A Distinctly American Industrial Policy: An Introduction

October 26, 2021

Christmas at risk.”

Get ready for years of chaos in container shipping.”

Chip designer arm sees chip shortage lasting through next year.”

These are just some of the supply chain headlines that have caught readers by surprise this fall. They’re not the only ones caught off guard: Even press outlets like the New York Times have noted they did not have a logistics beat before the crisis.

How did we get to this moment? While there are certainly specific supply chain challenges brought on by the COVID-induced policy decision to freeze and then thaw economies, the underlying cause is a decades-long faith that private firms could be trusted to make production decisions without public or worker input. Since the 1970s, those firms have pursued a wholesale offshoring of production—making the US economy less resilient and equipped for crisis, and increasingly leading to calls for “a 21st century industrial strategy,” as National Economic Council Director Brian Deese declared in a June speech. 

In recent days, it has become clearer that an effective industrial policy—which we define as any policy that encourages resources to shift from one industry into another—will require an expanded policy toolkit. 

This blog post is the first in a series that will explore what that toolkit might look like, spotlighting specific instruments the US has successfully deployed in the past but which are not well-known outside of academia. These tools include:

  • price and profit controls, 
  • government management of the production process, 
  • international pooling and decommodification of natural and industrial resources, and more. 

In addition to being of interest in their own right, these experiences also demonstrate the possibility for bold US industrial policy action. 

That endeavor is not without obstacles. The macrostructures of US politics—with an ample number of what political scientists call “veto players” or “veto points”—would seem to make it harder for the US to respond in real time to economic and other threats compared with authoritarian countries like China, technocratic regimes like the European Union, or unicameral parliamentary systems like New Zealand. Indeed, US presidents have to navigate not only a broadly representative House, but a Senate that skews power to smaller and whiter states, federal courts increasingly hostile to economic regulation, and a regulatory review process that utilizes a cost-benefit analysis that can privilege inaction. 

But the fact that this expanded toolkit not only could be used, but has been used in living memory, and with the blessing of Congress and the courts, shows that the US political and legal system can accommodate rigorous interventions—especially in emergencies like COVID and the climate crisis. 

Realigning Private Decisions with the Public Interest

The government is always practicing industrial policy, whether it acknowledges it or not. This series will explore how the government can directly shape markets to better serve Americans. 

There are many different flavors of industrial policy, and this series will focus on one in particular: government participating in and directly shaping markets, whereby managers employed by the state replace, compete with, or sharply limit the discretion of private managers. This can be contrasted with the hands-off industrial support of 2020’s CARES Act or Paycheck Protection Program, which were broadly available to all industries and contained minimal social conditions.

It can also be contrasted with subsidies and other financial support from the state to strategically chosen private industries with more ambitious conditions, such as producing in America, producing sustainably, or producing with unionized labor. That is the approach contemplated in the Biden administration’s 100-day supply chain recommendations

Such tactics can complement those we consider in this series, but a few points are worth making. First, the oversight capacity of the state must be high to ensure that private firms comply with every requirement in a subsidies-with-conditions strategy. This task becomes more complicated the more prescriptive the conditions are, and indeed, other laws might be needed to enforce transparency. (Buy-American policies are a case in point here. While at first glance these laws impose a requirement for the government to procure goods that were made in America, a number of exceptions and other laws make it virtually impossible for procurement officials to know the true national origin of many products and components.)

Second, at some point, firms may decide they would rather forego government support than change their labor or other practices. This leads to a final point: A subsidies-with-conditions approach may be more effective if there is a credible government threat to more directly shape or participate in the markets. Indeed, in many of the examples we will study in this series, milder interventions were made possible by the possibility of deploying stronger ones.

This moment of anxiety around supply chains presents an opportunity to reflect on the old and new tools that can address today’s challenges—and those around the corner.