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.
________
[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.
See original post for references
I have had occasion to propose before a credentialed expert the thesis that the one of the most successful industrial policies ever implemented was the second set of agricultural policies introduced during the New Deal, resulting as it did in vast increases in productivity and an orderly migration of people out of the agricultural sector. It was subverted by Secretary Butz in the Nixon Administration, but that is another story.
What I heard from my well-respected interlocutor was that it was all a purely coincidental success. Policy was theatre and the operative factor was Mr Market and his magic.
I do not think economics as we know it can even conceive of what an industrial policy should be or should do. The needed design principles are ruled out of bounds by “first principles”.
“…one of the most successful industrial policies ever implemented was the second set of agricultural policies introduced during the New Deal…”
Sounds like Henry A. Wallace.
Showing that national convention backstabbing is no exactly new.
I have had occasion to propose before a credentialed expert the thesis that the one of the most successful industrial policies ever implemented was the second set of agricultural policies introduced during the New Deal, resulting as it did in vast increases in productivity and an orderly migration of people out of the agricultural sector….
[ Agreed completely, but New Deal agricultural policy began to be successful from the beginning in that the plan was considered from 1993 on. ]
They hyper-financialized, soft “tech” world of the USA has put itself in a trick bag.
Now buzz word chanting, trend followers are saying the future is all about humans being handicapped in favor of circuits and machines half-assing care.
This article, like many others, show the need for investing and training humans. It’s good for humans.
No, you can’t get there (industrial policy for the benefit of the masses), from here (infantile hyper-financialization and emotional retardation).
“the US government has been working hard to eliminate its own technical capacities”
Not “eliminate”, they “sell” technical capacities in segments at first and then in totality by the end. The sell-off was always a goal but until a crisis emerged it was too costly to pursue. (That’s the thing about a crisis, it lowers the cost of selling unpopular goals by putting an even more unpopular problem next to it.)
The overton window mechanism?
You need a certain event/environment to create enough mania in the public for them to follow along.
If memory serves it was the promise that the digital industry (sold as the new digital frontier) would be at least a 1 for 1 replacement for physical industry that sealed the deal. You know…. the steady replacement of mechanics and machinist with programmers and MBA holders for that shiny new digital future.
And the public mostly believed that digital dream.
Also worth a read, how congress set this up: Why is Congress So Dumb? (Sorry, Wapo paywalled)
Why is Congress so dumb? Just Google it.
We are currently:
a. selecting the wrong products to excel in
b. expecting top-down policy tools like massive infusions of money to spur innovation
c. acting as though profits are the most relevant index of effectiveness
Right Products
What are the “right products”? Those that meet the fundamental needs of our time and place. The fundamental needs are:
a. to redesign our industrial production systems so they fix the planet .vs. ruining it as we make our livings
b. for the “many” to have a significant role in solving the key problems of our time, and to make a decent living doing it. De-skilling, wealth concentration and the resulting governmental capture are effectively excluding participation of the many
Most of our population isn’t involved in, nor incentivized to become involved in new product development, and what we need most is … new products.
Top-down policy doesn’t work in a captured political environment
What’s wrong with top-down industrial policy? The people at the top are not innovators, they’re political types. Policy options are constrained by what’s politically possible. That means the locus of innovation needs to be sited (moved to) areas where “what’s needed gets done” instead of “what’s politically possible gets done”. The other problem is the assumption that huge cash infusions result in useful products being invented and commercialized. Is that happening? Not so much.
Profits aren’t the best index of success
Well-designed, effective products, which are the fundamental components of a viable economy, are
what counts. That’s where “the good stuff” actually comes from. That’s what solves problems. Profits don’t solve problems, products do.
The index of “success” is “do you have the right mix of products to meet the major needs of your situation”. And we currently don’t, not by a wide margin.
China doesn’t invest based on interest rates or corporate profits; they invest based on strategic utility.
China pushes money out to the leaves of the tree, and permits a lot of local autonomy about how investments get made. A much larger proportion of China’s citizens are actively engaged in new product development than here in the West. China is actualizing a greater proportion of their human capital than we are. China has and continues to invest heavily in education, at all levels.
The U.S. is not currently capable of effective top-down innovation; the wrong people (wrong values, wrong skills) are in control. Effective top-down innovation policy just isn’t politically possible, and won’t be for some years to come.
Note: “industrial policy” is actually “innovation policy”. The industries are the _effect_ of innovation, not the other way around.
