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Does Joe Biden mean what he says on industrial policy?
Success requires focus and priority-setting
The Biden administration is the first White House to explicitly embrace “industrial policy” — the deliberate government cultivation of certain sectors of the economy as targets for growth and investment. It’s a theme that runs through a lot of their China initiatives, but also legislation like the CHIPS and Science Act and, to an extent, the Infrastructure Investment and Jobs Act.
To that end, a lot of people were sort of startled by the Commerce Department’s rollout of rules governing CHIPS Act subsidies at the end of February.
Any subsidy program is obviously going to come with strings attached. But what Commerce announced has a lot of strings. The legislation is designed to provide subsidies to create a domestic semiconductor industry, but to get a plant built, you’re going to have to go through the full wringer of NEPA review. You also need to comply with Davis Bacon pay rules, source materials from minority- and woman-owned contractors, and engage in some hazily defined consultation process with building trades unions. There are also provisions to claw back windfall profits and an effort to say companies tapping these subsidies need to provide child care.
I found this all a bit surprising.
Commerce Secretary Gina Raimondo, who clashed with labor as governor of Rhode Island, is one of the left’s least-favorite members of the Biden cabinet. And this came out just as Jeffrey Zients (who the left also doesn’t like) was taking over as Chief of Staff and Brian Deese was passing the torch to Lael Brainard (also not a favorite of the left) as head of the National Economic Council. It was supposed to be springtime for neoliberal shill technocrats — especially given that CHIPS was a bipartisan bill — and instead came out as a progressive Christmas tree. It’s weird, and it’s taken me a couple of weeks to write about it because I was initially hoping to be able to explain exactly what happened, but I failed.
So instead, I thought it might be useful to zoom out and talk about the idea of industrial policy, whether this shows industrial policy’s critics are right about everything, and why I think the proponents of industrial policy need to think harder about what it is they actually want.
At the of the day, after all, taking a firehose of subsidies intended for the semiconductor industry and diverting as much of it as possible to building trades, unions, and child care subsidies isn’t an obviously bad idea. I think the child care provisions that were written in the Build Back Better proposal were poorly designed, but the overall concept of child care subsidies is a perfectly good idea. And the notion that the government should be subsidizing semiconductor manufacturing is absolutely contestable. So if there’s money on the table for X but you think Y is a better use of money, then exploiting the rule-writing process to grab some of X’s money and give it to Y is just smart bureaucratic policy. From the beginning Bernie Sanders has denounced the CHIPS Act as corporate welfare, and within that framework, this approach to implementation makes a lot of sense. But does Joe Biden think the CHIPS Act is fundamentally misguided corporate welfare? I can’t read his mind, but I don’t think he does.
And if Biden wants to try to do industrial policy, which I think he’s probably right to want, then the whole point is that you want policymakers to set priorities and decide what direction they want for the country. Biden needs to do that.
Industrial policy is hard
So what are we even talking about?
When an economy is depressed due to deficient demand, the solution is to pump demand up. Stimulating consumption induces re-employment and raises incomes. It also increases the extent to which the existing stock of capital goods (buildings, machinery, etc.) actually gets used, which creates some incentives to invest in new capital goods. What you hope to see with a strong stimulus policy is not just an increase in consumption, but the “crowding-in” of additional investment. And what you fear from a recession is not just a short-term drop in employment and living standards, but a longer-term “scarring” as skills and capital waste away.
But even when an economy isn’t depressed, increasing growth is good. And one way to do that is to increase investment. How do you do that?
There’s a big-picture debate between a kind of Reagan/Bush strategy of cutting taxes on investment income even if that blows up the deficit and a Clinton/Obama strategy of reducing the budget deficit even if that means higher taxes on investment income. The tax theory is that making investments more profitable means that people will invest more, while the deficit theory claims that diverting less of the national savings into financing the deficit will generate more investment. This is an important debate, and of course there are a lot of specifics beyond those two broad themes.
The idea of industrial policy, though, is that in addition to worrying about how to increase the volume of generic investment, the government might be concerned with which sectors of the economy attract the investment.
You probably see this most clearly in development economics. An extremely poor country can make itself richer by accumulating some generic capital — people have nicer houses, there are some hotels tourists can visit, informal vendors are replaced by little stores, apparel companies set up sweatshops. But real development success stories (Japan, Taiwan, Korea, China) tend to involve the deliberate cultivation of export-oriented industries.An important thing to acknowledge about this process, though, is that the actual degree of success varies quite a bit. One of China's strategies, for example, is to take advantage of the fact that their country is so big that foreign companies have a hard time walking away from it. Making stuff in China is potentially very valuable, and the ability to sell things in China is also very valuable. So part of China’s campaign to move up the value chain has been telling companies that want to set up shop in China that they have to create joint ventures with a Chinese-owned company. That allows Chinese companies to learn from foreign ones.
