Yves here. Please read this important and accessible piece in full. James Galbraith starts with a high level review of the three Biden bills that take a stab in the direction of industrial policy. His tone is “damning with faint praise”: they probably have and will produce some positive results, but are not game-changers. And they do not amount to an industrial policy.
The second half of the post gives the real meat: why, as they say in Maine, you can’t get there from here. In this case, financiers, tech oligarchs, and arms makers hold sway, with the influence of academics, scientists, and unions greatly reduced. The current power players simply don’t care about the public at large having nice things, here a productive economy that generates shared prosperity.
By James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government and Business Relations, University of Texas at Austin. Originally published at the Institute for New Economic Thinking website
The American state has lost the capacity for concentrated and decisive effort at the forefront of technology and the associated science.
In a remarkable and comprehensive book, forthcoming from Cambridge, Marc Fasteau and Ian Fletcher provide a theoretical, historical, and up-to-date review of industrial policies, in the United States and elsewhere, as well as a decent summary of the main Biden initiatives: the Bipartisan Infrastructure Law, the Inflation Reduction Act, and the CHIPS Act, as of late 2023. Their goal is to justify, defend, and extend the case for industrial policies, which they do with admirably fair attention to unsuccessful past cases. Mine in this essay is narrower: mainly to describe the specific goals of President Biden’s programs, and to assess the likelihood of success given their structure and methods.
My background on this topic dates back to 1981, when under my supervision and editorship the congressional Joint Economic Committee published a study, “Monetary Policy, Selective Credit Policy and Industrial Policy in France, Britain, West Germany and Sweden,” which may reasonably be claimed as a forerunner of industrial policy debates and initiatives for the United States.[1] John Zysman and Steven Cohen, who co-authored the essay on France with me, went on to found (with Laura Tyson) the Berkeley Roundtable on the International Economy, a fertile source of later work on industrial and technology policy. The JEC held hearings on industrial policy in 1983, and Kent Hughes, then of the JEC staff, went on to head the Council on Competitiveness. Threads of these ideas formed part of Gary Hart’s unsuccessful bid for the Democratic presidential nomination in 1987-1988, in which I was again involved as an adviser. Tyson went on to chair the Council of Economic Advisers under President Clinton.
Definition and Goals of Industrial Policy
Industrial policy is the use of state power and public resources to build and maintain the capacity to produce specified lines of manufactured products, thereby developing and sustaining the associated techniques, technologies, and, among the working population, the required engineering expertise and mastery of machines and techniques. In the face of traditional textbook encomia to “free markets,” one can justify such efforts, as Fasteau and Fletcher do, by appealing to every caveat lurking in the back pages of any competent text: externalities, public goods, time horizons, uncertainty, and increasing returns. Further, there is the thought that so long as other nations decline to adopt the free market worldview, it may be prudent to hedge against the possibility that they may know something the textbooks don’t.
An actual policy must be assessed against actual and not theoretical goals; one does not advance a bill through Congress by claiming to have discovered an externality. In American politics, it is useful to distinguish between goals that appeal broadly to a concept of public interest and those tailored to the narrower purposes of the power elite. These are roughly – not entirely – identifiable according to the forums in which they are emphasized – the campaign trail, for example, versus (say) a congressional hearing or confidential briefing.
Under the public interest rubric, one may fit a number of familiar tropes: job creation is one, especially “good jobs at good wages” (Rodrik, 2023). Export promotion is another, or import substitution, allied to the vague concept of competitiveness, which appears to mean the success of “American” corporations against “foreign” rivals.[2] A more concrete statement associates competitiveness with the trade balance – one goal asserted by Fasteau and Fletcher is to reduce the “trade deficit” to zero and make the United States financially self-sufficient – though not necessarily in any particular good, service or product line. Exactly why this would be desirable may not be clear, but it plays well in public and may be counted as one of the ostensible goals of the policy.
