The other major area perpetually on the chopping block is health care. This would appear to be more fertile ground: the United States spends 17–18% of GDP on health care, by far the most in the world, to achieve overall public health outcomes that are decidedly mediocre. Spending on health care programmes composes about a quarter of the federal budget. Surely, the system could be more efficient?
The problem, once again, is that ideological motivations are at odds with practical solutions. Those most eager to cut health care spending tend to be those most committed to “market fundamentalist” ideology, who tend to ignore the possibility that increasing state intervention might be necessary to control costs. But marketisation, in practice, has generally failed to control costs and, in theory, there is little reason to expect that it should. As the economist Kenneth Arrow demonstrated back in 1963, normal market dynamics do not apply to critical aspects of health care. Ordinary competitive and pricing dynamics are often absent, and the sector is characterised by deep information asymmetries and network effects.
The irony is that even practical incremental steps to reduce health care costs, such as government negotiating prices with pharmaceutical companies or hospital monopolies, or better regulating parasitic middlemen such as “pharmacy benefit managers” (PBMs), are generally resisted by the same people who claim to be most concerned about reining in spending. As a result, “marketisation” in the US context has simply meant a refusal to employ the state to control costs, contributing to a cycle of expanding subsidisation.
In sum, the concerns of deficit hawks are real enough when it comes to health care, Social Security and defence, but the politics around these concerns remain insincere and ineffective.
“The concerns of deficit hawks are real enough, but the politics around these concerns remain insincere and ineffective.”
A similar pattern prevails in progressive environmentalism, another sphere in which legitimate concerns have been pressed into the service of a counterproductive politics. In the United States, unlike in Europe, true “de-growth” austerity has become so discredited that most politicians have run away from it, though the impulse still exists among many NGOs and activists. Yet even if American progressives, for the most part, are not looking to shut down modern agriculture, discourage having children, or revert to hand-washing their laundry to stop climate change, they are eager to restrict consumer choices and divert public resources to promote renewable energy and electric vehicles. The Inflation Reduction Act, which includes most of the climate-related subsidies passed during the Biden administration, is estimated to cost somewhere between $800 billion to $1.2 trillion over 10 years. The actual cost is unknown, because some of the IRA’s tax credits are uncapped and theoretically unlimited — but the “energy transition” is certainly expensive.
The necessity of such costly carbon reduction efforts is often presented as beyond ordinary politics — only pathologically greedy science-deniers would oppose taking action to avert a global climate emergency! Yet while environmental concerns are seemingly universal, the environmental movement remains deeply partisan. There is no getting around the fact that climate activists frequently demand sacrifices from ordinary people while ignoring the behaviours of ultra-wealthy donors and displaying clear sectoral biases. The farmer, the coal miner, the exurbanite, and so on are all called upon to make difficult adjustments to meet various arbitrary emissions targets. But the billionaires who shuttle between multiple estates on private jets are never expected to change their lifestyles to save the planet, except perhaps to donate to the climate NGO complex. Wind and solar fields are supposedly essential — but not within sight of Nantucket. Fossil fuel companies are demonised, but tech giants whose server farms consume more and more energy are largely exempt from such criticism, as long as they make the right noises on ESG. Likewise, the environmental movement has fought to impose more and more regulatory burdens on manufacturing and heavy industry, all while turning a blind eye toward pollution offshoring to China and elsewhere.
“Climate activists frequently demand sacrifices from ordinary people while ignoring the behaviours of ultra-wealthy donors.”
In fact, the history of the American environmental movement and its political alliances is rather sordid. In its earliest days, environmentalism was associated with population control and even eugenics. After rebranding as an emissions control movement in the second half of the 20th century, environmental groups first teamed up with coal and utility deregulators against nuclear power. Then they took money from natural gas and Enron for campaigns against coal. Recent years have seen a turn against all fossil fuels, though nuclear has once again been grudgingly readmitted to the decarbonisation push. Ironically, the most significant opponents to new renewable energy construction are often legacy environmental groups, who helped construct a legal regime in which it is relatively easy for third parties to challenge any new energy installations on environmental grounds. This is one reason why far more solar fields have been built in red states like Texas compared to ultra-progressive states like California.
