Evaluating the Impact of Industrial Policy at Local Levels

Various industrial strategies are being adopted to promote technological advancements, climate action, infrastructure growth, and innovation. These state-led initiatives are designed to strengthen productive capabilities, which constitute the economic framework for manufacturing goods and services. For instance, the Inflation Reduction Act aims to stimulate private sector investment in new manufacturing facilities and develop the supply chains and workforce skills necessary for the clean-energy sector.

The rise of industrial policies introduces a critical issue: how to assess their effectiveness. The objectives of these policies often target long-term structural changes that may take years to fully materialize. Current evaluation methods are often ineffective in capturing these changes in real time. Both quantitative and qualitative research struggle to determine whether the goals of these policies are being met, as broad measures of economic success may be influenced by numerous factors.

Focusing on local economies can provide insights into the effectiveness of industrial policies. Observing changes at this level can help gauge progress in developing productive capabilities and meeting socioeconomic objectives. Although the concept of productive capabilities can be somewhat abstract, alterations driven by industrial policy tend to be quantifiable and evident regionally. For instance, counties that attracted large manufacturing facilities experienced 12% productivity growth among existing plants over five years, compared to similar counties that were in consideration but did not ultimately host those plants.

Building productive capabilities requires time. Economic development is cumulative and path-dependent; the response to new investments is informed by existing local capabilities, which include production networks and prior access to government initiatives. Monitoring intermediate changes within local economies can provide early signals of whether the foundational economic structures are being established.

Local development is an outcome of industrial policy, despite policies often being designed with national or industry-wide goals. They are inherently place-based in their application. Therefore, tracking local economic activity not only reveals the success of industrial policies but also helps prevent exacerbating regional disparities.

To evaluate local changes, the proposed framework identifies seven mechanisms through which industrial policies can impact local economies: the expansion of local export bases, consumption multipliers, sectoral growth spurring complementary industries, clustering effects, general productivity improvements, enhanced local government capacity, and upgrades in the local labor market enabling higher wages and upward mobility.

While not every industrial policy will achieve all seven mechanisms, this framework provides a set of measurable outcomes for policymakers. Some indicators, such as industry employment statistics and housing prices, are readily available, while others—like local government capabilities and business relationships—will require new data sources for accurate assessment.

Implementing this framework for industrial policy evaluation will necessitate enhanced investment in the U.S. economic data infrastructure. As industrial policies are used to reconfigure economies, it’s vital to construct a system that accurately captures their impacts.

The complete paper, "All Economics is Local: Evaluating Industrial Policy Where It Lands," can be accessed through the Harvard Kennedy School’s Reimagining the Economy website.