Lurking behind these broad objectives are some narrower ones, which, though hardly hidden, play to a more focused gallery, including interests with “skin in the game” – those seeking results that benefit their own material interests. The most obvious is the case for industrial policy as national security – to support the “defense industrial base,” to secure the supply chain, to develop the next generation of armaments, and so on. In this area the stated objective of national defense and the pecuniary interests of military contractors are closely allied, indeed impossible to disentangle. However, while the former is a nebulous category whose very definition rests on (and can be modified by) changing strategic doctrines, the latter is a very precise question of (billions of) dollars and (trillions of) cents. Similar pressures apply in other sectors, among them pharmaceuticals, semiconductors, and civil aviation.
A second, related-yet-distinct concern is the “threat” from a country designated as a “peer competitor” in economic terms. At one time the Soviet Union held this position (thanks mainly to Sputnik), later it was Japan; today the focus of this preoccupation is China. Here the stated (or sometimes unstated) goal of the policy is to shore up (or restore) a weakened position. The United States long ago came to grips with the globalization of textiles and apparel; over the past 40 years, it has largely – not entirely — accepted the internationalization of steel, aluminum, automobiles, machine tools, and much else, including (of course) oil. Semiconductors are today’s leading example, especially insofar as today’s leading fabricator, Taiwan, may someday be reabsorbed by its mother country.
A third specific source of pressure for industrial policy concerns the industries of “the future” – those exploiting new technological possibilities, promising new arenas for private profit, meeting new needs, or promising new pathways to national power and prestige. At various times in the 20th century nuclear energy, the space race, and the Internet played this role. In this century, motivated by climate change, “renewable energy” has taken a leading place in this niche, including the harvesting of solar energy for electricity, battery storage, and transportation, the latter taking the peculiar form of private cars rather than the well-established solution of electric trains, subways and streetcars in compact cities – a model long ago adopted in much of the world.
Who Decides Industrial Goals and Policies?
The question of which precise policies get adopted in a given place and time is settled by the balance of influences in the decision-making structure. In countries often described as “authoritarian,” these decisions are largely reserved to planners, planning commissions, and associated ministries, with substantial control by engineers and other specialists; this was how Moscow obtained its metro and how China built its vast new high-speed rail network. It was also how France rebuilt its steel and railways after World War II and later moved from coal to nuclear power in its electrical systems. It was how the United States built the atomic bomb in the 1940s and reached for the moon two decades later. Technological choices are, by their nature, authoritarian to some degree.
In the United States today, Congress plays a central role in designing and arbitrating choices of this kind. Within that institution, since the early 1990s, professional expertise, once vested in the staff and various technical appendages has been radically devalued, making congressional decisions far more deeply influenced by outside lobbies.[3] The structure of these, in turn, has shifted with the changing balance of power in the American economy, to the advantage of tech-sector oligarchs and bankers, notably, along with Pharma, the military, and other emerging sectors including bio-tech and now, artificial intelligence. The role of unions, once quite powerful, has declined, as has that of citizen activist organizations. Faced with the realities of private power, US administrations have learned to tailor their proposals to the requirements of potentially successful coalitions. This has worked to reduce – practically speaking, to eliminate – the formerly substantial influence of the academic and scientific sectors. Today academics are called on, if at all, mainly to decorate a previously-decided agenda.
Biden’s Industrial Policies and the Macro-Economy
The Biden industrial policy, represented by the three Acts previously mentioned, has been widely celebrated for three reasons. First, it was enacted, and on a substantial scale. Second, it overrode the austerity lobby and their academic allies – the traditional doom-and-gloom position of mainstream economists when faced with anything decided by the government – and third, it weathered subsequent accusations of responsibility, from the same quarters, for the quasi-inflation of 2021-2022 (Galbraith, 2023a). So, for the first time in decades, the United States has a plausible simulacrum of an industrial policy. The question to assess is whether and to what extent this policy has met – or will meet – any of its stated broad or narrow objectives.
