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So Far, So Good on Biden's Industrial Policy
An update on the progress made on reshaping America's economy—and the challenges that lay ahead
It’s been less than a year since they made their way through Congress, but President Biden’s two signature industrial policy laws—the Inflation Reduction Act and the CHIPS and Science Act—have already started to reshape America’s economy in far-reaching ways.
These laws have spurred private investment in critical industries like semiconductor and electric vehicle manufacturing, sparking a massive shift in the structure and focus of the American economy that’s largely flown under the public’s radar screens. It’s far too early to declare victory, of course, but the spate of reports and data that have come out since the beginning of the year paint a picture of an industrial policy off to an impressive start.
It's worth taking a closer look at the three main ways that President Biden’s industrial policy has already paid off.
Crowding in private investment. According to the Financial Times, private companies have invested more than $200 billion in American semiconductor, clean energy, and electric vehicle manufacturing industries since the passage of the Inflation Reduction Act and CHIPS and Science Act. That includes more than 75 manufacturing projects worth more than $100 million each as well as the potential to create 82,000 jobs. The Inflation Reduction Act’s clean energy tax breaks have proven much more popular than initially anticipated, however, with updated estimates showing they will cost $180 billion more than first projected—though much will depend on the rules and provisions the Treasury Department eventually settles upon.
A factory building boom. Spending related to new factory construction rose in 2022 to $108 billion, the highest level recorded. Post-COVID supply chain and marketing concerns drove a good chunk of this factory boom, but much of it has been the result of the tax incentives and funding contained in the Inflation Reduction Act and CHIPS and Science Act. Demand for construction equipment and material has skyrocketed as a result, with excavator and truck manufacturers, concrete and steel makers, and industrial software programming companies all seeing their work orders—and their profits—increase. It’s a positive spillover from all the manufacturing investment that President Biden’s industrial policy has encouraged.
Shifting the emphasis of American manufacturing. More broadly, the Inflation Reduction Act and CHIPS and Science Act have dramatically and quickly shifted the focus of American manufacturing to a suite of sectors deemed national priorities: semiconductors, electric vehicles, batteries, and clean energy sources like solar and wind power. The private sector received signals from the federal government loud and clear, and began investing heavily in these industries itself. At the same time, the federal government continues to support more traditional industries like construction and defense in myriad ways such as the Bipartisan Infrastructure Law and the push to increase defense production capacity in the wake of the war in Ukraine.
These aren’t the only ways the Biden administration’s industrial policy is reshaping the national economy. The CHIPS and Science Act will fund the creation of an alternative to Huawei’s 5G telecommunications network, for instance, while provisions in that law and the Inflation Reduction Act aim to empower local governments and encourage organized labor in parts of the country where they’ve often been ignored or curbed. Initially, at least, the Biden administration’s industrial policy appears off to a good start.
But these laws and policies will still face significant hurdles as the move forward into implementation. They also possess important shortcomings and drawbacks that need to be considered in any full analysis of their overall effect on the nation.
Three in particular stand out:
An overreliance on the private sector to own and operate critical public infrastructure. The Inflation Reduction Act heavily subsidizes private companies to build out America’s new clean energy infrastructure—a departure from past practice in which private companies built energy infrastructure but the public paid for and ultimately owned it. In effect, the Inflation Reduction Act could wind up handing over enormous swathes of public infrastructure to private “asset management” companies that typically provide worse service at higher cost to the public itself. Then there are the issues involved with entrenching the existing public costs, private benefits model of industrial policy even deeper that exist in many components of the Inflation Reduction Act and CHIPS and Science Act.
Implementation problems—permits, NIMBYs, and adequate funding. The Biden administration’s industrial policies—and in particular its clean energy push—face a number of potential obstacles to implementation that need to be addressed. Permitting reform will be needed to ensure that anything can be built in with anything resembling speed. It will help overcome the “not-in-my-backyard” phenomenon that confronts just about every major building project in America, one that’s already gotten worse as large clean energy projects sprout up across the country. Finally, these laws often authorize funding rather than appropriate it—meaning that some parts of the CHIPS and Science Act, for instance, don’t receive all the funding they’re entitled to by law because Congress never actually appropriates the full amount. That problem will only grow worse given the funding caps put in place by the recently passed debt ceiling deal.
Disputes with allies over industrial policies. The Inflation Reduction Act and CHIPS and Science Act have both led to rifts with long-time American allies in Europe and Asia over the eligibility of European and Asian companies for tax breaks and public funding. Even if these allies protest a bit too much, it shouldn’t have been too hard for anyone in the U.S. government to see these issues coming. Instead, the Biden administration has been forced to clean up this diplomatic mess with a series of post hoc deals like a recently-signed critical minerals agreement with Japan that take advantage of a legislative loopholes that allow countries with which the United States has free trade agreements to take advantage of these incentives. There’s nothing wrong with a little healthy competition between allies, of course, but the diplomatic issues that arose with the Inflation Reduction Act and CHIPS and Science Act were foreseeable and should have been foreseen.
On balance, though, there’s good reason for optimism about America’s new industrial policy. It’s already crowding in private investment in critical industries like semiconductor, electric vehicle, and clean energy manufacturing. America has taken its first critical step toward consciously reshaping its economy in support of wider national goals and priorities—in much the same way it did in the days of Abraham Lincoln, Franklin D. Roosevelt, and Dwight Eisenhower. That’s an important achievement in and of itself, and both the Biden administration and Congress should be proud of it.
Despite this strong start, however, it’s still uncertain whether or not each one of these individual bets will pay off in the long run. Some investments may not pan out as well as initially hoped, while others may run completely aground. Even successful projects may slow to a glacial pace in the absence of permitting reform and other changes that’ll make it easier to actually build things across the country. Unexpected challenges may delay or derail plans as well, and policymakers may well be too bullish on the prospects for, say, a nationwide electric vehicle transition at the moment. But that’s the point of placing large bets across a wide array of industries and technologies—at least some will pay off over time (if not exactly on schedule), some spectacularly so.
Still, there’s definitely grounds for hope that America’s new industrial policy will succeed. We may quibble or disagree with certain aspects of the Inflation Reduction Act and CHIPS and Science Act, and we may think that some of the administration’s priorities are misplaced when it comes to actually making these investments. These laws certainly have their fair share of shortcomings, and the Biden administration and Congress haven’t always addressed them adroitly. But these flaws and imperfections shouldn’t distract us from the fact that America’s industrial policy appears to have largely gotten off on the right foot.
Some of the most daunting challenges for industrial policy—the ones that will determine its ultimate success—lay ahead. So far, though, that policy has already remolded America’s economy in important ways and changed its general direction.
In this respect, at least, America’s industrial policy has already succeeded.