Big Governments Are Reviving Old-School Industrial Planning Policies

Policy makers are reviving old-school industrial planning policies, but European recovery funds don’t appear targeted enough. Big Governments Are Reviving Old-School Industrial Planning Policies

When it comes to “more government,” Americans are supposed to be the skeptical ones. Yet the U.S. is now leaning on the state to transform the economy by giving trillions of dollars to consumers and even taking a more direct hand in industrial planning.

In government-loving Europe, political limitations may prevent a comparable economic boost.

Next week, the European Union will start approving member nations’ spending plans as part of the bloc’s €673 billion pandemic recovery package. Analysts expect Europe to bounce back strongly from Covid-19 but, unlike in the U.S., they forecast permanent economic damage.

More money will go to countries most in need: Spain and Italy will receive grants making up 6% and 4% of their gross domestic products, respectively. Although spread over many years, this isn’t insignificant. Spanish officials believe it could boost economic growth by 2 percentage points a year.

But can it also help fix the deep productive imbalances that have turned European stocks into chronic underperformers? A broad analysis of the Italian and Spanish proposals suggests that only 11% and 22% of the funds, respectively, will be spent nurturing specific industries where underperforming nations might gain an edge.

Indeed, most of the money seems earmarked for projects such as refurbishing buildings, modernizing infrastructure and helping small businesses go digital—all worthy goals that boost demand and help the climate, but probably less transformational.

Economists have found a tight link between prosperity and exports of complex products and services, as expressed by both American technology leadership and German manufacturing might.

As Europe has become more economically integrated, the periphery has fallen further behind the more industrialized North in terms of GDP per hour worked—except for some Eastern European nations that have benefited from offshoring. While the South retains some prowess in making cars, it has suffered disproportionately from post-1990s deindustrialization in less-advanced sectors dominated by suppliers that depend on other firms for innovation.

Italy’s Treasury found in a 2018 analysis that 59% of its exports are exposed to significant competition from China, compared with around 40% for its peers, due to the country’s focus on textiles and labor-intensive parts of the manufacturing supply chain. Losing its ability to depreciate the currency after the euro’s creation in 1999 was particularly damaging. Spain remains overly reliant on tourism, and has diversified into less complex goods.

The question is how to change this entrenched division of labor.

Since the 1980s, economists and policy makers have rejected “vertical” industrial strategies, which hark back to Alexander Hamilton’s 1791 “Report on Manufactures,” on the basis that picking winners and losers creates inefficient companies. EU law further blocks members from providing their industries with unfair advantages.

Instead, most Western officials have focused on “horizontal” spending that promotes basic science and modernization across all sectors. The argument goes: If governments in Italy and Spain wrote better regulations and invested more in technology and education, they wouldn’t be stuck with small firms focused on low-tech products and kept alive by low interest rates.

But in the last few decades, horizontal policies on their own have done little for the laggards. The Pentagon’s research money may have fostered the internet, but EU “cohesion” funds spent in the South failed to boost productivity.

Meanwhile, both Covid-19 vaccine development and breakneck growth in East Asia are examples of the power of government pre-purchase agreements and vertical planning to foster innovation and chart a path out of underdevelopment.

In government-loving Europe, political limitations may prevent a comparable economic boost.

Economists have found a tight link between prosperity and exports of complex products and services, as expressed by both American technology leadership and German manufacturing might.

While the South retains some prowess in making cars, it has suffered disproportionately from post-1990s deindustrialization in less-advanced sectors dominated by suppliers that depend on other firms for innovation.

The question is how to change this entrenched division of labor.

Now that the West fears losing its economic lead, it is slowly shifting gears. On Tuesday, the U.S. Senate passed a $250 billion bill designed to help American companies face off against China, which includes building up domestic semiconductor capacity.

The EU is granting antitrust exemptions to climate-focused industrial policy.

Yet Northern Europe seems more predisposed to identify favored sectors. Italian and Spanish officials remain reluctant, even though the Harvard Kennedy School of Government’s Atlas of Economic Complexity ranks Spain first—ahead of India and Turkey—in opportunities to shift from lower-skill exports to more complex products in fields like machinery and pharmaceuticals.

To be sure, the EU’s green agenda has provided a welcome backdoor for some vertical bets. Spain plans to invest €10 billion in the auto sector and build an electric-vehicle battery factory near Barcelona, plus spend a further €1.6 billion to promote clean hydrogen production.

But these are crowded areas: In 2019, the EU already cleared €3.2 billion for developing batteries, three-quarters of which went to “core” countries. So far, the European race to build battery factories is led by Sweden’s Northvolt.

Investors should welcome Europe’s turn away from austerity policies, but remain skeptical of fixes for its lopsided economy.

Redistributing wealth is difficult to reconcile with investing it productively, since the bloc’s delicate political balance makes it hard for the South to build up firms that challenge Northern industrial supremacy.

Europe may want more government, but not always where it is most needed.