Through the early months of 2024, the Biden programs have a strong claim to having been a contributor to macroeconomic success. Economic growth, while not spectacular, has been steady; unemployment has remained low; investment in manufacturing, though no longer large in relation to the whole economy, has been quite strong. An input-output study (Pollin et al. 2023) published by the Political Economy Research Institute at the University of Massachusetts – Amherst in September 2023 credited the three bills together as likely to generate $300 billion in new investments and 2.9 million new jobs, sustained for as long as the spending continues. These estimates now appear optimistic, partly due to a slow roll-out in the spending, discussed below, and partly because estimates of the leverage (public dollars stimulating private initiative) were aggressive. (Manufacturing employment as of March 2024 had gained seven hundred thousand jobs since 2021.) Yet the economy has not crumpled – so far – in the face of major increases in interest rates. And inflation, having peaked in June 2022, declined through early 2024. Tax incentives can be credited with a role in the strength of business investment and spending generally speaking, although other factors, including relatively favorable resource costs, expanding oil and gas production, and the serious problems facing Europe, have also played a role.
Quite predictably, with steady growth and high interest rates (supporting the exchange value of the dollar) the US trade and current account deficits have risen sharply. While it is unlikely that any parts of the Biden program would have yet yielded positive results for the trade balance in any event, even if they had, the larger forces of strong US growth and attractive conditions for capital inflow would have overwhelmed them. Corresponding to the trade deficit is a very large federal budget deficit, which in turn predictably ignites renewed calls for retrenchment, especially against Social Security, Medicare, and Medicaid. Budget projections are made to look very much worse by adding prospective interest costs at the higher rates, assumed to continue indefinitely, to the federal spending projections.
Yet another layer of macro effects, within which the consequences of the Biden initiatives are embedded, concerns wages and corporate profits. Profits have done very well, rising sharply after the Covid debacle receded. Wages declined in real terms, as the cost of living outstripped wage recovery in the quasi-inflation of 2021-2022, even though for many households the difference was made up by earlier relief payments. More recently real wages appear to have begun to recover, but household incomes, which take account of multiple earners, have not returned to pre-pandemic trends.
In sum, despite uninterrupted good news on the big three headline indicators – growth, unemployment, inflation – the macro record of Biden’s industrial policies has to be judged as somewhat mixed. The trade effect so far is negligible; the budget effect could bring a backlash, renewed austerity on key social programs threatens, and the wage/earnings picture is not as rosy as that for profits.
Biden’s Industrial Policies: Specific Goals
The Bipartisan Infrastructure Law
We turn next to the specific goals of each element of the Biden initiatives: the BIL, the IRA, and the CHIPS Act. Of these the infrastructure law is easiest to evaluate, because, as Fasteau and Fletcher report, it is spread out over some 7,000 projects in 4,000 communities; as of November 2023 the number claimed had risen to 40,000 (White House, 2023a); the data are however specified to be “preliminary and non-binding.” Highways and bridges form the largest component, absorbing over half of the money so far (The Guardian, 2024). Other elements include airports, water systems, toxic waste cleanup, extending broadband and the electrical grid, and some protections for suppliers of steel.
The BIL is, in short, diffuse. The specific priorities served are necessarily those of state and local authorities. While the funds are no doubt welcome and the improvements are real, it is nevertheless the case that the projects have few, if any, implications for competitiveness or industrial productivity. They fade quickly into the warp and woof of urban and suburban existence; their implications for commercial endeavors largely benefit real estate developers, who have no presence in the international economy. No grand vision and few signature projects appear to have been built into the legislation; the big ones include a new tunnel under the Hudson, another under the Baltimore harbor, and a bridge in Cincinnati. The facts of diffusion and decentralization, with something for everyone (Nichols 2024) undoubtedly helped the BIL to avoid partisan obstructions on the way to becoming law.
The Inflation Reduction Act
A major purpose of the Inflation Reduction Act is to foster the growth of renewable energy sources and uses, notably the electric vehicle sector. The major method is tax credits for business investment in renewables, and a tax rebate ($7,500) for purchases of electric cars, as well as for appliances, batteries, and solar panels. The benefits from these measures are limited to firms conducting a large share of their activities in North America, especially the final assembly of cars. Healthcare provisions were also included in the law, including measures to reduce the price of pharmaceutical products; these are not an element of industrial policy.
