If you’re eyeing President Biden’s grandiose subsidies and intrusive economic regulations with concern as to where it all will end, the answer is, the 1970s. That’s the last time governments of nominally free countries openly favored steering economies over maintaining the preconditions for individuals and businesses to make their own economic decisions. Whether you call it “industrial policy” or by older terms for statism, political functionaries once again tout plans to guide investment and favor industries. Good luck to us all.
Those Messy Free Markets
“When President Biden came into office more than two years ago, the country faced, from our perspective, four fundamental challenges. First, America’s industrial base had been hollowed out,” White House National Security Advisor Jake Sullivan complained during an April speech at the Brookings Institution. “The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.”
Sullivan boasted that his boss breaks from the free-market past with ideas for economic planning.
“A modern American industrial strategy identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions. It deploys targeted public investments in these areas that unlock the power and ingenuity of private markets, capitalism, and competition to lay a foundation for long-term growth.”
Sullivan named clean-energy policies and promoting semiconductor manufacturing as examples of molding the economy to meet political goals. As I noted in March, the CHIPS Act offering subsidies to the semiconductor industry is less about encouraging companies to make investments that many are already making than about gaining “leverage to extract concessions and take a big skim of the profits.”
Arm-Twisting by Any Name
“What US commerce secretary Gina Raimondo has outlined is a far-reaching attempt to bend employer behaviour, not only in the field of industrial and financial strategy — chipmakers must agree not to expand in China for a decade and refrain from stock buybacks — but also in how they treat their staff,” Anne-Sylvaine Chassany wrote for the Financial Times, calling arm-twisting by the French term dirigisme.
Of course, the Biden administration’s plans extend beyond computer chips. Wielding authority popular with presidents too impatient to wait for legislation, he’s invoked the powers of the Defense Production Act “to strengthen the U.S. industrial base for large-capacity batteries,” to boost “clean energy manufacturing,” and to direct government investment to microelectronics.
“I think we’ve clearly entered an age in which government, certainly in the United States, is working the levers of economic control much more proactively than in recent historical experience in order to advance a combination of geopolitical and domestic political purposes,” Daniel Sargent, a University of California-Berkely historian, commented last month.
Sargent spoke in the context of coverage in The Hill of the federal government’s use of the banking crisis as an excuse for greater intervention in financial markets.
“In a free market, a weaker bank like First Republic that didn’t successfully manage the rising interest rate environment would have simply been allowed to fail,” The Hill‘s Tobias Burns observed. “Where all this leaves the ideology of free marketeers is uncertain, but some economists think a productive direction for the political economy may lie in the conditions set up during the post World War II period, when a more robust social safety net undergirded a more tightly disciplined financial sector.”
Didn’t We Already Try That?
That’s an apt historical reference. Industrial policy, by which governments guided, dominated, and usually mismanaged economic activity, was popular even in democratic countries up until around 1980, as Alberto Mingardi, director general of Italy’s free-market Istituto Bruno Leoni, recently pointed out.
“Industrial policy used to look so 1970s,” he wrote. In Italy, “government aid was generously showered on private business so that they would invest in ‘depressed areas,’ thereby ‘supporting communities’—to use more contemporary jargon—to create (manufacturing) jobs… The result wasn’t pretty. Private companies eagerly cashed in the subsidies, building what were later called ‘cathedrals in the desert’: big factories that were soon of no use, because when and if the subsidies expired, those businesses exited the south as speedily as they went in.”
Decades have since passed. That’s enough time for policymakers to forget—or never learn—that statist ideas have been tried and have failed.
“In recent years the notion of an ‘industrial policy’ has been revived, and it is now alive and kicking,” added Mingardi. “The Biden Administration’s ‘Chips Act’ is a clear case in point: industrial policy is evoked in order to answer a temporary shortage of supply, something even the most interventionist economist used to assume the market could manage by itself.”
In fact, Jake Sullivan, in his speech, insisted that “had [the government-directed Indo-Pacific Economic Framework] been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly—companies and governments together—pivoting to new options for sourcing and sharing data in real-time.”
But government planners’ inability to out-plan individuals and private businesses is exactly why industrial policy fell out of favor after the 1970s. Moldy old ideas are, it seems, new again. Unfortunately, government-directed economic activity isn’t just back in style on the left, but also on the right. The Manhattan Institute’s Oren Cass is a prominent advocate among national conservatives.
Conservatives for a State-Controlled Economy
“Market economies do not automatically allocate resources well across sectors,” he insisted in a 2019 speech. “While the policies produced by our political system will be far from ideal, efforts at sensible industrial policy can improve upon our status quo, which is itself far from ideal.” Like many advocates of state direction, Cass just assumes that government preferences are superior to market outcomes.
“Why is the government better placed to decide the industrial composition of the economy than the interaction of consumers and producers?” responds the Cato Institute’s Ryan Bourne. “And would the political system deliver an economically‐reasoned industrial policy in practice?”
Former President Donald Trump tacitly embraced industrial policy with talk of reviving manufacturing and bringing jobs back. His 2024 agenda for a second term includes “a 4-year national reshoring plan” that “will bring back our supply chains, and build America into the manufacturing superpower of the world.” That means state direction of the economy is likely to feature to at least some extent in the programs of both major political parties.
Free markets brought the world prosperity, but only after hard lessons were learned about the perils of government-controlled economies. It looks like we’ll have to relearn those lessons, with all that implies as we do so for our freedom and our economic well-being.
The post Biden’s Industrial Policy Promises a Return to the 1970s appeared first on Reason.com.
