"Industrial Greatness Requires Economic Depressions"

From Palladium Magazine, February 21:

The state’s role in supporting economic growth is critical. Our wealth comes from industry, that is, from the ability to mass produce goods—more goods, better goods, cheaper goods, produced with fewer hours of labor. The biggest advances in industrial production have required massive investments and social transformations so large they can only succeed with the support of the state, including in countries where the state’s support comes largely via market mechanisms, like the United States and modern China. A well-designed industrial policy works by incubating new, better modes of production to move a nation from its current economic equilibrium to a new, wealthier equilibrium.

It is a tragedy, then, that our current economic policy does exactly the opposite. We are vastly poorer because, instead of supporting “infant industries” until they can stand on their own feet, the U.S. government has spent trillions of dollars to keep the most senile and sclerotic businesses on life support. This keeps millions of talented people and tens of trillions of dollars worth of plant and equipment locked up in decrepit enterprises run by mediocrities who specialize in preserving the status quo, or by outright incompetents running their businesses into the ground.

In the words of the economist Joseph Schumpeter, “[T]he problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.” If the government were willing to let big businesses die a natural death when their time comes, then these resources would be captured by better-managed firms, and our industrial and technological growth would proceed faster. In 2024, the largest 0.1% of businesses, those with over 500 employees, accounted for 54% of private sector jobs in the U.S. Firms with over 10,000 employees accounted for 18% of U.S. manufacturing jobs. Our prosperity, and especially our grandchildren’s prosperity, depends critically on how much of this is in the hands of companies like Boeing and how much is in the hands of companies like SpaceX.

The U.S. Government Keeps Zombie Companies Alive
If you listen to your schoolteachers and economics textbooks and the pundits on television and on Twitter, then you will learn that we live in a capitalist free market society. This means, we are told, that economic activity is a Darwinian contest of all against all. The most effective and efficient firms provide better products at lower prices, taking business away from their inferior competitors. Firms which cannot keep pace with the march of progress wither to dust and are blown away on the wind. In this way, the ruthless logic of the competitive market provides consumers with the best products at the best prices, driving improved living standards, technological development, and economic growth.

This has been roughly true in some times and some places—more on this later. But if you look at the present economy of the U.S. or any major nation, things seem very different now. Major companies simply do not collapse. If bankruptcy threatens, then the government will bail them out at any cost. If there’s a big disaster, then an individual executive might be fired, or not—more likely not. But either way, the company itself will persist. No matter how inefficient a company like General Motors or Boeing might become, no matter how much better and cheaper its competitors make their products, the state will not allow a major incumbent to die.

This is done to avoid the economic and political pain of companies failing. If the collapse of a major company were permitted, hundreds of thousands of people would lose their jobs. In the wake of the 2008 crash, General Motors went bankrupt. If it had collapsed and ceased operations, its 88,000 employees in the U.S. would have lost their jobs, along with probably a similar number of employees at companies directly supplying GM. This, in turn, would have caused devastating ripple effects as former GM employees stopped patronizing restaurants, buying homes, upgrading cell phones, and generally cut back spending.

Of course, these ripple effects are exactly what an economic depression consists of, and GM’s bankruptcy was itself triggered by ripple effects from the collapse of mortgage-backed securities. Rather than let the dominoes keep falling, the U.S. Treasury lent $50 billion to carry GM through bankruptcy and restructuring and preserved about three-quarters of the company’s U.S.-based jobs. Without this and similar bailouts, the 2008 depression would have been far worse than it was, at least in the short run.

In the long run, however, this retards U.S. industry below its potential by preventing badly-needed industrial restructuring. With the support of the explicit government loans and the implicit guarantee of an infinite federal backstop, GM has returned to profitable operations, but they are not actually very good at advancing American industry. Their best-selling cars are all variations of designs that are decades old at least, like the Chevrolet Silverado pickup truck, GM’s most popular product by volume, the first generation of which was sold in 1999.

The major advances in automaking technology—electric vehicles, self-driving vehicles, and, to a lesser extent, manufacturing process improvements like casting the chassis out of two large pieces rather than dozens of small pieces—are being driven by younger upstart companies without state backing. GM’s own entry into these advanced arenas has been lackluster at best. In 2024, electric vehicles accounted for only 4.2% of GM’s sales. Its foray into self-driving cars got underway with the 2016 acquisition of Cruise, an external startup company building self-driving taxis. Cruise began operating autonomous taxis in San Francisco, but their license to operate was revoked in 2023 after a Cruise vehicle struck a pedestrian, and the company attempted to withhold data on the accident from California officials. Cruise never recovered, and in 2024 GM shuttered the project.

An area related to this, but distinct, is the support of basic research, which can serve as a seed for industry. The U.S. excels at this, and while there is always room for improvement, we should mostly keep doing what we’re doing. Most famously, the Defense Advanced Research Projects Agency (DARPA) and the National Science Foundation housed and supported the projects which eventually became the internet. Or to return to the self-driving car example, the technology got started with DARPA challenges from 2004-2007, which incubated the teams of engineers that would go on to develop the first self-driving cars by offering cash prizes of up to a couple million dollars. That’s incredible bang for the buck, but not very many bucks. Most of the cost of research and development of self-driving cars has been borne by Google, which has probably spent billions on Waymo so far. The tasks of foundational R&D and of economy-scale economic policy are separate. The U.S. government is far better at supporting the former than the latter.

Prosperity Comes From Technology, Not From Full Employment

Much of the justification for our current policy of bailing out companies like GM was laid by the Keynesian economists, who take their name from the school’s founder, John Maynard Keynes. His magnum opus, The General Theory of Employment, Interest and Money, gives an algebraic model which argues that if technology and “technique” are held constant, then business cycles lead to depressions where employment and economic output are low, leading to unemployment and poverty with no purpose. This forms the main intellectual justification for the now-ubiquitous practice of massive “stimulus” spending in the face of economic depressions, where the government spends trillions of dollars on anything and everything in order to preserve employment and mitigate the slump, although the main political justification is simply that it wins votes from the money’s recipients.

Of course, technological improvement is by far the most important economic force in the world today, and any theory which assumes it away in order to simplify the algebra will be useless as a guide to steering a modern economy. Keynes repeatedly specifies that his theory is not concerned with technological development and focuses only on maintaining full employment assuming a static technology level. His theory’s recommendations do indeed help towards that goal.

However, the reason we are prosperous today is not because our forefathers maintained full employment. We are prosperous today because our forefathers developed and deployed better and better technology—cars, antibiotics, forge presses, container ships, cryogenic storage to transport liquefied natural gas, and thousands more. A society with full employment and the technology that existed in Keynes’s lifetime is vastly poorer than a society with high unemployment and today’s technology. Very few people would prefer being gainfully employed in the boom years of the late 19th century Gilded Age over struggling to find work in a sluggish 2020s economy—say, in Canada or Portugal.

In large part, this is because of the greatly expanded social spending and transfer payments, made possible by the gigantic increase in goods produced, which make it so that an unemployed American today consumes far more goods than a hardworking laborer or landowning farmer from the Gilded Age while living in bigger, better housing. Of course, the reason that Gilded Age society did not provide this is not because they were too unenlightened but because they were too poor. Most estimates place the U.S. per capita GDP in the year 1900 at around $10,000 in 2024 dollars....

....MUCH MORE