The tax subsidies have fostered an expansion of solar and wind electricity generation and the construction of new factories for electric cars in the United States. Advocates for clean power claim 83 new manufacturing plants have been announced; up to 170 either new or expanded (The Economist, 2023). The White House claims many new renewable energy projects, large and small, especially off-shore power generation (White House, 2023a).
Nevertheless, the challenges facing renewable electricity generation are daunting. In brief summary, electricity production has always, heretofore, been a matter of one-way diffusion: electricity is produced in high concentrations and distributed to consumers over a network of wires and transformers. Production is of two types: base-load, such as nuclear, coal, and hydro, which largely runs all the time, and peak-load – for which natural gas is optimal, as it can be switched on and off rapidly as needed. Renewables add the complexity of a diffuse production system; the power is generally collected from many relatively small sources (such as windmills; solar farms may be larger) and transmitted to the consuming area over lines that, in many cases, do not yet exist. According to the Department of Energy, a grid expansion of more than fifty percent would be required to move to a carbon-free system; given the need for highly-skilled labor and the complexity and cost of electrical equipment – much of it imported, this objective cannot be met; the current rate of grid expansion, including renovations, is a small fraction of the required rate. But renewables are also neither base nor peak; their output varies with the weather, not with demand. So they need a further element, which is electricity storage – a massive rechargeable battery system for which the technologies do not yet exist, and, possibly, may never exist, given the physics of batteries and the limitations on the relevant resources.
Further, the large renewable energy projects the IRA envisions are long-term and capital intensive; they require large fixed investments up front, in the hope of operating for decades at low variable cost, with the sunlight that powers them arriving free of charge. Their economic viability is therefore a matter of the cost of capital, which is a matter of the rate of interest. Since the product associated with the enterprise – electricity – must compete at a price determined by the fossil fuel competition and is entirely homogeneous to the consumer, the margins to be expected from these investments are low. Financing the capital at two percent is one thing, doing so at six or seven percent is something else entirely. The Federal Reserve’s movement to raise interest rates can be expected to wreak havoc with such investments, andreports of project cancellations (McDermott et al. 2023) are, therefore, not surprising. Front-end tax subsidies will only carry a business project so far.
Finally, despite the grand stated goals, there is no compelling reason to expect that the resulting tangle of new electricity generation, efficient machinery, and “zero-emissions” transportation will actually reduce emissions of carbon dioxide into the atmosphere. The IRA explicitly promotes the growth of US fossil fuel production. Reductions in US CO2 emissions have been achieved, but they are due in large measure to the substitution of natural gas for coal, and not to large inroads by renewables into the production of electrical power. Apart from this, Jevons’ Law – laid down 150 years ago – provides the reason: new energy sources and more efficient uses invariably add to total production and consumption rather than fully replacing previous methods and uses. The law has not been repealed. Nor will it be, in the US and globally, so long as fossil fuels are accessible and cheap, and vastly more energy-productive (in relation to their cost of extraction) than renewables.
Finally, the very nature of energy policy – even if successful, even if economic, even if it were to make a noticeable contribution to mitigating climate change – ensures that the political benefits of the policy are likely to be small. Like roads and water pipes, electricity fades into the background of daily life. Unless the policy reduces energy costs, providing energy from renewable sources has no benefits to industrial users either. And since current CO2 levels lock in climate effects for decades hence, even the environmental benefits – if any – will not be seen by most people in their own lifetimes. In fifty or more years, the most favorable verdict that is possible will be, “not as bad as it might have been.”
With respect to electric cars, it is also not obvious that the resulting vehicles can be sold at a profit. By its own account, Ford lost $4.7 billion on electric cars in 2023 or just under $65,000 per vehicle (Bryce 2024, possibly an overstatement, but still). Tesla has been discounting heavily, Hertz has given up on EVs for rentals, and uptake of new electric cars appears concentrated in a handful of high-income regions. Limitations on range, charging stations, and capital cost of the vehicles may constitute enduring barriers to the large-scale adaptation of EVs, perhaps particularly when compared to hybrids, the option favored by Toyota – and therefore an import to the United States. Outside the US, the Chinese competition has a cost advantage, thanks to scale and highly automated production processes, so there is little scope for US electric vehicles in third-country markets.
