Joe Biden will have plenty to talk about in his State of the Union address. In the past year, he has signed into law several major pieces of legislation, retained control of the Senate, presided over an economy that added five million jobs, led a coalition in support of Ukraine, and, just last week, ordered the shooting down of a Chinese spy balloon. But the heart of Biden’s speech will likely focus on his economic agenda, the core of which is an ambitious industrial policy designed to strengthen manufacturing, hasten a green energy transformation, create well-paid jobs, and insure American technological leadership over China.
In large part, the policy consists of federal tax credits, government grant programs, and infrastructure projects that were enacted in three landmark bills during Biden’s first two years in office. Last year’s Inflation Reduction Act contained about four hundred billion dollars in green-energy spending, including tax credits for green-energy producers and purchasers of electric vehicles. The CHIPS and Science Act, which Congress passed in August, provided more than fifty billion dollars to encourage manufacturers of semiconductors to build factories in the United States, and pledged about a hundred and seventy billion for research into technologies of the future. These two pieces of legislation built upon the $1.2 trillion bipartisan infrastructure bill, which Biden signed into law in November, 2021, and which was posited on the unchallengeable notion that it isn’t possible to build a twenty-first-century economy on dilapidated transport links and public utilities.
Spread out over many years of spending, and relative to a G.D.P. of $26.13 trillion, the sums involved in the Biden strategy aren’t as big as they seem. But, relative to recent U.S. economic policy, the spending certainly represents a sharp break from the past. “It isn’t quite the arrival of a New Deal; it’s not like we’ve created all these new agencies,” Felicia Wong, the president of the Roosevelt Institute, a liberal think tank, told me. “But it is a new way of using the government in a multipronged and muscular manner to shape, prod, and mobilize the economy in certain directions.” Pointing to the efforts to promote green energy and high-tech manufacturing, as well as efforts to locate new plants in parts of the country that have lost manufacturing jobs, Wong went on, “They are trying to shape markets, ultimately.”
In its broad scope and government interventionism, the Biden policy has some antecedents: F.D.R.’s rural-electrification initiatives, including the creation of the Tennessee Valley Authority; the use of the Pentagon research budget by Republican and Democratic Presidents to foster scientific research, especially in microelectronics; and debates inside the Democratic Party regarding strategic trade policy in the nineteen-eighties and nineties. But, when I asked Brian Deese, the head of the White House’s National Economic Council, about the origins of the Biden industrial policy, he went back even further—to Alexander Hamilton’s 1791 “Report on Manufactures,” which called for the creation of a vibrant industrial sector. “This has been a conversation for all of the American experiment,” Deese noted.
Hamilton lived in an era when the United States was largely agricultural and rival politicians like Thomas Jefferson had a vision of the country as a mosaic of rural homesteads. Hamilton argued that industrialization was essential on economic and national-security grounds. He said that building up domestic industry would “render the United States, independent of foreign nations for military, and other essential supplies.” And, he argued, relying solely on private enterprise wouldn’t get the job done. The effort would need “the incitement and patronage of government,” by which he meant “bounties” (subsidies) for domestic industry and tariffs to protect it from foreign competition.
The Biden Administration insists that it isn’t protectionist (more on that below), but it is making an argument similar to Hamilton’s about the need to build up American manufacturing capacity, in areas like semiconductors and batteries for electric vehicles. Administration officials point to three factors that have influenced their thinking: the rise of China, and the extent to which it has used non-market practices to strengthen its competitive position in key economic areas; the coronavirus pandemic, which illustrated the supply-chain vulnerabilities that the U.S. economy faces after decades of offshoring; and intensifying climate change, which necessitates a rapid transformation of energy production and transportation. “All of these themes connect to issues that have long been debated, but there is a new approach that I think reflects the new realities of the economy,” Deese told me.
Another factor pushing the Biden Administration in this direction is the political success that Donald Trump enjoyed with his bellicose economic nationalism. The White House has left some of Trump’s tariffs in place, and it has gone far beyond him in tax and spending policies designed to promote the growth of green and high-tech manufacturing, particularly in the Rust Belt. Biden’s industrial strategy was largely developed during the 2020 campaign, and Democrats hope that it will actually deliver what Trump promised.
Like many big, bold ventures, the new approach has attracted criticism. European officials complain that the Biden plan, which limits tax credits to electronic vehicles assembled in the United States, violates U.S. commitments not to subsidize domestic industries or discriminate against foreign ones. In December, Emmanuel Macron, the French President, warned that enacting the Inflation Reduction Act could “fragment the West.” In response, Biden suggested that some “tweaks” could be made to meet European concerns. Deese argued that the dispute needs to be placed in a larger context. “The Inflation Reduction Act is unapologetically focused on building American green energy capacity so the United States can meet its climate goals—a policy position the Europeans have long championed as well,” he wrote. “The world is so short of zero carbon energy production and zero carbon transportation options that what we all need is for the United States and Europe to build capacity at a very rapid clip.”
The other major criticism of Biden’s industrial policy, which largely comes from the right, is that it is unlikely to work. “In case after case, industrial policy plans sound good on paper and generate impressive results in various academic models,” Scott Lincicome, the director of economic studies at the pro-free-market Cato Institute, wrote in an article last month. “But they are ultimately distorted by politics, bureaucratic inertia (or incompetence), pre-existing policies, private or public resistance, or unanticipated market developments.” To offer an example, Lincicome pointed to new Treasury guidance that suggests that foreign-built electric vehicles will qualify for the Inflation Reduction Act’s new seventy-five-hundred-dollar subsidy if they are leased rather than purchased. In addition to hurting domestic carmakers, this provision “could encourage Americans to buy or lease bigger, heavier, and more expensive vehicles, raising safety and environmental problems,” Lincicome wrote.
Actually, the history of industrial policy is more two-sided than Lincicome suggests. From the rapid rise of U.S. manufacturing during the nineteenth century, which was facilitated by protectionist tariffs and large public investments in education and infrastructure, to the emergence of Silicon Valley, which successfully exploited basic technologies developed by the Pentagon (including the Internet), the federal government has long played an important role in fostering U.S. economic development. But Administration officials and other supporters of the Biden plan are well aware that it is ambitious and complicated, and that implementing it successfully represents a big challenge.
This content was originally published here.
