A Recipe for a Striving America
The New York Times, Oct.
3, 2024
I travel a lot. Just over the last several weeks, for example, I’ve been
in some rural and redder parts of America (in Idaho, Kansas, Nebraska,
Ohio, Texas) and some bluer parts (in California, Illinois, New York).
My overall impression is that the social,
economic and psychological chasms between these two zones are wider than
ever.
Of course, we’ve always had vast inequalities in America, but it used to
feel like inequality within a single society. Now it feels like
separate societies with almost no social exchange between the two. In
parts of the country with fewer college graduates,
the towns often look shabbier, they’re poorer, the effects of the opioid
crisis are evident, the young are leaving, obesity is more common, the
zeitgeist is grimmer, civic life is hollowed out.
We can all list the forces that contribute to this widening divide, but a
big one is this: Over the past 70 years or so, America, without much
conscious deliberation, embraced its information-age future. In 1973,
the sociologist Daniel Bell wrote a book called
“The Coming of Post-Industrial Society.” Bell wrote that the leadership
in the emerging social order would come from the “intellectual
institutions.” He added, “The entire complex of prestige and status will
be rooted in the intellectual and scientific communities.”
In the ensuing decades, finance, consulting and tech rose while
manufacturing shrank. According to the St. Louis Federal Reserve,
manufacturing made up 28 percent of America’s nominal gross domestic
product in 1953. By 2015 it was 12 percent, and today it is
lower still.
During these decades most of us in the news media, government, the
academy and other sectors developed a distinct, educated-class way of
seeing the world. We assumed, for example, that the best way to expand
opportunity and boost growth was through better schooling.
The Bushes, Bill Clinton and Barack Obama all produced important
education reforms. The thinking was simple: If we invested enough in
human capital — through preschool, community colleges, research
universities and beyond — we could prepare the next generation
for the high-tech and service-sector jobs of the future. This idea is
certainly central to the way I’ve seen the world over the last few
decades.
We were basically telling people in manufacturing regions to get out and shift to services. In a
provocative
2023 essay in American
Affairs, David Adler and William B. Bonvillian laid out the trends: The
vocational education system withered. Financial markets rewarded
outsourcing. There was a growing disconnect between
the American innovation system and the American production system. That
is to say that while America produces new ideas it has not made similar
advances in producing breakthroughs in manufacturing processes. In the
mid-20th century, America led the world in
building cars and ships, but, Adler and Bonvillian write, “As the mass
production era was succeeded by new waves of manufacturing advances,
America would no longer be king of manufacturing.”
Economically, this shift from manufacturing to ideas made total sense.
Let workers in low-wage countries work in factories. Americans will
graduate to high-wage information-age jobs. American society will
prosper as we do what we’re best at. And indeed, the
American economy is the strongest big economy in the world. High-income
manufacturing nations like Japan and Germany are stagnant, as American
wealth just keeps growing.
But sociologically, politically and culturally, this shift from brawn to
brains has contributed to the vast chasms we see today. Places where
highly educated information-age denizens gather are gleaming, while many
other places are desolate. The people who
have the kinds of abilities that make for school success are thriving;
people with other kinds of abilities are not.
This state of affairs has produced a seismic shift in how people in both
parties think about public policy. The old bipartisan
education-can-save-us mantra is falling into the background. A new
bipartisan we-need-to-rebuild-manufacturing mantra is taking hold.
Though his wife is a teacher, Joe Biden has not been an education
president. He’s been an industrial policy president. He’s tried to use
hundreds of billions of dollars to help America build things — through
big infrastructure projects and in factories.
In the spring of 2023, Biden’s national security adviser, Jake Sullivan,
gave
a speech at the Brookings
Institution laying out the economic mistakes the Biden administration
has tried to correct. He argued that while pursuing economic efficiency,
America had let entire supply chains of strategic
goods, like microchips, move overseas. He argued that it was a mistake
to believe that the type of growth a country achieved didn’t matter. It
was a mistake to believe that if the financial and tech sectors drove
wealth creation, then it didn’t matter if infrastructure
atrophied. He argued that when a large nonmarket economy like China’s
begins to dominate the world through brute force, then market economies
need to change their policies in response.
He summarized the Biden approach: “A modern American industrial strategy
identifies specific sectors that are foundational to economic growth,
strategic from a national security perspective and where private
industry on its own isn’t poised to make the investments
needed to secure our national ambitions. It deploys targeted public
investments in these areas that unlock the power and ingenuity of
private markets, capitalism and competition to lay a foundation for
long-term growth.”
In other words, industrial policy: The government chooses key sectors
that will spur economic growth and enhance national security. The
government supports those sectors with direct subsidies, tax credits,
trade protections and other measures. The government
isn’t just educating people; it’s shaping the economy in a much more
aggressive way. As the economics writer Noah Smith has noted, if the
1930s brought us the New Deal and the 1980s brought us the free-market
Reaganism, today we are entering an era of “New
Industrialism.”
I think of it this way. The Clinton-to-Obama era was bottom up. We
sought to give people the skills to rise. The Biden era is more top
down. The effort is to create the industries that will suck workers up
to middle-class status.
