As the faith in free trade withers, industrial policy is back in. Robert Reich traces the shifting views on industrial policy among the US political class since the Great Crash of 1929, surveys the damage the free trade dogma has done over the past four decades, and discusses the economic revolution President Biden has launched. As the imperative of competitiveness in the global economy persists, how far can we really deviate from the neoliberal policy formula of free markets and open economies? And what else can we do to stay the course?
Industrial policy is making a spectacular comeback in the US. and Europe. It is at the heart of President Biden’s economic policy designed to revive American manufacturing – what has been called Bidenomics for its rupture with politics-as-usual. The European Commission adopted in 2020 a new industrial strategy aiming to reduce the strategic dependencies of European economies on external economic actors, while facilitating the green and digital transitions. Is industrial policy here to stay?
We should have never let go of industrial policy. It was sacrificed at the altar of the belief, espoused even by the Clinton and Obama administrations, that free trade benefits all. True, free trade has profited consumers as it has brought cheaper goods. It benefited corporations, big investors, executives, Wall Street traders and other professionals. But free trade deals also destroyed millions of US jobs and caused US wages to stagnate or decline. This is what the Biden economic revolution aims to reverse. Between 2000 and 2017, a total of 5.5m manufacturing jobs vanished in the U.S. Automation accounted for about half of the loss, and imports, mostly from China, the other half. This is what the Biden economic revolution is reversing through massive public investments in infrastructure, semiconductors, wind and solar energy, and manufacturing. There are three other critical ingredients of Bidenomics: the threat (and, in some cases, reality) of tough antitrust enforcement, a pro-labor National Labor Relations Board, and strict limits on Chinese imports. Taken together, these policies are beginning to alter the structure of the American economy in favor of the bottom 90 percent. For instance, just over the past year, manufacturing construction in high-tech electronics, which the administration has subsidized through CHIPS and the Inflation Reduction Act, has quadrupled. Tens of billions in infrastructure spending has been funnelled to the states for road, water system, and internet upgrades to deliver high-speed Internet to underserved communities. More clean-energy manufacturing facilities have been announced in the last year than in the previous seven combined.
Bidenomics is effectively changing the structure of the American economy. Good manufacturing jobs are coming back.
Bidenomics is effectively changing the structure of the American economy. Good manufacturing jobs are coming back. This is turning out to be the most successful set of economic policies the United States has witnessed in a half-century. It may even put the nation on the path to widely shared prosperity for a generation.
This seems, indeed, to amount to a radical policy shift – a break with the free-market and free-trade doctrines that administrations across the left-right divide have championed during the neoliberal spell of the past 40 years. But is the policy shift really as radical? In Capitalism on Edge, I’ve observed that a trademark of contemporary capitalism is the governments’ practice of active reverse distribution – from society to specific economic actors, from the weak to the strong. Notwithstanding their overt espousal of the free market dogma, in order to ensure the competitiveness of national economies, governments across the left-right ideological spectrum supported hand-picked economic actors in order to increase the advantage the actors already have in the global marketplace – the phenomenon of ‘national champions’. While this maximized the opportunities for a handful of economic actors, the risks were shifted onto society, thereby engendering massive precarity. You yourself have commented on this discrepancy between the neoliberal mantra of free markets and the practice of governments. Some 38 years ago, in an op-ed for the New York Times you sarcastically congratulated Ronald Reagan for adopting “a more ambitious industrial policy than the Democrats ever dreamed of proposing” (“Reagan’s Hidden Industrial Policy“, August 4, 1985). So, is the shift in economic logic we now see really that significant?