Beneath all the moral preening, then, the green movement is fundamentally just another interest group pursuing a relatively narrow, partisan agenda. It is, and always has been, primarily composed of affluent and professional-class individuals in “asset-light” corporate sectors, as well as opportunistic energy players. In many ways, it is the ultimate neoliberal coalition: a global, post-political orientation, overseen by technocrats operating through nondemocratic transnational organisations and financial markets.
To be sure, the fact that the environmental movement is a self-interested lobby does not necessarily mean that its core claims are false, even if some activists have engaged in alarmism and exaggeration in the past. Indeed, the absence of effective environmental policy is already imposing its own form of austerity, as seen in rising home insurance prices across the United States, to which climate change is almost certainly a contributor. Yet being right about some things does not make the environmental movement any less of a lobby.
Oddly, the green movement would probably have more success in the United States if it simply accepted its corporate-lobby character. Certainly, a movement that focused less on moral preening and NGO fundraising probably would not have made the mistake of trying to pursue decarbonisation while demonising nuclear energy for decades. It also might be more practical about encouraging the transition to clean energy and electric vehicles.
The current push into EVs, based on a combination of tax subsidies and state-level mandates, is already sputtering. Sales growth has slowed dramatically, and auto companies have shelved plans for new models. A more serious approach would recognise that the United States — unlike, say, Norway — is a large country with a weak rail network; people regularly drive long distances; and combustion vehicles’ rapid refuelling remains a significant advantage. At the same time, the United States — unlike, say, China — has little capacity to enforce top-down changes in consumer preferences and infrastructure construction. Two years after Congress appropriated billions for charging stations, not a single one has been built. A more practical agenda would have emphasised vehicles such as plug-in hybrids, which could have a major impact on emissions and would create incentives for the private sector to add more charging stations, while also appealing to consumers who desire flexibility. Such thinking, however, would require the green movement to abandon the pretence of moral purity and accept the compromises and coalitional balancing of any industry lobby.
The more likely outcome is the continuation of the status quo, in which lavishly funded NGOs persist in their attempts to push badly designed policy on a reluctant populace. Whereas neoliberal austerity is essentially an ideological movement trying to appropriate the rhetoric of economic interest, progressive environmentalism is a class- and sector-based lobby seeking to brand itself as a moral-ideological cause. Both will remain ineffective as long as they continue to labour under these self-delusions.
The third option is, for lack of a better name, catch-up reindustrialisation. As with environmental “austerity”, this does not involve conventional budgetary austerity — it may in fact require more public spending — but it does entail a shift away from maximising consumption and towards increasing investment in productive capacity. Trade measures such as tariffs intentionally raise prices, at least in the immediate term, while funding for industrial policies may come at the expense of other budget priorities.
The need for a serious industrial policy programme has become more pressing for various reasons. The first is national security. As discussed above, America’s defence industrial base has eroded considerably. By contrast, China’s manufacturing advantage is overwhelming, which has created supply-chain dependencies in a number of critical commercial areas as well. Surrendering sectors to foreign competitors often entails losing more than “commodity manufacturing”; it also means losing technological prowess and workforce skills. The United States need not look to dominate every manufacturing sector, but it will be impossible to fix the defence industrial base without improving the broader industrial base.
In addition, it is slowly dawning on American politicians that it is impossible to avoid having an industrial policy; the only question is whether to pursue one’s own, or to accept the imposition of someone else’s. China, in particular, by massively subsidising capital investment and export industries, has disadvantaged and discouraged investment in manufacturing and capital-intensive sectors in the United States. And by refusing to intervene, the United States has simply allowed Beijing to pick winners and losers.
