June 2023 – J. W. Mason

Industrial Policy: Further Thoughts

(Cross-posted from my Substack. If you like this blog, why not subscribe to that too?)

I just returned from Bangalore, where Arjun and I spent an intense 10 days working on our book, and on another project which I’ll be posting about in due time. I’d never been to India before, and it was … a lot. It took me a while to put my finger on the overarching impression: not chaos, or disorder, but incongruity — buildings and activities right on top of each other that, in an American context, you’d expect to be widely separated in space or time. That, and the constant buzz of activity, and crowds of people everywhere. In vibes, if not in specifics, it felt like a city of back-to-back Times Squares. I imagine that someone who grew up there would find an American city, even New York, rather dull.

It’s a city that’s gone from one million people barely a generation ago to 8 million today, and is still growing. There’s a modern subway, clean, reliable and packed, with the open-gangway cars New York is supposed to switch to eventually. It opened 15 years ago and now has over 60 stations — I wish we could build like that here. But the traffic is awesome and terrifying. Every imaginable vehicle — handpainted trucks, overloaded and dangling with tassels and streamers; modern cars; vans carrying sheep and goats; the ubiquitous three-wheeled, open-sided taxis; the even more ubiquitous motorbikes, sometimes carrying whole families; and of course the wandering cows — with no stoplights or other traffic control to speak of, and outside the old central city, no sidewalks either. Crossing the street is an adventure.

I realize that I am very far from the first person to have this reaction to an Indian city. Some years ago Jim Crotty was here for some kind of event, and the institution he was visiting provided him with a driver. Afterwards, he said that despite all the dodging and weaving through the packed roads he never felt anything but safe and comfortable. But, he added, “I would never get into a car with that guy in the United States. He’d be so bored, he’d probably fall asleep.”

Varieties of industrial policy. The panel I moderated on industrial policy is up on YouTube, though due to some video glitch it is missing my introductory comments. Jain Family Institute also produced a transcript of the event, which is here.

It was a very productive and conversation; I thought people really engaged with each other, and everyone had something interesting to contribute. But it left me a bit puzzled: How could people who share broad political principles, and don’t seem to disagree factually about the IRA, nonetheless arrive at such different judgements of it?

I wrote a rather long blog post trying to answer this question.

The conclusion I came to was that the reason Daniela Gabor (and other critics, though I was mostly thinking of Daniela when I wrote it) takes such a negative view of the IRA is that she focuses on the form of interface between the state and production it embodies: subsidies and incentives to private businesses. This approach accepts, indeed reinforces, the premise that the main vehicle for decarbonization is private investment. Which means that making this investment attractive to private business owners, for which profitability is a necessary but not sufficient condition. If you don’t think the question “how do we solve this urgent social problem” should be immediately translated into “how do we ensure that business can make money solving the problem,” then the IRA deserves criticism not just on the details but for its fundamental approach.

I am quite sympathetic to this argument. I don’t think anyone on the panel would disagree with it, either normatively as a matter of principle or descriptively as applied to the IRA. And yet the rest of us, to varying degrees, nonetheless take a more positive view of the IRA than Daniela does.

The argument of the post was that this is because we focus more on two other dimensions. First, the IRA’s subsidies are directed to capital expenditure itself, rather than financing; this already distinguishes it from what I had thought of as derisking. And second the IRA’s subsidies are directed toward narrowly specified activities (e.g. battery production) rather than to some generic category of green or sustainable investment, as a carbon tax would be. I called this last dimension “broad versus fine-grained targeting,” which is not the most elegant phrasing. Perhaps I would have done better to call it indicative versus imperative targeting, tho I suppose people might have objected to applying the latter term to a subsidy. In any case, if you think the central problem is the lack of coordination among private investment decisions, rather than private ownership s such, this dimension will look more important.

