The policy has jumpstarted American manufacturing
America’s foray into industrial policy appears to be bearing fruit. Over the weekend the Financial Times reported that the commitments to investing in American manufacturing doubled after the Biden administration announced subsidies last year. The paper went on to detail that companies have committed more than $200bn to manufacturing projects since the policy was announced.
This number needs some context. Bureau of Economic Analysis (BEA) data shows that investment in manufacturing fixed assets increased by an average of around $226bn between 2018 and 2021. In a good year this increase was around $415bn; in a bad year it was roughly $143bn. We will have to wait until the release of further data to see if the impact is as large as the FT reports, as the $200bn of investment that it cites does not lie outside recent historical norms.
That said, there is every reason to think that Biden’s industrial policy is working. If investors are offered large government subsidies to invest in a project, they will usually take them. The Inflation Reduction Act (IRA) includes $369bn of tax credits for clean energy technologies, $39bn in funds to stimulate semiconductor manufacturing and $24bn of more general manufacturing tax credits.
The distribution of the funds is, however, somewhat influenced by ideology. Most of the package goes to clean energy technology when it is obvious that, for instance, semiconductors are far more strategically important for the American economy. This represents the massive influence of lobbying in general in Washington, and the efforts of green lobbying in particular.
Gone are the days when the green lobby consisted of Greenpeace and a few other non-profits. Today, environmental lobbying is big business inside the Beltway. This could well cause issues down the road: many of these companies may turn out nonviable, as the Obama administration realised to its chagrin when the solar panel company Solyndra filed for bankruptcy two years after the White House awarded it $535m in loans. This quickly became a political football, with opponents of industrial policy using it as evidence of the bankruptcy of such an approach.
The relatively low amount of money allocated to the strategically important semiconductor industry is also the result of lobbying, as Julius Krein has written about in detail. Even those of us who are enthusiastic about industrial policy must take these political difficulties seriously: the lobbying in D.C. does make a coherent and game-changing industrial policy extremely challenging. Still, recent reports showing over $200bn in new investment demonstrate that the mechanism works perfectly well.
Britain, too, could benefit from a similar policy. The country currently makes some of the most advanced aircraft engines in the world at its Rolls Royce factory in Bristol. Yet, since the disappearance of Rover cars in 2005, the UK has not produced a large range of entry level vehicles for British consumers. Brexit gives Britain the chance to pursue these sorts of policies once again.
The reality is that the world is changing rapidly. The American reaction has been, in part, to pull up the drawbridges and engage in trade war with China. This is a futile effort. It is far more productive to try to rebuild American and British manufacturing capacity through industrial policy, a strategy that might actually work. Yet, even if we support these projects, we should take the criticisms of subsidy politicisation seriously. If badly allocated, these subsidies could discredit the policy completely.