So here in the U.S., if top-down isn’t workable, that leaves bottom-up. That means innovation won’t be well-resourced. How much does that matter, really? Fulton, Edison, Tesla, McCormick, Whitney, the Wright brothers … all happened bottom-up. They didn’t get big infusions of cash until well after their big product breakthroughs happened.
Culturally, things were different then. People who “made stuff” were valued.
Here in the U.S. the primary problem with innovation is that too few are doing it, and what little innovation is occurring is currently mis-directed.
Too few people are making the wrong products.
“China doesn’t invest based on interest rates or corporate profits; they invest based on strategic utility.
China pushes money out to the leaves of the tree, and permits a lot of local autonomy about how investments get made. A much larger proportion of China’s citizens are actively engaged in new product development than here in the West. China is actualizing a greater proportion of their human capital than we are. China has and continues to invest heavily in education, at all levels…”
Really nice.
I’d love to see an Industrial Vision. Something that looks out for a century and beyond. A North Star. And then begin to adjust our economies to follow that path. Stop the worst abuses and promote best practices. When it comes to the most important thing, imo, – the health of the global environment – we should have strict quotas for extraction in order to give Nature time to recuperate. Instead of focusing our natural urge to innovate on fast new shiney things, it would do us all good to have quasi government recycling operations, because they won’t make a financial profit. But they could change the entire zeitgeist.
“I’d love to see an Industrial Vision. Something that looks out for a century and beyond. A North Star…”
Interesting wish, but development as such changes economic conditions through a society that adaptation will be repeatedly necessary or development will become increasingly difficult. Simply think of the policy changes that climate change makes necessary, but how could the nature of climate change have been anticipated all that long ago? Possibly proper attention to ecology would have helped significantly, and surely was always called for, but would climate change have been forestalled for long?
What seems highly possible however is responsive in planning to change as change is understood.
StO: I think your vision is exactly what’s needed.
It’s not going to happen top-down, tho. This is why it’s so important for you to keep advocating for what you believe in.
You have an excellent, perfected emotional compass.
My role in all this is to develop the products – the means – to get from where we are, to where you want us to be.
Stay on it.
“It’s not going to happen top-down, tho. This is why it’s so important for you to keep advocating for what you believe in…”
Yes, and this better helps me understand the argument.
No such thing as bottom up in a kiss-up kick-down world. Bottom out, maybe? Reason and compassion at the grass roots to give those corrupted towers a healthy culture to disintegrate into?
I wonder what that looks like.
‘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.’
This has got to be the best definition of Industrial policy that I have ever read. Will it work in the US? Well, no and for the same reason that the Russian Federation is producing equipment greater that the US and the Collective West combined. The later will only produce what they can make a profit on and if they can, they will seek a monopoly on it as well. It is ingrained into western thinking and as such is incompatible with having an effective industrial policy. An example of how this will play out – A vital factor for an industrial policy to work is highly-trained, well-paid workers but modern corporations find that anathema and so will use ex-McDonalds workers instead.
Yes, and it took cutting the Russian oligarchs off from their Western compatriots to achieve what success Russia is having, which in our brilliance we did because… we’ve been sniffing glue for 40 years? In any case I’m sure Putin & Xi appreciate all we’ve done for them even as we attack them.
It began with hollowing out public education in the 60s and 70s and has now remade us as a nation with competences so narrow and focused, and so few, that it’s really unclear what can be rebuilt from where we are. I watched in 90s and 00ts as right wing “historians” reconstructed a self referential counter history of the New Deal explaining how it was all a happy accident despite policy, which BS is now the curriculum of most schools of economics or history. We’ve created a population of systematically deluded people, figuring out how to reorganize them into something remotely productive is now easy problem.
When climate change kicks in full bore, which it appears may be around now, these challenges will only grow.
Galbraith’s book review or essay is mostly a pessimist’s assessment of the politically possible and what makes possible, possible. In that line, he made excellent points. It was not his chosen task to explain the mechanics that successful industrial policies might employ strategically. The definition of industrial policy that he puts forth works well enough for his purpose, but in another context it would invite redefinition of terms as “picking winners”, invoking a critique well-prepared by ideological opponents of public purposes in general. Galbraith is an advocate of the state pursuing public purposes, the general welfare and so on, so meeting his opponents squarely makes sense.
It is unfortunate that we haven’t had more imaginative work from economists like Galbraith on what gives an industrial policy not just a claim to “success” but technical and social merit as the means by which a state purposely builds a better society and better economy. His citing Laura Tyson rankled me a little because I remember her as a particularly dull hack with regard to industrial policy, emphasizing subsidies to allocate additional resources. If your policy idea for improving “productivity” in a sector is simply to subsidize capital investment in structures, plant and equipment by incumbents, I count that as dull hackery that gives industrial policy a bad reputation.