Extending the matrix. The post got a nice response; it seems like other people have been thinking along similar lines. Adam Tooze restated the argument more gracefully than I did:

Mason’s taxonomy focuses attention on two axes: how far is industrial policy driven by direct state engagement v. how far does it operate at arms-length through incentives? On the other hand, how far is green industrial policy broad-brush offering general financial incentives for green investment, as opposed to more fine-grained focus on key sectors and technologies?

Skeptics like Daniel Gabor, Mason suggests, can be seen as placing the focus on the form of policy action, prioritizing the question of direct versus indirect state action. Insofar as the IRA operates by way of tax incentives it remains within the existing, hands-off paradigm. A big green state would be far more directly involved. Those who see more promise in the IRA would not disagree with this judgment as to form but would insist that what makes the IRA different is that it engages in relatively fine-grained targeting of investment in key sectors.

My only quibble with this is that I don’t think it’s just two dimensions — to me, broad versus narrow and capital expenditure versus financing are two independent aspects of targeting.

I should stress that I wrote the post and the table to clarify the lines of disagreement on the panel, and in some similar discussions that I’ve been part of. They aren’t intended as a general classification of industrial policy, which — if it can be done at all — would require much more detailed knowledge of the range of IP experiences than I possess.

Tooze offers his own additional dimensions:

The relationship of economic policy to the underlying balance of class forces.
The mediation of those forces through the electoral system …
The agenda, expertise & de facto autonomy of state institutions…

These are certainly interesting and important questions. But it seems to me that they are perhaps questions for a historian rather than for a participant. They will offer a very useful framework for explaining, after the fact, why the debate over industrial policy turned out the way that it did. But if one is engaged in politics, one can’t treat the outcome one is aiming at as a fact to be explained. Advocacy in a political context presumes some degree of freedom at whatever decision point it is trying to influence. One wouldn’t want to take this too far: It’s silly to talk about what policies “should” be if there is no one capable of adopting them. But it seems to me that by participating in a political debate within a given community, you are accepting the premise, on some level, that the outcome depends on reason and not the balance of forces.

That said, Tooze’s third point, about state institutions, I think does work in an advocacy context, and adds something important to my schema. Though it’s not entirely obvious which way it cuts. Certainly a lack of state capacity — both administrative and fiscal — was an important motivation for the original derisking approach, and for neoliberalism more broadly. But as Beth Popp Berman reminds us, simple prohibitions and mandates are often easier to administer than incentives. And if the idea is to build up state capacity, rather than taking it as a fact, then that seems like an argument for public ownership.

I’ve thought for years that this was a badly neglected question in progressive economics. We have plenty of arguments for public goods — why the government should ensure that things are provided in different amounts or on different terms than a hypothetical market would. We don’t have so many arguments for why, and which, things should be provided by the public. The same goes for public ownership versus public provisions, with the latter entailing non-market criteria and intrinsic motivation, with the civil service protections that foster it.

The case for public provisioning. One group of people who are thinking about these questions seriously are Paul Williams and his team at the Center for Public Enterprise. (Full disclosure: I sit on CPE’s board.) Paul wrote a blog post a couple weeks ago in response to some underinformed criticisms of public housing, on why public ownership is an important part of the housing picture. Looking at the problem from the point of view of the local government that are actually responsible for housing in the US, the problem looks a bit different than the perspective of national governments that I implicitly adopted in my post.

The first argument he makes for public ownership is that it economizes on what is often in practice the binding constraint on affordable housing, the fixed pot of federal subsidies. A public developer doesn’t need the substantial profit margin a private developer would expect; recovering its costs is enough. Public ownership also allows for, in my terms, more fine-grained targeting. A general program of subsidies or inclusionary zoning (like New York’s 421a tax credits) will be too lax in some cases, leaving affordable units on the table, and too stringent in others, deterring construction. A public developer can assess on a case by case basis the proportion and depth of affordable units that a given project can support. A third argument, not emphasized here but which Paul has made elsewhere, is that developing and operating public housing builds up the expertise within the public sector that is needed for any kind of transformative housing policy.

