America (finally) gets an industrial strategy

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Swamp Notes readers will know that I’m a big fan of industrial policy for the US, which as I wrote in this note from a few weeks ago, isn’t about picking winners but simply bringing a smidgen of strategic and long-term foresight to the way America’s economy is run. In a world in which we have to compete with state-run giants like in China, that think on 50-year time horizons, quarterly capitalism simply doesn’t cut it any more (not that it really ever did).

I had a chance to dive into the topic last week with Brian Deese, the director of the White House National Economic Council. (See the transcript of his speech and my Q&A with him, here.)

As most readers will recognise, what Deese is proposing is neither protectionist, nor particularly radical — indeed, it’s just the beginnings of an outline for how the government could provide some better incentives for long-term thinking, how politicians might use the power of federal procurement to forward climate and equity goals, and how supply chains could be made less concentrated and more resilient (both in terms of geography and company). Most developed countries and many developing ones already do this.

America has a long way to go to regain its muscle memory in this area. As I wrote in Swamp Notes back in 2019, industrial policy has its roots in America, but over the past 40 years, we’ve moved completely away from any kind of state involvement in the economy. Research shows that US multinational corporations and the Chinese benefited from this approach, but most workers in the developed world did not.

The Deese speech outlines several ways that the administration plans to address this, most specifically by rebuilding America’s semiconductor supply chains. As I write in my column this Monday, that should involve allies who will help bolster demand and innovation across a newly revamped ecosystem that will make everyone less reliant on Taiwan.

If anything, I think the US plan isn’t radical enough — yet. So, I’ve listed below three things that the White House could do to help build back better, stronger and faster:

  1. Appoint a resiliency tsar. As I argued in this column, such a person could bring all the various departments together faster, to cut bureaucracy and red tape in addressing things like the most needed critical infrastructure, connections between the public and private sector, and areas where there is low hanging fruit to be plucked to create more resiliency. Industrial policy by its very nature requires action at the top, but the process shouldn’t become too cumbersome or involve too many different budget line sheets or vested interests, lest it drag along too slowly to do any good.

  2. The tsar’s first task should be to create a kind of 3D picture of all the resources available to meet the White House goals — world beating private sector businesses, top vocational schools or industrial programmes, areas with too much or too little skilled labour, etc. Simply creating this kind of knowledge hub and then allowing anyone who wants to tap it would go a long way. I’m thinking of a story I covered at the beginning of the pandemic, during which time private sector textile companies were retooling to create masks, without much help from the Trump White House or anyone else. If there was a place that these companies could go to quickly find out the best place to source demand from the public or private sector, get tax incentives for retooling, find workers, etc, they could have done what they did even more quickly and efficiently.

  3. Look for possibilities to bolster regional resiliency — again, I’m thinking of those highly productive textile supply chains in North Carolina, which could deploy the Darwinian skills learned in the past 20 years of battling the outsourcing of their businesses to China in some more productive way. Right now, they make low margin T-shirts (mask production stopped, since there are no long-term incentives to keep it going — yet another problem to be fixed). Why not connect them with electric vehicle carmakers 400 miles south in Greenville, South Carolina, to make upholstery for EVs? That would, in term, help connect a broader range of businesses with higher margin, strategic government subsidies in areas like lithium batteries, clean energy, and so on.

Again, this isn’t about picking winners, or any kind of heavy top-down planning — it’s just about connecting the dots. Nothing protectionist about that. Peter, what do you think about the Deese speech, and do you have any points to add to my list?

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Peter Spiegel responds

Rana, Deese’s blueprint is both compelling and sweeping, but as someone far more sceptical of industrial policy than you are, I find it almost too sweeping. He claims to be against “reshoring all our supply lines”, but in some of the most advanced sectors of our economy, that’s exactly what his plans would promote. After a global pandemic, I can see the appeal: countries that could rely on domestic medical supplies and manufacturing have emerged more quickly than those that couldn’t. But that doesn’t mean we should organise the entire top of the economic value chain around government-backed domestic suppliers.

A lot of the current hand-wringing surrounds semiconductors, where global shortfalls (and a lack of domestic suppliers) have already triggered Congressional legislation, as you noted. But let’s not forget, we’ve been here before: in the 1980s, when it appeared that Japanese chipmakers were putting their American rivals out of business, the Reagan administration backed a government-funded consortium called Sematech. Economists have debated its impact ever since, and it may have helped drive down costs in domestic chip manufacturing, but it also appears to have crowded out private investment in the sector. After all, here we are just a few decades later facing an almost identical market failure.

For years, I believed that industrial policy was warranted for one reason and one reason only: national security. If we go to war with the country that makes our bullets, well . . . it’s going to be a very short war. But the pandemic has opened my eyes to a truly historic partnership between government and the private sector: Operation Warp Speed, which delivered amazingly effective Covid vaccines in record time. 

I recently attended a virtual Ditchley Park conference where one of the participants (Chatham House rules, so I can’t say who it was!) referred to Operation Warp Speed as the government serving as “buyer of first resort”, a concept I found compelling. It is essentially what Deese is talking about when he touts the Obama-era policies towards private space exploration: if you build it, we will come.

Of all Deese’s “pillars”, this is the one I think has the best chance of producing the desired effect: use federal procurement dollars to incentivise the private sector. Build a better microprocessor? The Pentagon will buy them. Invent more robust, emissions-free vehicles? We’ll make sure municipalities have the funds to acquire them.

Maybe not as sweeping as Deese would like, but I think it has a better chance of success.

Edward Luce is on leave and will return in mid-July.

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And now a word from our Swampians . . . 

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“There are two other measures which would address the defects of UBI and do even more. The first is land value taxation (better described as site location taxation) — an idea already endorsed by your own Martin Wolf as being an effective way of supporting the public commons. The other is to replace income tax on labour with a progressive consumption tax, as advocated by Robert Frank. This would raise motivation to work for ordinary folks and have ecological benefits by squeezing consumption at the CO2-intensive top end.” — Andrew Hallan, Luxembourg

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