QUESTION: How many economists does it take to accurately pick industrial winners?

ANSWER:  None, the market will do it.

One of the unfortunate side effects of stimulus spending is that the government must decide where to spend.  The list of mistakes is long, but apparently soon forgotten:

the record shows, again and again, that industrial policy doesn’t work. The hall of infamy is filled with costly failures like Minitel (a dead-end French national communications network long since overtaken by the internet) and British Leyland (a nationalised car company). However many new justifications are invented for the government to pick winners, and coddle losers, it will remain a bad old idea. Thanks to globalisation and the rise of the information economy, new ideas move to market faster than ever before. No bureaucrat could have predicted the success of Nestlé’s Nespresso coffee-capsule system—just as none foresaw that utility vehicles, vacuum cleaners and tufted carpets (to cite examples noted by Charles Schultze, an American opponent of state planning) would have been some of America’s fastest-growing industries in the 1970s. Officials ignore the potential for innovation in consumer products or services and get seduced by the hype of voguish high-tech sectors.

The universal race to create green jobs is the latest example. Led by China and America, support for green tech is rapidly becoming one of the biggest industrial-policy efforts ever. Spain, blinded by visions of a solar future, subsidised the industry so lavishly that in 2008 the country accounted for two-fifths of the world’s new solar-power installations by wattage. This week it slashed its subsidies, but still has a bill of billions.

What can President Obama learn from Bain Capital? (iii)

Now that President Obama has begun a discussion about the role of business vs. the government in making decisions that move assets to higher (or lower) valued uses, the Washington Post has jumped into the middle of it:

Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions.

Some examples:

• Raser Technologies, $33 million in 2010. Bankrupt in 2012 and owes $1.5 million in back taxes. 
• ECOtality. $126.2 million in 2009. Has since incurred more than $45 million in losses and “under investigation for insider trading,” 
• Nevada Geothermal Power, $98.5 million in 2010. Now "significant doubt about the company’s ability to continue” 
• First Solar. $3 billion. Recently “fell to a record low in Nasdaq Stock Market trading and fired 30 percent of its workforce.” 
• Abound Solar, Inc. $400 million. Recently the company halted production and laid off 180 employees. 
• Beacon Power. $43 million. Now bankrupt.

UPDATE: A reader correctly points out that you cannot judge a policy by looking at only its failures, you must also look at the benefits. I have blogged before about the record of the industrial policy of picking winners and losers.

How to say "no."

Larry Summers tries to lower expectations in Detroit:

The future of activist government was at stake, he warned. If Obama’s programs wasted money, they would discredit progressivism itself. “I would have guessed that bailing out big banks was going to be unpopular, and bailing out real companies where people work was going to be popular,” he said. “But I was wrong. They were both unpopular. There’s a lot of suspicion around. Why this business but not that business? Is this industrial policy? Is this socialism? Why is the government moving in?”

Now what?

Former student John Tamny has an idea:

It’s probably naive to ask this considering the basic governmental incentive to grow, but if Washington won’t countenance the market-clearing and cleansing process that would be a path to recovery, why not at least minimize the government’s role through basic industrial policy? We always hear about how tax cuts “cost” the Treasury versus “stimulus” and $700B in spending that will allegedly aid the economy at a profit, but if bank balance sheets really are a mess, why not zero out capital gains treatment on the purchase of toxic securities to foster a private rescue?

Will falling dollar cause domestic inflation?

The question:

Since 2002, the U.S. dollar has depreciated over 40 percent against a basket of major currencies, weighted by their countries' trade with the United States. Over the past two years, the trade-weighted dollar has fallen by 15 percent. The decline in the value of the U.S. dollar, particularly if it continues, has raised concerns that it might lead to higher inflation. After all, a lower value of the dollar is likely to raise the cost of imports, which can feed into higher consumer prices.

The answer, from Fed Governor Mishkin:

Sizeable depreciations of the nominal exchange rate exert fairly small effects on consumer prices across a wide set of industrial countries, and these effects have declined over the past two decades. Exchange rate depreciations are thus likely to have less adverse effects on inflation than they have had in the past. The empirical evidence also indicates that pass-through from exchange rates to import prices is low and has declined markedly over the past two decades. This evidence suggests that there may be a weaker relationship between exchange rate fluctuations and nominal demand than prevailed in the past, which may make it easier for monetary policy to stabilize inflation and real activity.

What he seems to be saying is that monetary policy may be the proverbial "free lunch." We can lower interest rates, which makes the US a less attractive place to put money, which leads to dollar depreciation. But a weak dollar will not cause domestic inflation.