Editors note: Senator Elizabeth Warren’s economic patriotism plan creates a split with Democrats still dedicated to cosmopolitan globalism. In some ways it is closer to President Trump’s economic nationalism.
The plan is to marry industrial policy to environmentalism and transform the economy.
[Matthew Yglesias | June 4, 2019 | Vox]
Sen. Elizabeth Warren is out Tuesday morning with another one of her signature plans. This time the theme is “economic patriotism” — an idea that challenges what Democrats see as a tension between Republican rhetoric around patriotism and the policies they employ to unshackle companies from government regulation.
Donald Trump fused his anti-immigration politics with his love of tariffs to create a politics of “nationalism” that worked well for him in some traditional Midwestern states. One possible response to that would be for Democrats to embrace a new role as the party of cosmopolitan globalism. But Warren, a 2020 candidate, wants to essentially redouble on themes that previous high-profile Democrats have only dabbled in.
The specific policy initiative is about green manufacturing (she’s unveiling the plan ahead of a campaign trip to Michigan and Indiana), and it’s just one plank in a larger economic patriotism platform. She’s describing the vision in broad outlines, and her team says she will flesh it out with more specific initiatives in the weeks to come.
Warren puts it this way: “‘American’ companies show only one real loyalty: to the short-term interests of their shareholders, a third of whom are foreign investors. If they can close up an American factory and ship jobs overseas to save a nickel, that’s exactly what they will do — abandoning loyal American workers and hollowing out American cities along the way.”
And she wants it to stop.
Warren wants a Department of Economic Development
One specific bullet point on Warren’s policy agenda is to create a unified Department of Economic Development that would combine the functions of the Commerce Department with the Small Business Administration, the Patent and Trademark Office, various job training and R&D programs scattered around the bureaucracy, and the export and trade agencies including the Office of the US Trade Representative.
The bureaucratic reorganization, however, is basically just to set the stage for a mission statement: “the new Department will have a single goal: creating and defending good American jobs.”
All administrations frame their policy agenda in terms of job creation. Warren’s specific idea is that economic policy should be more oriented toward promoting domestic manufacturing and domestic export-oriented industries.
“The prevailing view in Washington — from both political parties — has been that our government should not aggressively intervene in the markets to boost American workers,” she writes, before proclaiming that this approach “has failed spectacularly.”
She calls instead for a multifaceted economic development policy approach that’s loosely modeled on Germany, Japan, and China.
- She wants the Federal Reserve and other relevant agencies to focus on how the value of the US dollar contributes to the trade deficit.
- She wants more federal spending on research and development and stronger rules to ensure that federally funded R&D leads to production that is geographically located in the United States.
- She calls for various rules to ensure that the federal government captures the financial upside of commercial products that depend on federal R&D, with the money recycled into more future R&D programs.
- She wants this R&D spending spread geographically around the country to ensure it boosts economic activity in many parts of the country.
- She calls for a bigger version of the existing Export-Import Bank(interestingly, an issue on which Sen. Bernie Sanders tends to side with conservatives) that would fund a broader range of programs.
- She wants stricter rules requiring US government purchases to come from domestic sources.
- She calls for a ten-fold increase on spending on apprenticeship programs and a restructuring of some existing job training programs to more clearly resemble the widely admired German apprenticeship model.
This is all broadly speaking “industrial policy,” a concept that (largely under the influence of academic economists) went out of fashion in policy circles, but that’s been making a comeback in recent years largely thanks to the success of a number of East Asian countries. The International Monetary Fund even recently released a paper called “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy,” as if to officially mark industrial policy’s return to orthodoxy.
Whether this actually works, of course, ends up hinging a lot on the details.
Industrial policy: the good, the bad, and the ugly
The fundamental concept of industrial policy, as economist Noah Smith described in a recent Bloomberg column, is that “by pushing private companies to increase exports of sophisticated products — semiconductors and aircraft instead of soybeans and oil — governments can stimulate productivity gains.”
