Industrial policy is back — if it ever left.
Across the political spectrum, a consensus has emerged that President Joe Biden is making a sharp turn, embarking on a bold experiment, and turning to a governing framework outside the economic mainstream: He is embracing industrial policy, where the government takes an active hand encouraging investment in emerging industries, new factories, equipment, and research, across the public and private sectors.
With a suite of legislation and executive branch initiatives, the Biden administration has only too happily highlighted its willingness to roll up its sleeves and take charge of investment decisions in the real economy: port and freight expansion programs, clean energy tax credits and loans, boosts to manufacturing in regions that had been left behind, and massive subsidies to re-establish an entire domestic microchip ecosystem, to name a few.
His cheerleaders, who’ve embraced labels like supply-side progressivism, argue the Biden agenda is a bold new vision that corrects a congenital American failure to dictate a clear national economic strategy. Detractors argue that governments don’t know how to invest better than the market, and that picking winners and losers based on often ideological or strategic considerations, rather than purely economic ones, risks massive inefficiency.
But just how novel is this “experiment”?
There’s good reason to question the idea that America ever really gave up on industrial policy, or that Biden has embarked on an exception to the laissez-faire rules governing American capitalism.
Industrial policy is arguably the American contribution to economic thinking. The idea that the government could use its hand to direct the free market’s course — as opposed to letting the market run unfettered, or, on the other end of the spectrum, bringing it under total state control — reached its heyday alongside the so-called “golden era” of capitalism following World War II.
Even as neoliberal free-market thinking rose to dominance from the 1970s through 2020, industrial policy proved a powerful tool many presidents were reluctant to abandon — even if they avoided calling it by its name.
It has persisted as central to American political economy not despite the fact that industrial policy is often an effective means of reshaping society through economic development, but because of it.
The surprisingly long history of industrial policy
The Biden administration has pitched industrial policy as not only a sound economic strategy but also a remedy to a national anxiety about decline.
It comes out of a recognition that China has outcompeted America in some crucial high-tech sectors, and that many American communities suffered grievously from deindustrialization. Though the United States is still the richest, most powerful country on the planet, it finds itself playing catch-up to other nations when it comes to maintaining the cutting edge and ensuring broad-based prosperity.
Squint a little, and America’s situation at its founding looked similar. Though colonists in the 13 colonies enjoyed the highest standard of living on earth at the time, the Industrial Revolution roared loudest not here but in Britain, which meant that costly manufactured goods were overwhelmingly imported, creating a major drain on national finances.
Britain’s economic might was built in tandem with its naval hegemony, which threatened the ability of the newly independent United States to trade with major economies, like France, that were often hostile to Britain. The financing needed for capital investment created a massive market in government debt that put Britain at the center of the world’s most powerful financial system.
So in order to trade, not only did America have to make nice with a nation with which it had just fought a bloody war of independence, but it also depended on that country for lending to invest in just about anything.
Many among the Federalist camp of the nation’s founders, particularly Alexander Hamilton, believed the country’s course couldn’t just be left to the free market. Rather, they believed that government had to deliberately spark an American industrial revolution if it wanted to survive as a country.
So they put their thumbs on the scales and created what was known as the American (or National) System. It included high tariffs to promote domestic manufacturing, and debt-financed public spending projects, like building a navy, that not only protected national security but guaranteed revenue for advanced sectors like shipbuilding and Connecticut’s early arms industry.
Internal improvements, such as the Erie Canal, reduced transportation and distribution costs for domestic firms while working to knit the separate states into one country. A central bank encouraged long-term fixed investment over short-term speculation.
The United States elaborated on this basic theme for nearly two centuries. It was also the formula for basically every successful major industrialization that followed the original in Britain: 19th-century Germany, Stalin’s USSR, post-World War II Western Europe and East Asia, and post-Mao China.
As economic journalist Joe Studwell wrote in his book How Asia Works, economists often tell a story about the free market as the basis of prosperity. But in the real world, the made-in-America Hamiltonian interventionist approach has proved the only real route to continuous growth and improving standards of living.
Industrial policy distinctly fell out of favor during the so-called neoliberal era, from the 1970s to 2008, when economic policymakers in the developed world sought not to spark industrial growth but rather to tame a growth machine so overheated that prices rose at a dizzying pace.
So instead of pushing big firms to build more factories and produce more widgets, central bankers, legislators, and regulators in both major parties pursued reforms that increased returns to owners of capital: raising interest rates, lowering top income tax rates, deregulating finance, and privatizing many of the state-owned or sponsored assets that had grown so massive during the midcentury height of public-private industrial cooperation.
The idea was that investors would keep investing if they were sure they could reap handsome rewards. Neoliberal policies arguably crushed the Great Inflation of the 1970s, but they worked only too well at rewarding investors for amassing private stores of wealth: As economist Thomas Piketty demonstrated in his book Capital in the Twenty-First Century, neoliberalism encouraged wealth hoarding, not productive investment.
Capitalists can’t be trusted to manage capitalism
At its heart, industrial policy strives to solve a “classic Keynesian political problem,” says economic historian Yakov Feygin, director of the Berggruen Institute’s Future of Capitalism program: The only way to grow the economy is ultimately through productivity-enhancing investment — but there are enormous upfront costs to building new plants or buying new equipment, especially at the technological bleeding edge, while returns are years in the future if they ever come at all.