I brought up New Deal agricultural policy in an earlier comment with ambition I cannot fulfill unfortunately to at least gesture at the subtlety and complexity of an industrial policy that wasn’t “picking winners” or prescribing free (magic) markets in everything and then subsidizing rentiers. If I wanted to improve productivity, innovation and competitiveness in auto manufacturing, as an example, I would not subsidize business investment with tax breaks. I would mandate detailed annual vehicle inspections for safety and serviceability and publish the results. One of the more effective industrial policies of the 20th century (though subverted now as we know) was having the FDA require proof of a drug’s medical effectiveness. Such requirements built enormously capable pharmaceutical giants. (Before lax regulation and scrutiny enabled the opiate crisis wrought by predatory capitalism.)
Tyson helped bill clinton throw away over 200 years of americas wealth, and impoverished the nation.
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.
Wall streets industrial policy is unrestrained immigration combined with restrictions (by thoughtfully focused other countries) on exodus(I can’t move to most countries to work…russia might take me…) combined with lots of free money/asset protectionism (what’s that noise in the next room over?…Oh It’s the taper tantrum)
This is a good post with broad appeal that could have an effect in the personal sphere, in the event that one knows someone not drunken on koolaid…
remember, supply chains have supply chains. most supply chains do not rely on just one industry, but many industries to remain profitable.
so which industries are you going to protect? and if you choose certain industries, what are you going to do to make sure the supply chain remains profitable, and of course the supply chain, has supply chains, who also supply many different industries to remain profitable.
a much easier way is what the founders did, lincoln did, smoot-hawley did, and FDR even added to smoot, trumans Gatt allowed protectionism, and smoot may well be still on the books.
so to have a industrial policy, what does it take. gotta reverse everything bill clinton did. restore the new deal, upgrade it with more teeth, free education, stiff social safety net.
tariffs built america.
http://www.pbs.org/moyers/journal/07252008/transcript3.html
“BILL MOYERS: They would call you protectionist, they would call you–
FRITZ HOLLINGS: Yeah, I am a protectionist. You– you got Social Security to protect you from the ravages of old age, Medicare to protect you from ill health. You got food and drugs and clean air, the water we drink, the food we eat, antitrust to protect the openness of the market and everything else. Before I open up Moyer Manufactory, you gotta have clean air, clean water, Social Security, Medicare, Medicaid, plant closing notice, parental leave, safe working place, safe machinery, antitrust. You can go to China for 58 cents an hour. They’d get you the plant, they own the workers, and you don’t have any investments so you don’t have to worry about it.
BILL MOYERS: You say all we need to do to make the country work, is follow the lead of the forefathers to compete in globalization. To build the country’s economy Washington, Hamilton, Jefferson, and Madison, made sure the first bill to pass the Congress in its history on July 4th 1789–
FRITZ HOLLINGS: Seventeen eighty nine.
BILL MOYERS: Was a–
FRITZ HOLLINGS: Protectionist bill, tariff bill on 60 articles. We financed the country’s development with tariffs. That’s how we–that’s the Treasurer’s Building is the best building here in Washington. The best building in Charleston is the custom house. The best building in Brooklyn is the custom house. Treasury had the money. Teddy Roosevelt said, “Thank God I am not a free trader.” Oh, Lincoln, everybody says, I’m either for Roosevelt, I’m a Lincoln Republican. He was a big protectionist. Oh, he raised tariffs. They were gonna build a transcontinental railroad on the Abraham Lincoln. And they said we could get the steel cheap from England. He said, ah – wait a minute, we’re gonna build our own steel mills, and then we’ll have not only a steel capacity, but we’ll have the railroad. And so he was a builder. Everybody was a builder. Eisenhower, he protected oil. Jack Kennedy, I went to him, and he protected textiles. Ronald Reagan, he protected computers and Harley Davidson. He saved it. I saw George W. the other day about three weeks or a month ago, he was at the Harley Davidson plant, but protectionism saved it. That’s why they were making money at Harley Davidson. Oh, he got– ”
…
other wise the real industrial policy coming out of washington will rely on what the germans did during WWII.
Or maybe what the Germans did AFTER WW II, right up until the FUKUSA blew up the Nord Stream pipeline and took other measures to protect imperial global financializef prerogatives at the expense of our European buddies and the mope consumers in the Homeland?