It’s telling but not surprising to see the but-this-one-goes-to-11 response to Paul’s post that all we need for more housing is land-use deregulation. Personally, I am quite sympathetic to the YIMBY position, and I know Paul is too. But it doesn’t help to oversell it. The problems of “not enough housing” and “not enough affordable housing” do overlap, but they are two distinct problems.

A somewhat different perspective on these questions comes from this report by Josh Wallack at Roosevelt, on universal childcare as industrial policy. Childcare doesn’t have some of the specific problems that industrial policy is often presented as the solution to – it doesn’t require specialized long-lived capital goods, or coordination across multiple industries. But, Wallack argues, it shares the essential element: We don’t think that demand on its own will call forth sufficient capacity, even with subsidies, so government has to intervene directly on the supply side, building up the new capacity itself. I’ve always thought that NYC’s universal pre-K was a great success story (both my kids benefited from it) that should be looked to as a model of how to expand the scope of the public sector. So I’m very glad to see this piece, which draws general lessons from the NYC experience. Wallack himself oversaw implementation of the program, so the report has a lot more detail on the specifics of implementation than you normally get. Very worth reading, if you’re at all interested in this topic.

One area where Wallack thinks the program could have done better is democratic participation in the planning process. This could be another dimension for thinking about industrial policy. A more political practice-oriented version of Tooze’s bullets would be to ask to what extent a particular program broadens or narrows the space for popular movements to shape policy. Of course the extent to which this is feasible, or even desirable, depends on the kind of production we’re talking about. In Catalyst, Matt Huber and Fred Stafford argue, persuasively in my view, that there is a tension between the need for larger-scale electricity transmission implied by the transition away from carbon, and the preference of some environmentalists for a more decentralized, locally-controlled energy system. I am less persuaded by their argument that the need for increased transmission and energy storage rule out a wholesale shift toward renewables; here as elsewhere, it seems to me, which obstacles you regard as insurmountable depend on where you want to end up.

The general point I would make is that politics is not about a final destination, but about a direction of travel. Whether or not we could have 100 percent renewable electricity — or 100 percent public ownership of housing, or whatever — is not so important. What matters is whether we could have substantially more than we have now.

On other topics.

Showing the inconsistencies between conservative free-market economics and actual conservative politics is, in my experience, much harder in practice than it seems like it ought to be, at least if you want to persuade people who actually hold one or both. So it’s fun to see Brian Callaci’s (excellent) arguments against non-compete agreements in ProMarket, the journal of the ur-Chicago Stigler Center.

Garbriel Zucman observes that the past few years have seen very large increases in the share of income at the very top, which now seems to have passed its gilded age peak. Does this mean that I and others have been wrong to stress the gains for low-wage workers from tight post-pandemic labor markets? I don’t think so — both seem to be true. According to Realtime Inequality, the biggest income gains of the past two years have indeed gone to the top 1 percent and especially its top fractiles. But the next biggest gains have gone to the bottom half, which has outpaced the top 10 percent and comfortably outpaced the middle 40 percent. Their income numbers don’t further break out the bottom half, but given that the biggest wage gains have come a the very bottom, I suspect this picture would get even stronger if we looked further down the distribution.

This may well be a general pattern. The incomes that rise fastest in an economic boom are those that come from profits, on the one hand, and flexible wages that are strongly dependent on labor-market conditions on the other. People whose income comes from less commodified labor, with more socially embedded wage-setting, will be relatively insulated from swings in demand, downward but also upward. This may have something to do with the negative feeling about the economy among upper-middle class households that Emily Stewart writes about in Vox.

I’m still hoping to write something more at length about the debates around “greedflation” and price controls. But in the meantime, this from Servaas Storm is very good.

