Biden's New Industrial Policy Will Fail, Just Like Industrial Policy Always Fails
While campaigning for the midterm election, the president is promoting a disastrous and expensive form of economic protectionism.
There can be no mistaking the intention of the Merchant Marine Act, the 1920 law more commonly referred to as the Jones Act. Passed in the aftermath of World War I, when demand for shipping services had increased dramatically, its purpose was laid out in the text of the statute itself, which declared the law "necessary for the national defense and for the proper growth of its foreign and domestic commerce." The intention was to make sure that in times of war or another national emergency, America had a high-quality merchant marine fleet "ultimately to be owned and operated privately by citizens of the United States."
When it was passed, the law provided subsidies for the construction of a domestic shipping industry, while imposing various employment rules and other shipping regulations. It has been amended in the century since, but it continues to prohibit foreign-flagged ships from traveling between U.S. ports, and many of its wage and labor regulations are still in effect, making it beloved, almost obsessively, by unions.
In at least one way, the Jones Act has served at least part of its intended purpose: It has benefited the domestic shipping industry by shielding it from foreign competition. But it has done so at considerable expense to everyone else.
By restricting and regulating shipping at America's ports, the Jones Act considerably raises the costs of transporting goods, which in turn raises prices on everything from food to electronics to textiles. In good economic times, the Jones Act is a cost borne by the majority to bolster the fortunes of a few. In periods of global economic instability and high inflation, the Jones Act makes supply chain problems worse and drives prices even higher. On a daily basis, it is a force for impoverishment.
And in a true emergency, it is a crisis unto itself. After Hurricane Fiona wreaked havoc on Puerto Rico this summer, Jones Act shipping restrictions made it effectively impossible to procure vital supplies, including diesel fuel necessary to power generators. Only after considerable public pressure did the Biden administration waive the rule on a "temporary and targeted" basis.
The Jones Act, in other words, was a subsidy, labor, and regulatory scheme intended to promote American security and economic interests by giving advantages to a particular domestic industry—a classic example of protectionism and industrial policy. And every single day it is a demonstration of how both fail.
So it is notable that President Joe Biden has spent the better part of this midterm election year promoting what amounts to a new industrial policy as the centerpiece of his economic agenda. What he appears to want is to take the failed ideas of the Jones Act and apply them to the rest of the economy. The president's big economic idea is, more or less, the Jones Act—but for everything.
Biden has focused on promoting manufacturing, making campaign-style appearances at planned factory facilities, and crediting his policies with creating jobs. In September, after Micron announced that it would build a new facility for manufacturing computer memory in Boise, Idaho, Biden said it was a "big win for America." He called the announcement of the new plant, along with facilities from other companies, such as Toyota and Honda, a "direct result of my economic plan."
Just about any time one finds a politician taking credit for specific business decisions by specific companies, one ought to be skeptical, worried, or both. In this case, the proximate cause of much of Biden's factory-jobs campaigning is the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, a $52 billion package of industry subsidies Biden signed into law in August. Manufacturers who stand to benefit from these subsidies have played along, with Micron's leadership saying that its facility is "the first of Micron's multiple planned U.S. investments following the passage of the CHIPS and Science Act." Micron, however, was publicly teasing the possibility of new manufacturing facilities as early as October 2021, long before the CHIPS Act became law.
Similarly, Biden has touted Intel's plans for a large computer chip factory outside of Columbus, Ohio, traveling to the state to speak at a groundbreaking ceremony in September. The plan to build the facility was already underway when the CHIPS Act was signed. The initial announcement in January cautioned that the "scope and pace" would depend "heavily on funding from the CHIPS Act."
It is almost definitionally true that a company like Intel can be expected to rearrange its plans in order to take maximum advantage of a large stream of government subsidies. But the fact that the company announced a "more than $20 billion" build-out before the CHIPS Act passed strongly suggests that the subsidies were not the deciding factor in the project.
