America Needs a Comprehensive Industrial Policy
The United States risks falling behind countries who embrace strategically-planned economic policies
Our 40th president, Ronald Reagan, once described the nine most terrifying words in the English language as “I’m from the government, and I’m here to help”. But as modern nations like Germany, Canada, and China use state intervention to guide their industries into the future, America’s near-religious pursuit of laissez-faire economics shows signs of backfiring.
While headlines highlight foreign plans such as “Made in Germany 2030”, “Belt and Road Initiative”, and “Industry Canada”, the U.S. has seemingly made the choice to sit on the sidelines. Long removed from its role as the “Arsenal of Democracy”, there is a clear gap in America’s economy.
The lack of an industrial plan, wherein the state uses incentives, tax credits, trade policy and public investment to direct private business, has left American firms uncompetitive and without direction. We have a history of using policy to direct the economy. If we do not learn from this history, and other nations, we will surely be left behind in tomorrow’s economy.
Origins of Economic Policy: Hamilton vs. Jefferson
It now seems ingrained into our national identity that the US has always strayed from planning and preferred market forces to any sort of intervention. But this ignores important history from the very founding of our republic.
Two philosophies competed for the direction of national policy in the late 18th century: Alexander Hamilton’s Federalism and Jefferson’s Democratic-Republicanism.
Jefferson posited that the US should continue course on the economy. Small farmers would dominate, and government would pursue free trade. The state would take little to no role in the economy, besides contract enforcement.
Hamilton saw things differently. Picking up on the early industrialization of Europe, he proposed that the government should take an activist role to direct business to modernize the country, instituting policies that would encourage manufacturing and support strong institutions. Protective tariffs, a central bank, and bold infrastructure plans.
Hamilton’s way won out, and an early form of economic planning propelled American industry throughout the 19th and early 20th centuries. Tariffs bolstered manufacturing, federal money bankrolled railroads, and the Homestead Act was specifically designed to encourage westward expansion.
The New Deal and the Federal Highway Act continued this tradition, predicting the future needs of the country’s infrastructure and putting a committed bureaucracy in charge of delivering it.
But perhaps no plan compares to industrial policy during World War 2. Franklin Roosevelt set production quotas and directed retooling of civilian industries to meet the present military needs. This earned the US the nickname, “Arsenal of Democracy”.
The Economy Pivots Away From Planning
“The greatest advances of civilization…have never come from centralized government.”
-Milton Friedman
The 1980s ushered in a sea change in the US economy. After the 70s’ Stagflation and the failure of price controls, more Americans were receptive to Ronald Reagan’s anti-state messaging. Economists also took note — many still embrace an untouched free market that strives for little more than lower taxes. The Jeffersonian ideal was reignited, as politicians from both parties ditched government plans for privatization, protectionism for free trade. But overall, the government decided to take a backseat on most economic issues.
The results were mixed. On paper, there was much to appreciate. Unemployment fell, corporate profits expanded, and the Tech Boom of the 90s led to proliferous innovation. Whether this was a result of Reaganism is debatable, but what’s certain is that the economy structurally changed.
Manufacturing plummeted in importance as the government’s new free-trade initiatives removed much incentive to produce domestically. Funds for infrastructure dried up, and broad public investment became gauche for newer Republican and Democratic politicians.
Other nations have taken a different road.
Germany’s High-Tech Industrial Plan
The Industrial Strategy 2030 put forward by Federal Minister Peter Altmaier is a comprehensive concept to strengthen the competitiveness of the industrial sector in Germany and Europe.
German Federal Ministry for Economic Affairs
Germany’s modern attitude towards using state incentives to bolster advanced industries is unparalleled around the world. As the fourth largest economy Germany leads the capital goods market, producing high-tech machinery, automobiles, chemicals and more.
They’ve done so with a mixture of policies. Germany funds technical schools to train highly-skilled tradesmen and plant workers. Students can find a promising industrial career in Germany, as opposed to America.
Also, Germany cultivates a competitive industrial market by elevating small and medium sized producers (SME). A government startup initiative, Gründerland Deutschland, actively funds and promotes small entrepreneurs. With more players in the economy, more innovation occurs.
And it occurs at little cost. Germany’s public sector devotes 3% of annual GDP to R&D, and companies can receive a €500,000 tax credit for technological research¹.
Germany is a great example of a country that identifies its strong suit and exercises concrete policies to fulfill an industrial plan.