Last week, Kamala Harris signaled that she would continue the trend.
“One of the recurring themes in American history is that when we make an
intentional effort to invest in our industrial strength, it leads to
extraordinary prosperity and security,” she said.
The 2024 election could be an occasion to debate this fundamental shift
in policy. This election could be a moment to ask fundamental questions:
Is it smart to focus our policy attention on manufacturing, which is
only one-tenth of the American economy, and
not the other 90 percent? Is it plausible to think America can ever be a
manufacturing powerhouse again? Even if manufacturing recovers, does
that mean manufacturing jobs will recover? The new plants employ robots,
not humans. Does industrial policy even work?
We’re not having this debate. That’s in part because Harris and Donald
Trump are not exactly conviction politicians with well-defined
worldviews. It’s also in part because both parties agree on this shift
to manufacturing. It’s just that to achieve this goal,
Trump wants to primarily use tariffs and the Democrats propose using
subsidies and other measures.
I think Trump’s tariff idea is insane, but I’ve also genuinely been
uncertain about the prudence of Democrats’ new industrial policy focus.
Will it contribute to social cohesion and an American economic
renaissance, or just become a sinkhole of debt-funded
spending that will drag us to stagnation?
*
Personally, I have no philosophic objections to aggressive government
efforts to reshape the American economy. I’m the kind of guy who first
read Alexander Hamilton’s 1791 Report on Manufactures with a thrill in
my heart. Hamilton sought to transform an agrarian
society into a dynamic, industrial one. I’m the kind of guy who reveres
Republican legislators like William Pitt Fessenden, who, during the
Civil War, passed the gigantic pieces of legislation that fueled
America’s transformation into an economic colossus.
I strongly believe that any healthy society needs to find ways to reward
a variety of abilities, not just the one our current meritocracy
rewards: the ability to please teachers and take tests during
adolescence.
But I wasn’t born yesterday. Industrial policy has been around for a
while, and it’s often been a miserable failure. During the middle of the
20th century, governments around the world intervened aggressively to
jump-start economic development. Most of those
projects were counterproductive. For example, in the 20th century
African nations and global development agencies spent tremendous amounts
of money to industrialize Africa. But Africa failed to industrialize.
Part of the problem was bad policy. As one Brookings
Institution report put it, “Investments were often made with little
regard to efficiency, and the managerial capacity of the state was badly
overstretched.”
In 2021, the Peterson Institute for International Economics released a
report called “Scoring 50 Years of US Industrial Policy, 1970-2020.” It
found that the programs that worked best focused on basic research and
development, like DARPA, which helped develop
the internet. The programs that worked worse were the ones in which
government tried to target and develop specific sectors or companies,
like protections and subsidies for steel and semiconductors, and
investments in the Solyndra Corporation (solar panels)
and Foxconn (electronics). In other words, government is most effective
when shaping the conditions in which private companies operate and worse
at the kind of targeted interventions that today’s New Industrialists
are talking about.
Japan was supposedly an early model of industrial policy success. But
the Japanese economy has stagnated. Between 1990 and 2021, the U.S.
economy grew by about 110 percent, while the Japanese economy grew by
about 25 percent.
China seemed to show that you can build a booming economy through huge
government interventions, reviving industrial policy’s prestige around
the world. But China grew fastest when it was liberalizing its economy,
not after 2010, when its government started
intervening more aggressively. Today, China’s economy is slowing.
Productivity growth has stalled. Public morale has collapsed. China’s
factory activity has declined for five consecutive months.
Another downside of industrial policy is that it creates divisions and
bitterness between nations. When you support your own national
industries, you end up harming other countries’ industries, including
those of your friends and allies. The International Monetary
Fund and Global Trade Alert monitored over 2,500 industrial policies
around the world last year and found that more than two-thirds distorted
trade, discriminating against foreign concerns. Furthermore, this kind
of protectionism backfires. More workers lose
their jobs when other countries retaliate than gain jobs from the
protections themselves.
The final downside I’ll mention is that industrial policy leads to more
regulations. When government agencies hand out money, they inevitably
attach strings intended to serve other social goals. Some of the Biden
administration’s industrial policies have provisions
to encourage better child care, more opportunities for women and the
economically disadvantaged, and promotion of diversity, equity and
inclusion.
I know it sounds like old-school Reaganism to say this, but regulations
really do strangle growth. Why is the European tech sector so pathetic
compared with the American one? It’s not for lack of smart people, great
research centers and government support.
In a report last month, the former European Central Bank president Mario
Draghi blamed “inconsistent and restrictive regulations.”
Why is the Canadian economy doing so much worse than the American
economy? Living standards for Canadians have barely budged since Justin
Trudeau took office in 2015. Part of the problem is regulations,
especially on energy and mining. Why has the vaunted German
economy stagnated? Some experts believe the Germans allowed their
economy to become overregulated. Why is it so hard to build housing in
America? Regulations.
These are the industrial policy downsides. So does this mean Team Biden
is wrong and we should reverse course? Well, not so fast. If you look at
the early results of some of the industrial policies passed during the
Biden administration, some are pretty fantastic.
