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What Should Be the Goal of U.S. Industrial Strategy?
Editor’s note: This is the second release in a new TLP series surveying major domestic and foreign policy issues facing the country. These articles will explore the basic factual context shaping each policy area, examine the major positions on offer across the ideological spectrum, and evaluate which ideas are best—or if new ideas may be needed—to help advance a common-sense perspective in American politics and policymaking.
The last few years have witnessed a flurry of industrial policy in the United States. So much money has been appropriated, in fact, that implementation has become the foremost challenge after decades of atrophy in relevant government competencies. What was just a few years ago a “policy that dare not speak its name” has become one of the few areas of at least some bipartisan cooperation. In this context, it can seem churlish for industrial policy advocates to find fault with current approaches or to question recent progress. Despite the remarkable shifts of recent years, significant gaps and problems nevertheless remain.
What is the goal, or should be the goal, of American industrial strategy?
Depending on whom you ask and when, the answer may be, among other things, to compete with China in critical technology areas or to secure strategic supply chains; to rebuild the defense industrial base; to decarbonize the economy; to create better jobs; or to support underserved communities or regions. Industrial policy can address more than one issue, of course, and multiple objectives can be useful when building legislative coalitions. Yet it is difficult to develop a coherent strategy without a coherent purpose, and such a multiplicity of goals, some of which are at least occasionally in tension, can also lead to confusion in both politics and policy.
Unfortunately, industrial policy discussions in America today—whether around implementing existing legislation or designing new proposals—often suffer from this uncertainty.
At the most fundamental level, there is no new, “post-neoliberal” consensus to replace the neoliberal consensus that prevailed during the post–Cold War “end of history,” era—certainly not a positive vision, as the purely negative term “post-neoliberal” suggests. This inability to define what post-neoliberalism is arises, in large part, from an incomplete understanding of what neoliberalism was.
Critics as well as defenders of neoliberalism tend to accept its own ideological self-conception: the free movement of capital, goods, and labor; economic policy insulated from democratic politics; privatizing public services; and so on. The end of neoliberal hegemony, therefore, is often thought to mean a little more “state” and a little less “market” in economic policy, or more “Polanyi” and less “Hayek,” as economist Brad DeLong put it in a recent book. This approach is perhaps appropriate for academic intellectual history, but it fails to provide a practical direction for state intervention going forward. Nor do generic critiques of neoliberalism adequately account for the concrete changes in economic incentives and corporate behavior that have resulted from neoliberal policies—the issues that industrial policy, specifically, should be designed to address.
Neoliberal governance did not merely shift the distribution of wealth or shrink the state (the latter was arguably never accomplished in the United States; only the state capacity for public projects was diminished). More importantly, neoliberalism incentivized specific modes of wealth generation that brought about a “fissured economy,” and the resulting changes in corporate and investor behavior are arguably the most profound and enduring effects of the neoliberal revolution. These changes underlie both the loss of strategic supply chains and the explosion of inequality, and it is only by addressing these issues that post-neoliberal industrial strategy can be successful in achieving its policy goals. Moreover, to avoid the conventional partisan polarization that sets, say, student-loan borrowers against displaced Rust Belt manufacturing workers, it is necessary to grasp the phenomena that contributed to both outcomes.
In the Fordist economy of the mid-twentieth century, dominated by large integrated manufacturers (Ford, GM, GE, etc.), the most profitable companies were also the largest employers and capital spenders, as Herman Mark Schwartz has shown. After the neoliberal turn, however, a “fissured” economy arose in which intellectual property and financial rents became the main drivers of corporate profits. In the fissured economy, the most profitable enterprises—today’s leading tech and financial firms—have relatively few employees and capital investment needs, while mostly outsourcing physical production and infrastructure.
The construction of this fissured economy was America’s response to the crises of the 1970s. Once it became clear that American integrated manufacturers could no longer dominate global production, U.S. firms increasingly outsourced manufacturing and organized themselves around intellectual property and financial rents. To be sure, these shifts were not always conscious or intentional, and factors beyond policy such as technological change played a role. But neoliberalism essentially functioned as the ideological gloss (and often mystification) justifying this transformation, and the associated policy changes were important catalysts.
From the 1980s until the Trump administration, for example, U.S. trade policy consistently sought to reduce tariffs and other protections for domestic manufacturing while strengthening intellectual property protections and foreign investor rights. In antitrust law, limitations on “vertical restraints” were gradually weakened, allowing firms like Apple to capture the lion’s share of profits and exert effective control over outsourced suppliers and labor without having to manufacture its products or directly employ (and share profits with) most of the workers involved. Patent laws became increasingly favorable to big business, while federal R&D policies were changed to allow for easier private commercialization of government research. Changes in corporate governance increased the power of institutional asset managers vis-à-vis business executives, and so on. Each of these changes was probably more significant in creating the neoliberal economy than tax cuts.