There was an important debate in the 1980s about the transition to the ‘new economy’ of openly integrated, digitalized economies. A view was gaining ground that our government should be more purposeful in easing the transition of our economy out of basic industries like steel and textiles into high-tech businesses. The argument was that without an explicit industrial policy – encouraging our older industries to reduce outmoded capacity and adapt newer technologies, without channelling research and development funds to emerging industries and helping workers retrain – the changes would come slower and be more painful, and in the meantime the United States would have lost out to other nations that had made the transition more smoothly (notably, Japan). That would mean the government actively shifting economic resources, picking competently winners and losers – effectively pursuing an industrial policy– which went against the ideological drift of the times.
And yet, this is exactly what Reagan did as he actively promoted both high tech and the arms industry. America’s emerging industries – advanced computers, lasers, fiber-optics, new materials, biotechnologies and so on profited immensely. Billions were channelled into new weapons – especially those depending on advanced technologies. Well over 60 percent of all the research and development funds for America’s high-technology industries at that time came directly from the Pentagon. Altogether, Reagan’s budget deficit, tax plan and military buildup amounted to an extraordinarily ambitious plan for shifting America’s industrial base – industrial policy with a vengeance.
However, American basic industry was sacrificed. Basic steel, autos, textiles, commodity chemicals and others that rest on mass or large-batch production are particularly vulnerable to price competition in open markets. Moreover, in 1981 the value of the dollar began climbing to unprecedented levels as the budget deficit ballooned. This made American exports very costly and these industries were forced to contract. Reagan’s tax reforms also eliminated any lingering incentives to invest in America’s older industrial base. Steel, autos and others were forced to reduce domestic capacity, set up operations abroad (or enter into joint ventures with foreign producers) and diversify into specialized niches. Millions of jobs were lost in old-line manufacturing businesses. Crippled by international trade, American basic industry was done for.
Yet, as I warned back then, the collapse of America’s basic industries was shedding off far more blue-collar workers than could be reabsorbed into other high-paying jobs, even during the years of record growth. I argued that such a brave leap from older industries to new carries a danger that the new ones will not be able to sustain our standard of living on their own. We badly needed the return of industrial policy, but of a different kind – we needed to put high technologies into our older industries – and simultaneously upgrade workers’ skills to handle the new manufacturing processes – so as to render the entire industrial base more competitive.
The return of industrial policy in the US and Europe is marked by the imperative of competitiveness. This implies that the globally integrated market within which competitiveness is sought, remains an acutely relevant factor in the design of economic policy. Does the return of industrial policy entail the end of globalisation or does it rather invite us to redesign globalisation in a way that it sustains ecologically and socially sustainable economies?
Whether globalization is good or bad depends on who gets most of its benefits and who pays most of its costs. For too long, US workers have paid disproportionately. Over the past 40 years, global market integration was fuelled by the age-old economic doctrine of “comparative advantage”, which assumes that more trade is good for all nations because each trading partner specializes in what it does best. But in many cases a country’s comparative advantage was cheap labour, which in turn was a result of dangerous or exploitative conditions, and lack of right to collective bargaining. Sure, neoliberal globalisation intensified economic growth and reduced the inequality between countries, mostly because of China’s growth, but the working conditions for most workers have deteriorated because of the advantages the rules of the game gave to cheap labour. We can change that.
It has taken one of the oldest presidents in American history, who has been in politics for over half a century, to return America to an economic paradigm that dominated public life between 1933 and 1980 and is far superior to the one that has dominated it since. Call it democratic capitalism.
The Great Crash of 1929 followed by the Great Depression taught the nation a crucial lesson that we forgot after Ronald Reagan’s presidency: that the so-called “free market” does not exist. It’s a fiction. Markets are always and inevitably human creations. They reflect decisions by judges, legislators, and government agencies as to how the market should be organized and enforced — and for whom.
The economy that collapsed in 1929 was the consequence of decisions that had organized the market for a monied elite — allowing nearly unlimited borrowing, encouraging people to gamble on Wall Street, suppressing labor unions, holding down wages, and permitting the Street to take huge risks with other people’s money.