Moreover, the fact is that, even without a self-conscious industrial policy, the US government has had to subsidise fallen national champions such as Boeing in recent decades. What has been missing is a serious plan to maximise the effectiveness of these investments, in large part because the post–Cold War neoliberal consensus precluded any open consideration of industrial policy.
According to this conventional economic theory, industrial policy will always be inefficient, value-destructive, and a drag on growth because it interferes with market-driven capital allocation. If private-sector actors require government support or prodding to make an investment, the theory goes, then it must be a poor investment, even if necessary for non-economic reasons such as defence. These models assume, however, a form of economic rationality in which firms operate to maximise profits. In reality, firms operate to maximise shareholder value. The two may occasionally overlap, but they are not the same. As a result, firms often maintain hurdle rates well in excess of their cost of capital, and pursue financial engineering strategies instead of investment. This behaviour may be irrational in the sense of forgoing profits, but it is often eminently rational in the sense of maximising equity valuation. The net result, from a national perspective, is chronic underinvestment, particularly in capital-intensive sectors where foreign industrial policies drive down returns. This is one reason why the relationship between financial returns and productivity breakthroughs has always been more tenuous than standard models would predict, and why industrial policy can spur economic development by dislodging financial rentierism.
Government investment promotion, therefore, is not necessarily value-destructive. It may in fact enable investments whose returns, while below private sector hurdle rates, are still positive. These investments, in turn, can form the basis of new companies, technologies, and industries, as the many historical examples of successful industrial policies attest, from Korean autos to Taiwanese semiconductors to early Silicon Valley.
From this perspective, successful industrial policy is perhaps best thought of not simply as consumer austerity but rather as “deferred gratification”, or investment in the future. Notably, the Chinese government has actively suppressed domestic consumption in favour of industrial investment throughout the last several decades, and yet, contra Western economic orthodoxy, has presided over a miraculous rise in living standards, in addition to its growing geo-economic power.
That is not to say, however, that the path forward for the United States will be easy. On the contrary, American industrial policy faces a number of obstacles and complications. First, US government agencies have relatively little expertise in designing and executing industrial strategy, certainly when compared to their Asian counterparts. The US government itself is poorly structured for this end, with limited institutional capacity to integrate foreign policy and economic policy.
Second, advocates of US industrial policy often have diverging goals in mind. Some focus on the defence industrial base, others on the “energy transition”, others on “creating jobs”. In a Venn diagram, these circles would intersect, but they are not identical. Such diffuse ambitions may impede both the passage and implementation of successful industrial strategy, as previous criticisms of “everything bagel” industrial policy have shown.
Third, the largest corporate and financial actors in the US are at best ambivalent about industrial strategy. They are deeply dependent on China, and are also prime beneficiaries of the “fissured economy” model in which intellectual property rents are separated from capital investment and labour. Furthermore, policies like the Chips Act passed in large part due to the support of incumbent industry lobbies, though policy design suffered in various ways as a result. It remains to be seen whether the United States can pursue industrial policy in critical areas that, unlike semiconductors, do not have powerful incumbent lobbies.
Finally, and perhaps most importantly, a critical ingredient present in the canonical East Asian industrial policy success stories is absent in the United States. Namely, the “Asian Tigers” each used global export markets, particularly the US market, as a competition check: companies that increased export share received more industrial policy support; those that did not were cut off. Without the export-market check, there is an increased temptation to subsidise “zombies”, rather than orient industrial policy investments toward improving productivity and competitiveness. US industrial strategy, therefore, may need to place greater emphasis on stimulating domestic competition. Another option involves using government procurement and investment to create milestone-based contests. In Operation Warp Speed, for example, the government offered contracts only to vaccine developers who met certain thresholds, such as Moderna and Pfizer. Unfortunately, such contracting models remain more the exception than the rule in US policy.
