Industrial Policy Isn’t Boring. It’s Big, and It Has United the Left and Right.

Editor’s note. The world is coming around to industrial strategy. As usual, CPA was ahead of the trend with our national competitiveness strategy four years ago.

Many Republicans and Democrats agree: Governments should intervene to help the industries and technologies of the future.

[Julius Krein | August 20, 2019 | NY Times]

Just a few years ago, the phrase “industrial policy” was employed mainly as a term of abuse. Economists almost universally insisted that state interventions to improve competitiveness, prioritize investment in strategic sectors and structure market incentives around political goals were backward policies doomed to failure — whether applied in America, Asia or anywhere in between.

The political consensus that had prevailed since Ronald Reagan, across both Republican and Democratic administrations, favored free markets, trade liberalization and deregulated finance. Bill Clinton, for instance, reduced trade barriers and the regulatory structure around finance as enthusiastically as both Bush administrations.

In the wake of the 2008 financial crisis, however, the Reagan-Bush-Clinton neoliberal consensus seems intellectually and politically bankrupt. Party “establishments” appear incapable of proposing, much less advancing, policies sufficient to address major economic challenges. And the Trump administration has pursued a mostly incoherent and so far ineffective combination of tax cuts and tariffs.

But now a growing number of politicians and intellectuals — left and right, “populist” and “establishment,” from Senator Marco Rubio to Senator Elizabeth Warren, Representative Alexandria Ocasio-Cortez to Senator Josh Hawley — are finding common ground under the banner of industrial policy. Even the typically neoliberal Financial Times editorial board recently argued in favor of industrial policy, calling on the United States to “drop concerns around state planning.”

Why now? The United States has essentially experienced two lost decades, and inequality has reached Gilded Age levels. Productivity growth has stagnated, and trade deficits in advanced technology products continue to widen. The “information economy” job of the future has turned out to be driving an Uber, along with other poorly paid, precarious, low-value-added service jobs. The growth of the financial sector has done little to encourage productive investment in the real economy, and the short-term financial engineering it facilitates has inflated catastrophic asset bubbles.

The deindustrialization of the United States has now proceeded to such an extent that even critical defense sectors are compromised. From submarines and aircraft to medicine, the military is dependent on foreign supply chains, including those running through geopolitical rivals. In telecommunications, China essentially won the 5G race, and recent efforts to discourage allies from buying Huawei network components have been rebuffed on multiple occasions. America is also at risk of being leapfrogged by China in key areas like A.I. and quantum computing.

These problems will not be solved by tariffs alone or related proposals like a market access charge on foreign capital. In the first place, foreign central banks can easily retaliate against these measures through currency manipulation or other means. More fundamentally, United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia, and more and more research and development funding is flowing to China.

A successful American industrial policy would draw on replicable foreign models as well as take lessons from our history. Some simple first steps would be to update the Small Business Investment Company and Small Business Innovation Research programs — which played a role in catalyzing Silicon Valley decades ago — to focus more on domestic hardware businesses. The upcoming reauthorization of the Small Business Administration offers a chance to make changes along these lines. Government agencies could also step in to seed investment funds focused on strategic industries and to incentivize commercial lending to key sectors, policies that have proven successful in other countries (including in Canada, Britain, Israel, South Korea, China, Taiwan and Singapore).

The federal government should also be spending more on basic research, which has declined significantly in recent decades as a percentage of gross domestic product. Already too much of basic research funding effectively functions as a subsidy for other countries. Because of a lack of scale-up funding or technical capacity or both, many inventions cannot be produced in the United States. Too often, the most promising ideas migrate to Asia, where the factories and, increasingly, the engineering talent and funding for non-software companies are. So the United States needs to invest more in applied research, perhaps borrowing from Germany’s Fraunhofer Institutes. Elizabeth Warren has also proposed a government-sponsored research and licensing model for the pharmaceutical industry, which could be applied to other industries as well.

More ambitiously, Timothy Meyer and Ganesh Sitaraman of Vanderbilt Law School have proposed a large-scale reorganization of federal agencies, bringing domestic development, trade and export promotion under one Department of Economic Growth and Security, which would focus on both domestic economic policy and international competition. Ms. Warren has embraced a version of this idea. Similarly, Senator Gary Peters, Democrat of Michigan, has called for the creation of a National Institute of Manufacturing, taking inspiration from the National Institutes of Health. As America falls behind in key technologies, we may also have to use defense procurement, along with other carrots and sticks, to mobilize companies to compete in strategic sectors, such as 5G. America has a long and successful history of employing this sort of robust industrial policy.

In addition to improving competitiveness and productivity growth, industrial policy may be the only way to meaningfully increase economic opportunities for struggling regions and populations. More generally, during the last several decades, the benefits of productivity gains have mostly accrued to the largest capital holders. A successful industrial policy would aim to strengthen worker bargaining power while organizing and training a better skilled labor force. Industrial policy also involves, and even depends upon, rebuilding infrastructure.

Most debates concerning industrial policy have so far occurred within, rather than between, political parties. But as the issue gains prominence within both parties, differences over the priorities and content of industrial policy can be expected to fall along partisan lines. The right will be likely to prioritize technological competition and securing the defense industrial base. The left is likely to emphasize wages, environmental sustainability and using industrial policy to alter the “primary distribution” of wealth — rather than relying solely on secondary redistribution through taxes and transfers while leaving basic neoliberal structures intact — as can be seen in the Green New Deal. Just as Republicans and Democrats in the Bush-Clinton era had intense debates over issues like marginal tax rates, all the while advancing an underlying neoliberal agenda, so will future debates play out in an era of renewed industrial policy. Uniting both sides will be a desire to revitalize domestic industry and to use the state to ensure that the economy serves a broader set of stakeholders and public interests rather than only large shareholders.

Perhaps more important than any partisan debates will be the position of the corporate sector. There is no industrial policy without industry, after all, and this is especially true given the oligarchic character of American politics. For several decades, business leaders have been indoctrinated to believe that success is simply a matter of maximizing short-term profits for shareholders. Corporate America and its lobbyists have prioritized labor arbitrage over innovation and productivity, share buybacks over investment.

But as the disappointing economic performance of the last several years demonstrates, especially the failure of the staggering 2017 tax cuts to stimulate growth and investment, that model is exhausted. Business leaders are slowly beginning to recognize that they have more to gain from greater state support of domestic industry, as well as from a stronger and more stable labor force with greater spending power.

As a recent report from Mr. Rubio’s office makes clear, “the U.S. cannot escape or avoid decisions about industrial policy.” Refusal to consciously pursue a serious industrial policy simply means accepting a counterproductive one — and an economy shaped by the industrial policies of others. After decades of economic mismanagement, prominent figures in both parties are finally awakening to this reality, and a new consensus on the need for a strong industrial policy is beginning to emerge.

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