The fissured economy generated early returns, but its costs and contradictions have grown increasingly burdensome. Unlike the virtuous cycle of Fordism—in which high investment drives high wages which drive strong demand—the sequestration of corporate profits away from the most labor- and capital-intensive pieces of corporate value chains breeds financialization, stagnation, and heightened inequality. Despite ideological pretentions of fiscal rectitude, the neoliberal model relies upon debt to sustain consumption—whether private household borrowing, as in the run-up to the financial crisis, or large government budget and trade deficits, which have prevailed for most of the neoliberal period—exacerbating household precarity and systemic financial instability.
Moreover, the hollowing out of manufacturing and the abandonment of capital-intensive industries has gradually undermined U.S. capacity for innovation in many sectors, threatening the American geo-economic position and some upper echelons of the economy, in addition to internal strains caused by the steady erosion of the middle class and growing regional divides. U.S. firms have ceded not only “commodity” production but advanced manufacturing and technological leadership in a number of critical areas. At this point, even parts of the U.S. defense industrial base and other critical supply chains are dependent upon the production capacities of geopolitical rivals.
In sum, the problem with neoliberalism in the United States is not simply that taxes are too low or that billionaires are too greedy or that corporations are too “globalist” but that neoliberal modes of wealth accumulation increasingly undermine the economic, political, and security conditions on which they rely. It is precisely these issues which have motivated a rethinking of neoliberal orthodoxy among both elite and popular audiences, yet these problems are rarely discussed in these precise terms, and post-neoliberalism struggles to find an established constituency.
It is also clear that the industrial policy bills passed under Biden, significant though they may be and massive by the standards of recent years, have done little to establish a new consensus or electoral realignment. They are perhaps better understood as idiosyncratic cases in which the legacy moral and ideological commitments of existing partisan coalitions (national security, environmentalism) happened to align with incumbent industry lobbies (semiconductors, universities, automakers). Further legislative momentum has since stalled out, and will remain so at least until the 2024 elections.
Once we recognize that the structure of the fissured economy is the key practical challenge that needs to be overcome, however, a framework to shape and order industrial policy (as well as other post-neoliberal initiatives) emerges. The overriding purpose—whether one’s immediate aims are to rebuild the defense industrial base, strengthen clean energy supply chains, or create better jobs—should be reconnecting corporate profits with investment in strategic sectors and larger portions of the workforce. In other words, instead of incentivizing corporations to sequester intellectual property and financial rents away from capital- and labor-intensive segments of value chains, policy should incentivize profits through investment and production.
Industrial policy, therefore, should directly target the following areas: finance, intellectual property, and integrating manufacturing into innovation and R&D. Recent legislation, emphasizing consumer and corporate subsidies, has not focused on these areas directly or sufficiently. The same can be said for rumors about CHIPS 2.0 legislation, which offers more of the same and does not appear likely to advance anyway.
In an era of “shareholder primacy,” industrial strategy must incentivize capital allocation at the investor level, not merely at the corporate level. Subsidizing corporate profits—whether through subsidies, tax cuts, or other means—is unlikely to motivate firms if shifting into a capital-intensive activity results in a lower equity valuation, even if earnings are higher, as I have discussed at length elsewhere. Directly channeling investor capital and supporting investor returns in strategic sectors, on the other hand, is often more efficient and less expensive. Moreover, an effective industrial strategy should take advantage of the vast resources of American finance. Government must decide which sectors are strategic, but for reasons of both politics and policy, picking the “winners and losers” among firms can mainly be left to private investors, a model which has worked in Israel, Singapore, China, and elsewhere.
According to data from the Department of Defense Office of Strategic Capital, venture capital investment in hardware companies fell from 45 percent in 2006 to eight percent in 2017. Manufacturing and other capital-intensive sectors also comprise a relatively small percentage of private equity investment. Needless to say, if investors seem uninterested in these sectors, it is because they find making money in them comparatively difficult. Much of this is inherent to the nature of capital-intensive sectors, which, unlike software, have high up-front investment needs and considerable marginal costs of expansion. These issues are further compounded by the industrial policies of other nations which disadvantage American domestic investment in these sectors.
