America needs an industrial policy — now more than ever

At a moment when the two major parties disagree on just about everything, leaders on both sides of the aisle have surprisingly converged on an idea that was left for dead decades ago: industrial policy. The Democratic nominee for president, Joe Biden, has elevated it to a centerpiece of his economic plan, and Republican leaders like Marco Rubio and center-right think tanks like American Compass are touting it as well.

And so they should. We are going to need a robust industrial policy to take on the big challenges that lie ahead: building a more resilient economic infrastructure, creating good jobs for more Americans, and transitioning to a more sustainable production system.

Industrial policy is not just trade protection or subsidies for domestic manufacturers. It entails active government efforts to promote technological leadership and to transform the industrial structure. It can be deployed to advance core policy goals, from growth, employment, and competitiveness to the mitigation of climate change. And it can strengthen domestic supply chains to make the country better prepared to respond to unforeseen emergencies — like pandemics, for example.

The United States went through a first round of industrial policy debate in the 1980s as American industrial supremacy was challenged by Japan. But this time is different. There is actually less of a partisan divide this time. The Democrats were the industrial policy enthusiasts in the 1980s, while most Republicans opposed. Economists have now softened their hostility to the idea, and some have even embraced it. And recent calls for industrial policy have fused with demands for action on climate change, especially in the proposals for a Green New Deal.

The logical case for industrial policy is compelling. The private sector is bound to underinvest in socially productive research and development precisely because it benefits society as a whole. That is, private firms cannot capture all of the returns from that investment. So, it makes sense for the government to fill that gap.

Moreover, the U.S. experience with the COVID-19 pandemic has demonstrated rather definitively that the private sector cannot develop, produce, and deliver critical supplies for an emergency on its own. And only the government has the capacity to make the massive investments required to explore revolutionary technological solutions to combat climate change.

Critics have dismissed industrial policy for decades with two words: “picking winners.” The government has no ability to pick the winners in industrial competition, they charge, so it should leave that to the free market. Yet this line of criticism is misplaced. A proper industrial policy does not aim to pick winners in the sense of favoring specific companies or particular technical standards. Rather, it is designed to shift the industrial structure in a broad direction, such as from fossil fuels to renewable energy. It is meant to place lots of small bets on different research strategies rather than one big one. And it is aimed at basic research and the enhancement of manufacturing capacity rather than at final product development. 

Think of it this way. Government officials cannot foresee the optimal electric car battery of the future. But they can recognize that we need to shift from dependence on fossils fuel to greater reliance on renewable energy, and they can make investments and forge partnerships to make that happen.

Japan successfully deployed industrial policy to orchestrate its postwar “economic miracle” and to challenge U.S. manufacturing supremacy by the 1980s. It did not guess right on every technology, but it successfully raised the level of investment in productive capacity. And it transformed the industrial sector from lower value-added sectors, likes textiles and toys, to higher value-added sectors, like automobiles and electronics.

The United States has benefitted from its own industrial policy, although most Americans do not realize it. American industrial policy has been skewed toward military applications, with the defense establishment funding research in core technology and serving as a critical launch market for high-tech firms. The heterodox economist Mariana Mazzucato demonstrates in her book The Entrepreneurial State how U.S. government R&D, procurement, and seed funding supported some purportedly “self-made” entrepreneurs like Apple’s Steve Jobs.

The Biden plan pledges $300 billion in R&D funding over four years, plus $400 billion in government procurement from U.S. firms. And it proposes to boost investment in workforce technical training and research capacity at educational institutions. That is a good start. But a new industrial policy should deploy some best-practice policy tools and restructure government institutions to maximize results.

For example, the government should forge research consortia that bring together private firms to reduce duplication and increase economies of scale by collaborating on early-stage research while continuing to compete at the stage of product development. And it should coordinate investment via industrial planning — not by dictating private sector behavior but by setting long-term goals through its own R&D and procurement plans.

The skeptics rightly note that industrial policy, like most any economic policy, is vulnerable to capture by narrow business interests. But the solution is not to abandon industrial policy, but to structure government institutions to limit political capture and enhance administrative capacity. The government should form deliberative bodies to set industrial policy priorities, with academic experts and public interest members as well as industry representatives. It should entrust implementation plans to a professional bureaucracy that is mission-oriented and insulated from lobbying. And it should appoint independent review panels to ensure accountability. We are going to need some capable bureaucrats to build a more resilient and sustainable economy after the current crisis.

Steven K. Vogel is Chair of the Political Economy program, Il Han New Professor of Asian Studies, and Professor of Political Science at the University of California, Berkeley. He is the author of Marketcraft: How Governments Make Markets Work.