Every president promises to change the nation’s future. George W. Bush promised a stronger military. After 9/11, he initiated a war on terror that continues to shape our foreign and domestic policy. Barack Obama also was true to his word. Frustrated with Congress’s inaction in expanding his social-welfare agenda, he turned to executive orders to promote that end.
After three years in office, though, it’s clear that Joe Biden envisions a much bigger remake of America than did his predecessors. His campaign promise to bring the country together, speaking of himself as “a bridge, not as anything else,” seemed to presage a modest agenda. Yet, once in office, he began to restructure the economy in profound ways.
The massive federal spending supposedly justified by Covid-19 served as cover for the Biden administration to transform the American economy into something more like China’s state-managed one. Left-leaning Keynesian economists had long desired to do just that, and the Biden administration put it into practice: the American Rescue Plan, the Investment and Jobs Act, the CHIPS and Science Act, and the misnamed Inflation Reduction Act pushed trillions of federal dollars into the consumer economy. Predictably, inflation in consumer prices reached the worst levels since the Carter presidency.
Biden’s economic ventriloquist seems to have been Brian Deese, director of the National Economic Council from 2021 to 2023. Last October, Deese announced the first-ever peacetime use of industrial policy by the U.S. government, which he baptized as a “modern American industrial strategy.”
To appreciate the hazards of this policy, one needs to understand industrial policy as it operates in Europe, where various nations explicitly work to protect their oldest and biggest companies. These firms are seen as bedrock institutions that define the economies in which they exist. They have enjoyed decades of protection from competition and have never been allowed to fail.
Americans, on the other hand, are used to seeing established, successful firms misread markets, misjudge new technologies, or over-leverage themselves, with sometimes fatal results. Recent examples of American bankruptcies include those of Silicon Valley Bank, WeWork, Mallinckrodt, Yellow Freight, and Bed, Bath and Beyond. From an American policy perspective, business failures are an indicator of a healthy, dynamic economy.
The cost of Europe’s protectionist policies is best illustrated by the continent’s comparatively slow growth. Since 2000, EU member states have expanded their GDP at roughly 1 percent annually, while the U.S. has enjoyed overall economic expansion of slightly above 3 percent. Estimates by the European Centre for Political Economy suggest that, if this trend continues, the prosperity gap between the average European and American in 2035 will be as big as between the average European and Indian today.
Biden’s version of industrial policy presents three long-term threats to American capitalism. First, allowing unelected governmental elites to favor certain firms with subsidies for what they deem needed innovations does not work. Historically, American innovation has typically occurred in the market, whether from existing firms or the imaginations of entrepreneurs. When “experts” use government power to suppress market signals, enormous market distortions—inflation, shortages, and more—inevitably ensue.
During the Obama presidency, for example, government experts thought that Solyndra and a host of green-energy companies would be winners. These firms’ collective bankruptcies wasted over $1 billion of federal money. Today, far more resources are squandered as Washington seeks to limit the production of fossil fuels, despite the government’s own cost-benefit analysis showing that these steps will slow economic growth.
The second threat of industrial policy relates to the federal government’s efforts to manage innovation. The CHIPS and Science Act of 2022 established targeted grant funding, and the federal government decides the focus of these grants. Under this arrangement, the nation’s corporate innovation apparatus, university laboratories, and entrepreneurial ecosystems are induced to conform to government views of what’s required.
To decide what that is, the government has turned to a 60-year-old model: the Defense Advanced Research Projects Agency. DARPA was established during the Eisenhower administration to encourage the development of technologies that would prevent the U.S. from being surprised as it was by the Russian launch of Sputnik in 1957; it once served America well. While DARPA may claim credit for many breakthrough technologies, including the Internet, more recently it has missed out on several critical innovations that China and Russia have led the way on, such as hypersonic missile technology.
Nevertheless, federal planners, likely over-invested in the DARPA story, have propagated the model into other executive departments. ARPA-H, for example, is intended as the equivalent initiative to push medical advances in the Department of Health and Human Services. Similarly, ARPA-E attempts DARPA-like breakthroughs in energy.
The principal danger of this government-centric approach is that it pushes aside more organic methods of innovation. When government agencies use subsidies to assert dominance over the innovation process, entrepreneurs will tend to pursue the opportunities that government planners see as important. The federal government is disturbing the nation’s ecosystem of innovation and entrepreneurship. The end result will be fewer startups.
Therein lies the third and biggest worry related to industrial policy: cronyism. Business owners have sought privileged relationships with the government since Robert Fulton and Robert Livingston obtained a patent giving them a monopoly to operate a steamboat on the Hudson. But the United States has generally been able to rely on courts committed to principles of private property and free markets to provide some balance of interest. Historically, government-business ties commonly were initiated by companies seeking protection and subsidy for massive projects like canals and waterways that were cloaked in public benefit. With the coming of the Biden industrial policy, however, entrepreneurs and businesses inevitably will see it in their interest to pursue innovations that the federal government prescribes—not ideas that arise from their own experience or initiative.
In describing the new industrial policy, Deese promised enhanced worker productivity, a higher standard of living, reduced carbon emissions, and—of course—greater “inclusion.” As an added benefit, he said, the new industrial strategy would focus on localities. Even assuming that an industrial policy could deliver on any of these promises, the fulfillment would come at a serious cost: slowing American economic growth for decades to come.
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