What songs do an imperial people sing, as they fight for places in the lifeboats circling the drain?
“What’s that giant sucking sound I hear, getting ever louder in each ear?”
See Hudson’s America’s Protectionist Takeoff 1815-1914
https://www.goodreads.com/en/book/show/10074353
These three bills don’t constitute an industrial policy, they’re just throwing money at favored sectors to enrich and entrench the existing players.
Properly done industrial policy requires long term commitments by all the relevant players in a society. There has to be a consistent and conscious effort to cultivate and protect their industries, regardless of the government in power and short term economic conditions at play.
Viewed in this light, the Japanese and Chinese and the Germans until very recently, have been working on consistent industrial policies for over 100 years. There was the awareness that they were falling behind compared to the Americans and the English to a degree as to endanger their national sovereignty, and its been a slow climb to build up their industrial capacity including human and logistical capacity. Even when disrupted by war or social disruption, they had enough to pick up the pieces on the other side and keep going.
Meanwhile, the US has been deindustrializating itself since 1980. Throwing some money at the remaining players, many of whom are quickly hollowing themselves out via stock buybacks and outsourcing, is not going to reverse the trend.
I’d argue that the most successful industrial policy in history is the rise of China and the CPC’s accomplishments.
There is one other issue for the US – the US is now short in human capital. For example, when manufacturers do set up new plants, they struggle to get people hired. Part of that is due to greed, but also another part is due to lack of workers who have a background in manufacturing as a result of decades of outsourcing. There are shortages in skilled trades, engineers, and production managers, to give a few examples. Training them will take years. Pay needs to go up to attract the best – the West has overpaid questionable careers like investment banking and management consulting, while under paying the working and middle classes.
Another issue is that the US may simply subsidizing the greed of the US ruling class.
https://www.investors.com/news/sp500-stock-buybacks-top-1-trillion-in-2025-goldman-says/
Nvidia for example engaged in stock buybacks as it’s shares rose.
https://www.reuters.com/technology/nvidias-25-billion-buyback-a-head-scratcher-some-shareholders-2023-08-25/
So the Chips Act might be a bust before it really takes off. Granted, Nvidia is a fabless company, but in the past, Intel has also engaged in buybacks.
As Galbraith has noted, the Finance dominance means that instead of building industry, this industrial policy may very well end up subsidizing stock buybacks rather than building industry.
That brings up the real elephant in the room. The elite are rent seeking our society. Industrial policy requires the elite to work for the benefit of society. Unless the elite make major changes and stop their rent seeking schemes like stock buybacks or private equity, any industrial policy is doomed.
That’s why China has done so well. The elite in China are very disciplined, competent, and have run China for the collective benefit of the Chinese people.
Our elite have done the opposite. At this point, the Western elite won’t even have the skills to run an industrial policy. They have built a rent seeking economic system for so long. Essentially we would need a revolutionary against the Elite for a problem they created.
Yes!
Everyone I talk to confirms the lack of skilled workers, but that’s what happens if your country has a war on labor for forty years.
As you so correctly point out, the financial incentives which drove American de-institutionalization are still our “industrial policy” which means any funding thrown at American industry may actually act more like throwing gasoline on the fire.
“Everyone I talk to confirms the lack of skilled workers, but that’s what happens if your country has a war on labor for forty years…”
Worth lots of discussion.
Exactly.
“I’d argue that the most successful industrial policy in history is the rise of China and the CPC’s accomplishments…”
I question myself, but I keep coming to this conclusion. There has been repeated adaption:
https://twitter.com/RnaudBertrand/status/1782579278779211965
Arnaud Bertrand @RnaudBertrand
Fascinating figures by @MacroPoloChina (the Paulson Institute’s think tank) on China’s absolute and growing domination of AI top-tier talent in Asia-Pacific.
To summarize:
– An insane 81.9% of top-tier AI talent in Asia-Pacific come from China, up from 67.2% in 2019
– 79.2% of top-tier AI talent in Asia-Pacific work in China, up from 64.8% in 2019 – Out of the top 20 AI institutions in Asia-Pacific, 14 are Chinese
– China is now managing to retain 58% of its top-tier AI talent domestically, up from only 34% in 2019
This is the link to the full report:
https://macropolo.org/digital-projects/the-global-ai-talent-tracker/regional-deep-dives-europe-asia-and-middle-east/
9:16 PM · Apr 22, 2024
And AI is an industrial policy feature exactly how, again? Which is to employ people in making the stuff that sustains the political economy, or do I have that wrong? And if AI creatures do all the labor and possess all the knowledge and skills, how soon until we humans are all just useless eaters?
