Biden Would Usher In a New Era of Industrial Policy

President Joe Biden unveiled his American Jobs Plan today, and Bloomberg Opinion columnists Karl Smith and Noah Smith met online to swap early impressions. A lightly edited transcript follows.

Karl Smith: The president’s plan has the potential to define U.S. economic policy for the next several decades. And from a political standpoint, it’s very smart — meeting the American people where they are by combining populist elements from the left and the right. It includes efforts to rebuild America’s industrial capacity, ease the financial burden on working-class and young professional families, and challenge China’s growing economic dominance.

But politically smart is not the same as economically astute. On that measure, Noah, I think the plan falls short.

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Overall, its more-government-is better approach is worrisome. The primary obstacle to U.S. industrial dominance is regulation. In areas where regulators have been slow to catch up to industry (fracking) or when charismatic and popular personalities kept them at bay (electric cars), the U.S. has been globally dominant. Getting out of the way is the cheapest and most effective approach.

When it comes to families, no-strings-attached cash-assistance may be popular. But a huge expansion in government services and regulation — for home-care workers, for example — is likely to lead to higher costs and lower access to those jobs for marginalized workers.

Finally, when it comes to economic competition with China, the only real solution over the medium run is a radical increase of skilled immigration to the U.S. The spending and mandates detailed in the plan are at best a side show.

The plan isn’t all bad. It puts a premium on fixing aging infrastructure, which economic research shows has a much higher return than investing in new infrastructure. And it gives lip service to the most pressing supply-side issue in the U.S. economy: local restrictions on housing development in expensive urban areas.

Still, its heavy-handed approach, along with the enormous proposed tax increases on businesses to pay for this program, make me skeptical that it will actually have the economic impact the Biden administration is hoping for.

Noah Smith:  If you come into this plan with the belief that deregulation is the only effective growth policy, then sure, you’re not going to like a multitrillion-dollar spending bill. But I’ve never seen any convincing evidence for that idea — the one good study I know of, by Alex Tabarrok and Nathan Goldschlag, finds no relationship between regulation and the dynamism of an industry.

Anyway, on to Biden’s plan. It repairs the roads and bridges, which are important to the economy. It would build a national network of electric-vehicle charging stations, which is something no private company, even Tesla Inc., can really hope to do on its own. Ditto for strengthening the electrical grid. The plan also speeds the switch to electric for the government fleet, which was something that was always going to happen as the technology improved.

The bill provides money to teach more Americans how to manufacture things. This seems like a promising alternative to requiring that everyone get a four-year college degree in order to have a job that provides a decent living.

Designating $180 billion to build on a very successful tradition of government-supported research is also excellent. It's the kind of backing that helped give rise to many U.S. high-technology industries last century. 

These are crucial economic functions we know the private sector won’t — or can’t — do on its own. If our policy toward growth is to dismiss government activism and wish for deregulation, we’ll be repeating the mistakes of the last two decades.

Karl Smith: I don’t think deregulation is the only effective growth policy — but I do think that the devil is in the details. The major policy mistake of the last two decades, by my estimation, was the failure of both the Federal Reserve and Congress to stimulate the economy sufficiently. That’s something that contemporary economic conservatives have been slow to recognize but are coming to accept.

An error common on both the left and the right — and that the Biden plan seems to pay too much lip service to — is the idea that the absence of an industrial policy has held the U.S. back. The China shock was real. When China was admitted to the World Trade Organization, U.S. manufacturing took a major hit, and it was a mistake for economists to be in denial of that fact for so long.

It’s equally misguided, however, to think that copying China’s economic policy will undo that shock. The overwhelming factor in China’s growth is economic convergence — the tendency for poor countries to grow faster than rich countries. This force is particularly powerful in manufacturing, where successful processes can be copied from wealthier countries, avoiding a lot of the cost from trial and error.

Biden, like Trump before him, has done a good job of bolstering aggregate demand. If the U.S. lets that process play out, the private sector will cure much of what has ailed struggling workers for so long.

Noah Smith:   I agree that Biden’s plan will boost aggregate demand over the next decade. As our colleague Michael Strain has written, the rapid bounce-back from the Covid-19 recession means that this bill was able to focus on items that increase demand at a more stately pace while also providing more long-term economic value. That’s great!

As for the industrial policy pieces of the bill, such as the new office in the Commerce Department that picks specific industries to boost in the U.S., it’s really copying South Korea much more than it’s copying China. I agree that this idea goes out on a limb — boosting strategic industries is something the U.S. hasn’t done much of since the early 90s, when it was worried about competition from Japan. And the economic case for these sorts of policies is far more speculative and tenuous. There’s a possibility that they could waste money, or even backfire, as they did for Japan in the 90s.

But when you look at the specifics, much of the so-called industrial policy is really just money for research and education — two very traditional functions of government. The funding for that new Commerce Department office is only $50 billion over 10 years. So it’s really more of a small experiment.

And that’s how policy gets better: trying small experiments, seeing if they work, then scaling them up. If there’s anything Biden is copying from China, it’s Deng Xiaoping’s advice to “cross the river by feeling the stones.” Trial-and-error works for companies, it’s worked for China, and it seems like a much better approach for the U.S. than the theory-driven deregulation that we relied on in recent decades.

Karl Smith: As always, a lot will be determined by the specifics. But from what we already know, it seems that most of the $580 billion slated for manufacturing jobs, for example, could be fairly characterized as industrial policy. Indeed, this is the slant that the Biden administration itself is putting on the plan.

And yes, there is money from research — but it is a far cry from the open-ended attempts to capture low-hanging fruit represented by the legendary ARPA model of the mid-20th century. Likewise, much of the education spending represents a new start for federal job training programs, which have gone poorly in the past.

All this said, Noah, on some level I hope you are correct. Given the political winds, the U.S. is definitely on the road toward a more activist role for government in economic policy. If it’s able to identify and scale some successful programs, that will be a win for the country and the world. I’m just concerned that this trial will be mostly error.

Noah Smith: Industrial policy is popular right now, and rightly so. People can sense that the deregulatory approach of the past few decades — step back and let the market handle everything — has been utterly insufficient to boost growth. Maybe deregulation and tax cuts helped in the 1970s and early ‘80s, but since the ‘90s they’ve only given us deficits and a financial crisis, while productivity growth has slowed to a crawl.

When your approach isn’t working, you try something different.

That $580 billion for manufacturing jobs is mainly about those key government functions of  research and education. The ARPA model is great, but the National Science Foundation model for government research spending is also great, and scales up better. Remember that while the price tag may sound big, a few tens of billions a year isn’t even enough to bring government research spending back to the percentage of Gross Domestic Product that prevailed in the 1980s. And vocational education programs are similar to the community-college model, which also has a good return on investment.

So while a few parts of this bill are “try new things and see what works,” most of it is just the government spending more on things that the government needs to do. It’s long overdue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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