This has worked really well in lots of industries, and China now has several home-grown car companies, among others, thanks to the joint venture initiative. But they ran this same play on Boeing and Airbus with the hopes of launching a Chinese-owned competitor, and the Comac 919 has been a disaster. It’s years behind schedule, still isn’t in commercial service anywhere, and is dependent on Chinese-owned airlines for orders. So in this case, while China has succeeded at creating a plane manufacturing company, they are still a long way off from that company being competitive in global markets.
It can be misleading to look at a bunch of development success stories, see that they did industrial policy, and then say “and there you have it, industrial policy is great.” Almost every country that’s totally failed at development has also tried to be an industrial policy success story. The problem is that it’s hard.
The case for trying anyway
Because industrial policy is fraught with pitfalls, you can always get a good column out of the idea that countries shouldn’t try and should just leave investment decisions up to the market.
You can write that column as a dogmatic libertarian, or you can do it in the style of Bernie complaining about the CHIPS Act and saying that corporate welfare is bad and tax dollars should be invested in schools or fiscal transfer programs. I think that at different points in time, I’ve written versions of that column myself. But I don’t really think it holds up as an idea, mostly because it’s genuinely pretty impossible to say what it would mean to “not have industrial policy.” There just isn’t any country anywhere on earth where investment decisions are being driven purely by “the market” rather than by market forces that are profoundly shaped by public policy choices. In American history, whether you’re talking about Alexander Hamilton’s tariffs, structuring western lands as small farms and building the transcontinental railroad, or about Cold War defense spending and the interstate highway system, the government is always shaping economic development.
Things go awry when you structure your industrial policy poorly, but things can also go awry when you’re thoughtless about it.
I really enjoyed Brad DeLong’s 2016 book “Concrete Economics,” which made this point about the Clinton/Bush approach to China’s entry into the global trading system. Those administrations believed that free trade is generally beneficial (which is true), and so even though a huge influx of Chinese imports would cost a bunch of people their jobs, it would be better to re-employ those people doing something else. But doing what? If you abstract away from any detailed information about life in the United States of America, you’d point to the booming computer, biotech, and finance industries happening in coastal cities and note that those places ought to be experiencing skyrocketing population growth, with tons of blue-collar job opportunities building housing and infrastructure, and tons of generic service-sector work to complement it all. Letting that process of reallocation play out would be much better than trying to prop up midwestern manufacturing communities.
The problem, obviously, is that nothing about the non-trade aspects of American public policy was set up to facilitate a large-scale migration of blue-collar workers to New York, San Francisco, Seattle, Boston, and D.C. to provide the workforce for a construction boom and infrastructure upgrades. What actually happened was that the labor force participation rate declined and productivity stagnated.
This isn’t to say that increasing tariffs on China to keep their imports out would have been a great idea either. But it is to say that even though policymakers can’t see the future or outsmart financial markets, they also don’t need to act like they have no information about the world. They ought to take stock of the situation and try to shape the future. After all, policymakers were deliberately trying to foster the growth of the American technology sector. They championed tech companies’ interests in trade negotiations, fought against protectionist regulatory impulses in Brussels, invested in broadband infrastructure, encouraged STEM education, and until recently, deliberately took a light-touch regulatory approach to these companies in order to encourage their growth. These things don’t happen just because politicians snap their fingers, but it is true and relevant that the sun of American public policy shone on the tech sector and not on manufacturing.
Biden needs to decide what he wants
Bringing this back to semiconductor factories, I think the key point is that there’s much more to successful industrial policy initiatives than handing out subsidies.
If we want to have a domestic semiconductor manufacturing industry, then we need to go through the checklist of potentially relevant policy choices. Have we made it easy for companies to get the visas they need? Have we made it easy for companies to get the permits they need? If you do an unexpectedly good job, will you have the opportunity to grow rapidly? And on down the line.
The historian Richard White wrote a very cynical book titled “Railroaded: The Transcontinentals and the Making of Modern America” in which he portrays the great era of railroad building in all its corruption, brutality, and waste. But say what you will about Gilded Age railroad policy, they built the hell out of those railroads. Were workers exploited? Did investors get ripped off? Were public funds misused? Absolutely. But they also absolutely built the railroads. And the latest economic history research suggests this had enormous benefits.
And I think you’ve got to ask similar questions about CHIPS.
If it’s really strategically important for the United States to have a domestic semiconductor manufacturing industry, then worrying about excess profits from subsidy recipients seems foolish. Trying to force companies into union-friendly construction plans seems pointless. And trying to pound the round peg of child care policy into the square peg of semiconductors seems like a distraction at best. Or maybe you don’t really think this is important and it’s just a piggybank of money that Congress left you, so you may as well hand it out to stuff you care about. If that’s the case, then NEPA review isn’t so burdensome, aligning immigration policy probably doesn’t matter, and it’s all fine.
But my sense is that Biden really does think this is important, and if that’s the case, he needs to get the whole administration to act like it’s important and say that other causes need to fall by the wayside.
I think the problems with this strategy are pretty obvious, but Catherine Rampell did a great job spelling them out.