While the Covid-19 pandemic appears to be easing, the spending battles in Washington are as animated as ever. With both parties eager to set the economy on a faster path to recovery, calls for a costly and game-changing industrial policy are growing louder.
The Trump administration seeks another $2 trillion featuring, according to trade adviser Peter Navarro, ideas to promote “buy American, hire American and make it in USA.” The annual Defense Authorization Act, which is likely to be one of the few legislative vehicle for new programs this year, will soon start taking shape, and supporters of industrial plans are circling.
Ideas include a $110 billion proposal by Sens. Chuck Schumer and Todd Young for a new federal “directorate for technology,” and multibillion-dollar programs to support the semiconductor, 5G and medical-products industries, among others. Progressive Democrats such as Sens. Sherrod Brown and Elizabeth Warren and Rep. Alexandria Ocasio-Cortez think industrial policy can re-engineer the economy to solve problems such as income inequality and climate change. Republican Sens. Marco Rubio and Josh Hawley see it as a way to reverse America’s industrial decline and meet the growing challenge from China.
Despite bipartisan enthusiasm, an industrial policy remains a bad idea. The pandemic has highlighted the inability of technical experts to understand and respond effectively to complex medical problems. Economic problems are no less complex. History records few examples of democracies in which political leaders have successfully steered their economies by targeting industries for support. Japan gave up central planning decades ago. Europe’s efforts to create national champions have largely foundered.
There are many useful steps the U.S. could and should take to make its well-functioning, innovation-rich economy more resilient and secure. Cost-effective regulatory policy, a tax system that rewards investment and research, and an education system focused on the requirements of a 21st-century market economy are all important. So is a strong infrastructure improvement program, funded in part by public-private partnerships.
The U.S. would benefit from a government-led effort to identify industries that are vital to national security and products that are essential in national health emergencies. The Defense and Interior departments have already compiled lists of critical materials and technologies (such as rare-earth metals and specialized integrated circuits) that must be locally sourced or purchased from trusted allies to maintain U.S. technological superiority. The federal government must also consider how to protect the overall economic strength of important and capital-intensive sectors like semiconductors and telecommunications equipment.
On health care, a national commission should review the reliability of supply chains, determine which products are vital to meeting the next crisis, and subject institutions to stress tests. In sectors where domestic production is insufficient, as may be the case for some pharmaceuticals and medical products, there are several good ways to create incentives for domestic production: permanent first-year expensing of capital investments, a stronger research-and-development tax credit, and establishment of a similar credit for education and skills training.
The Chinese have pursued a strategy of draining profitability out of the global telecommunications market by subsidizing companies such as Huawei. The U.S. will never be able to compete as long as Beijing punishes Chinese consumers to support an export-driven economy. But Washington can increase support for research in the physical and medical sciences and engineering, where we have fallen behind industrial powers such as Korea, Japan and Germany.
China will soon match America’s investment in research, in terms of the portion of the economy devoted to it. Getting back to the research levels of the 1980s would require an 80% increase in federal support, or about $100 billion. In many cases the U.S. can facilitate private research by authorizing premarket research consortia. This was done in the 1960s with the creation of Comsat to meet the Soviet satellite challenge, and in the 1980s with Sematech to keep pace with the Japanese on semiconductors. Both allowed basic research and sharing of results for foundational technologies.
The U.S. must maintain its competitive advantages in advanced technologies. Doing so will require focus and coherence. But empowering politicians to direct a top-down technocratic state would smother the entrepreneurial drive that is central to wealth creation. A competitive private sector that rewards innovation is the American economy’s greatest strength. Don’t choke it to death with industrial policy.
Read in the Wall Street Journal