Franklin D. Roosevelt and his administration reversed this. They reorganized the market to serve public purposes — stopping the excessive borrowing and Wall Street gambling, encouraging labor unions, establishing Social Security, and creating unemployment insurance, disability insurance, and a 40-hour workweek. They used government spending to create more jobs.
During World War II, they controlled prices and put almost every American to work. Subsequent Democratic and Republican administrations enlarged and extended democratic capitalism. Wall Street was regulated, as were television networks, airlines, railroads, and other common carriers. CEO pay was modest. Taxes on the highest earners financed public investments in infrastructure (such as the national highway system) and higher education.
America’s postwar industrial policy spurred innovation. The Department of Defense and its Defense Advanced Research Projects Administration developed satellite communications, container ships, and the internet. The National Institutes of Health did trailblazing basic research in biochemistry, DNA, and infectious diseases.
Public spending rose during economic downturns to encourage hiring. Even Richard Nixon admitted “we’re all Keynesians.” Meanwhile, antitrust enforcers broke up AT&T and other monopolies. Small businesses were protected from giant chain stores. Labor unions thrived. By the 1960s, a third of all private-sector workers were unionized.
Large corporations sought to be responsive to all their stakeholders — not just shareholders but employees, consumers, the communities where they produced goods and services, and the nation as a whole.
Then came a giant U-turn. The OPEC oil embargo of the 1970s brought double-digit inflation followed by Fed Chair Paul Volcker’s effort to “break the back” of inflation by raising interest rates so high that the economy fell into deep recession.
All of which prepared the ground for Ronald Reagan’s war on democratic capitalism. From 1981 onward, a new bipartisan orthodoxy emerged that the so-called “free market” functioned well only if the government got out of the way (conveniently forgetting that the market required government).
The goal of economic policy thereby shifted from public welfare to economic growth. And the means shifted from public oversight of the market to deregulation, free trade, privatization, “trickle-down” tax cuts, and deficit reduction — all of which helped the monied interests make more money.
What happened next? For 40 years, the U.S. economy grew, but median wages stagnated. Inequalities of income and wealth ballooned. Wall Street reverted to the betting parlor it had been in the 1920s. Finance once again ruled the economy. Spurred by hostile takeovers, corporations began focusing solely on maximizing shareholder returns — which led them to fight unions, suppress wages, abandon their communities, and outsource abroad.
Corporations and the super-rich used their increasing wealth to corrupt politics with campaign donations — buying tax cuts, tax loopholes, government subsidies, bailouts, loan guarantees, non-bid government contracts, and government forbearance from antitrust enforcement, allowing them to monopolize markets.
Democratic capitalism, organized to serve public purposes, all but disappeared. It was replaced by corporate capitalism, organized to serve the monied interests.
The secret story of the Biden administration is its return to democratic capitalism. Biden learned from the Obama administration’s mistake of spending too little to pull the economy out of the
Great Recession that the pandemic required substantially greater spending, which would also give working families a cushion against adversity. So he pushed for and got the giant $1.9 trillion American Rescue Plan.
This was followed by a $550 billion initiative to rebuild the nation’s bridges, roads, public transit, broadband, water, and energy systems. And in 2022, the biggest investment in clean energy sources in American history — expanding wind and solar power, electric vehicles, carbon capture and sequestration, and hydrogen and small nuclear reactors. Then came the largest public investment ever made in semiconductors, the building blocks of the next economy. Notably, these initiatives were targeted to companies that employ American workers.
Biden also embarked on altering the balance of power between capital and labor, as did FDR. Biden put trustbusters at the head of the Federal Trade Commission and the Antitrust Division of the Justice Department. And he remade the National Labor Relations Board into a strong advocate of labor unions.
Unlike his Democratic predecessors, Biden has not sought to reduce trade barriers. In fact, he has retained several from the Trump administration. But unlike Trump, he has not given a huge tax cut to corporations and the wealthy.