China Bets Big On Infrastructure
No one has denied China’s emergence as an economic powerhouse and the second largest economy in the world. Mostly specializing in low-tech manufacturing, China has moved into innovation and has benefited greatly from international trade.
To solidify their status as the king of global exports, China has developed an ambitious long-term infrastructure plan, the Belt and Road Initiative. It will spend $1–8 trillion to create railways, pipelines, ports, roads, and internet connections between Asia, Africa, Europe and Oceania.
Accounting for the cost, this investment could increase participants’ GDP by 3.35%². With easier links to facilitate trade, exports, and manufacturing, China would see its allure as a destination for business increase greatly.
Heavy-handed state intervention alongside private business has been a hallmark of the Chinese economy. While China is far from a model country, their dedicated investments in modern infrastructure and facilities undeniably provide an edge, bringing them closer to “Made in China 2025”.
America Has Suffered Without A Plan
The image of a post-WW2 America was a far cry from the present. Rapidly expanding cities, connected by brand-new freeways and fueled by booming industry. The time of the small entrepreneur, the worker, and the large corporations alike.
Today’s image is much different. Urban blight, abandoned factories, and an embarrassingly underdeveloped infrastructure system for a modern country. Ever since America abandoned having an aggressive, thought-out industrial strategy, the economy has experienced major pitfalls.
Nearly 6 million manufacturing jobs were lost from 1980 to 2018³. Despite rhetoric around retraining these workers to perform higher-skill roles, no national program even close to the scale of Germany’s has been developed for finding them a place in the modern economy. Often, they are just told to “go and learn code”. The absence of a comprehensive trade school program prevents a high-tech manufacturing sector from flourishing.
Small businesses remain dominated by monopolistic corporations which corner the market and prevent competition. Meanwhile, other countries encourage competition as a means to advance innovation and improve service.
Funding for science and technology in the US has stagnated or declined over the decades. Just this year, Trump administration further cut the EPA research budget by 31% and the National Institutes for Health by 7%⁴.
And anyone who has driven around a Midwest city knows how poor our infrastructure truly is. The American Society of Civil Engineers reported that federal infrastructure spending is half of what is needed for proper maintenance. This will cost (period 2016–2025) the economy an estimated $3.4 trillion in GDP, 2.5 million jobs, and $7 trillion in lost business sales⁵.
The longer we wait to reinvigorate our institutions and develop a plan, the more we can expect these problems to mount and manifest.
How We Stay in the Race
It’s disheartening to see how much disrepair and decay has come to the United States. But let’s not forget this was a conscious policy choice. Past administrations and leaders have chosen not to re-invest in America.
To escape this cycle and ensure the US will remain a leading power in the coming years, it will be necessary to make some repairs. There is increasing evidence that having a cogent industrial policy can help a nation understand and build on their strengths.
We’ll need to restore the mind frame Hamilton had — turning his young, backwards nation into a modern state.
Main Sources:
- BDO, I. (2020, February). New R&D Tax Incentive for German Taxpayers. Retrieved September 11, 2020, from https://www.bdo.com/insights/tax/r-d-tax/new-r-d-tax-incentive-for-german-taxpayers
- De Soyres, F., Mulabdic, A., & Ruta, M. (2019, July). Welfare effects of the Belt and Road Initiative. Retrieved September 11, 2020, from https://voxeu.org/article/welfare-effects-belt-and-road-initiative
- Federal Reserve Bank of St. Louis. (2017, April 10). Is U.S. Manufacturing Really Declining? Retrieved September 11, 2020, from https://www.stlouisfed.org/on-the-economy/2017/april/us-manufacturing-really-declining
- Ledford, H., Reardon, S., Mega, E., Tollefson, J., & Witze, A. (2019, March 11). Trump seeks big cuts to science funding — again. Retrieved September 11, 2020, from https://www.nature.com/articles/d41586-019-00719-4
- American Society of Civil Engineers Report 2016
- Buchanan, C. (2019, September 13). What Funding is Available to German Businesses?: Grant, Loan, Incentive. Retrieved September 11, 2020, from https://www.eurocompanyformations.com/blog/what-funding-is-available-to-german-businesses/
- Federal Ministry for Economics Affairs and Energy. (2019). Made in Germany: Industrial Strategy 2030. Retrieved September 11, 2020, from https://www.bmwi.de/Redaktion/EN/Dossier/industrial-strategy-2030.html
