The Curse of Nostalgia: Industrial Policy in the United States
Despite this uncertainty, industrial policy’s avid supporters are prematurely declaring victory in the hopes that this “new stage” is actually a paradigm shift. Some even claim that the United States is entering a “post-neoliberal era.”[4] The left-leaning New York–based think tank the Roosevelt Institute has launched a newsletter praising Bidenomics, and claims that it is already working.[5] Heather Boushey, a member of President Biden’s Council of Economic Advisors, argued that “sometimes new paradigms are dismissed for not conforming to the textbooks of decades past. But when the data and evidence evolve, our views need to change too.”[6] Other prominent economists have argued that the field is reconsidering industrial policy given new evidence.[7]
Not all of the evidence presented, however, supports the advocates’ claims. While traditional arguments have reemerged, the current debate over industrial policy differs in that its supporters are making three empirical errors: they are incorrectly framing the debate, they are conflating various goals that work at cross-purposes, and they are misreading history. A critical look at the arguments for industrial policy, past and present, reveals that its recent popularity is not only misguided, but is likely to have negative economic and geopolitical consequences for the United States and the world.
The Neoliberal Straw Man
Contemporary supporters of industrial policy rely on a straw man to make their case, painting critics of industrial policy as neoliberals that hold blind faith in markets and consider all government intervention in the economy bad policy.[8] However, those who are skeptical of the new industrial policy are not market fundamentalists. In fact, most skeptics are not claiming that industrial policy, across the board, cannot work.
The crux of the critique of modern industrial policy in the United States is that while it can have some success, there will also be plenty of failure along the way. The evidence bears this out. Trade experts Gary Hufbauer and Euijin Jung studied fifty years of U.S. industrial policy and found that it largely delivered mixed results.[9] Their bottom line was caution. The other key takeaway was that successful efforts invested in basic research and development and opened foreign markets to U.S. goods. A notable source of failure was protectionism, or rather, the inability of industries to survive absent measures to shield them from competition. Therefore, industrial policy’s skeptics generally urge caution and ask supporters to craft their subsidies in a careful and thoughtful way.
One approach would be to use existing institutions to identify “good” versus “bad” subsidies, and update subsidy disciplines where required.[10] The World Trade Organization’s Subsidies and Countervailing Measures agreement went into effect in 1995 and contained a list of permitted (“non-actionable”) subsidies for certain research activities, disadvantaged regions, or adaptation to new environmental requirements. However, consensus could not be reached to extend those provisions, so they lapsed on January 1, 2000. Recent developments indicate a desire to revisit the distinction between good and bad subsidies. In fact, the Fisheries Subsidies agreement developed a new category of prohibited subsidies, and introduced the notion that subsidies disciplines could be tied to sustainable development goals. Focusing on global commons goals is a pragmatic way to think about coordinating globally on investments targeted at addressing specific outcomes, such as reducing overfishing.
If a country throws enough money at a problem, it is true that there might be some industrial policy successes. At the same time, one need only look at China’s experience of massive state subsidies to see that it is riddled with examples of failure.[11] In the end, those costs far outweigh the benefits. China, meanwhile, can bear the political cost of its interventions because its government does not answer to its people. Democratic countries lack that privilege, and any bad economic outcomes will not escape notice at the polls.
Conflicting Goals
The second issue is that industrial policy’s supporters are conflating various goals that work at cross-purposes, which in the end, will lead to predictable outcomes that are already well documented in the literature. The new industrial policy is about saving the environment, creating jobs, and competing with China. But this smorgasbord of policy goals reveals a lack of strategy about what industrial policy is supposed to achieve and gives the administration political cover in defining concrete outcomes that can be used to measure success or failure. It is also filled with contradictions.[12]
Let’s take countering China. U.S. Trade Representative Katherine Tai has argued that this is a primary motivation of the Inflation Reduction Act, in addition to climate change, to address “a significant distortion” in the global economy.[13] This explains why the electric vehicle (EV) tax credit and battery requirements are structured in such a way so as to prioritize U.S. jobs and investments over climate goals. If the U.S. government simply wanted Americans to buy more EVs, it should not matter where they are assembled, or where the component parts come from. The Biden administration certainly recognizes this tension, otherwise the Department of Treasury would not have taken action to relax the EV tax credit requirements after U.S. trading partners complained, and Tai would not have negotiated a critical-minerals deal with Japan to ensure its participation in battery supply chains.[14]
Looking at both the Inflation Reduction Act and the CHIPS and Science Act, the current approach to industrial policy resembles industrial policy of the past—a grab bag that delivers political rents to specific allies. Biden is trying to replicate this spending-to-win strategy.[15] After all, investments are being directed to major political battleground states such as Arizona, North Carolina, Ohio, and Michigan, which Joe Biden must win in 2024 in order to stay in office.
Yet, supporters of this approach should be cautious in selling this as a jobs program. Initial estimates suggest that the semiconductor industry will add 115,000 jobs because of CHIPS funding.[16] When the U.S. economy creates that many jobs in two weeks, on average, pitching industrial policy as a jobs program rings hollow. So is modern industrial strategy, as some in the United States like to call it, really about jobs, competing with China, or just manufacturing more things in the country? It’s difficult to tell. And, if the outcome by which this new set of policies should be measured is hard to define, then it would be fair to question the assumptions that inform the identification of the problem itself.
