When I wrote recently about the growing number of entrepreneurs, investors, and Wall Street veterans entering government to run industrial policy and public investment programs, many readers interpreted my argument as a simple warning: government is bad at investing.
I’m also a great believer in the market and have seen the government bungle plenty, but with respect, I think you left out the part where the market’s wisdom led us into a situation in which we cannot make missiles, radar, airplanes or even basic ammunition without first asking China’s permission.
This rare earth problem isn’t too big for the market to solve, it’s too small for the market to solve. The gross value of rare earths we need is measured in the hundreds of millions. The cost to produce them is in the tens of billions. Chinese policies ensures there can be no margin sufficient to *ever* overcome that gap. And the cost of getting cut off is measured in the trillions. That’s an existential risk - both for American manufacturers and for America itself.
The investments have already - in a single year - broken America’s categorical dependence on rare earths from China. That vulnerability had existed for two decades.
It’s an existential problem that the market has not, cannot, and will not solve. Is correcting that vulnerability worth 0.5% of our defense budget? I’d argue so. Without that investment, we functionally don’t have a military anymore. We have the ghost of one.
The market similarly decided it was wise to put 90% of advanced semiconductors in a location our peer adversary has made clear they’re willing to take by force. The same adversary who routinely uses export controls (and non-market subsidies) for coercion and manipulation. In a war, they’ll use it for a lot more than that.
The chips (and rare earths) are an existential threat. It’s not a “nice to have”.
Moreover, the market didn’t decide what factories should produce in WWII. The precursor to the Defense Production Act did.
Back then, the market created a manufacturing powerhouse. But the market didn’t win WWII. Government policy interfering with that manufacturing sector and telling it what to make and in what quantities did.
The Japanese had better ships and the Germans better tanks. We could out produce them. Now it’s the reverse. We struggle to produce one warship a year. China can build 200. We have 103 merchant vessels (which are utterly necessary to support logistics in a major war). China has 11,000.
Should we accept this simply because our costs are 2-3x higher? Will shipbuilders pump billions into loss-making shipyards? Will banks loan for such a purpose?
That’s the market’s wisdom at work again. It’s yet another pair of existential threats.
And finally, there are some notable flaws in the claim itself. The government isn’t in fact terrible at investing. It wasn’t the market that spontaneously invented Velcro or GPS or the internet or the foundational technology for touch screens, voice recognition, or drones for that matter. Government investments through DARPA did.
The government’s “only role” isn’t to protect individual rights. It’s also to provide for the common defense - and sometimes (especially war time) that means allocating some investment dollars to things that make no short-term economic sense. Because without making and sustaining such investments, economic and personal freedom would be (and could be) right out the window.
All told, in $31 trillion economy, I’ll still sleep ok if we waste a few hundred million here and there - even billions - in trying to address some of these problems. I won’t sleep so well, however, if we don’t.
"The Japanese had better ships and the Germans better tanks."
This is wrong. The Japanese excelled only in night vision, a matter of crew training, which radar rendered useless. Their ships were neither worse nor better on the whole.
What makes a tank better? The best German tanks were individually better armored, and sometimes armed, than the best British and American and Russian tanks, but slower, shorter ranged, expensive, unreliable, and harder to repair.
Everything's a tradeoff. Stop concentrating on the details you like and pretending there is no unseen.
"This rare earth problem isn’t too big for the market to solve, it’s too small for the market to solve."
Nonsense. The market solves far smaller problems every day. The rare earths problem is due entirely to government regulations blocking mining and refining.
I’ll grant you the industry was lost and thus the problem was initially caused by misguided regulation. But getting rid of all the regulations now isn’t going to make that math pencil when our adversary is willing to spend whatever it takes to make sure American producers can be undercut on price. Period. Full stop.
This is my problem with the “market can solve all problems” and shushing anybody who dares argue otherwise.
The market can solve *economic* problems. The free market works when it’s a bunch of capitalists competing in a free market. But that’s not what this is. And more broadly, the market can’t solve all national security or geopolitical problems. That’s not its job. We’re in a war and a shortsighted, myopic focus on efficiency maximization put us on the losing end of it. Too much of a good thing here.