The CHIPS Act
The main purpose of the CHIPS Act is to restore US manufacturing capacity in semiconductors, partly at the expense of the world-dominant facilities presently in Taiwan, and to impede or thwart a competitive threat – so it is claimed – from China. Semiconductor capacity is also claimed to be essential for military and national security reasons, associated with reconnaissance, surveillance, information processing, command-and-control, and other functions.
Once again, the Biden policy has had a front-end effect. Most visibly, the Taiwan Semiconductor Manufacturing Corporation has undertaken to build “fabs” in Arizona; work is underway though not without delays and difficulties(Lee and Wu, 2024; Ting-Fang and Li, 2024). Whether the factories will function effectively is an open question; whether they will be profitable is another. A report from Brookings raises doubts (Hourihan and Chapman, 2023). Time will tell. Meanwhile, Senator Elizabeth Warren and Representative Pramila Jayapal have raised concerns that the process of allocating funds under the act has been largely delegated to a group of financiers drawn from Wall Street.
In the present and immediate future, we may reasonably expect the following consequences of a reshoring policy for semiconductors:
- If the price of the resulting chips is higher than the world price for equivalent capability, American consumers of end products will either shift demand to goods made from offshore chips or pay more for the local product;
- If the policy deprives China (or any other capable competitor) of advanced semiconductor designs or production capabilities – e.g., lithography machines – they may be expected to accelerate their own research and development in this area, as has been done with every strategic technology in the past;
- If a competitor has control of an important precursor material, it may be expected to use that control to its own advantage, as China is doing with germanium and gallium. Measures to move raw material sourcing away from China are in the legislation, but their effectiveness is unproven.
- The government of Taiwan, facing the reality that US policy aims to deprive it of its one greatest economic asset, may draw conclusions and move toward an accommodation with the PRC.
The difficulty with competitive chess is that one’s opponent always has the next move.
However, it may be that these consequences of a (hypothetically) successful policy will not be felt, at least not soon, simply because the policy itself may prove to be a chimera. According to the law, a formal evaluation from the Governmental Accountability Office is not due until 2025 – safely past the next election. But preliminary evidencesuggests that the administering agency has received many proposals, made few allocations and that only a small part of the $52 billion approved under the Act had been spent as of a year after enactment (Partsinevelos and Freda 2023). When (if) it is, it will be spread over many relatively small research, development, and fab operations. This approach contrasts quite sharply with the concentrated structure of the semiconductor industry in Taiwan or elsewhere. But it is well-suited to the American system of log-rolling, coalition building, and the priority of narrative over results – to the system, in two words, of money politics.
Conclusions
As noted earlier, the history of industrial policy is dotted with successes, in the United States including nuclear power and the space program, not to mention the Internet. In her 2021 book, Mission Economy, Mariana Mazzucatto gives a detailed description of a narrow example, the development of the Lunar Excursion Module (LEM) by Grumman for NASA in the Apollo program. These examples look nothing at all like the Biden initiatives.
Why is that? The answer lies deeper than in the limitations or disingenuousness of this or any other administration. Rather, the American state has lost the capacity for concentrated and decisive effort at the forefront of technology and the associated science. For forty years – and especially since the early 1990s “Gingrich revolution” in Congress and the triumph of neoliberalism in the Clinton and Bush years – the US government has been working hard to eliminate its own technical capacities. In their place, a constellation of lobbies, privately funded think tanks, and tax-subsidy farmers has grown up, many of them talented at projecting the impression of scientific authority, which crowds out whatever genuine authority may still exist. We can see this in every domain, including climate, public health, and the cyber-sphere. And behind the cacophony of a “marketplace of ideas,” legions of economists chime in to advocate for decentralized, competitive, market-based solutions, guided by price incentives, taxes, tax breaks and subsidies. It can be little wonder, then, that when the government is called upon to specify exactly how to proceed – for instance, to evaluate grant applications or to judge the viability of a major private initiative, it doesn’t know how – except, perhaps, by the path of least political resistance.