Furthermore, if U.S. actions encourage other countries to make similar investments, it could proliferate subsidies delinked from a clear policy goal. This would, in turn, make it easier for countries to justify the use of subsidies for nearly anything, and further risk a global subsidies race. The unfortunate reality of this is the fact that very few countries have the largesse to engage in such investments. The United States, the European Union, and China are responsible for more than half of all subsidy measures, which raises questions about global equity and inclusiveness.[17] There is also a false assumption that the creation of new technology will support developing countries as well. But without technology transfer agreements or investments to manufacture and develop electric vehicles and green tech in poorer nations, it is hard to see how they will benefit directly from those large investments. This is precisely where the goals of job creation at home and fighting a global challenge such as climate change are at odds. Domestic investments are only one part of the solution to climate change, but in the end, it will take getting all countries on board to affect lasting change.
The lack of clarity in what current industrial policy is trying to correct for further underscores the need for a well-articulated industrial policy where the goals are plainly stated, the trade-offs are specified, and where an assessment is done to determine where countries should focus government interventions for the greatest benefits. A recent report by the National Network for Critical Technology Assessment, emphasizes this point, and also spells out the challenges presented by purely top-down coordination or a framework that tries to optimize investments by copying “competitors’ style and approach.”[18] Being clear-eyed about both stakes and outcomes is critical if current industrial policies aim to avoid replicating the long history of failure that other countries have experienced.
Misreading History
Administration officials and industrial policy supporters often like to quote Alexander Hamilton, particularly when he wrote, “the public purse must supply the deficiency of private resource. In what can it be so useful as in prompting and improving the efforts of industry?”[19] However, broad reference to Hamilton’s eighty-plus page Report on Manufacturers is missing a critical nuance in his argument. Hamilton was focused on the economics of encouraging industry in the United States, and the prevailing view at the time was to impose high tariffs to prevent foreign competition. But, Hamilton knew that tariffs imposed costs, particularly on technological imports from Britain that U.S. manufacturers relied on to make their wares. Thus, he saw the subsidization of select industries as a better policy option than tariffs because “it avoids the inconvenience of a temporary augmentation of price.”[20]
Hamilton also warned that subsidies should not be expansive, but rather should focus on infant industries, arguing that subsidies for “manufactures long established must almost always be of questionable policy.”[21] In fact, Hamilton was so concerned about “an appearance of giving away the public money” that “serve to enrich particular classes, at the expence [sic] of the Community,” that he suggested great care should be given to selecting which industries to support. Hamilton would not live to see the policy he proposed go into effect, but when it did, subsidies were combined with broad tariffs, something Hamilton would not have agreed with.
Some supporters of bringing manufacturing back home and a more protectionist U.S. trade policy argue that high tariffs helped the U.S. economy develop into what it is today. However, as economic historian Douglas Irwin has found, while the United States did have high tariffs as a new country, it also had a relatively open economy, mainly through the free flow of immigration, capital, and technology, while also maintaining a domestically competitive market. He argues that a misreading of history is largely responsible for this prevailing and incorrect belief that rich countries became successful because they protected manufacturing, and that this justifies industrial policy today.[22]
The issue does not stop with a misreading of U.S. history, but also of countries like Japan that are thought to have developed because of a commitment to industrial planning. However, as scholars of Japan’s industrial policy have shown, there is no evidence that industrial policies “raised productivity growth among the more rapidly growing or technologically advanced sectors of the Japanese economy.”[23] In fact, the evidence shows that industrial policies often end up propping up declining industries rather than emerging ones. This in turn results in several unseen costs that can hinder overall economic growth.[24]
Furthermore, as the president of the Peterson Institute for International Economics, Adam Posen, has observed, “the U.S. industrial economy has a vast excess of job vacancies relative to the number of available workers, with notable shortages in the kinds of employees needed for the production of semiconductor chips and their components.”[25] One solution, he says, is more immigration, a policy proposal that is “unlikely in today’s political climate.” At the same time, this is precisely why any pivot to industrial policy needs to think beyond our own borders, and work with our allies to address shared problems in the absence of expanding immigration. The Biden administration seems to be addressing this through its friendshoring agenda, but this is also plagued with similar goal identification problems.[26]
The Curse of Nostalgia
It will take time to see what comes of the IRA, CHIPS, and any additional efforts that seek to expand industrial policy in the United States and elsewhere. However, anyone that claims that their success is guaranteed, or that these initiatives are worth it despite their costs, will face a harsh reality when everything does not go according to plan. This all-or-nothing approach will hamper the Biden administration’s goals and prevent the United States from developing an actual industrial strategy that responds to real needs, not political wins.
In fact, the biggest threat to current efforts are the politics that motivate them. The growing fear that President Trump will return to office if his supporters are not won over and their grievances addressed has led Joe Biden to double down on Trump’s populist protectionism.[27] But this also misses the reasons for populist anger, which does not stem from “economic anxiety but of perceived declines in economic status.”[28] Past presidents have tried to address this through erecting barriers to competition in the hopes of going back to a bygone era of American greatness, but failed to deliver on grand promises.
Today’s nostalgia has prompted the rise of industrial policy, which risks a similar fate. This does not mean there will be a laundry list of failures. Not everything will go wrong. But the fact that there are many people so committed to the success of these policies, regardless of actual outcomes, means that there will likely be some bad investments that countries will continue to keep afloat even if they are not working. On top of that, the most likely outcome will be more trade wars and the exacerbation of already strained relations with our allies.
To understand the future of industrial policy, we must look to the past. Today’s industrial policy is not new, nor is it a paradigm shift if it repeats the mistakes of the past. In the end, governments should not expect better outcomes if they travel down the same path.
Inu Manak is Fellow for Trade Policy at CFR. This article is published courtesy of the Council on Foreign Relations (CFR). This article was published in Aus Politik und Zeitgeschichte on January 20, 2024, and is reposted in English with permission.
