The Time for America to Embrace Industrial Policy Has Arrived

For years, if you wanted to be dismissed in debates over how to help the U.S. economy, you merely had to utter the words “industrial policy.” This is the idea that in pursuit of a national goal, the government can and should choose particular industries for targeted help—which can take the form of low-cost loans, grants, subsidies, tax breaks, or direct purchases of goods and services using the government’s $600 billion annual procurement budget. Critics—especially, but not only, conservative ones—ridiculed industrial policy as government eggheads “picking winners” and pointed to socialist planned economies as proof that such efforts were doomed to fail.

That consensus is rapidly changing. In December 2019, Republican Sen. Marco Rubio called for “revitalizing American industrial policy” to counter China’s aggressive brand of state capitalism. In discussing new proposals from Democratic presidential candidate Joe Biden, the Wall Street Journal’s Gerald Seib wrote that while conservatives once recoiled at the idea of industrial policy as a “harmful interference with free markets,” now some of them “explicitly argue for helping American manufacturers.” (Disclosure: I was then-Vice President Biden’s chief economist during President Barack Obama’s first term and informally advise his current campaign.)

In fact, the shifting consensus has less to do with new ideas for policy than with finally opening one’s eyes. The United States, along with every other advanced and emerging economy, has always pursued industrial policies. The question is not whether the country should have such policies, but whether it is willing to be transparent about them. And, more importantly, whether it is willing to implement smart policies promoting useful and inclusive national goals—or counterproductive ones at the behest of well-connected lobbyists.

Consider the privileges the U.S. government bestows on the finance industry. The assets and deals the industry markets to its customers are deeply subsidized through the tax code (capital gains get favorable tax treatment, including deferred taxation at a lower rate than paychecks), deregulation has hugely boosted the industry’s size and profitability, and when this unregulated industry systematically underprices risk, as it did during the housing bubble leading up to the global financial crisis, it is quickly made whole through taxpayer-funded bailouts.

The financial industry isn’t the only sector that has been coddled by the U.S. government—others include Big Agriculture, the sugar industry, defense and aerospace, and even Silicon Valley.This is industrial policy of the worst kind and has been happening right under our noses. But it’s not the only sector that has been coddled by the U.S. government—others include Big Agriculture, the sugar industry, defense and aerospace, and even Silicon Valley, which would not exist if the government hadn’t subsidized and purchased its output long before laptops and mobile phones even existed.

Support for industrial policy has deep roots in U.S. history. Americans’ “safety and interest require that they should promote such manufactures as tend to render them independent of others for essential, particularly military, supplies,” President George Washington told the U.S. Congress in his first State of the Union address in 1790. The need to onshore vital supply chains was apparent even then, even if policies that made sense in the 18th century don’t necessary make sense now.

And yet the rationale for industrial policy is as strong as ever. Consider, for example, climate change induced by human activity. It must be reversed by policies that invest in renewable energy sources; electric vehicles (and their charging stations); a new, efficient grid; and conservation efforts such as mass transit. Some of these are classic public goods that no private enterprise will undertake.

The tools of such industrial policy are tax incentives to produce and purchase clean energy, renewable portfolio standards (rules that require utilities to produce a given share of energy from renewable sources), border adjustment taxes that force countries to internalize the environmental costs they’re imposing on the rest of the world with their manufacturing methods and energy mix, and direct government support to clean-energy producers.

This international dimension provides yet another rationale for industrial policy. For many years, certain other countries, including China and Germany, suppressed consumer spending to help exporters and, in China’s case, managed the value of its currency in the service of boosting competitiveness and generating trade surpluses. The inevitable flip side was trade deficits in manufactured goods for countries such as the United States that consumed more than they produced. In the U.S. case, the flood of foreign loans to finance these imbalances helped feed destructive credit cycles in the U.S. financial sector, including the subprime mortgage crisis.

These are the inevitable results of not having a smart industrial policy. While competitors are investing in keeping good jobs on their shores and positioning themselves to meet the next big focus of global demand, the United States is eschewing strategic industrial policy in favor of sweeping tariffs that cost U.S. consumers and manufacturers, dampen global trade as a whole, and don’t help anyone. This is the context to understand Biden’s plans for boosting U.S. manufacturing and supporting clean energy, including his “Buy American” plan for government procurement.

Of course, industrial policy must go well beyond manufacturing, which only accounts for about 10 percent of U.S. output and employment. In services, the most fertile ground for targeted industrial policy is the child care sector. Here, the United States is also behind many other advanced economies, with the pandemic drawing back the curtain on the severe lack of policies to grow and nurture this critical industry. Approaches include direct provision of care by creating public child care centers, subsidies to parents and providers, and introducing universal prekindergarten for all children between 3 and 4 years of age. The clear goal of these policies is to allow parents to participate in the job market while holding down the cost of child care. (U.S. working families with low to moderate incomes who pay for child care spend 35 percent of their take-home pay on it, more than double the share in most of Europe.)

Jennifer Harris and Jake Sullivan wrote in Foreign Policy earlier this year that “advocating industrial policy … was once considered embarrassing—now it should be considered something close to obvious.” As long as the United States has been a nation, it has implemented industrial policy just like every other country, and it will continue to do so. The United States might as well get it right by being transparent and smart about these policies in order to support good jobs, rising living standards, and globally competitive industries while offsetting market failures such as those affecting child care and climate change. Anything else would not only be embarrassing and naive—it would also be bad for Americans and the U.S. economy.