There is yet a deeper reason. Ever since the launch of industrial policy debates in the early 1980s, the commanding heights of the US economy have been firmly held by high finance, and the overriding objective of policy has been global power projection – financial, technological, and military, with close interaction between technological and military sectors. Hope for an industrial policy oriented toward civilian competition foundered in the 1980s under the high dollar and the flood of imports it induced, crushing the core of American manufacturing and dislocating the engineers and skilled machinists once employed in the sector. In the 1990s and beyond, the Chinese juggernaut gathered momentum under the same umbrella, gradually eroding the margins of high technology still dominated by the US. Today, even US military production – a mainstay of remaining manufactured exports – has large elements of foreign sourcing – including in some notorious instances from China (Hudson 2022).
Today, financial power – the dollar system — remains a cornerstone of US economic strategy, long after the mid-twentieth century industrial basis of that power disappeared and as its longer-lived technological and military props have eroded. As every country that ever experienced Dutch Disease has learned, there is a deep contradiction between financial preeminence and industrial competitiveness, which no amount of specific subsidy can erase, and which trade protection cannot cure. It is impossible for a polity dominated by Wall Street to acknowledge, let alone resolve, this contradiction.
Today’s advocates and champions of industrial policy are, in many cases, the same people (Galbraith, 2023b) who helped to pioneer the concept back in the early 1980s. Back then, one could draw on the experiences of the United States from the 1930s through the 1960s, and on those of Europe in the years of postwar reconstruction and social-democratic growth. The foundation of scientists, engineers, machinists, and productive organization by large industrial corporations appeared solid; industrial policy was, or seemed to be, a task of setting out goals and coordinating strategies. But time passes and things change. The Reagan years dealt a heavy blow to the industrial core. The Clinton years enshrined neoliberal mismanagement of the larger economy, mitigated only by the rise of a very thin veneer of technical excellence in the information sector. The relevant industrial personnel were not reproduced and to a considerable degree, no longer exist. A quarter century has passed since then. It is a tragedy – for America – that the concept of industrial policy has taken hold (Wraight, 2024) perhaps thirty, or even fifty, years since the capacity to do a proper job began to decline.
To be fair, the Biden packages contain many good and useful things. Jobs are created; roads will be repaired and bridges will be replaced; the Internet may eventually reach the most remote backwaters of Appalachia and the Vermont hills. Electric vehicles may find an enduring niche in the transportation ecology, wind turbines, and solar panels will add something to the electrical supply, and new uses for batteries may be found. These developments may contribute to security and self-sufficiency in domestic markets. Whether the US will regain its lost edge in semiconductors seems less likely, as the counter-currents of the high dollar and Chinese competence – as well as control over both precursor materials and downstream markets – appear very strong. Does the whole amount to an industrial policy, creating new American competitiveness on the world stage? This seems quite far from the case.
And will all the sound and fury make a difference to voters in 2024? That too remains to be seen. But if so, it will be due mainly to effective marketing of the narrative, and not much to actual achievement of the stated goals.
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[1] The study was commissioned by the House Banking Committee and I organized it over the spring and summer of 1980, participating in field research in all four countries. In addition to the Zysman/Cohen duo, it helped to launch the careers of the late Richard Medley, founder of Medley Global Advisers, writing on West Germany, and Catharine Hill, later President of Vassar, writing on the UK. Sweden was covered by Andrew Martin, a distinguished specialist from the Center for European Studies at Harvard. When Henry Reuss moved to chair the JEC in 1981, that committee undertook to publish the study.
[2] In an era of global multinationals where manufacturers are spread over many countries, this is a dated idea, but it persists, partly because companies ally themselves with states.
[3] The abolition in the early 1990s of the Office of Technology Assessment was one key step in the subordination of congressional initiatives to business lobbies. This and the reduction of congressional staff were parts of a deliberate strategy of House Speaker Newt Gingrich at that time.
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