Then there’s this:
“ Telehealth startups see an opportunity in long-ignored, complex chronic diseases ” https://www.statnews.com/2024/04/23/telehealth-complex-chronic-diseases-pots-ehlers-danlos/
“The future is calling…”
Under socialism and communism, productivity gains are supposed to be distributed to the population to enable them to work less and have more personal time to do other things. Humans should not live to work, but work just enough to live comfortably. If that can be accomplished by working 4 hours a day instead of 8, that’s a win for humans.
AI is a recipe for immiseration and unemployment under capitalism. That’s why we need to get rid of capitalism and our capitalist parasites.
Actually, the most telling statistic that shows how China will out compete everyone is the number of Engineers it graduates every year.
I do not have a link to show this but Michael Hudson and many other people have discussed this.
It’s in the multiples of hundreds compared to the US.
Editing – I mean real engineers, not software engineers :-)
“I’d argue that the most successful industrial policy in history is the rise of China and the CPC’s accomplishments.”
I agree, but at least among the most successful these last 45 years. Which is why study seems so necessary.
Lee Kwan Yew was the advisor that Deng turned to in order to initiate China’s transformation. Deng followed his advice. The Chinese always had a great deal of respect for LKY. His number one priority was to combat corruption and especially government corruption in the immediate aftermath of the war.. The Singapore government could at any time review the finances of any government official. If their assets exceeded what their salary could justify and they had no explanation for why that was the case like inheritance or marriage they were considered guilty and punished accordingly. Consequently Singapore was not run by government created millionaires like the US. People who had been in leadership position for many decades were not allowed to have fortunes in the hundreds of millions. The US would do well to try to emulate LKY in terms of government management. Luckily many of his speeches are available on You Tube. They are well worth watching and listening to. His first book was excellent as well.
I haven’t read all of this article yet but this leapt out at me about a third of the way through:
“ 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”
This is always rolled out as a problem by sceptics of greener electricity generation. Here in Australia we have seen some evidence to the contrary. See this:
https://www.popularmechanics.com/science/a31350880/elon-musk-battery-farm/
And this:
https://reneweconomy.com.au/tesla-says-south-australia-is-blueprint-for-batteries-to-replace-coal-and-gas-one-plant-at-a-time/
Although there is, admittedly, some debate on the success of this. See here:
https://www.abc.net.au/news/2021-09-23/sa-tesla-battery-sued-for-not-helping-during-qld-coal-failure/100484664
The main point is that battery storage of greener electricity generation that is not “base load” or “dependent on the weather” is actually an improving technology that can overcome some of the limitations of wind or solar power.
Even if we have reached the limits of battery storage and I don’t think we’re anywhere near it, I always thought the more important solution to intermittent power is simply to have automated industrial production that is set to run during periods of high power availability. This is something that’s going to take a few years and appropriate market conditions to refine, but seems likely to take off given China’s vast expansion of solar power and automation in the last few years.
Utility battery prices are plummeting – CATL state that there has been a 50% drop this year alone. While there are other reasons for that particularly dramatic annual drop, the trends are still sharply downwards.
There is a lot of misunderstanding around the issue of storage and intermittency. We are already at the stage in many grids where super cheap solar is resulting in negative pricing during daytime, which means its not just cannabalizing solar profits, it hitting every other form of electricity power input.
But batteries are just one element in storage – you need short term spinning capacity, which is usually provided by momentum from thermal plants, but it can be provided relatively cheaply through other means. Batteries are vital for medium term storage (i.e. managing daily load management and over a few days). For longer term storage you need other means – the tried and tested method is pumped storage, for which only a tiny percentage of potential capacity has been developed. Plus, as Emma above observed, we’ve only started to address the issue of demand management to iron out daily and weekly cycles.
I don’t think many people outside the industry realise just what a revolution in energy has taken place in just the last 5 years alone. PV panels have become ridiculously cheap and there is already a vast production capacity in place. This is completely altering grid economics worldwide – we now have the odd feature of regular negative wholesale prices in many grids, which is driving investment in both storage and in capacity for using cheap electricity (for example, hydrogen and ammonium production). Many claimed problems in grid balancing can be addressed simply by using the most efficient power cabling and better software management, plus of course putting in place larger, more integrated grids.
Probably the biggest problem for the energy transition right now is not policy, or technology, but artificially high interest rates driven by the US Fed (which is forcing up interest rates worldwide) because of phantom inflation fears. It is artificially high interest rates which have killed off many promising large scale investments in renewables.