Reclaiming U.S. Industry

Biden’s industrial policies represent a stunning ideological reversal. The harder part will be making them work.

BY ROBERT KUTTNER

Since the late 1970s, as the U.S. lost productive capacity in industry after industry, progressives have been calling for an industrial policy. This was mostly disdained by orthodox economists and rejected by the presidential wing of both parties in favor of global outsourcing.

The economy has paid dearly for this, with the loss of good jobs and industries that anchored entire regional economies. Democrats in turn have paid with the loss of working-class voters.

Now, under Joe Biden, we have a potentially transformational shift of ideology and policy. Stimulated by the COVID recession, the supply chain crisis, and the urgent need for renewable energy, Biden’s administration has sponsored an industrial policy, actually several industrial policies, intended to reclaim technological leadership and domestic manufacturing.

Jubilant liberals, who have long called for this, are now a little like the dog who caught the car. Coordinating these diffuse policies into a coherent whole and enabling them to succeed is a staggeringly complex enterprise.

One marquee piece of legislation, the CHIPS and Science Act, will spend $13 billion to subsidize semiconductor research and another $39 billion to build more production facilities (known as fabs) in the U.S., using grants, loans, and tax credits. Spending $52 billion (over five years) sounds like a lot, but a single semiconductor fab can cost $5 billion or more, and Intel says that their new Ohio research and manufacturing complex will cost between $60 billion and $120 billion over a decade.

All told, chip manufacturers had planned to invest on the order of $200 billion in at least 23 new U.S. semiconductor factories, even before the new legislation passed. Government needs detailed performance standards for these subsidies for maximum public benefit.

The Inflation Reduction Act includes even more money for clean-energy security and climate change mitigation, $369 billion over a decade. Much of this is via tax credits to accelerate the shift from fossil fuels for heating and cooling to heat pumps and electricity generated by wind turbines and solar panels, as well some direct subsidies to promote domestic manufacture. There are also tax credits for the purchase of electric vehicles made in the USA .

And the bipartisan infrastructure law, with about $600 billion of new money beyond the usual appropriations for highways and public works, includes major outlays for green projects, including $73 billion to update the nation’s electricity grid to carry more renewable energy, $7.5 billion for electric-vehicle charging stations (on which accelerated EV sales depend), and $7.5 billion for clean buses and ferries. These outlays also promote domestic production and jobs.

In addition, the National Defense Authorization Act passed in December includes dozens of industrial-policy measures. This is on top of continuing outlays for the Department of Energy, the National Science Foundation, and the National Institutes of Health (NIH).

It’s hard enough to make industrial policy work in a single agency. The new enhanced industrial policies involve coordination across multiple federal agencies; several levels of government (federal, state, county, municipal); multiple technologies; and the intense involvement of the private sector. There is no single industrial-policy czar. Among top officials, John Podesta oversees outlays under the Inflation Reduction Act. Commerce Secretary Gina Raimondo is in charge of CHIPS and Science. Mitch Landrieu coordinates the bipartisan infrastructure law. Jake Sullivan deals with the foreign-policy cross-pressures of America’s new economic nationalism. Presumably, these people talk to each other, and to the leaders of dozens of other agencies with jurisdiction in these areas.

Among the challenges are:

• Making sure that different agencies and programs are not operating at crosspurposes and that it all adds up to a coherent whole;

• Engaging the private sector without producing windfall profits, gratuitous subsidies, or failed ventures that become grist for Republican we-toldyou-so investigations (viz. Solyndra);

• Putting tough performance standards into these grants and loans to achieve other progressive goals, such as support for union labor and climate justice;

• Connecting industrial policy to workforce policy, so that there is a rendezvous between needed specialists at every level and newly created jobs;

• Streamlining permitting and environmental reviews, so planned facilities come to fruition without endless delays;

• Reconciling the bold climate goals in these several programs with the practical disruption of the environment caused by, say, solar farms and power lines; and

• Harmonizing our new industrial policy with foreign policy and trade policy, notably with our European allies, who see U.S. industrial subsidies as violating trade rules at their expense. In principle, it all adds up to reclaiming industrial and tech leadership, accelerating the post-carbon shift, and creating good domestic jobs. In practice, it’s potential chaos.

The Old Industrial Policy, and How We Lost It

Industrial policy in the U.S. dates to Alexander Hamilton’s 1791 Report on the Subject of Manufactures, Henry Clay’s American System of public improvements and high tariffs, and Lincoln’s support for public investments to enhance agriculture and manufacturing.

In World War I, the government organized several industries needed for the war effort, including radio and aircraft research and production. World War II was one massive industrial policy, creating new weapons systems, synthetic substitutes for supplies that the war had cut off, and the technologies to make them work.

After WWII , government continued to invest in science and technology, via the National Science Foundation, the National Institutes of Health, and the Cold War–era Defense Department. The Pentagon created the Advanced Research Projects Agency (later renamed DARPA) to fund “beyond the horizon” technologies, operating like a government venture capitalist. Specialized military procurement subsidized new processes and products, many with civilian spin-offs, from aircraft to computers. The U.S. also had the national laboratories and the great research universities, heavily underwritten by government, which incubated new technologies and entire new industries. It was taken for granted that production would stay at home.

This was America’s national innovation system, and it worked. Despite protestations that we believed in free trade, it added up to a tacit form of economic nationalism.