If only capitalists get to decide when to invest, they may — rightfully — decide that the unpredictability of future demand and credit conditions make it difficult to justify expanding capacity in crucial sectors even in the face of soaring prices. They fear the “bullwhip effect,” where investors may put up cash for new plants or equipment to respond to higher prices, only for those prices to fall before new production can actually come online.
We saw an example of this dynamic with the rash of “capital discipline” that drove gas and oil prices so high through much of 2021 and 2022. Typically we think that producers will respond to price rises with more production, which should eventually bring prices back down.
But investment in new capacity to produce enough for rising demand takes time, and in an environment disrupted by war and pandemics, investors may not be sure the demand driving prices up today will last long enough to pay off the costs of new equipment or a plant that only starts generating revenue months or years down the line.
It’s much safer to rake in the profits that come with unexpectedly high prices, which is what shareholders demanded of energy companies for much of last year. In other words, as Feygin put it, “bottlenecks are incentivized.”
The government, for better or worse, has the unique ability to stabilize the investment cycle and goad risk-averse private capital into making desperately needed, but enormously costly, long-term investments.
Industrial policy has always been with us
Though Biden has put a unique focus on rebuilding fraying supply chains, “the US has always done investment strategy,” says Feygin, even in recent years, when that policy impulse had supposedly vanished.
Take, for instance, Operation Warp Speed under former President Donald Trump, which guaranteed enormous revenues to the makers of MRNA vaccines for Covid-19: Had this policy not been in place, Pfizer and Moderna may not have been able to justify the immense cost of standing up new factories and distribution networks.
Before that, the Obama administration’s auto bailout saved an entire American industry from the short-term liquidationist impulses of Wall Street. The Bush administration’s pro-homeownership policies drove new home construction to multi-decade highs, and once the policies cratered in the 2008 crash, the homebuilding industry didn’t recover for more than a decade.
President Bill Clinton boosted the high-tech sector to smooth the industrial transition from the end of the Cold War’s arms-making boom to a civilian economy.
The distortions may be half the point
Many economic commentators dinged the Biden administration for its recent decision to require semiconductor factories to offer child care if they wanted federal subsidies. Child care requirements on a program intended to protect a vital supply chain seemed like a classic example of an industrial policy perverted by political concerns, an unrelated sop to Democratic interest groups, or even social engineering in disguise.
But industrial policy is attractive to policymakers precisely because it can provide the means for enacting a particular vision of society. As historian Tim Barker has written in a recent dissertation, the post-World War II “golden age of capitalism” and the American lifestyle of mass prosperity and suburban consumption owe far more to a particular form of industrial policy — the military Keynesianism of the Cold War arms buildup and the space race — than the common story of an explosion of pent-up consumer demand fueling growth.
By the peak of the midcentury boom in the late 1950s through the 1960s, the biggest manufacturing employer was not the civilian-focused auto industry, but the almost entirely government-subsidized aerospace industry, which did 80 percent of its business with the Department of Defense.
Looking at macroeconomic data, Barker found that the 1950s and ’60s did not show a transition from an investment-heavy World War II era to a flowering of private consumption, as popular narratives about that time suggest. Instead, the consumption share of the economy stagnated, while booms and busts corresponded almost exactly with boosts in defense spending.
The American dream, Barker’s work suggests, rested on a foundation of a thoroughly militarized economy. While economists typically talk about social welfare and defense spending as competing macroeconomic priorities — guns versus butter — the 1950s and 1960s were an era when jobs making guns provided much of the butter. Think of the quintessential postwar Californian suburban nuclear family: chances are, dad was an aerospace or defense engineer.
This could lead politicians to make some cynical choices. When capitalism dipped into crisis in the early 1970s, Nixon told members of his Cabinet, “To goose the economy, the private sector is the best place. In government the best place is the military,” and urged military planners to look for forms of war spending that could provide an economic boost back home.
War spending helped Nixon reward and grow his “silent majority” political base who lived in the suburbs and the Sunbelt where the defense and aerospace industries had exploded. Of course, Nixon was aware of the politically explosive nature of increasing spending on an unpopular Vietnam War to sustain domestic prosperity, and said, “Don’t discuss jobs outside this room … Don’t write any memos on this.”
Biden, meanwhile, can afford to be “more explicit” about using investment spending to accomplish social goals, according to Feygin of the Berggruen Institute. “The US has a very weak welfare state, but that doesn’t mean it has a small state,” Feygin says.
By driving investment into leading industries, the government creates the kind of jobs that provide benefits — like child care — seen in welfare states. The hope is that employers in other sectors will feel the need to offer similar benefits to compete for labor.
Industrial spending can also have massive regional impacts, as Cold War defense spending did in places like California or Long Island, and as Biden seeks to do with “place-based” programs for a “battery belt” in areas previously devastated by deindustrialization.
Biden’s industrial policy only constitutes a sharp deviation when viewed narrowly next to the neoliberal era — an era that, to be sure, also saw its own government interventions in the economy. Another way to see it is as a return to the roots of the early American economy, and the mid-20th-century economy that those policies eventually nurtured.
Biden’s economic team is betting on something Hamilton knew: Long-term investment in the real economy is essential, but private investors might not provide it. That’s where government can — and should — step in.
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