Government and Industry: Promises and perils

Posted: June 12, 2024

In her book, The Entrepreneurial State, Italian economist Mariana Mazzucato argues that governments should shape markets to tackle large collective-action problems like climate change. Private sector investment, she claims, has generally followed the lead of large, high-risk investments from governments. But government intervention in industry can also be a double-edged sword.

Here we look at four case studies that exemplify the complex relationship between the public and private industrial sectors.

Hydrogen: Solving coordination problems

Green hydrogen promises to be a renewable fuel source with zero carbon emissions. But companies don’t want to produce green hydrogen until they have customers, and customers don’t want to develop systems that rely on hydrogen until they’re guaranteed a ready supply.

Several governments are breaking this supply-demand stalemate by giving the industry a jumpstart:

• German state and federal governments are investing over €13 billion in public-private partnerships to develop hydrogen technology.
• The U.S. Inflation Reduction Act tax credit 45V provides up to $100 billion for low-emissions hydrogen, while the U.S. Bipartisan Infrastructure Law is funding Regional Clean Hydrogen Hubs, or H2Hubs, which will bring together both hydrogen producers and consumers to build infrastructure for a hydrogen economy.
• Saudi Arabia is partnering with private companies to fund the Neom Green Hydrogen Company, which aims to produce 600 tons of carbon-free hydrogen per day by 2026.

As many EU energy executives have said recently, there will only be market incentive to reap the rewards of a hydrogen economy if governments provide both subsidies and regulations. On the other hand, using government policy to shape markets also raises controversies about just how they should be shaped.

Wind power: Hampering progress

Whenever governments adjudicate conflicts between competing economic, environmental and political interests, industry runs the risk of being on the losing side. That’s where the U.S. offshore wind industry currently finds itself.

As of December 2023, China had the most offshore wind capacity in the world, at 31,527 megawatts (MW). The UK came in second, with 14,741 MW. Meanwhile, the U.S. had a measly 42 MW.

At least part of that low capacity is a consequence of tortuous governmental regulations and approval processes. In the U.S., it takes years for wind power companies to procure ocean leases and get permits from multiple local, tribal and state governments. They must also get approvals from various federal agencies, which themselves must consult with competing private interests, such as shipping, fishing and property development companies. The United States’ first large-scale offshore wind farm just started delivering power this year—nine years after it first acquired its ocean lease. Even now, it only has five turbines out of a planned 62 operating off Martha’s Vineyard.

NASA: Spinoff technology

The journalist James Pethokoukis, currently a policy analyst at the American Enterprise Institute, argues that governments should regulate industry less intensely and instead focus on funding basic research. He proposes that U.S. economic productivity took a dive in the 1970s, at least in part, because of decreases to NASA’s funding.

Technology developed by NASA has inspired the development of commercial technology like cellphone cameras, CAT scanners, LED technology, water purification systems, and more. Mazzucato notes, “In fact, there is not a single key technology behind the iPhone that has not been State-funded.” Just recently, NASA unveiled a wildfire digital twin that uses AI to predict wildfire progression and air pollution so responders can fight fires and protect residents from smoke more effectively. The agency now also partners with private enterprises to help them develop their own space programs. By developing useful technologies and sharing expertise, government agencies like NASA can spur innovation in the private sector without tipping the scales toward any particular industry.

Operation Warp Speed: Emergency intervention

Sometimes the payoff from government support can be measured in tens of thousands of lives. Vaccines developed by the U.S. government’s emergency vaccine-development program, Operation Warp Speed, saved close to 140,000 lives in just the first five months after they became available.

Government intervention sped up vaccine development in at least two different ways. First, both U.S. and European governments committed to buying vaccines—if they were effective—ahead of time. Those commitments were crucial to convince companies to do the necessary research because vaccine development has often proved a risky, profitless enterprise.

But what really set the U.S. government effort apart from its European counterparts was its investment in directly facilitating clinical trials, manufacturing and logistics. Within six months, the U.S. government built a supply chain to manufacture and distribute 300 million doses of each of six candidate vaccines—1.8 billion total. It did all this during the global supply chain crisis caused by the very pandemic it was working to ameliorate.

Striking a balance

Recently, the U.S. and European governments have loosened their commitments to free trade and are starting to embrace industrial policies that are more supportive of critical industries. This change is partially a reaction to the success of these kinds of policies in China, and other East Asian countries.

As we’ve seen, that kind of government involvement can help facilitate rapid responses to emergencies, like global pandemics, and prop up burgeoning industries for which there are few short-term benefits, but potentially huge long-term gains—as with green hydrogen and other decarbonization technologies. But, as we saw with wind power in the U.S., too much regulation can stymie progress.

Governments and industries are still figuring out how to partner with each other in ways that will prove mutually beneficial. And there may not be one clear model that applies to all cases. We're all best served when we continue to take stock, re-evaluate our plans, and stay open to innovation.