But by the 1970s, while government-sponsored R&D continued, there was an increasing disconnect between U.S. technological leadership and domestic production. This was the era when the U.S. began losing industry, and good-paying unionized workforces.

The U.S. cemented the loyalty of Cold War allies by opening our borders to their exports without demanding reciprocity. The extreme disdain among economists for the survival of industry, much less industrial policy, was captured in a famous remark by Michael Boskin, chair of the Council of Economic Advisers under Bush I: “Potato chips, computer chips—what’s the difference? They’re all chips.” (Boskin has since denied saying this.)

By the early 1980s, for example, Japan was leading the U.S. in most categories of semiconductors. Japan’s targeted industrial policy and protectionism, its bank-industry interlocks and cartels, all orchestrated by the Ministry of Trade and Industry (MITI), became the model for the subsequent national innovation systems in China and elsewhere in Asia. Today, the U.S. share of global semiconductor production has fallen from 37 percent in 1990 to 12 percent, with heavy dependency on Taiwan and South Korea.

In the ’80s, the U.S. also lost most of its machine tool industry to Japan and Germany, autos and steel to multiple foreign competitors, and the entire consumer electronics industry, which domestic manufacturers had previously dominated. When the

U.S. did regain some innovative leadership in microelectronics, via Apple computers and iPhones (using technologies partly developed thanks to DARPA), production was outsourced to Asia. The rupture between technical innovation and domestic manufacturing was complete.

Throughout this period, the U.S. did have several tacit mini-industrial policies. The 1980 Bayh-Dole Act allowed industry to exploit government-funded R&D. In 1984, Congress created a blanket antitrust exemption for private companies to engage in collaborative research. There were modest tech subsidy programs housed at NSF and the Commerce Department. NIH sponsored the Human Genome Project, which was a tacit industrial policy for biotech.

In 1987, the top 14 semiconductor makers persuaded Reagan’s administration to back a home-based consortium known as Sematech, with $100 million in DARPA funding matched by the industry. Robert Noyce, who had co-invented the integrated circuit and co-founded Intel, was the industry leader of Sematech. Noyce was charismatic, widely admired, and well connected in both parties. “Semiconductors were sexy, machine tools were old economy,” says Clyde Prestowitz, one of the architects of Reagan’s trade policy with Japan.

But these policies lacked adequate scale, ideological approval, or an explicit national commitment to connect them to domestic manufacturing. The dominant ideological premise was that the location of production is the proper business of the market, not the government.

Industrial Policy for Corporate America

There was a logic and a discipline to wartime industrial planning because government was the customer. So government could dictate specifications as well as target applied research to focused goals, and build or requisition factories as necessary.

Today’s industrial policy is far more dif- fuse. It’s more about developing new technologies and bringing production home, but without the discipline of government as customer, except in the case of some military hardware. It will require nothing less than a transformation in the logic of our entire economic system, making government’s role far more explicit and coherent.

The lead agency for CHIPS and Science is the Commerce Department, which has neither the experience nor the personnel to manage a government-wide industrial policy. The one part of Commerce with some related expertise is the National Institute of Standards and Technology (NIST), a billion-dollar agency that has sponsored small industrialpolicy initiatives in the past. But under previous administrations when NIST tried to play a government-wide coordinating role, “the big players, the Pentagon and the Department of Energy, basically told NIST to get lost,” says one former Commerce official.

Commerce simply doesn’t have enough people to process the various CHIPS sub - sidy proposals that will come flooding in from corporations, universities, and other research centers after detailed criteria are published by the department in February. The bigger challenge is devising the terms of the Commerce Department’s contractual agreements with the semiconductor companies that will get its largesse. What kinds of chips will they commit to make, at what volume, and with what public input and public benefits, including for organized labor?

Commerce Secretary Gina Raimondo, who meets regularly with top executives , is among the most corporate of Biden’s appointees. And in many ways, that’s the point. Progressive enthusiasts of industrial policy need to reckon with the awkward fact that industrial policy, not surprisingly, is mostly carried out by industry.

The long-sought arrival of industrial policy comes at a time when the left is properly excoriating corporate America for everything from hyperconcentration and stock buybacks to grotesque pay gaps and union busting. Big Tech companies in particular are improbable partners because of the serial abuses of tech platform monopolies and the extreme outsourcing by the likes of Apple.

And yet, unless we are proposing industrial policy via socialized public enterprises, private corporations must be the instruments. The key question for progressives is: What does government (and the ideal of a just society) get in return, beyond returning more production and technical leadership to the U.S.?

Biden has done well in targeting new clean-energy outlays to poor and underserved communities, as well as rural areas and tribal reservations. His Justice40 Initiative commits to delivering 40 percent of the overall benefits of climate, clean-energy, and related federal investments to diverse low-income communities that are overburdened by pollution and underserved by infrastructure. He wins praise from advocates of climate justice.

But for the most part, Biden has chosen not to use these extensive industry subsidies and tax breaks as leverage to get corporate America to clean up its act in other respects. The CHIPS and Science Act does prohibit corporate beneficiaries from using government funds for stock buybacks. But as Sen. Elizabeth Warren has pointed out , since money is fungible there is nothing to prevent corporations from taking CHIPS money and using other money on buybacks.

That would be consistent with past prac-