Industrial policy for a just democracy

Authors: Matthew Delmastro, Elisabeth Winter

A modern industrial policy can promote a just democracy. Under the mantle of “Bidenomics”, the US administration has launched a new industrial policy aimed not only at boosting economic growth and competing with China, but also at strengthening American democracy.

For a country that for decades has been the epicentre and enforcer of the main tenets of what some call “neoliberalism” or the “Washington Consensus” – e.g. free trade, privatisation, deregulation and state budget cuts – this is indeed a startling reversal, but one which is welcome amidst the multiple and overlapping crises of our time. From a European perspective, much of the debate around US industrial policy has centred on the Inflation Reduction Act (IRA) and how its clean energy and subsidies for electric vehicles (EV) may threaten European firms’ competitiveness and lure them to invest in the US rather than in Europe. But these debates can come across as short-sighted, as they ignore the broader, more positive fact of the US being “back at the table” in the fight against climate change. It also betrays a lack of understanding of the broader project and goals of Bidenomics. One particularly overlooked aspect is its explicit focus on improving the socioeconomic conditions conducive to the stability of democracy. We illustrate how Bidenomics seeks to strengthen American democracy, showcasing that a modern industrial policy can promote democracy by reducing inequalities, delivering good jobs and higher wages and, ultimately, increasing trust in government.

Understanding industrial policy

Despite there being no consensus on the definition of industrial policy, we follow Dani Rodrik and his colleagues in defining it generally as “those government policies that explicitly target the transformation of the structure of economic activity in pursuit of some public goal” (Juhász et al. 2023). In other words, industrial policy entails government favouring certain industries and sectors over others to achieve some larger objective, whether it be economic growth, competitiveness, reducing inequalities or bolstering national security. Historically, industrial policy mainly targeted economic and productivity growth in the manufacturing sector, but new approaches have widened both the range of objectives as well as the sectors to which it is applied. States are now using industrial policy to promote decarbonisation, digitalisation, the development of lagging regions and the creation of new, well-paid forms of employment. In developed countries in particular, new industrial policy calls for extending interventions into the vast services sectors, as in countries like the US, only around 10 per cent of the workforce is still employed in manufacturing (Rodrik 2022). The primary mechanism of industrial policy consists in offering incentives to the private sector to produce particular goods or offer particular services. Usually, these incentives come in the form of subsidies; however, many other tools are possible. New industrial policy explicitly calls for novel forms of support, such as the provision of customised business services, job training, improved infrastructure and various forms of private-public collaboration. Common to all these forms of intervention is that they, one, seek to remove the production constraints facing certain sectors and firms and, two, involve some form of conditionality to qualify for government support. Industrial policy sometimes gets a bad rap for its connotations of inward-looking protectionism, but this need not be the case. In fact, it is often used to help make firms more competitive internationally and to facilitate exports.

But for all the recent excitement around industrial policy, it is far from a new phenomenon. On a very basic level, states are always engaged in industrial policy to the extent that they incentivise certain sectors of the economy over others. In the US, for example, this is blatantly obvious when looking at the defence sector and the wider to finance subsidies and protect American industry to Dwight Eisenhower’s preservation of the New Deal architecture and further investments in social security, the US has a long and storied history of robust government intervention in pursuit of pragmatic policy goals. In a sense, then, the recent free market era concerned above all with keeping the state out of the economy can just as well be viewed as an historical exception rather than the rule.

Bidenomics and the new US industrial policy

To best get a sense of what Bidenomics and the new US industrial policy is all about, it is easiest to list the challenges to which they are meant to respond. In April 2023, US National Security Advisor Jake Sullivan gave what is perhaps the clearest explanation of the Biden administration’s new international economic policy in a speech at the Brookings Institution (Sullivan 2023). In it, he implies that the administration is proposing a “new Washington Consensus” to leave behind the era of “trickle-down economic policies”. This rethink, he explains, was prompted by four fundamental challenges facing the US.

