Industrial Policy Still Doesn’t Work

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The failures of the Administration’s industrial policy in the energy sector have been recently documented. It’s not just an unlucky streak for the Department of Energy that Solyndra and other targets for subsidies have failed, but a fundamental problem of the government trying to do a better job than the market in directing investment flows. Economist Michael Boskin looked at the government’s decades-long track record of failed industrial policy and made a principled case against the government picking winners and losers in the free market in The Wall Street Journal.

Like the mythical monster Hydra—who grew two heads every time Hercules cut one off—President Obama, in both his State of the Union address and his new budget, has defiantly doubled down on his brand of industrial policy, the usually ill-advised attempt by governments to promote particular industries, companies and technologies at the expense of broad, evenhanded competition.

Despite his record of picking losers—witness the failed "clean energy" projects Solyndra, Ener1 and Beacon Power—Mr. Obama appears determined to continue pushing his brew of federal spending, regulations, mandates, special waivers, loan guarantees, subsidies and tax breaks for companies he deems worthy.

Favoring key constituencies with taxpayer money appeals to politicians, who can claim to be helping the overall economy, but it usually does far more harm than good. It crowds out valuable competing investment efforts financed by private investors, and it warps decisions by bureaucratic diktats susceptible to political cronyism. Former Obama adviser Larry Summers echoed most economists' view when he warned the administration against federal loan guarantees to Solyndra, writing in a 2009 email that "the government is a crappy venture capitalist."

Markets function well when the returns are received and the risks borne by private owners. There are, of course, exceptions: Governments have a responsibility to fund defense R&D and other forms of pre-competitive, generic R&D—e.g., basic science and technology from nanoscience to batteries—but only when they pass rigorous cost-benefit tests and maintain a level playing field among alternative commercial applications.