Fans of Hamilton will recall that Alexander Hamilton favored setting a fairly high tariff on imported manufactured goods to encourage Americans to set up their own factories, rather than relying on imports from Britain. Thomas Jefferson, more in line with what you’d read in an economics textbook, argued that this would senselessly raise the cost of living for most Americans (who at the time were farmers) to enrich a relatively small cabal of industrialists and bankers. Hamilton’s view was that to become a really rich and successful country, the United States had to be at the forefront of global cutting-edge technology — which meant building factories — and not just be a complacent bunch of plantation owners.
You see echoes of this debate in Warren’s text.
Her desire for monetary policy that’s more attendant to the needs of American manufacturing implies that most Americans (who these days work in local services like health care, education, restaurants, and other retail locations) will on balance pay higher prices for stuff. The case for doing this is that globally competitive manufacturing industries can breed national wealth over time in a way that non-tradable things like hair salons and child care centers can’t.
Similarly, imposing more stringent “buy American” rules on the federal government will raise costs — implying either stingier services or higher taxes. But in exchange we could be creating the globally competitive industries of the future. Due to the unique sensitivities of the defense industry, the United States already implicitly does this in the realm of aerospace. The Pentagon isn’t going to just let “the market” decide whether or not the United States has an airplane manufacturing industry. And that commitment to American aerospace helps explain why the United States has a globally competitive industry building and exporting civilian airplanes as well as military ones.
That’s the good and the bad — short-term costs in the form of higher prices balanced against long-term gains in the form of nurturing the industries of tomorrow.
The ugly is that in a practical sense industry policy can devolve into narrow interest group politics. One example is the way America treats domestic procurement rules for passenger trains. While Japan, China, and Europe have built up their domestic train industries into globally competitive exporters, the United States has not. We don’t use or make passenger trains on remotely the kind of scale that would make that viable.
But we also don’t take advantage of European and Asian proficiency to just use their good trains. Instead our domestic procurement policies encourage Amtrak to buy trains that cost double what European railroads would pay, but then politicians send out press releases celebrating the local job creation. Even more alarmingly, you can get a situation like the Boeing 737 Max fiasco, where it appears that the relevant agencies were so committed to the success of a major American manufacturing company that they turned a blind eye to safety problems.
Warren’s pitch, obviously, is that she wants the good kind of economic patriotism where you promote forward-looking economic development. And green manufacturing is a promising place to start.
Industrial policy for clean energy
The specific Warren proposal on this score has three parts, a Green Apollo Program, a Green Marshall Plan, and a Green Industrial Mobilization.
The Apollo Program is a ten-fold increase in clean energy R&D funding, the Marshall Plan is a $100 billion program to help foreign countries buy American-made clean technology, and the Industrial Mobilization (which it would perhaps be more natural to call a “Green New Deal,” were that name not already taken) proposes a massive $1.5 trillion federal procurement initiative over 10 years to buy “American-made clean, renewable, and emission free products for federal, state, and local use and for export.” That’s roughly the scale of federal spending on defense acquisition and would of course turn the federal government into a huge player in this market.
As a target for industrial policy, clean energy and clean technology make a lot of sense. The threat of climate change and other forms of air pollution gives people around the world a strong motive to want to shift energy production in this direction in a way that is knowable by policymakers.
Similarly, because climate change has a global impact, the American people have an interest in seeing foreign countries shift to cleaner modes of power production, so subsidizing their consumption of American-made clean energy is a very reasonable way of subsidizing American manufacturing. And, most of all, this is clearly about trying to push the frontier forward rather than trying to help politically connected incumbents hang on.
Still, the basic tensions around cost remain. In her Green Industrial Mobilization plank, Warren specifies that contracts will go to companies that meet a $15/hour wage floor with a minimum of 12 weeks paid family leave and that maintain a neutral posture in union-organizing drives. That’s all in line with standard progressive economic policy priorities, but it means Warren is proposing to buy less with her $1.5 trillion procurement drive than could otherwise be obtained.
That in turn underscores some of the differences from industrial policy in developing countries, where the idea is generally to move people off the farm and into the factory, regardless of how little the factory job pays. It’s a challenge to make this work in a rich country like the United States where “good jobs,” and not just industrialization, are the goal. But the nature of these big bets is that if they do pay off and give birth to a series of next-generation industries that sustain communities all across the country, then down the road nobody is going to be complaining about the cost.
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