What I’ve been reading. On the plane to Bangalore, I finished Enzo Traverso’s Fire and Blood. I suppose it’s pretty common now to talk about the period from 1914 to 1945 as a unit, a second Thirty Years War. Traverso does this, but with the variation of approaching it as a European civil war — a war within a society along lines of class and ideology, rather than a war between states. A corollary of this, and arguably the animating spirit of the book, is the rehabilitation of anti-fascism as a positive political program. It’s a bit different from the kind of narrative history I usually read; the organization is thematic rather than chronological, and the focus is on culture — there are no tables and hardly any numbers, but plenty of reproductions of paintings. It reads more like a series of linked essays than a coherent whole, but what it lacks in overarching structure in makes up with endless fascinating particulars. I liked it very much.

Varieties of Industrial Policy

I was on a virtual panel last week on industrial policy as derisking, in response to an important new paper by Daniela Gabor. For me, the conversation helped clarify why people who have broadly similar politics and analysis can have very different feelings about the Inflation Reduction Act and similar measures elsewhere.

There are substantive disagreements, to be sure. But I think the more fundamental issue is that while we, inevitably, discuss the relationship between the state, the organization of production and private businesses in terms of alternative ideal types, the actual policy alternatives are often somewhere in the fuzzy middle ground. When we deal with a case that resembles one of our ideal types in some ways, but another in other ways, our evaluation of it isn’t going to depend so much on our assessment of each of these features, but on which of them we consider most salient.

I think this is part of what’s going on with current discussions of price controls. There has been a lot of heated debate following Zach Carter’s New Yorker profile of Isabella Weber on whether the energy price regulation adopted by Germany can be described as a form of price controls. Much of this criticism is clearly in bad faith. But the broad space between orthodox inflation-control policy, on the one hand, and comprehensive World War II style price ceilings, on the other, means that there is room for legitimate disagreement about how we describe policies somewhere in the middle. If you think that the defining feature of price regulation is that government is deciding how much people should pay for particular commodities, you will probably include the German policy. If you’re focused on other dimensions of it, you might not.

I am not going to say more about this topic now, though I hope to return to it in the future. But I think there is something parallel going on in the derisking debate.

People who talk about industrial policy mean some deliberate government action to shift the sectoral composition of output — to pick winners and losers, whether at the industry or firm level. But of course, there are lots of ways to do this. (Indeed, as people sometimes point out, governments are always doing this in some way — what distinguishes “industrial policy” is that it is visible effort to pick different winners.) Given the range of ways governments can conduct industrial policy, and their different implications for larger political-economy questions, it makes sense to try to distinguish different models. Daniela Gabor’s paper was a very helpful contribution to this.

The problem, again, is that models are ideal types — they identify discrete poles in a continuous landscape. We need abstractions like this — there’s no other way to talk about all the possible variation on the multiple dimensions on which we can describe real-world situations. If the classification is a good one, it will pick out ways in which variation on one dimension is linked to variation on another. But in the real world things never match up exactly; which pole a particular point is closer to will depend on which dimension we are looking at.

In our current discussions of industrial policy, four dimensions seem most important — four questions we might ask about how a government is seeking to direct investment to new areas. Here I’ll sketch them out quickly; I’ll explore them in a bit more detail below.

First is ownership — what kind of property rights are exercised over production? This is not a simple binary. We can draw a slope from for-profit private enterprises, to non-profits, to publicly-owned enterprises, to direct public provision.

Second is the form of control the government exercises over investment (assuming it is not being carried out directly by the public sector). Here the alternatives are hard rules or incentives, the latter of which can be positive (carrots) or negative (sticks).

The third question is whether the target of the intervention is investment in the sense of creation of new means of production, or investment in the sense of financing.

The last question is how detailed or fine-grained the intervention is — how narrowly specified are the activities that we are trying to shift investment into and out of?

“Derisking” in its original sense had specific meaning, found in the upper right of the table. The idea was that in lower-income countries, the binding constraint on investment was financing. Because of limited fiscal capacity (and state capacity more generally), the public sector should not try to fill this gap directly, but rather to make projects more attractive to private finance. Offering guarantees to foreign investors would make efficient use of scarce public resources, while trusting profit motive to guide capital to socially useful projects.