Thirty years after the end of the Cold War, it is clear that the United States squandered its unipolar moment, not only via quixotic foreign policy interventions but also through imprudent economic policy. Deluded by abstract and idealistic theories, American leaders offshored the country’s industrial base to what is now its greatest rival, in order to support debt-funded consumption and financial asset bubbles. The result is a new era of great power competition, massive public and private debt loads, and an economy dominated by software monopolies that have done little to improve productivity. In the next few decades, America will have to commit more resources to addressing these problems. If it fails to do so, an even more drastic austerity will eventually be imposed upon it, as an already strained empire collapses completely.
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeWho knew that endlessly ratcheting up spending – no matter its purpose – while believing it could be done on a credit card might not work out? Oh, that’s right; everyone who manages a personal or corporate budget knows that. People in local and state govts know that. Only in DC do people believe that they are immune from the laws of basic math. Money out can only exceed money in for so long. Eventually, that equation becomes a problem.
No society has ever taxed its way into prosperity and the endless need to punish people on the high end ignores that they pay the lion’s share of taxes as it is. Distasteful as the author finds it, the spending side must be addressed. Must. Be. Addressed. Start with a couple of useless federal agencies, like the Dept of Education whose presence and growth have been inversely proportional to student outcomes. Move to the welfare apparatus that features 100 anti-poverty programs.
Boss Krein
Wow, another white collar clean hand telling labor they know how to put them to work !
Like they themselves would actually do blue collar tasks for a career.
Acting like the workers never heard of robots and AI.
We want opportunities not a 40 year Chinese factory droid job.
But wait, the author said authoritatively that cutting spending wouldn’t help…
Just kidding. Yours is the best response too this piece, by far.
Anerica is an empire, and like all empires, is now in the early evening of its final decline, as is Europe. Who , 40 years ago, would have imagined that the likes of Ford, GM and Chrysler would ever go bust?.. Yet the US auto industry stubbornly refused to look at rivals, rather than what it saw as a permanently loyal domestic market, that deserted its outdated low tech products? Without the financial and IT/ tech sectors the US would be in a far worse state, and is being effectively propped up by a vast domestic market.
“is being effectively propped up by a vast domestic market.”
We should be so lucky…
Each industry has its day, and the free market allows for this. If we didn’t have it, we would still be praising horse driven transport, and wondering how to reduce the ’emission problem’.
The demise of the Western car industries is due to government edicts, like the NET Zero policies, a non-solution to a non-problem.
The car killed itself.
Hilarious, that’s an emission problem we can all care about
Bang on the money
What creates 5 mile an hour commutes ?
About 40 years ago is when the American carmakers woke up and started adopting Japanese-style manufacturing principles. They were in danger of going bust then — Chrysler actually had to be bailed out. Nowadays they are competitive — the 2008-09 crisis was more due to external factors.
Chrysler did go bust 40 yrs ago. Jimmy Carter leant iacocca cash. They invented the minivan, and paid the debt back. The others are recipients of generous govt contracts when not getting bailouts like 2009.
American CEOs, and their pathological obsession with short-term profits, helped ‘Make China Great Again.’
So did slave labour.
US prosperity has very largely been based on their very own slaves labouring in their actual cotton pickin’ chains.
Slavery economically impoverished southern states in different ways (as per De Tocqueville).
Rubbish.
Also suited American and other western consumers fine, all those cheap made in China goods. There is plenty of blame to go around, no one really cared about the slave labor conditions as long as the product was and is cheap. Suited governments as well by keeping inflation low
And when they bring those jobs back to the US it will be
high paid unforced Labor ?
What economic dream world do these Labor experts
feed the Amerikan peasants .
What, you mean companies like Apple? They have never been focused on short-term profit. They went to China in large part not because of lower labor costs, but because they could not produce a product like an iPhone in the US no matter how much it cost. There is not the capability here.