Updated: 6-14-2021

Did Big Tech Get Too Big? U.S. Crackdown Seeks Answer

The rise of global technology superstars Amazon, Apple, Facebook and Google created new challenges for the competition watchdogs who enforce antitrust laws. The companies dominate markets in e-commerce and smartphones, search advertising and social-media traffic. An anti-monopoly crackdown that began under President Donald Trump is expected to continue under President Joe Biden, who is surrounding himself with outspoken advocates for vigorous antitrust enforcement against U.S. tech companies.

1. How Far Is The U.S. Going?

In the final months of the Trump administration, the U.S. Justice Department sued Alphabet Inc.’s Google and the Federal Trade Commission sued Facebook Inc. over allegations that they violated antitrust laws. Those are the biggest antitrust actions against a tech giant since the U.S. sued Microsoft Corp. more than two decades ago. State attorneys general across the country joined the federal cases against Facebook and Google, while Texas led another group that sued Google over its role in the online advertising market. Also late in 2020, the House Judiciary Committee’s antitrust subcommittee released a report accusing Apple, Amazon, Google and Facebook of abusing their market power. Lawmakers are now following through on the report’s recommendation that a dominant tech platform be prohibited from operating in competition with the firms dependent on them.

2. What Does That Mean?

A bipartisan group of House lawmakers introduced legislation that would prohibit tech companies from owning a business that competes with other products or services on their platforms. That could mean Amazon wouldn’t be allowed to sell its own branded products, Amazon Basics, and Apple couldn’t offer Apple Music, and Google couldn’t providing specialized search services in travel, local businesses and shopping. The package of five bills would lead to the biggest reform of competition laws in the U.S. since the first antitrust laws were passed in the late 19th century and includes measures that would toughen merger reviews for tech companies, prohibit them from offering certain products and services, and restrict how they treat other businesses that depend on their platforms.

3. Are The Tech Giants Really Monopolies?

They’re powerful, for sure. In the U.S., Google and Facebook together collect more than half of digital advertising spending and Apple Inc. has about half the smartphone market. The House antitrust report estimated that 50% or more of U.S. e-commerce sales goes through Amazon.com Inc.; that 99% of mobile devices in the U.S. and globally run on Apple’s iOS or Google’s Android systems; that Google captures about 89% of all general search queries in the U.S.; and that Facebook’s app reached 74% of U.S. smartphone users as of December 2019. But under modern antitrust enforcement, those percentages alone aren’t enough to alarm regulators in the U.S., which long ago stopped equating big with bad.

4. What’s The Point Of Antitrust Enforcement, Then?

What’s illegal is for a monopoly to abuse its market power to prevent rivals from threatening its position. (In the U.S. case against Microsoft, a federal judge ruled the software giant did exactly that.) U.S. law sets a higher bar than the European Union for finding abuse of dominance, meaning it’s easier to run afoul of antitrust restrictions in Europe. The EU brought three antitrust actions against Google in as many years carrying penalties that totaled $9.3 billion, while the U.S. chose not to bring charges for some of the same conduct. Still, Google, Amazon, Facebook and Apple are all grappling with criticism that they have crossed a line by taking steps to quash competition.

5. How Do Tech Giants Abuse Their Power?

As the middlemen for today’s essential products and services, tech platforms have leverage over both producers and consumers. They have control over vast amounts of data about their customers, raising concerns about threats to privacy. The tech giants are also growing by snapping up potential rivals that might threaten market share. Data compiled by Bloomberg show the big five — Alphabet, Amazon, Apple, Facebook and Microsoft — made more than 600 acquisitions in the last decade worth more than $200 billion.

6. How Often Does The U.S. Go After Monopolies?

Until the Google and Facebook cases last year, the Microsoft lawsuit was the last major monopolization case brought by the U.S. The 20-year dry spell between those events is cited by those who argue enforcement has been too timid. President Barack Obama’s administration vowed to get tough on dominant companies in 2009 but didn’t follow through. The number of monopoly cases brought by the U.S. dropped sharply from an average of 15.7 cases per year from 1970 to 1999 to less than three between 2000 and 2014.

7. Is Antitrust Thinking Outdated?

Some lawyers and economists think it’s time to move past conventional antitrust enforcement to take into account the effects of concentration on innovation, employment and consumer privacy. A fresh line of thinking labeled the New Brandeis School (derided as “hipster antitrust” by critics) would rewrite the playbook entirely and prevent, for example, tech platforms from vertically integrating into other lines of business. Cicilline has noted that key antitrust laws were “written more than 100 years ago” — the Sherman Act of 1890 and the Clayton Act of 1914. The House antitrust report that Cicilline oversaw calls for curbs on further mergers, a rethinking of antitrust beyond consumer welfare and, potentially, the forced breakup of tech companies. Lina Khan, whom Biden nominated to the FTC, who was one of the authors of the panel’s report.

8. What Do The Companies Say?

That they face competition across their businesses, both from established tech companies and new startups. Google might be the world’s dominant search engine, but nearly half of all Americans start their product searches on Amazon, according to one survey. Facebook says countless services like TikTok, Snapchat and Twitter are competing for users’ attention. Amazon says its own line of products that compete with third-party sellers means more choice for consumers and is no different than brick-and-mortar retailers that sell their own branded products next to name-brands on their shelves.

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Big Governments Are Reviving Old-School Industrial Planning Policies

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