Just as the Jones Act ends up distorting the shipping industry, shaping it in ways that make it less flexible and less responsive to genuine consumer demand, we should expect the CHIPS Act to push the semiconductor industry into labor and production decisions intended to satisfy politically determined subsidy requirements rather than genuine market needs. Subsidies are more likely to incentivize inefficiency and dysfunction than genuinely useful production, inflating prices in the process. When subsidies are driving decisions, that means subsidy programs, not end users, are the true customer.
Moreover, subsidies often end up benefiting companies that are already doing well and, thus, have the capacity to reorient themselves to obtain the handouts. In January, Intel said that in 2021 it had more than $74 billion in revenue, making for what a company slide described as its "Best Year Ever." Biden's industrial policy is doling out big benefits to giant companies that were already riding high.
None of this has stopped the Biden administration from bragging about its ill-conceived plans. Just this month, the president traveled to Poughkeepsie, New York, to give himself credit for a planned IBM facility. "The industrial strategy is really helping to drive a renaissance in American manufacturing and domestic investment…that we haven't seen in generations," White House National Economic Director Brian Deese said during the trip. In the 1990s, IBM somewhat famously moved some domestic manufacturing overseas. Biden played up the reversal, saying: "The supply chain is going to start here and end here, in the United States." Relatedly, the White House has promoted the idea that the CHIPS Act "will strengthen our national security by making us less dependent on foreign sources of semiconductors."
Yet, if the Jones Act has shown us anything over the last century, it is that subsidies, labor requirements, and regulatory schemes intended to protect American jobs and industries deemed vital to national security end up raising costs in ordinary times while leaving America more vulnerable in moments of crisis.
CHIPS is only one aspect of Biden's Jones-Act-for-everything approach to the economy. His "Buy American" plan, for example, is a foolhardy attempt to promote domestic manufacturing with a Trump-era rule that mostly drives up prices for American consumers, all under the guise of economic patriotism.
Biden's Labor Department also recently proposed a rule that would result in the reclassification of millions of independent contractors as employees. This is being portrayed as a move to protect workers, but by forcing them into full-time status, it would eliminate flexibility and adaptability for vast swaths of the work force, making the American economy less efficient and less resilient.
The Labor Department proposal is best understood as an extension of Biden's outspoken fondness for union labor and a stepping stone toward an eventual unionization push for many such jobs. And what are unions if not engines of labor force sclerosis, determined to impose worker rules that make organizations of all kinds less nimble and less adaptable to changing circumstances? It's not for nothing that unions strongly support the Jones Act.
Even Biden's fiscal policy maneuvers have enabled cumbersome forms of industrial policy. As Cato Institute trade policy scholar Scott Lincicome—a sworn enemy of the Jones Act and an exhaustive, entertaining cataloger of industrial policy failures—recently noted on Twitter, states are using excess funds from the American Rescue Plan (ARP) to bid for electric vehicle plants, "costing taxpayers billions for, at best, modest overall economic benefits and, at worst, total boondoggles."
States are using leftover (never-needed) American Rescue Plan funds to engage in a bidding war for EV plants, costing taxpayers billions for, at best, modest overall economic benefits and, at worst, total boondoggles.
Industrial policy 101. https://t.co/BYdhofZ2aT pic.twitter.com/5xxYEABCx6
— Scott Lincicome (@scottlincicome) October 14, 2022
This one is worth briefly unpacking, because it demonstrates the ways in which Biden's economic follies are interwoven. The ARP was a $2 trillion, deficit-funded stimulus package that congressional Democrats passed on party lines shortly after Biden took office in 2021. The bill was sold as an economic lifeline, but economists on the right and left warned that it was oversized and poorly targeted and that it would inevitably result in inflation. The inflation has now arrived, but the poorly targeted funds are still working their way through the economy, with states spending borrowed federal money to finance green energy projects of dubious economic value that will, at best, result in factory jobs at astronomical public cost—in some cases well over $400,000 per permanent position.
Biden's factory jobs revolution is just a series of expensive, taxpayer-funded boondoggles, and his fanciful vision of a manufacturing economy revitalized by subsidies and labor regulations is, in reality, a vision of vastly expanded Jones Act–style top-down economic planning. That might, as Biden seems so keen to claim, be a direct result of his economic policies, but it's hardly a win for America.