“Period. Full stop.” is signalling that everyone else is wrong, so they should just shut up and listen to their betters. Talk about shushing everybody!
Anyone who “grants” me the privilege of being right, then turns around and says that was then, this is now, and only government is powerful and wise enough to fix what government screwed up … words fail me for that kind of arrogant stupidity.
I granted a key part of your premise and invited more evidence. You’re hearing what you think you’re hearing and getting very close to ad hominem instead of addressing substance.
As a thought exercise to make the “full stop” point: if the Chinese government subsidizes 100% of the operating costs of their firms for geostrategic reasons, our firms will still have costs. Even with 100% of regulations removed, there are costs involved in doing business.
I’d also argue that there is an assumption here that it would be the most productive use of capital to produce rare earths in America if regulations were removed and I’m not sure that’s true.
For free market ideologues (and I’d very much consider myself one, hence why I follow a smart academic doing research at Mercatus in the first place), the highest good is for the most productive use of capital. But it doesn’t necessarily follow that all things which are vital national security interests are the most productive use of capital. I would argue that rare earths, shipbuilding, and securing a sufficient portion of the advanced semiconductor supply chain inside our castle walls are all potentially just such cases.
And even if you were right that removing regulations is all it would take, and even if all relevant regulations were removed tomorrow, there is also the very tactical question of speed. The timeline for organic renewal of industries lost over decades may not match up with the more urgent national security need. Nor, I would argue, is the risk of being wrong on the market assumptions in proportion to the risk we were facing just a year ago.
Having said all of that, let me apologize for offending you. It certainly wasn’t my intention to shush you. I’m looking for actual substantive counter arguments, logic, and proof. Not talking points. Not dogma. Not personal attacks. I assure you I do my level best to remain intellectually humble, openminded, and willing to be persuaded. In fact I just wrote a piece a couple weeks ago about being wrong a lot (and inevitably so).
This is utterly irrelevant but I can't resist the temptation.
"higher borrowing costs ab=nd other distortions"
Someone who makes my typoes! If your econ expertise weren't enough, this seals the deal.
I’m also a great believer in the market and have seen the government bungle plenty, but with respect, I think you left out the part where the market’s wisdom led us into a situation in which we cannot make missiles, radar, airplanes or even basic ammunition without first asking China’s permission.
This rare earth problem isn’t too big for the market to solve, it’s too small for the market to solve. The gross value of rare earths we need is measured in the hundreds of millions. The cost to produce them is in the tens of billions. Chinese policies ensures there can be no margin sufficient to *ever* overcome that gap. And the cost of getting cut off is measured in the trillions. That’s an existential risk - both for American manufacturers and for America itself.
The investments have already - in a single year - broken America’s categorical dependence on rare earths from China. That vulnerability had existed for two decades.
It’s an existential problem that the market has not, cannot, and will not solve. Is correcting that vulnerability worth 0.5% of our defense budget? I’d argue so. Without that investment, we functionally don’t have a military anymore. We have the ghost of one.
The market similarly decided it was wise to put 90% of advanced semiconductors in a location our peer adversary has made clear they’re willing to take by force. The same adversary who routinely uses export controls (and non-market subsidies) for coercion and manipulation. In a war, they’ll use it for a lot more than that.
The chips (and rare earths) are an existential threat. It’s not a “nice to have”.
Moreover, the market didn’t decide what factories should produce in WWII. The precursor to the Defense Production Act did.
Back then, the market created a manufacturing powerhouse. But the market didn’t win WWII. Government policy interfering with that manufacturing sector and telling it what to make and in what quantities did.
The Japanese had better ships and the Germans better tanks. We could out produce them. Now it’s the reverse. We struggle to produce one warship a year. China can build 200. We have 103 merchant vessels (which are utterly necessary to support logistics in a major war). China has 11,000.
Should we accept this simply because our costs are 2-3x higher? Will shipbuilders pump billions into loss-making shipyards? Will banks loan for such a purpose?
