America’s Next President Needs a New Industrial Policy

Secretary of Commerce Gina Raimondo listens as national security adviser Jake Sullivan speaks at a virtual meeting with President Joe Biden, CEOs, and labor leaders on the CHIPS for America Act in the Eisenhower Executive Office Building in Washington, on July 25, 2022. Brendan Smialowski/AFP/Getty Images

Commentary

A recent column in the Financial Times, “America (Still) Has No Industrial Policy,” by Rana Foroohar, touched on some issues that have long troubled me about what purports to be U.S. industrial policy—the practice by which governments encourage certain sectors of business and industry to advance national, state, or local economies. The latest examples are, of course, the CHIPS and Science Act of 2022 and countless “Green New Deal” mandates.

It had been a long-standing taboo in Washington policy circles, and particularly among conservatives, to advance a national industrial policy. Ironic, because at the state and municipal levels, nearly every governor and mayor from both parties did things to encourage business and industry in their jurisdiction. Nevertheless, the party line at the national level was “can-do” capitalism; the government doesn’t “put its thumb on the scale of private business.”

A Long History of American Industrial Policy

But industrial policy has been part of the American economy since the earliest days of the republic. Alexander Hamilton’s “Report on Manufactures” (1791) proposed tariffs to fund “bounties” (i.e., incentives) to constitute a fund for the operations of a “Board, to be established, for promoting Arts, Agriculture, Manufactures and Commerce.” Mr. Hamilton also observed:

“It is well known … that certain nations grant bounties on the exportation of particular commodities, to enable their own workmen to undersell and supplant all competitors, in the countries to which those commodities are sent. Hence the undertakers of a new manufacture have to contend not only with the natural disadvantages of a new undertaking, but with the gratuities and remunerations other governments bestow. To be enabled to contend with success, it is evident that the interference and aid of their own government are indispensable.”

While Congress rejected Mr. Hamilton’s report, by 1792 it had nevertheless adopted most of his tariffs, and subsequently engaged in a variety of projects, like authorizing the Cumberland Road (1802), to incentivize the westward expansion.

Then, in 1816, Congress adopted the “Dallas Tariff,” named for Alexander Hamilton’s successor, Treasury Secretary Alexander Dallas. Ostensibly, it was to help pay off American debt from the War of 1812, so it imposed a tariff on luxury items like jewelry, gold, and lace of 7 percent. But it was also explicitly protectionist, imposing a tariff of 15 percent on things like manufactured metals, cutlery, firearms, and glass, the existing American “heavy manufacturing” of the day.

But it laid the heaviest tariff, at 20 percent, on cotton and wool textiles to protect the  then nascent American textile industry. Earlier, in 1812, an American businessman had pirated the closely guarded technology for Britain’s power loom and built a replica in the United States. His theft and Congress’s tariff sparked a virtuous cycle of U.S. manufacturing, because building and maintaining the looms caused Americans to develop the kind of mechanical expertise and hand tools that are used in other industries, from shoes, to hats, to barrel making.

An F-15C fighter is refueled by a KC-135R Stratotanker, familiar looking to civilians as the airframe of the once ubiquitous Boeing 707 jetliner, the first commercially viable jetliner. U.S. Air Force photo/Tech. Sgt. Angelique Perez

Industrial Policy in Our Own Age

In our own time, industrial policy has been enormously successful, creating the earliest version of what we now know as “Google” (as defined in this patent), funded by a grant from the National Science Foundation;  the legendary Boeing 707  (built, like nearly all subsequent Boeing aircraft, as an U.S. Air Force mid-air tanker, the KC-135) that created the civilian jet liner industry; even Cheetos snack crackers (derived from military foodstuff innovation to preserve cheese.)

Of course, sound industrial policy has been corrupted by politics. That was clearly the case with President Barack Obama’s support for Solyndra, a solar panel manufacturer, where the United States guaranteed more than half a billion dollars of loans to the company after he received generous campaign contributions from donors tied to the company for President Obama’s 2008 presidential campaign. There are countless other instances.

Properly implemented, though, industrial policy has been an enormous success in most instances.

We Need a Macroeconomic Industrial Policy

Unfortunately, most U.S. industrial policy has been concentrated on industries—and even single companies. Macroeconomic industrial policy—government support for broad elements of the economy that further general commerce, job growth, and national wealth creation—has been gravely neglected.

According to consulting firm BCG, we are graduating far fewer engineering students than we need. And instead of being engineers, they sometimes end up taking the rigorous math and statistical expertise that an engineering degree conveys to Wall Street and private equity firms, not the factory floor.

In primary education, we rank well below most of industrial Europe and Japan (as seen in this interactive global chart). In major urban centers, things are even worse. Here in New York City, we spend something like $38,000 per year per child to educate our youngsters. Yet despite spending nearly $1 million a year on a class of 25 children, our educational achievement in primary education is horrendous. Their secondary school counterparts are doing just as poorly in their mastery of science, mathematics, and languages, the building blocks of commercial and global trading success.

