Back to the future: industrial policy makes a comeback

The revival began in the Trump administration as part of an anti-China attack, but it gathered momentum under President Joe Biden, who stocked his economic agencies with data eager to intervene in the market. “Part of our effort is to re-create space for very serious people so that they can really bat for the idea that the government has the right role to play,” says a senior administrative official.

But the big industrial policy raises a bigger question at the multi-billion dollar stake: What works and what doesn’t?

Advocates point to a long record of achievement, beginning with Alexander Hamilton, whose “Report on Manufacturing” argued for tariffs and subsidies to aid the fledgling industry. Government research and funding helped build commercial jet aircraft, the Internet, communications satellites, digital mapping, and at times, kept large auto companies alive during economic downturns. Recently, the Trump administration’s “Operation Warp Speed” bet $10 billion on multiple COVID vaccine candidates and came up with winners.

Critics count a long list of failures, including decades-long attempts to create “clean coal”, nuclear reactors that use recycled plutonium, nuclear fusion, synthetic fuels, and supersonic commercial jets. The most recent poster child is Solindra Corp. which persuaded the Obama administration to co-sign a $535 million loan and broke up nearly two years later.

Even proponents say that industrial policy has its limits. While government help can be effective in starting new industries and strengthening those facing competitive challenges from abroad, it cannot turn back the clock and revive the industries America has lost.

That emerging consensus means heartache for many companies seeking government help. US-owned solar makers were counting on the White House to help revive the domestic industry by blocking foreign competitors. But China and other Asian countries dominate the market so much that the administration turned its back on their arguments, paving the way for imported solar panels to continue in the US.

“It’s not that industrial policy doesn’t work,” says Robert Atkinson, who has supported government aid for industry since the Clinton administration. “But you have to do things at the right time. Once you lose critical abilities and competitors have acquired them, there’s not much you can do.”

These days Atkinson is the president of the Information Technology and Innovation Foundation, a think tank supported by the semiconductor and other technology industries. He has supported computer-chip funding with the likes of a bill passed late last week.

Ultimately, once an industry loses out to foreign competition, it is very unlikely to recover. Then it’s not primarily a question of inventing new technology – it’s finding a way to attract manufacturers and their ancillary industries back to the US. A large domestic supply includes manufacturing, refining polysilicon, and producing silicon ingots, wafers, and cells. In some of those areas, Chinese firms control more than 90 percent of the global market.

Industrial policy is most effective at helping new industries gain momentum, where they can take advantage of America’s long-standing power in science and technology. But even after this, tough policy decisions remain.

As manufacturing increasingly moves internationally, it is unclear which companies are “American” enough to warrant government aid. Are US companies those that do business in the US or are they companies that have facilities in the US and, if so, should they be factories? Or are American companies headquartered in the US, even though many of their shareholders and employees are overseas?

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