America Has an Industrial Policy: The Wrong One

March 10, 2023

David P. Goldman

Washington Fellow

This op-ed was originally published on March 9, 2023 by Newsweek.

Officially, the United States has no industrial policy. But in practice, it has had one in place for decades—one that has shrunk America’s manufacturing sector and blunted its technological edge. Its tax and regulatory policies discourage capital-intensive investment, it subsidizes white-collar professionals rather than skilled workers, and it has shrunk support for the basic scientific research that sustains productivity. As a result, the U.S. now depends on China and other countries for strategic goods, and runs chronic deficits that have swollen our obligations to foreign entities.

All nations have industrial policies, and America needs one that fosters industry rather than stifles it. That is the theme of a new essay for the Claremont Institute’s Center for the American Way of Life.

Whenever the federal government spends a dollar, demons awake and work to encourage rent-seeking and cronyism. Industrial policy as practiced by European social democracies has become a dirty word, and with good reason. Humanity has not discovered a worse or more corruption-prone mechanism for misallocating resources than committees of civil servants appointed by politicians. Nonetheless, every developed economy has an industrial policy of one kind or another.

America is no exception. It has a massive, pervasive, and comprehensive industrial policy that has perversely hollowed out its industrial economy and suppressed the incomes and capabilities of American workers.

That explains why we have record imports from China, but can’t find workers to fill nearly a million open factory jobs in the U.S. Stagnating productivity and low wages discourage factory employment, while our schools don’t train young people for skilled jobs.

Our de facto industrial policy is to blame in several ways. The American tax code favors “capital-light” Big Tech companies and penalizes capital-intensive manufacturing. American regulation, including environmental and worker safety regulation, favors companies with a preponderance of white-collar employees at the expense of manufacturing, mining, chemical, and refining industries.

The United States also provides enormous subsidies to universities through tax-exempt status and direct grants, favoring elite universities with large endowments and research facilities, taxing average Americans to fund the education of elite professionals. Other countries subsidize apprenticeship programs for less-affluent citizens to train a highly skilled and highly paid industrial workforce.

Public improvements are a subsidy to goods-producing industry and mining, and America’s level of spending is among the lowest in the industrial world. The United States spends just 0.55 percent of GDP annually on infrastructure, about the same level as Greece. Germany spends 0.8 percent, France spends 0.9 percent, Japan spends 1.1 percent, and China spends 5.8 percent.

Federal subsidies for R&D subsidize innovative, entrepreneurial industries. During the 1970s and 1980s, the federal R&D budget was about 1 percent of GDP, and federal funding supported every major invention of the digital age, helping to make America the world’s undisputed leader in advanced technology. Today, the federal R&D budget is only 0.3 percent of GDP.

Whether we realize it or not, we have an industrial policy that discourages industry.

Absence of a policy is itself a policy, when the competition has a policy of its own. Our biggest strategic rival, China, spends over 1.7 percent of GDP in direct subsidies to favored domestic industries, according to a study by the Center for Strategic and International Studies. China also provides indirect subsidies to key industries.

China’s telecommunications equipment giant Huawei claims that it has already installed dedicated 5G networks in more than 10,000 business, including 6,000 factories, enabling artificial intelligence applications that boost productivity. The count in the rest of the world is below 200. China has made an all-country commitment to the Fourth Industrial Revolution powered by AI, and threatens to widen its already commanding lead in manufacturing.

The United States will, in response, have to cut the Gordian Knot, or rather, seven Gordian Knots:

First, establish tax and regulatory conditions that foster manufacturing, as opposed to the present system that favors capital-light industries.

Second, shift the defense budget away from costly, obsolete weapons systems to support innovative weapons that push the frontier of physics and computation.

Third, subsidize a very few critical industries (such as semiconductors) whose onshore operation is vital to national defense and economic security.

Fourth, foster innovation at the frontier of science—first of all in the service of national defense, but by extension in the interest of long-term productivity and growth.

Fifth, protect industry from harmful monopolies, such as Big Tech, which stifle innovation and divert capital away from essential industries.

Sixth, shift educational subsidies away from elite institutions that train financiers and functionaries toward an apprenticeship system that trains skilled workers for high-tech industry.

And seventh, require school curricula that emphasize literacy and numeracy in preparation for skilled jobs and engineering studies.

We should use the defense budget as a lever for technological transformation, on the model of the war-winning strategy of the 1970s and 1980s. Defense-related development spending shrank from about 1 percent of GDP in the early 1980s to about 0.3 percent of GDP at present, as defense spending shifted toward purchases of legacy systems rather than innovation to create new ones. Defending the homeland against the next generation of strategic weapons requires fundamental innovations in physics and computation, and those will in turn require solving problems that will have a transformative impact on the civilian economy.