In terms of my four dimensions, this combines private ownership and positive incentives with broad financial target.

The opposite case is what Daniela calls the big green state. There we have public ownership and control of production, with the state making specific decisions about production on social rather than monetary criteria.

For the four of us on the panel, and for most people on the left, the second of these is clearly preferable to the first. In general, movement from the upper right toward the lower left is going to look like progress.

But there are lots of cases that are off the diagonal. In general, variation on each of these dimensions is independent of variation on the others. We can imagine real world cases that fall almost anywhere within the grid.

Say we want more wind and solar power and less dirty power.

We could have government build and operate new power plants and transmission lines, while buying out and shutting down old ones.

We could have a public fund or bank that would lend to green producers, along with rules that would penalize banks for holding assets linked to dirty ones.

We could have regulations that would require private producers to reduce carbon emissions, either setting broad portfolio standards or mandating the adoption of specific technologies.

Or we could have tax credits or similar incentives to encourage voluntary reductions, which again could be framed in a broad, rules-based way or incorporate specific decisions about technologies, geography, timelines, etc.

As we evaluate concrete initiatives, the hard question may not be where we place them in this grid nor on where we would like to be, but how much weight we give to each dimension.

The neoliberal consensus was in favor of private ownership and broad, rules-based incentives, for climate policy as in other areas. A carbon price is the canonical example. For those of us on the panel, again, the consensus is that the lower left corner is first best. But at the risk of flattening out complex views, I think the difference between let’s say Daniela on one side and Skanda Amarnath (or me) on the other is the which dimensions we prioritize. Broadly speaking, she cares more about movement in horizontal axis, as I’ve drawn the table, with a particular emphasis on staying off of the right side. While we care more about vertical axis, with a particular preference for the bottom row.

Some people might say it doesn’t matter how you manage investment, as long as you get the clean power. But here I am completely on (what I understand to be) Daniela’s side. We can’t look at policy in isolation, but have to see it as part of a broader political economy, as part of the relationship between private capital and the state. How we achieve our goals here matters for more than the immediate outcome, it shifts the terrain on which next battle will be fought.

But even if we agree that the test for industrial policy is whether it moves us toward a broader socialization of production, it’s not always easy to evaluate particular instances.

Let’s compare two hypothetical cases. In one, government imposes strict standards for carbon emissions, so many tons per megawatt. How producers get there is up to them, but if they don’t, there will be stiff fines for the companies and criminal penalties for their executives. In the second case, we have a set of generous tax credits. Participation is voluntary, but if the companies want the credits they have to adopt particular technologies on a specified schedule, source inputs in a specified way, etc.

Which case is moving us more in the direction of the big green state? The second one shifts more expertise and decision making into the public sector, it expands the domain of the political not just to carbon emissions in general but to the organization of production. But unlike the first, it does not challenge the assumption that private profitability is the first requirement of any change in the organization of production. It respects capital-owners’ veto, while the first does not.

(Neoliberals, it goes without saying, would hate both — the first damages the business climate and discourages investment, while the second distorts market more.)

Or what about if we have a strict rule limiting the share of “dirty” assets in the portfolios of financial institutions? This is the path Europe seems to have been on, pre IRA. In our discussion, Daniela suggested that this might have been better, since it had more of an element of discipline — it involved sticks rather than just subsidy carrots. To Skanda or me, it looks weak compared with the US approach, both because it focuses on financing rather than real investment, and because it is based on a broad classification of assets rather than trying to identify key areas to push investment towards. (It was this debate that crystallized the idea in this post for me.)

Or again, suppose we have a sovereign wealth fund that takes equity stakes in green energy producers, as Labour seems to be proposing in the UK. How close is this to direct public provision of power?

