The industrial policy dilemma

Most countries foster new industries by deliberately suppressing wages, not boosting them

Industrial policy is a hot topic in Biden-era Washington, but it’s hard to get a handle on it because nobody is totally sure what it means.

We know what it’s not — it’s not a continuation of the free trade consensus associated with the pre-Trump years. It’s also supposedly not just crude protectionism that props up inefficient companies that happen to have political clout in congress. It’s supposed to be something better and more sophisticated than that, the deliberate cultivation of areas of national economic strength in a manner inspired by the economic growth success stories of Japan, the “Asian Tigers,” and China.

One reason it’s such a confusing topic, though, is that it is, to a large extent, an effort by smart policy thinkers to intellectually backfill ideas adopted out of political opportunism on both the right and the left.

Republicans used to favor free trade¹ until Donald Trump, who very much does not favor free trade,² won both a GOP primary and a general election as a protectionist Republican. The fact that Trump won largely without the support of the conservative policy community created a market for policy ideas that fit the Trump model. And while most Democrats in congress have voted against free trade deals for the last few decades, the two Democratic presidents who served during this era, Clinton and Obama, were free traders. But the party’s general shift to the left in the 2016 and 2020 cycles involved Hillary Clinton and Joe Biden breaking with that pattern and embracing labor union hostility to the Clinton-Obama trade record. Progressives, even more than conservatives, want policy justifications for their actions (no one wants to say “well, the unions asked for it”) and industrial policy — whatever it means — provided that justification.

I think there is a level on which this is good. It’s good to have some concept of a national economic development strategy that isn’t just “assume the market will come up with something.” But on a more cynical level, I also think that there’s always a robust market in Washington for slogans that serve to rationalize lazy thinking and that in practice, “it’s industrial policy” has come to serve that role in many cases. But to work, industrial policy, especially in a rich country like the United States, has to be selective and rigorous, relentlessly focused on reducing the non-wage costs faced by favored industries and clear-eyed about the tradeoffs that entails.