American industry must rise again The US has squandered its Cold War victory

Let’s start by considering neoliberal austerity. Conventional budgetary concerns have resurfaced with the inflation spikes of recent years and interest rates still near their highest levels since 2008. In the past, deficits significantly above 3% of GDP were only experienced during major economic downturns or in wartime. In 2023, however, the United States ran a roughly 6% deficit with a relatively low unemployment rate of around 4%. While paranoia about the US national debt has always proved baseless in the modern era, the limits of the present trajectory are becoming more visible, as interest payments take up greater and greater percentages of government spending.

The question for deficit hawks — today and in the past — is whether they are in fact primarily concerned with reducing the deficit. In America, this pose is often, if not typically, disingenuous — rhetorical cover for an ideological project of shrinking the state rather than responsibly balancing revenues with expenditures. Hence the most strident deficit hawks are almost invariably the most eager tax cutters. Or, perhaps more accurately, the most aggressive tax cutters often masquerade as deficit hawks but have little real interest in responsible fiscal policy.

Today, with federal tax rates at low levels, any serious deficit reduction programme would have to consider tax increases. The rates themselves may not even be the key issue: taxing corporate profits in the country where they are earned, or closing various personal loopholes, may have a greater impact at this point. But these items are largely excluded from the “deficit” agenda, especially among Republicans, who continue to indulge in fantasies that tax cuts will “pay for themselves”, despite the manifest failure of the Bush and Trump tax cuts to generate meaningful growth.

Instead, the conservative focus remains entirely on cutting spending. The problem here is that, within the realm of political plausibility, there is not all that much to cut. According to the most recent numbers from the Congressional Budget Office, “mandatory spending” (mostly Medicare, Medicaid, and Social Security) accounted for $3.8 trillion of the $6.1 trillion 2023 federal budget. Defence spending added another $800 billion, constituting almost half of “discretionary spending”. Interest costs were an additional $700 billion, contributing to a total deficit of $1.7 trillion. The bottom line is that, even if all $900 billion of non-defence discretionary spending were miraculously cut — zeroing out transportation, education, veterans’ benefits, the justice system, and scientific research — that would only reduce the deficit by about half. Significant deficit reduction must therefore involve cuts to the most politically sensitive areas: defence and entitlements.

Given China’s emergence as a peer competitor — and one with a massive industrial-base advantage — cutting defence appears to be off the table. On the contrary, the ranking Republican on the Senate Armed Services Committee, Roger Wicker, has proposed increasing defence spending to 5% of GDP, up from the current level of 3%. The reasons are clear: China built 21 submarines last year, while the United States struggled to build one; it will take up to seven years to replenish certain munitions stocks used in Ukraine, and analysts estimate that the United States would be out of some critical weapons within a week in any active conflict over Taiwan. One reason the US Navy has not been able to better protect Middle Eastern shipping lanes from recent Houthi attacks is a concern that the increased use of certain munitions there would compromise readiness for other potential conflicts.

Simply throwing more money at the Pentagon and incumbent defence contractors will not solve these problems: serious procurement reforms and broader industrial policy measures are necessary. And yet there is little doubt that America’s security situation is more perilous than it has been for generations. Legacy ideological commitments further complicate these issues. The most aggressive “deficit hawks” — such as Nikki Haley in the Republican Party or various centrist Democrats — also tend to be the most fervent supporters of interventions in Ukraine and elsewhere to uphold a “US-led liberal international order”. Although Haley and others typically prefer to imagine that foreign policy and economic policy are distinct domains, their interventionist commitments nevertheless preclude any significant cuts to defence spending.

That leaves Social Security and Medicare. Cutting Social Security is so politically toxic that Trump has completely distanced himself from the proposals of George W. Bush and Paul Ryan, once hallmarks of conservative economic policy. Republican congressional leadership also notably refused to endorse entitlement cuts in the last midterm elections. Even if Social Security cuts were politically viable, however, there has been little serious effort to think through the effects.

Significant cuts would mean workers would have to defer their own consumption, either to save more for their own retirement or to keep their elderly parents out of poverty, creating a drag on growth and complicating deficit reduction efforts. Although Social Security is structured as social insurance rather than welfare, the benefit formulas are somewhat redistributive, so major cuts would probably result in a further shift of wealth from lower-income people, with a high propensity to spend, to affluent savers, with a lower propensity to spend.

In the past, advocates of “privatising” Social Security sometimes argued that allowing individuals to manage their own retirement savings would enable higher returns and boost growth. But the Social Security programme functions less as a professionally managed pool of capital, like the public pension funds common in many other countries or in US states, and more like debt-funded consumption stimulus. Eliminating Social Security, therefore, is not simply a matter of distributing a pool of assets to individual accounts. Furthermore, if the goal were simply to maximise returns, the Social Security “trust funds” could be authorised to make public and private investments beyond US Treasury securities. But the same small-government ideology that calls for cutting Social Security also resists giving the government the authority to make such investments, which could distort “market signals”. Devolving all responsibility to individuals, on the other hand, would magnify the impact of market volatility for each household and likely require further increasing savings. At the same time, the government would probably still be called upon to bail out retirees — whether they saved prudently or not — during major stock market crashes.

A more practical approach might aim to maximise the value derived from the existing programme rather than cutting it. Senator Vance was roundly criticised for saying that more should be done to enlist grandparents to assist with childcare. Yet there are a number of serious proposals to use Social Security to incentivise childcare or otherwise better support the sharing of resources within extended families.

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.

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.

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.

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Julius Krein is the editor of American Affairs

JuliusKrein