The most advanced proposal to address these issues is Senator Chris Coons’s (D-DE) Industrial Finance Corporation (IFCUS) bill. Senator Marco Rubio (R-FL) and Representative Ro Khanna (D-CA) have a bill that would use the existing Federal Financing Bank, and former Pennsylvania senatorial candidate and ex-Bridgewater CEO David McCormick has proposed a similar mechanism he calls “innovation funds.” The essence of these proposals is the creation of a national development bank to support strategic sectors, particularly manufacturing and hard tech. Crucially, the bank would use private-sector investment from “mainstream” institutional investors as a key validator in providing subsidized lending, project financing, investment guarantees, matching equity, or other support to both firms and investors in strategic sectors.
Compared to the costs of CHIPS and IRA, proposals like IFCUS require relatively modest appropriations, but could have an outsized impact. As we see from Tesla, an American company which is the exception that proves the rule and has received significant direct and indirect subsidies from the United States (and China), subsidized investment in capital-intensive sectors can work, not only to build a successful firm, but to attract more private capital into these sectors. Other issues that could be addressed through IFCUS or additional proposals include better coordination of different parts of the existing investment community to support critical industries as well as the development of deeper derivatives markets and pricing mechanisms for key inputs like rare earth minerals.
The United States currently has a robust ecosystem for technology companies and intellectual property development (venture capital) and a robust system for the financial engineering (essentially) of mature companies (private equity). But there is often very little coordination between them, even though financing the domestic scale-up of hard-tech start-ups, especially with some policy support, could offer attractive opportunities for private equity firms (though typically not for venture capital firms). Recreating the integrated manufacturing giants of the mid-twentieth century is unlikely in the current era, but the disaggregation of value chains does not necessarily have to lead to offshoring critical industries to geopolitical rivals, even within existing investment paradigms.
Meanwhile, many of the inputs used in battery manufacturing and other key industries are not only dominated by Chinese suppliers but have their prices set in China. Deeper markets, national stockpiles, hedging instruments, and other basic financing arrangements are often absent in the United States. Building up this ecosystem would represent an opportunity for finance and a fairly low-cost initiative for policymakers.
Outside of some research among antitrust-oriented organizations, few proposals concerned with intellectual property are on offer today, likely because they would involve some form of a “stick”—rather than “carrots” and subsidies—for America’s leading corporations. Yet the current intellectual property regime is what allows firms to extract enormous profits from intellectual property rents without investing in important capital- and labor-intensive sectors.
There are relevant foreign examples, however. Israel, during the period when much of its tech industry was built, prevented firms from offshoring the production of technology developed with state support through the Office of the Chief Scientist. In fact, the Bayh-Dole Act of 1980, which created the framework for commercializing government R&D in the United States, has similar provisions requiring companies to at least attempt to manufacture products in America before offshoring production. But these provisions have simply not been enforced for decades.
Other alternatives include offering intellectual property incentives (such as extended patent protection) to firms that license production of their intellectual property in the United States. Coupled with enhanced financial support for such investment, these incentives could have a significant impact.
Connecting manufacturing to innovation
When the U.S. research and innovation system was created (the national lab system, National Science Foundation, and so on) during and after World War II, manufacturing was not included in it. The industry hardly seemed to need support at that time. But countries like Germany, Japan, and China have built robust innovation apparatuses around manufacturing improvement. These institutions seek to develop improved manufacturing techniques—a current example would be integrating AI into manufacturing—and to disseminate them throughout the country’s industry, including to small business, somewhat like how the Department of Agriculture’s extension service works with small farmers.
David Adler and William Bonvillian have written at length on a number of measures that could be taken here. These include: improving and funding the existing Manufacturing Institutes, created under President Obama; backing R&D specifically for manufacturing technologies; mapping supply chains; and fixing workforce education. (The education issue is increasingly pressing, and while critically important, outside the scope of this essay, though unions and other worker organizations should be enlisted here.) Local innovation hubs, created by the CHIPS Act, which are still not funded and whose implementation is not fully defined, could also be useful in some of these areas.
On a related note, recent U.S. industrial polices compare unfavorably against international competitors in terms of conditions and evaluation. East Asian industrial policy famously used world export markets to evaluate policy and determine its future direction: companies that performed well in export markets received more support; those that failed did not. In Israel, the Office of the Chief Scientist could closely scrutinize company financial performance and enforced fairly strict conditions on domestic production. U.S. policies lack this sort of conditionality around company performance. Instead, the relevant legislation contains relatively few conditions (after significant lobbying by groups like the Semiconductor Industry Association) and little oversight. Executive agencies later imposed conditions mostly aimed at supporting workers and local economies, including controversial “everything-bagel” items like mandating daycare facilities and diversity requirements. There are essentially no conditions related to company performance. But industrial policy is, after all, about industry, and it only works if the competitive performance and productivity of beneficiary companies improves. Unfortunately, the recent track records of companies like Intel are not especially inspiring.