That’s the market’s wisdom at work again. It’s yet another pair of existential threats.
And finally, there are some notable flaws in the claim itself. The government isn’t in fact terrible at investing. It wasn’t the market that spontaneously invented Velcro or GPS or the internet or the foundational technology for touch screens, voice recognition, or drones for that matter. Government investments through DARPA did.
The government’s “only role” isn’t to protect individual rights. It’s also to provide for the common defense - and sometimes (especially war time) that means allocating some investment dollars to things that make no short-term economic sense. Because without making and sustaining such investments, economic and personal freedom would be (and could be) right out the window.
All told, in $31 trillion economy, I’ll still sleep ok if we waste a few hundred million here and there - even billions - in trying to address some of these problems. I won’t sleep so well, however, if we don’t.
Another point:
"The Japanese had better ships and the Germans better tanks."
This is wrong. The Japanese excelled only in night vision, a matter of crew training, which radar rendered useless. Their ships were neither worse nor better on the whole.
What makes a tank better? The best German tanks were individually better armored, and sometimes armed, than the best British and American and Russian tanks, but slower, shorter ranged, expensive, unreliable, and harder to repair.
Everything's a tradeoff. Stop concentrating on the details you like and pretending there is no unseen.
The rare earths problem is not a market problem.
"This rare earth problem isn’t too big for the market to solve, it’s too small for the market to solve."
Nonsense. The market solves far smaller problems every day. The rare earths problem is due entirely to government regulations blocking mining and refining.
I’ll grant you the industry was lost and thus the problem was initially caused by misguided regulation. But getting rid of all the regulations now isn’t going to make that math pencil when our adversary is willing to spend whatever it takes to make sure American producers can be undercut on price. Period. Full stop.
This is my problem with the “market can solve all problems” and shushing anybody who dares argue otherwise.
The market can solve *economic* problems. The free market works when it’s a bunch of capitalists competing in a free market. But that’s not what this is. And more broadly, the market can’t solve all national security or geopolitical problems. That’s not its job. We’re in a war and a shortsighted, myopic focus on efficiency maximization put us on the losing end of it. Too much of a good thing here.
“Period. Full stop.” is signalling that everyone else is wrong, so they should just shut up and listen to their betters. Talk about shushing everybody!
Anyone who “grants” me the privilege of being right, then turns around and says that was then, this is now, and only government is powerful and wise enough to fix what government screwed up … words fail me for that kind of arrogant stupidity.
I granted a key part of your premise and invited more evidence. You’re hearing what you think you’re hearing and getting very close to ad hominem instead of addressing substance.
As a thought exercise to make the “full stop” point: if the Chinese government subsidizes 100% of the operating costs of their firms for geostrategic reasons, our firms will still have costs. Even with 100% of regulations removed, there are costs involved in doing business.
I’d also argue that there is an assumption here that it would be the most productive use of capital to produce rare earths in America if regulations were removed and I’m not sure that’s true.
For free market ideologues (and I’d very much consider myself one, hence why I follow a smart academic doing research at Mercatus in the first place), the highest good is for the most productive use of capital. But it doesn’t necessarily follow that all things which are vital national security interests are the most productive use of capital. I would argue that rare earths, shipbuilding, and securing a sufficient portion of the advanced semiconductor supply chain inside our castle walls are all potentially just such cases.
And even if you were right that removing regulations is all it would take, and even if all relevant regulations were removed tomorrow, there is also the very tactical question of speed. The timeline for organic renewal of industries lost over decades may not match up with the more urgent national security need. Nor, I would argue, is the risk of being wrong on the market assumptions in proportion to the risk we were facing just a year ago.
Having said all of that, let me apologize for offending you. It certainly wasn’t my intention to shush you. I’m looking for actual substantive counter arguments, logic, and proof. Not talking points. Not dogma. Not personal attacks. I assure you I do my level best to remain intellectually humble, openminded, and willing to be persuaded. In fact I just wrote a piece a couple weeks ago about being wrong a lot (and inevitably so).