U.S. education and standards are so poor that the kind of high value-added industries we need for national prosperity—to say nothing of national security—can’t even use our workers. Taiwan Semiconductor Manufacturing Company (TSMC), the leading manufacturer of advanced computer chips, has had to fly its own technicians into Arizona in order to build and equip its factory there because it could not find qualified Americans. It has been able to hire less than a quarter of the 4,200 workers reports say it will need to staff the factory.

Sadly, national policymakers ignore these educational shortcomings and refuse to do the hard work necessary to correct it. Instead, they bundle its end product—poorly educated and poorly trained victims of their educational neglect, allow them to be indoctrinated in the grievance ideology of today’s Left and Right—and force employers to put them into jobs for which they are ill-prepared under the thin veneer of “diversity, equity, and inclusion (DEI). These “leaders” offer just a performative solution to a substantive problem—one that they lack the political, moral, and personal courage to address.

But our macroeconomic industrial policy shortcomings don’t stop with educational shortcomings

The United States has some of the most onerous legal and regulatory hurdles in the world, and they are imposed at virtually every level of government, from homeowners’ associations and business improvement districts at the neighborhood level to the Environmental Protection Agency and the Department of Labor at the national level. All these layers of regulation and oversight place costly, inefficient, and often redundant hurdles in the path of American commerce.

The United States also tends to have an older industrial plant than our counterparts in Asia and parts of Europe. The postwar infrastructure of Japan and Europe was all built in the last 75 years, whereas that of the eastern U.S. was built, in many instances, 125 years ago or more.

Finally, while the United States has arguably the best and most transparent capital markets in the world, the finances of the United States and its individual states are significantly less so. Inflation is far from under control, and the balance sheets of states look like they are held together with bailing wire and chewing gum, with various “one-shots” gimmicks and off-balance sheet sophistries used to achieve constitutionally mandated “balanced” budgets. Ongoing basic governmental services—police, fire, and ambulance service—cannot be relied upon in some places because of the perilous fiscal conditions of many municipalities. On top of that, we have a byzantine national tax code that many states emulate that misallocates capital and human resources and sucks time from productive endeavors.

A New Take on Industrial Policy

In May 1961, President John F. Kennedy addressed Congress and challenged the nation to “commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth.” President Kennedy’s goal-setting was largely set by Cold War and national security imperatives at a time of heightened geopolitical tensions. But it was also a quintessential industrial policy. The United States had not embraced a national endeavor so thoroughly since it forced the unconditional surrender of its enemies in World War II.

Today, we face the imperative of maintaining the United States as the leader of the free world’s nations in a multipolar and dangerous world, but also ensuring the prosperity of our heirs in generations to come.

Our industrial policy—and the policy of the next president—should be to make the United States the global leader in high value-added manufacturing, technology, and post-secondary technical education and training.

We should bootstrap a far more rigorous primary and secondary education standard so that students joining the workforce from the United States in 2040 are the best educated in the world, with a superior understanding of math through calculus and a solid background in the hard sciences. Students should have conversational fluency and basic literacy in at least one foreign language in order to graduate high school. Post-secondary education should become far more demanding than it has been, so that a college degree by 2040 is the equivalent of a master’s degree today.

Instead of spending infinite sums on nebulous “green” technology and goals, we should spend to replace our old existing infrastructure—bridges, the electric grid, rail lines, pipelines, and sewerages—that is necessary for the efficient functioning of commerce.

The next president, and each governor and mayor, should appoint bipartisan committees, immune from the interests of lobbyists and donors, to review, identify, and eliminate deadwood regulations that are redundant, obsolete, or unnecessary, and to reimagine regulatory oversight to ensure that it is efficient and not overly burdensome.

Finally, but perhaps most importantly, we must get a handle on our budget, to ensure that federal spending is reduced to 15–20 percent of GDP and that our spending comports with our revenues. Those fiscal goals will become easier with the increasing GDP from implementing the other elements of macroeconomic industrial policy, but it will still require a mix of spending cuts and tax increases.

Summary

In World War II, we were known as “The Arsenal of Democracy”—and we lived up to it. Millions of American workers produced tens of thousands of aircraft, tanks, ships, artillery, arms, and ordnance to defeat the Third Reich, Benito Mussolini and Italian fascism, and the Japanese empire.

As we head toward the second quarter of the twenty-first century, we should embrace macroeconomic industrial policy with the same vigor and resilience that our parents and grandparents embraced in World War II and the Space Race. In an increasingly dangerous world, where some of our adversaries embrace ideologies anathema to the principles of this republic, we must prepare to be the industrial, technical, and innovation capital of the world.

It’s a mission our leadership should embrace—and pursue.