Fiscal policy and industrial policy – new bedfellows?

In the north of Sweden, the EU is part-funding a new battery ‘gigafactory.’ When finished, it will be larger than Tesla’s factory in Nevada. The project is part of the EU’s investment in a new battery industry, its answer to competition from the US and China in the industries of the future.

Across the West, this kind of industrial policy has been making a comeback in the last decade. Industrial policy is a big tent that includes everything from coordinating private actors and funding basic research, to subsidies, long-term investments or public guarantees.

Does the rehabilitation of fiscal policy strengthen the case for it?

One of the factors driving the rehabilitation of fiscal policy has been the reduced risk of crowding out private investment. Low interest rates and slack supply for the foreseeable future mean crowding out through higher interest rates is unlikely. The low productivity of capital means the productivity differential between public and private investment might be diminished. Then there is the list seemingly worthwhile public investments like decarbonisation.

To date, advocates have focused on the classic areas for government spending like infrastructure, health, and education, areas which are often underfunded by the private sector, but are also likely to increase the nation’s long-term productive capacity.

To what degree should this logic be applied to industrial policy?

It seems to me there is no in principle reason not to make industrial policy part of fiscal expansion – whether through tax credits or even direct spending funneled through state investment banks. We can all agree that “wasteful and poorly designed spending programs” must be avoided, but what constitutes that is an empirical question which should be examined.

To date, much of the research has focused on industrial policy in the context of developing countries. For the developed world, a 2014 report by the OECD was cautiously optimistic, but said more research is required.

The simultaneous rehabilitation of fiscal spending and industrial policy offers left-wing politicians a way to resolve tensions between their socially liberal and working class supporters by encouraging job creation in a renewed and sustainable industrial base.