Not All Policy Is Industrial Policy

Just say no to empowering government actors to put their thumbs on the scale on behalf of certain sectors.

It's not particularly surprising that President Joe Biden has become a de facto champion of industrial policy, with his National Economic Council director calling for a "modern industrial strategy" involving "strategic public investments" to bring about "the full potential of our nation's economy." A hallmark of left-of-center economics has always been a high degree of comfort with attempts to manage the economy from the top down. 

More surprising has been the rise in recent years of a cadre of self-identifying conservatives who think industrial policy is wise or even necessary. Prominent within that cadre is Oren Cass, who founded the group American Compass in 2020 to push back against the free market "dogmatism" that he says has caused generations of Republicans to resist economic meddling on principle.

Among the strongest arguments for insisting that government remain as hands-off as possible toward the economy is that there is something fundamentally unjust about using public resources to give a leg up to individuals or segments of the population that isn't available to everyone. To sidestep that objection, some industrial policy proponents make a curious claim: that everything government does necessarily involves choosing winners and losers, and so all we can hope to do is to choose wisely—to pick the right winners and losers, if you will.

Cass articulated this view in unusually explicit terms near the end of a recent podcast episode. "Any country is going to have an industrial policy. It's just a question of what industrial policy," he said. "And you're always going to have special interests steering it. So the art is not in draining the swamp or keeping the special interests out. It's in picking the right special interests and having them push towards things that might actually be useful." 

A similar idea was floated by the Financial Times columnist Rana Foroohar at an event hosted by American Compass last week. "Decisions are always political," she said during one panel. "Everything's an industrial policy in the sense that different interest groups are being prioritized or not."

But is it true that all policy is industrial policy? That's a puzzling suggestion given that one of the core complaints of Cass et al. is that the so-called neoliberal order has failed to do what they consider a sufficient amount of industrial policy. If the only choice is which industrial policy to pursue, then being "for industrial policy" (or even for an increase in industrial policy) would be just as meaningless as being against it. 

But as the American Enterprise Institute scholar Michael Strain put it during the American Compass event, "I don't think it's the case that all policy is industrial policy. Industrial policy is a set of policies that are designed to prop up a particular industry….Some people may think particular sectors are more important than others. I think a lot of people in this room probably think that manufacturing is particularly important…but let's be clear: The absence of doing that is not itself an industrial policy."

Set aside the semantics. There are, in fact, two broad visions on offer in this debate. One says that people should be as free as possible to make their own resource-allocation decisions, and markets should be allowed to sort things out from there. Economic winners and losers will emerge, but they won't be "chosen." The state's role is to enforce the basic rules of the game, which apply to everyone equally, and it should never abuse its power by tilting the playing field to favor one team over another. 

The other vision is one in which markets cannot be trusted to produce good outcomes, so government actors must step in and overrule them. The state isn't a referee; it's a mechanic, and subsidies and regulatory carve-outs are levers that can be pulled and tools that can be employed to fine-tune the economic machine in the best interest of society as a whole. Needless to say, there is a clear substantive difference between these libertarian and technocratic approaches.

Industrial policy advocates will occasionally make a fuss when their position is characterized in terms of picking winners and losers. But industrial policy, as Cass himself defends it, involves making exactly those sorts of judgments about which industries are deserving of a boost from Uncle Sam and which are not. One of Cass' favorite dictums is that producing computer chips serves the national interest more than producing potato chips does, and he wants our public policy to reflect that. 

Back in 2019, Cass participated in a high-profile debate at the first National Conservatism Conference (check out my writeup of that event) in which he admitted that his aim was to have Washington privilege "the sector of our economy that makes physical things—traditional manufacturing, resource extraction, energy production, agriculture, some construction, and so forth," because he believes those industries "matter more for the economy's health and long-run trajectory." 

There's just no way around it: Cass wants to empower policy makers to put their thumbs on the scale on behalf of certain sectors. And that's a best-case scenario; attempts at industrial policy in practice often devolve into handouts from taxpayers to individual companies that have political connections to those in power. Think of the outrageous amounts of money the Export-Import Bank funnels to Boeing (and how well has that been working out?), or the Trump administration's Foxconn boondoggle, or, well, pretty much everything about the CHIPS Act implementation.

It is true that there will always be special interests vying to capture what economists call "rents," or goodies available to private actors via the political process rather than the market. Some of us look at that reality and resolve on doing everything we can to constrain state interference in the economy, since by reducing the rents that are available you reduce the incentive for private actors to focus their resources on Washington instead of on actually productive pursuits. Others apparently think the fact that rent-seeking interests will always exist gives them moral carte blanche to use public power on behalf of whichever interests they like best.

A helpful example of this distinction was on display during a different panel at last week's American Compass event, when National Review senior writer Michael Brendan Dougherty trained his ire on America's higher-ed financing apparatus, which he correctly noted enables the existence of "bottom-tier colleges" that are surely a net drain on society:

There's one near me, Mercy College. Almost all the students at Mercy College are brought in by advertising saying, 'Hey, you make a million dollars more over your lifetime if you have a college degree.' The college does not advertise that it has like a sub–33 percent completion rate after six years. Almost all of the people who even complete the [degrees] go back to the service industry that they left, with no improvement in their earnings. So what you've done is you've used the government to load a giant debt load onto a low-five-figure-earning worker to subsidize the existence of a totally mediocre six-figure professor and the administrative class around them.

The federally subsidized student loan system is an obvious instance of government tilting the playing field to benefit a well-connected segment of the economy at the expense of the majority of Americans who will never earn a college degree. It's something that libertarians have been beating the drum about relentlessly for as long as it has existed. And it's something that supporters of the Republican Party's working-class turn, which I presume includes Cass and his allies, ought to be particularly aggrieved by.

But there are two crucially different positions that a proponent of student-loan reform might take. One is that the current system is corrupt and we should roll it back, full stop. The other is that we should redirect the resources from one well-intentioned but disastrous federal subsidy program into a different federal subsidy program, benefitting some other, more deserving constituency, in the deluded belief that this time we'll be able to avoid the pitfalls that have plagued so many of the mind-bogglingly wasteful, tragically distortionary, and inherently unfair federal subsidy programs that came before.

Dougherty suggested we have two choices on the higher-ed issue: "Do we want to keep protecting the lowest third of colleges with the way they're given this gusher of money from the government through student loans," he asked, "or do we want to protect some workers with those resources?" 

Friends, there is a third option: Just say no. It may be futile to think we can get special interests entirely out of our politics, but we can choose to move, however imperfectly, in the direction of less government interference in the economy.