Summary: Officially, the United States has no industrial policy. But in practice, it has had one in place for decades that has shrunk America’s manufacturing sector and blunted its technological edge: Tax and regulatory policies that discourage capital-intensive investment, subsidies for white-collar professionals rather than skilled workers, and shrinking support for the basic scientific research that sustains productivity. As a result, the US depends on China and other countries for strategic goods, and runs chronic deficits that have swollen our obligations to foreigners. All nations have industrial policies, and America need one that fosters industry rather than stifles it.

Whenever the federal government spends a dollar, demons awake and go abroad to encourage rent-seeking and cronyism. Industrial policy of the sort practiced by European social democracies has become a dirty word, and with good reason. Humanity has not discovered a worse or more corruption-prone mechanism for misallocating resources than committees of civil servants appointed by politicians. Nonetheless, every developed economy has an industrial policy of sorts, embedded in its tax, regulatory, public works, and other policies.

America already has a massive, pervasive, and comprehensive industrial policy, but a policy so perverse that it has hollowed out America’s industrial economy and suppressed the incomes and capabilities of American workers. The federal government has an enormous influence on the allocation of capital among different sectors of the economy. For example:

  • The American tax code favors “capital-light” Big Tech companies and penalizes capital-intensive manufacturing.
  • American regulation, including environmental and worker safety regulation, favors companies with a preponderance of white-collar employees at the expense of manufacturing, mining, chemical, and refining industries.
  • The United States provides enormous subsidies to universities through tax-exempt status and direct grants, favoring elite universities with large endowments and research facilities, taxing average Americans to fund the education of elite professionals. Other countries subsidize apprenticeship programs for less-affluent citizens to train a highly skilled and highly paid industrial workforce.
  • The United States spends just 0.55 percent of GDP annually on infrastructure, about the same level as Greece, compared to 0.8 percent in Germany, 0.9 percent in France, 1.1 percent in Japan and 5.8 percent in China. Public improvements are a subsidy to goods-producing industry and mining, and America’s level of spending is among the lowest in the industrial world.
  • Federal subsidies for R&D subsidize innovative, entrepreneurial industries. During the 1970s and 1980s, the federal R&D budget was about 1 percent of GDP, and federal funding supported every invention of the Digital Age, helping to make America the world’s undisputed leader in advanced technology. Today, the federal R&D budget is only 0.3 percent of GDP.
  • The largest discretionary component of federal spending, the $1.75 trillion Department of Defense allocation, includes vast payments to industries. At the peak of the Cold War during the late 1970s and the 1980s, defense policy demanded a wide range of innovations in weapons systems that required the discovery of new technologies. These new technologies were adopted by entrepreneurs who created new industries in computation, communications, materials science, and other fields. Today the defense acquisitions budget supports a small group of giant defense contractors who have little incentive to innovate.

Whether most Americans realize it or not, we have an industrial policy that discourages capital-intensive investment through taxation and regulation, subsidizes the education of white-collar professionals rather than skilled workers and engineers, neglects infrastructure, and skimps on the kind of scientific research that translates into industrial productivity.

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