Sectoral Subsidies

A comprehensive survey of recent empirical research on industrial policy, arguing that advances in data and causal inference have moved the debate beyond whether governments should pursue sectoral interventions to how they can do so effectively. Drawing on evidence from East Asia, Europe, the United States, and Latin America, the authors find that carefully designed industrial strategies — particularly those targeting coordination failures, externalities, and tailored public inputs — can successfully restructure economic activity and boost long-term productivity. They also discuss how modern industrial policy is being reshaped by a richer set of instruments beyond subsidies and a greater emphasis on governance and institutional quality.

Acemoglu, Autor, and Johnson call for using procurement, reimbursement policy, and public R&D funding to steer AI development toward tools that complement rather than replace workers. They argue that since government insurance programs fund 43% of US healthcare spending and public funding covers 92% of K-12 expenditure, policymakers already have significant leverage to shape AI adoption in these sectors, using procurement standards and reimbursement rules to incentivize tools that complement workers rather than automate them.

The authors argue that sustained public investment in the care economy (childcare, early education, elder care, and health services) is not only a social imperative but an economic growth strategy. They document how federal investments of over $50 billion in child care during the pandemic stabilized the sector and supported nearly 10 million children, while noting that chronic underfunding means only 11% of the 11.5 million children eligible for federal child care subsidies are actually served. They make the case that care work is a sector where sustained government subsidy creates jobs, raises labor force participation (by freeing caregivers to work), and generates fiscal returns.