on criteria for selecting target industries, it may be reasonable to expect government agencies to fill in the seven