In the table, under public ownership, I’ve distinguished public provision from public enterprise. The distinction I have in mind is between a service that is provided by government, by public employees, paid for out of the general budget, on the one hand; and entities that are owned by the government but are set up formally as independent enterprises, more or less self-financing, with their own governance, on the other. Nationalizing an industry, in the sense of taking ownership of the existing businesses, is not the same as providing something as a public service. To some people, the question of who owns a project is decisive. To others, a business where the government is the majority stakeholder, but which operates for profit, is not necessarily more public in a substantive sense than a business that isprivately owned but tightly regulated.

Moving to the right, government can change the decisions of private businesses by drawing sharp lines with regulation — “you must”; “you must not” — or in a smoother way with taxes and subsidies. A preference for the latter is an important part of the neoliberal program, effectively shifting the trading -off of different social goals to the private sector; there’s a good discussion of this in Beth Popp Berman’s Thinking Like an Economist. On the other side, hard rules are easier to enforce and better for democratic accountability — everybody knows what the minimum wage is. Of course there is a gray area in between: a regulation with weak penalties can function like a tax, while a sufficiently punitive tax is effectively a regulation.

Finally, incentives can be positive or negative, subsidies or taxes. This is another point where Daniela perhaps puts more stress than I might. Carrots and sticks, after all, are ways of getting the mule to move; either way, it’s the farmer deciding which way it goes. That said, the distinction certainly matters if fiscal capacity is limited; and of course it matters to business, who will always want the carrot.

On the vertical axis, the big distinction is whether what is being targeted is investment in the sense of the creation of new means of production, or investment in the sense of financing. Let’s step back a bit and think about why this matters.

There’s a model of business decision-making that you learn in school, which is perhaps implicitly held by people with more radical politics. Investment normally has to be financed; it involves the creation of real asset and a liability, which is held somewhere in financial system. You build a $10 million wind turbine, you issue a $10 million bond. Which real investment is worth doing, then, will depend on the terms on which business can issue liabilities. The higher the interest rate on the bond, the higher must be the income from the project it finances, to make it worth issuing.

Business, in this story, will invest in anything whose expected return exceeds their cost of capital; that cost of capital in turn is set in financial markets. From this point of view, a subsidy or incentive to holders of financial assets is equivalent to one to the underlying activity. Telling the power producer “I’ll give you 10 percent of the cost of the turbine you built” and telling the bank “I’ll give you 10 percent of the value of the bond you bought” are substantively the same thing.

As I said, this is the orthodox view. But it also implicitly underlies an analysis that talks about private capital without distinguishing between “capital” as a quantity of money in financial form, and “capital” as the concrete means of production of some private enterprise. If you don’t think that the question “what factory should I build” is essentially the same as the question “which factory’s debt should I hold?”, then it doesn’t make sense to use the same word for both.

Alternatively, we might argue that the relevant hurdle rate for private investment is well above borrowing costs and not very sensitive to them. Investment projects must pass several independent criteria and financing is often not the binding constraint. The required return is not set in financial markets; it is well above the prevailing interest rate and largely insensitive to it. If you look at survey evidence of corporate investment decisions, financing conditions seem to have very little to do with it. If this is true, a subsidy to an activity is very different from a subsidy to financial claims against that activity. (A long-standing theme of this blog is the pervasive illusion by which a claim on an income from something is equated with the thing itself.)

Daniela defines derisking as, among other things, “the production of inevitability”, which I think is exactly right as a description of the (genuine and important) trend toward endlessly broadening the range of claims that can be held in financial portfolios. But I am not convinced it is a good description of efforts to encourage functioning businesses to expand in certain directions. Even though we use the word “invest” for both.

Conversely, when financing is a constraint, as it often is for smaller businesses and households, it takes the form of being unable to access credit at all, or a hard limit on the quantity of financing available (due to limited collateral, etc.), rather than the price of it. One lesson of the Great Recession is that credit conditions matter much more for small businesses than for large ones. So to the extent that we want to work through financing, we need to be targeting our interventions at the sites where credit constraints actually bind. (The lower part of the top row, in terms of my table.) A general preference for green assets, as in Europe, will not achieve much; a program to lend specifically for, say, home retrofits might.