The first challenge Sullivan named has been the hollowing out of American industry as a result of the old market-liberal paradigm of trade liberalisation and privatisation. Certain sectors like the financial industry won out while manufacturing experienced massive, geographically-concentrated job losses embodied in the “China Shock” of the 1990s and 2000s (Autor et al. 2016). The second challenge consists in the failure of what is known in Germany as Wandel durch Handel: the idea of a more economically interconnected world leading to more peaceful and collaborative relations between states and the gradual transformation of autocracies into democracies. The third challenge, according to Sullivan, is the accelerating climate crisis and the accompanying need for rapid and massive action to ensure a “just and efficient energy transition” that rejects the false choice between economic growth and climate action. The fourth and final challenge laid out by Sullivan is the state of inequality in America and how it has undermined social cohesion and the socioeconomic conditions necessary for a stable democracy. Sullivan lays the blame for rising inequality at the foot of trickle-down economics and a free trade paradigm that promised broadly distributed gains, but which, in reality, massively benefitted the wealthy while squeezing the middle class.

The speech is striking for its explicit condemnation of the previous market-liberal paradigm, one that had gone unquestioned for decades amongst both Republicans and Democrats, but also for its recognition that inequality has had a corrosive and destabilising effect on American democracy. As is made clear, the Biden team has fully bought into the new thinking about industrial policy by seeking to meet a handful of diverse objectives with its economic policies. Under the mantle of Bidenomics, it is seeking to, among other things: revive the American manufacturing sector, accelerate the energy transition, drive innovation, reduce inequalities, increase the power of labour over capital, reduce strategic dependencies and outcompete China.

In concrete terms, the administration is pursuing these goals via four pieces of legislation passed in 2021 and 2022: the American Rescue Plan (ARP), the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act and the Inflation Reduction Act (IRA). Even excluding the ARP stimulus bill passed in the wake of the pandemic, the remaining three laws contain over $1.5 trillion in new spending and investment. A useful metaphor for this set of laws describes the CHIPS act as the “brains”, the IIJA as the “backbone” and the IRA as the “engine” (Carey & Shepard 2022). The CHIPS Act is the brains because it concentrates its roughly $280 billion of spending on semiconductor R&D and manufacturing ($53 billion) as well as on America’s overall research and science ecosystem. The IIJA makes up the backbone for its massive investments to rebuild America’s roads and bridges, to modernise the grid for the renewable energy build-out and to finish expanding broadband infrastructure. The IRA represents the engine for its powerful package of loans, grants and tax credits ($370 billion) to incentivise the green energy transition and to boost domestic manufacturing.

Industrial policy and democracy

Industrial policy is implemented in the realm of the economy, but its motivations and effects are also to be found in the realm of politics. We would therefore like to shift the attention to those aspects of the laws that are connected to questions of democracy and justice in order to illustrate how industrial policy can strengthen democracy. Three aspects are worth highlighting in particular.

First, industrial policy can reduce geographical and socioeconomic inequalities in the form of place-based policy, or “government efforts to enhance the economic performance of an area within its jurisdiction” (Neumark & Simpson 2014). It typically targets lagging regions with the goal of creating more job opportunities and higher wages. The Biden administration has been implementing place-based policy through its Justice40 Initiative, which pledges that 40 per cent of the overall benefits of federal investments in climate, clean energy and sustainable housing go to disadvantaged communities plagued by underinvestment and pollution (Daly & Gunn-Wright 2022, The White House 2024). And the data shows that this effort has already been paying off: the massive increase in construction spending occurring across the US has been concentrated in the struggling Rust Belt (as wellas the rising Sun Belt) and, at a local level, in rural and often more conservative regions of the country (Politano 2024). In its recent IRA report, the Biden administration boasted that “99 per cent of high-poverty counties have received funding from the infrastructure law, CHIPS Act, or Inflation Reduction Act, and non-metro communities have received nearly double the per capita funding of their urban counterparts” (The White House 2024). Place-based industrial policy can thus play an essential role in rectifying geographic inequalities that undermine social solidarity and sow resentments among people living in “left-behind regions”.

Second, industrial policy can help to rebalance the power between labour and cap ital by promoting new job growth, higher wages and union density. This is especially important in places, such as the US, where the power of labour has been continuously and systematically weakened since the 1980s. Besides generating new job growth through its investment spending, the Biden administration is pursuing these objectives by offering incentives for firms to pay prevailing wages and to use collective bargaining agreements, such as in the IRA’s clean energy tax credit (The White House 2024). More far-reaching provisions in support of unions fell victim to the legislative bargaining process, such as the proposal to give extra tax credits for EVs produced in union shops. Such ideas were viciously opposed by foreign automakers and even raised protest from European ambassadors trying to protect their firms operating in non-union states (Gabor et al. 2023). A more general component of the push to support labour is the Biden administration’s policy of running the economy hot, or keeping demand high and unemployment low to put upward pressure on wages and give workers more bargaining power. Taken together, these are all pro-worker measures that can help to reduce the staggering levels of economic inequality that sow distrust in institutions and enforce peoples’ beliefs that the system is rigged in favour of those at the top.