Great essay. It punctures many economic myths promulgated by the kind of commentariat who like to indulge their economic opinions even though they aren’t actually sufficiently interested in economic realities to educate those opinions….particularly about inevitable trade-offs in any policy decision. “At the end of the 80s, with the collapse of utopian socialism in the Soviet Union and elsewhere, laissez faire capitalism – undergirded by a humane but limited welfare safety net – seemed the only way to go. So much so that even quasi-socialists like Bill Clinton and Tony Blair were on board with it. But thirty years on I do think there is a strong case to argue that our recent history of internet- turbocharged globalisation has taken laissez-faire down a wrong track. Adam Smith – widely seen as the father of laissez-faire capitalism – would, if he were alive today, have agreed….probably.” https://grahamcunningham.substack.com/p/globalism-vs-national-conservatism
It’s a great article, but does anyone believe that either of the two running for president can coherently attempt to deal with the complexity of what they are facing? One of them may read this and just move on with a couple of simplistic policies for appearances sake, the other won’t get past the 1st paragraph and just go golfing. Good luck to the US, they will just keep piling on the debt until the end. The system is hooked on spiraling debt
So you haven’t noticed that some of the Trump team (and lately the man himself) have addressed the need for re-industrialization?
On the one hand ……, and on the other …. .
Korean Shipyards are significantly faster and cheaper than US shipyards. And the biggest difference between US shipyards and Korean shipyards is that the former regards the certifications of their suppliers as the most important way to determine who gets a certain contract, while the latter regards the guarantees offered as the most important determiner of who gets a contract. What distinguishes a guarantee from a certification is that a guarantee( which is a monetary penalty if a thing provided doesn’t work) means that a supplier has a much greater incentive to ensure that the shipyard actually uses the materials and parts provided properly. The supplier has a much greater stake in the quality of the product. While a certification in the end doesn’t really mean much past the sale phase of a contract negotiation and isn’t nearly as direct and therefore results in a much lower quality product overall. US manufacturing has too many certifications and not enough guarantees.
Excellent essay, with a lot of insights. But I disagree with its pushing of industrial policy. The best way to promote industry is to free up the free market. Not for the government to step in.
Stated that way, it’s too simplistic but I think the basic principle is sound. Take electric cars, for example. As the author points out, the government is trying to force consumers to buy what they don’t want. Best to let the market work. Consumers aren’t stupid.
That said, it is important to think about incentives. As Charlie Munger used to say, show me the incentive and I will show you the outcome. Market incentives usually do much better than government incentives, but there can be abuse by powerful market players. Government can help with that limited task.
You lost me at “you can’t cut taxes to raise revenue”. People who live in the real world and account for incentives are familiar with things such as the laffer curve.
In the 1990s intellectual competition between Fukuyama’s “The End of History” and Harrington’s “The Clash of Civilizations,” the incorrect argument, Fuluyama’s, prevailed. And now we must deal with the consequences.
SS is not the problem. Employees and employers pay in 12.6% of gross pay altogether. Up to about 140K earned. SS Trust then loans the US govt all the money to be paid back with interest. SS Trust is the largest holder of US debt. Govt squanders it on name your favorite pork program. SS could contribute to it’s future by uncapping the amount of gross earnings subject to the with holding. But this would just anger the affluent and corp.
Having people work to 70 or 75 is no answer. Most corps are looking to rid themselves of most long term workers by age 50. And most people are used up well before 70.
Privatizing just sets US up for 1920s style speculation, or further control of markets and investing by govt.
The considerable value of the insights that this article presents is unfortunately tainted with too much regard for “environmental” activist claims. For example, stating that with rising insurance costs,”climate change is almost certainly a contributor” and seeing merit in government efforts in “energy transition” to supposedly cleaner transportation fails to consider some important facts. The slight net warming of the planet hasn’t actually changed the climate anywhere (and storms have decidedly not gotten more frequent and/or severe than in pre-fossil-fuel times, except in news reports and alarmist publications). The push for electric vehicles and unreliable “renewable” energy ignores the real environment damage that those policies entails, even apart from the economic cost.
The problems developed over decades and will likely take decades to correct. But real progress requires an honest understanding of the issues, such as squandering resources on false alarm or recognizing the security implications of unfettered globalization.