Should the Government Target Specific Industries?

Since at least the era of Alexander Hamilton and Thomas Jefferson, economists and policy makers have debated about the appropriate role for industrial policy; that is, the use of subsidy, tax, and regulatory policy to allocate capital.  The alleged “success” of Japan’s Ministry of Industrial Trade and Industry in the 1950s and 1960s found many advocates for government directed allocation of capital and funding.  Most recently, Andy Grove, former CEO of Intel,  strongly advocated a targeted focus on manufacturing.  Many others, and the vast majority of economists, argue that  governments are not better than markets at allocating capital and that subsidies for some require higher taxes for others.  They also argue that entrepreneurial efforts are channeled at attracting politicians rather than producing new products and attracting customers.

The Economist recently completed an open debate on this subject.  I encourage all to read the two sides and see which you find most persuasive.