Third, and more generally, a coherent and successfully implemented industrial policy can demonstrate to citizens that government can actually solve problems and offer real, tangible benefits to their lives. The Biden administration’s promise is to raise wa ges, create good sustainable jobs, ensure a cleaner and healthier environment, rebuild local infrastructure and to protect the coun try’s economic and strategic interests amidst competition with China. Insofar as these in vestments pan out and people start to feel the positive impact of their government’s actions, it can go some way in restoring the dismal levels of trust in government institutions and politicians. Despite the increases in investment and construction spending, as well the growth of new clean energy jobs (Climate Power 2024), the real impacts of the legislation will take years to pan out. The onus is now on the government to move from the allocation of funds to, in collabo ration with the private sector, seeing projects through to implementation.

Industrial policy, while not a panacea, of fers several tools for strengthening democracy by addressing various forms of inequality and delivering tangible benefits to citizens. It also, after decades of the supremacy of free market thinking, represents a much-needed evitalisation of the idea that the state, act ing in the public interest, has an essential role to play in tackling today’s biggest chal lenges and safeguarding democracy. 

References

• Autor, David H.; Dorn, David & Hanson, Gordon H. (2016): The China shock: learning from labor market adjustement to large changes in trade, in: NBER Working Paper No. 21906.
• Carey, Laclan & Shepard, Jun Ukita (2022): Congress’s climate triple whammy: innovation, investment, and industrial policy, RMI, rmi.org/climate-innovation-investment-and-industrial-policy (date of retrieval 22.10.2024).
• Climate Power (2024): Two years of the Biden-Harris clean energy boom, climatepower.us/wp-content/uploads/2024/08/Clean-Energy-Boom-Two-Year-Anniversary-Report-RES-2024_07_30-DR.pdf (date of retrieval 22.10.2024).
• Daly, Lew & Gunn-Wright, Rhiana (2022): A new administrative architecture for Justice40, Roosevelt Institute, rooseveltinstitute.org/2022/04/18/a-new-administrative-architecture-for-justice40/ (date of retrieval 22.10.2024).
• Delong, Brad (2022): A note on “Industrial Policy” …, Grasping Reality, braddelong.substack.com/p/a-note-on-industrial-policy-and (date of retrieval: 22.10.2024).
• Gabor, Daniela; Fertik, Ted & Sahay, Tim (2023): Bidenomics, the Dig, thedigradio.com/podcast/bidenomics-w-daniela-gabor-ted-fertik-tim-sahay/ (date of retrieval 22.10.2024).
• Juhász, Réka; Lane, Nathan & Dani, Rodrik (2023): The new economics of industrial policy, in: NBER Working Paper No. 31538.
• Neumark, David & Simpson, Helen (2014): Place-Based policies, in: NBER Working Paper No. 20049. Politano, Joseph (2024): The regional impacts of America’s investment boom, Apricitas Economis, www.apricitas.io/p/the-regional-impacts-of-americas (date of retrieval 22.10.2024).
• Rodrik, Dani (2022): Why sercices need an industrial policy, Project Syndicate, www.project-syndicate.org/commentary/services-industrial-policy-good-jobs-agenda-by-dani-rodrik-2022-10 (date of retrieval 22.10.2024).
• Tankersley, Jim (2024): Harris and Trump offer a clear contrast on the economy, The New York Times, www.nytimes.com/2024/08/16/business/economy/harris-trump-economy-inflation.html (date of retrieval: 22.10.2024).
• The White House (2024): Statement from Vice President Kamala Harris on the Inflation Reduction Act, www.whitehouse.gov/briefing-room/statements-releases/2024/08/16/statement-from-vice-president-kamala-harris-on-the-inflation-reduction-act-anniversary/ (date of retrieval: 22.10.2024).
• U.S. Department of Labor (2024): The Inflation Reduction Act and qualifying project labor agreements, www.dol.gov/general/inflation-reduction-act-tax-credit/project-labor-agreements (date of retrieval: 22.10.2024).

© 21.11.2024 | Originally Published in BKHS Magazine „For a Just Democracy!“

About the authors