The Inflation Reduction Act and the CHIPS and Science Act offered more
than $400 billion in subsidies, tax credits and loans to boost industry.
They have spurred a tidal wave of private investment spending. For
example, chip companies and their suppliers have
announced investments totaling $327 billion over the next 10 years. The
clean energy sector is booming, too. The U.S. is now spending more than
twice as much on factory construction as it did during the Obama and
Trump years.
These investments are being made exactly where you’d want them — the
formerly industrial Midwest. Along with all the grimness I see, I
occasionally get to visit places — upstate New York, eastern Ohio —
where people are excited about new chip plants and employers
coming in. Their main worry is: Where are we going to find workers?
Not everything is perfect. Government is still government. A Financial
Times report found that 40 percent of Biden’s big manufacturing
investments have faced delays or been postponed indefinitely. There’s
been a lot of
spending to create electric vehicle chargers, but so far, not a
lot of E.V. chargers have been created. Nor has manufacturing employment
risen; it’s roughly the same as in 2019.
But after weighing the pluses and minuses, you’d have to say the Biden
agenda is off to a very promising start. It will take a while for the
factories under construction to come online and start employing people,
but the investments are huge, reviving America’s
industrial base.
If I were an economist I might be wary, given industrial policy’s mostly
unsuccessful record. But I’m a journalist who mostly sees the world
through a sociological and cultural lens. We just can’t continue as a
society with the kind of economic, social and
cultural chasms that I see in my travels. Something has to be done, and
the New Industrialism is right now the best thing out there.
To create a just society we need to build a society that rewards a
diversity of skills. I know how to process information, and our current
society is built to reward people like me. I’m terrible at working with
my hands. I have low spatial intelligence. I don’t
have the wisdom and sensitivity to know how to diagnose and correct,
say, engine trouble. We have to find more ways to reward the abilities
that don’t involve information analysis on a laptop.
So, at the end of the day, I agree with those who say the question is
not whether we do industrial policy, but how. And when I think about it,
five basic principles come to mind that might guide a modern industrial
policy:
Create pleasant surprises. The
crucial question for industrial policy is when in the production cycle
should the government intervene. Should it restrict itself to funding
basic research or, further downstream, should
we actively try to subsidize specific companies?
In my view, government should focus on setting the table, not trying to
serve the meal. The primary focus should be basic research. Industrial
policymakers face an epistemological problem. Government bureaucrats
don’t have enough knowledge to plan the future.
Basic research turns that disadvantage on its head. When expanding the
frontiers of knowledge, you never know what is going to lead to what.
DARPA researchers didn’t set out to create Silicon Valley, but that’s
what happened. It was a pleasant surprise.
We could have a DARPA for manufacturing, doing research on materials
discovery, machine tool innovation, maintenance innovation and
execution. How can we most efficiently build stuff?
Pick the low-hanging fruit. I’m
suspicious of plans to comprehensively revamp American economic policy.
Our economy is pretty awesome. But we have blind spots and scarcities.
My Times colleague Ezra Klein and Derek Thompson
of The Atlantic have been asking the right question: How can we take
areas where there is scarcity and turn them into abundance? I think we
all agree we need additional housing, faster trains, cleaner energy,
more health research centers and speedier shipbuilding.
If we just worked on building in the areas where the need is obvious, we
wouldn’t have to get bogged down in an ideological fight over the ideal
form of political economy.
An economics-only approach fails. These
left-behind places don’t lack only jobs. They also lack community
organizations, intact families, religious institutions,
cross-class friendships, fathers in the neighborhoods — all the sorts of
things the economist Raj Chetty has shown lead to social mobility.
You’re not going to grow a successful work force if the families and
neighborhoods the people come from are in chaos.
As Chetty noted in a recent
Times essay, we need
place-based programs built on the wisdom that the neighborhood is the
unit of change. Economic policy, family policy, local community policy
are all one thing, so industrial policy has to have
a social capital component.
Push China to the edge. How did we
defeat the Soviet Union? We showed Soviet leaders that their model
couldn’t compete. The West has to pressure China until its leaders
conclude that their policies before 2010 were better
than their policies after. China is obviously not as dysfunctional as
the U.S.S.R. was, but it has real weaknesses. Xi Jinping has a
puritanical streak that leads him to see industrial production as
honorable and consumer activity as hedonistic. That’s a self-destructive
way to build a modern economy. Democratic nations can expose these
weaknesses if they adopt a global posture toward one another and a
relatively strict one toward China, denying it access to key markets and
goods.
Support progressive deregulation. J.
Hector St. John de Crevecoeur, who came to America in the 18th century,
observed: “A European, when he first arrives, seems limited in his
intentions, as well as in his views; but he
very suddenly alters his scale; 200 miles formerly appeared a very great
distance, it is now but a trifle; he no sooner breathes our air than he
forms schemes and embarks in designs he never would have thought of in
his own country.”
That’s the America I want all of us to live in, a nation that incites a
hunger to learn and build, a social order that cultivates the vigorous
virtues — aspiration, experimentation, creativity, entrepreneurship.
Many of us in the educated class get to live
in such an America. A humble form of industrial policy is a step toward
creating a dynamic, striving America for all.