Another key intervention is reforming government and defense procurement and contracting. Following the success of Operation Warp Speed, the value of novel contracting arrangements such as “other transaction authority,” milestone payments, and advanced purchasing should be clear. Reforms can advance two goals: first, allowing more firms and investors to participate in rebuilding the defense industrial base seems critical at this time. Second, procurement can be used to encourage suppliers to the U.S. government to embrace and invest in advanced manufacturing techniques, as was done with CNC equipment in the twentieth century, which the Department of Defense required all relevant suppliers to adopt.
Tax and environmental policy
These policies also deserve mention here given their importance. Recent history demonstrates that broad personal or corporate tax cuts have little impact on investment. (As research by Andrew Smithers indicates, corporations responded to tax cuts by increasing investment before 2000, but have not done so since.) Nevertheless, targeted tax cuts aimed at specific industries or investments (such as the R&D tax credit) are more effective. In particular, instead of relying entirely on accelerated depreciation, which merely affects timing, industrial-oriented tax policy should look to provide ongoing reductions and credits, better aligning with typical executive compensation and incentive schemes.
Another important facet of tax policy is the ease of tax avoidance for intellectual-property companies. These companies not only minimize capital investment and labor costs through outsourcing and offshoring, they also avoid taxes by shifting profits to tax havens such as Ireland. Tax policy should be adjusted to discourage this activity. Unfortunately, most of these efforts have focused on a “global minimum tax,” but the solution lies not in a futile attempt at equalizing global tax rates but ensuring that profits earned in the United States are taxed in the United States (and likewise for other countries). This is not usually considered industrial policy, but could indirectly make domestic manufacturing more attractive, or at least less unattractive.
Finally, a word needs to be said about environmental policy. For progressives, decarbonization is perhaps the primary goal of industrial policy, while most Republicans are somewhere between indifferent and hostile to this objective. (While I personally appreciate lower pollution and welcome increased energy efficiency, I remain skeptical of “decarbonization” and of what Speaker Emerita Nancy Pelosi called “the green dream or whatever.”) One reason for this polarization is the environmental movement’s complicity in the fissured economy. Environmentalism has focused almost entirely on penalizing fossil fuels, along with the domestic manufacturing industries and regional economies they support, while mostly ignoring trade-driven environmental arbitrage and pollution offshoring. Its closeness with Big Tech, Big Finance, and white-collar professionals is no surprise, as the environmental movement is effectively a lobby group for the fissured economy.
These obvious class, sectoral, and sectional biases undercut its self-proclaimed urgency, as does its litigious opposition to virtually any new construction, including of clean energy projects. This situation has changed somewhat since the passage of IRA, and the salutary embrace of permitting reform and nuclear energy by “supply-side progressives.” But transforming a movement steeped in de-growth ideology does not happen overnight. And if environmentalism is ever to become a unifying cause, it will have to reorient itself toward healing the divides of the fissured economy instead of exacerbating them.
The initial revival of industrial policy under the Biden administration largely caught opponents by surprise and was very much a product of the shocks surrounding Covid and Russia’s invasion of Ukraine. But a backlash may be gaining strength, especially given Biden’s weak poll numbers. Much of the corporate sector remains committed to the fissured economy model, and much of the economics discipline remains devoted to the failed theoretical doctrines that undergird it. A broader consensus and a deeper foundation for economic recovery requires a clear view of the problems of the fissured economy and their solutions.
The Biden administration deserves credit for reviving industrial policy after decades of neglect. Unfortunately, its legislative achievements are still unlikely to address several key strategic sectors as well as the underlying corporate incentives that have contributed to the problems of the fissured economy. The design of CHIPS and IRA was not helped by the participation of industry lobbies, and the balance of conditions and oversight could be improved. A stronger industrial strategy would further include a number of key sectors beyond semiconductors and clean energy, such as critical minerals, the defense industrial base, and essential supply-chain components ranging from machine tools to generic pharmaceuticals.
More fundamentally, it would look to address the financial and intellectual property incentives that have cut off corporate profits from capital- and labor-intensive production. It would aim to reintegrate innovation within manufacturing processes and improve defense as well as other government procurement, better align tax incentives with investor preferences and corporate compensation schemes, and finally fix counterproductive environmental permitting and regulation. Supportive constituencies exist around all of these issues, though many are not presently activated, and while many of these policies are the subject of proposed legislation, the pieces still need to be put together.
The Biden administration has made significant progress on industrial policy, but we have a long way to go.
Julius Krein is the founder and editor of American Affairs.