It’s also worth noting that, in contrast with every president since Reagan, Biden has not filled his White House with former Wall Street executives. Not one of his economic advisers — not even his treasury secretary — is from the Street.
Biden’s larger achievement has been to change the economic paradigm that reigned since Reagan. He taught America a lesson we once knew but have since forgotten — that the “free market” does not exist. It is designed. It either advances public purposes or it serves the monied interests.
Biden’s democratic capitalism is neither socialism nor “big government.” It is, rather, a return to an era when government organized the market for the greater good.
The industrial policies the US and the EU are now adopting considerably rely on subsidizing specific industries, which amounts to a transfer of public resources in private hands. The industrial policy through which the post-war inclusive prosperity was achieved in developed economies, especially in Europe, relied considerably on state-owned companies (such as British rail, and the French steel producer Arcelor) which were privatized in the 1980s and 1990s. Does this golden formula of national industrial policy stand a chance today? Is this something we should try to emulate?
I don’t think we have any choice, frankly. The public doesn’t want a return to state-owned enterprise (the American public would never tolerate it). But in order for industrial policy to work, it must be structured as a transparent contract, with responsibilities on both sides. If the public sector is to foot the bill, the recipients of these public funds must agree to specific conditions that both benefit the public and prevent profiteering.
And finally, a question about the social purpose of economic policy. You have been one of the most ardent critics of inequality. Is equality to be the guiding virtue of the transformative politics we pursue?
To criticize immense inequalities does not imply that equality is a gauge of justice. The distribution of income and wealth doesn’t have to be a zero-sum game in which the rich do better only at the expense of everyone else, and everyone else can do better only if wealth at the top is constrained. It is power — the power to alter the rules of the game and organize the market to the advantage of those possessing it — that is a zero-sum game. Some possess it only to the extent that others do not. And in modern America, as we all know, great wealth turns into great power. In Republican circles, the monied interests have preached the snake oil of supply-side economics, which legitimized giant tax cuts going mostly to the rich and large corporations. Those tax cuts — under Reagan, George W. Bush, and Trump — exploded the federal debt, fuelled giant profits in the biggest firms and financial institutions, and stoked a surge in billionaire wealth but did literally nothing for average working people. In Democratic circles, the monied interests have used neoliberalism — which has called for deregulation, privatization, free trade, and the domination of finance over the economy. This orthodoxy pervaded the Clinton and Obama administrations. This whole perilous dynamic needs to be ended. This requires altering the structure of the economy so the poor and working middle class get a larger share of the gains and the ownership class doesn’t continue to run away with the lion’s share. Gaining more jobs at higher wages is imperative.
Biden understands that the new investments must translate into high-paying jobs, which often require unions. “When I think climate, I think jobs … union workers are the best workers in the world,” he said in a recent speech on Bidenomics.
The monied interests don’t want unions, of course. The narrow congressional majority that got these bills passed rolled back some of the labor conditions that were originally on the tax credits and grants. Moreover, much of the funding is pouring into so-called “right-to-work states” that make it exceedingly difficult to unionize.
But a buoyant economy strengthens the hand of workers, making it easier to unionize — an equitable economy cannot replace equitable social policy, but it creates the conditions for the empowerment of the many. That is why a new Industrial policy is just the start.
- R. Reich. August 29, 2023. “Biden is turning away from free trade — and that’s a great thing“. The Guardian.
- R. Reich. 31 July, 2023 “Why Bidenomics will get Joe another term and give the Democrats control over Congress“. Substack.
- R. Reich. 3 Aug, 2023. “Biden’s New Industrial Policy. And Ronald Reagan’s Old One“. Substack.
Robert Reich is Chancellor’s Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center. He served as Secretary of Labor in the Clinton administration, for which Time Magazine named him one of the 10 most effective cabinet secretaries of the twentieth century. His latest book is THE SYSTEM: Who Rigged It, How To Fix It (Picador, 2020)