This leads to the final dimension, what I am calling fine-grained versus broad or rules-based interventions. (Perhaps one could come up with better labels.) While for some people the critical question is ownership, for others — including me — the critical question is market coordination versus public coordination. It is whether we, as the government, are consciously choosing to shift production in specific ways, or whether we are setting out broad priorities and letting prices and the profit motive determine what specific form they will take. This — and this may be the central point of this post — cuts across the other criteria. Privately-owned firms can have their investment choices substantively shaped by the public. Publicly-owned firms can respond to the market.

Or again, yes, one way of distinguishing incentives is whether they are positive or negative. But another is how precise they are — in how much detail they specify the behavior that is to be punished or rewarded. A fine-grained incentive effectively moves discretion about specific choices and tradeoffs to the entity offering the incentive. A broad incentive leaves it to the receiver. An incentive conditioned on X shifts more discretion to the public sector than an incentive conditioned on any of X, Y or Z, regardless of whether the incentive is a positive or negative.

Let me end with a few concrete examples.

In her paper, Daniela draws a sharp distinction between the IRA and CHIPS Act, with the former as a clear example of derisking and the latter a more positive model. The basis for this is that CHIPS includes penalties and explicit mandates, while the IRA is overwhelmingly about subsidies.¹. This is reflected in the table by CHIPS’ position to the left of the IRA. (Both are areas rather than points, given the range of provisions they include.) From another point of view, this is a less salient distinction; what matters is that they are both fairly fine-grained measures to redirect the investment decisions of private businesses. If you focus on the vertical axis they don’t look that different.

Similarly, Daniela points to things like the ECB’s climate action plan, which creates climate disclosure requirements for bank bond holdings and limits the use of carbon-linked bonds as collateral, as a possible alternative to the subsidy approach. It is true that these measures impose limits and penalties on the private sector, as opposed to the bottomless mimosas of the IRA. But the effectiveness of these measures would require a strong direct link from banks’ desired bond holdings, to the real investment decisions of productive businesses. I am very skeptical of such a link; I doubt measures like this will have any effect on real investment decisions at all. To me, that seems more salient.

The key point here is that Daniela and I agree 100% both that private profit should not be the condition of addressing public needs, and that the public sector does need to redirect investment toward particular ends. Where we differ, I think, is on which of those considerations is more relevant in this particular case.

If the EPA succeeds in imposing its tough new standards for greenhouse gas emissions from power plants, that will be an example of a rules-based rather than incentive-based policy. This is not exactly industrial policy — it leaves broad discretion to producers about how to meet the standards. But it is still more targeted than a carbon tax or permit, since it limits emissions at each individual plant rather than allowing producers to trade off lower emissions one place for higher emissions somewhere else.

Finally, consider the UK Labour Party’s proposal for a climate-focused National Wealth Fund, or similar proposals for green banks elsewhere. The team at Common Wealth has a very good discussion of how this could be a tool for actively redirecting credit as part of a broader green industrial policy. But other supporters of the idea stress ownership stakes as an end in itself. This is similar to the language one hears from advocates of social wealth funds: The goal is to replace private shareholders with the government, without necessarily changing anything about the companies that the shares are a claim on. ² From this point of view, there’s a critical difference between whether the fund or bank has an equity stake in the businesses it supports or only makes loans.

To me, that doesn’t matter. The important question is does it acts as an investment fund, buying the liabilities (bonds or shares or whatever) of established business for which there’s already a market? Or does it function as more of a bank, lending directly to smaller businesses and households that otherwise might not have access to credit? This would require a form of fine-grained targeting, as opposed to buying a broad set of assets that fit some general criteria.³ Climate advocate showing to shape the NWF need to think carefully about whether it’s more important for it to get ownership stakes or for it to target its lending to credit-constrained businesses.

My goal in all this is not to say that I am right and others are wrong (though obviously I have a point of view). My goal is to try to clarify where the disagreements are. The better we understand the contours of the landscape, the easier it will be to find a route toward where we want to go.