Joe Biden’s subsidies are working — and Britain should take note
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.
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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.
Ugh. Large-scale subsidies are not the answer – they never are. I’m not even opposed to one-off subsidies used in specific situations. And green subsidies are even worse because you have nations across the world splashing money around to chase a limited number of solar panel manufacturers. Canada is going down this rabbit hole already, to compete with the US. It’s all going to end in failure.
I don’t even know where to begin critiquing this. The author gives Biden credit for boosting manufacturing then immediately undermines his own assertion by stating, accurately, that the manufacturing increases date back to 2018, when he who shall not be named was still in the White House. . He also mentions how much of the investment was in ideologically motivated ‘green’ energy technologies. He does a far better job of critiquing his own assertions than he does making them in the first place. Finally, The American trade war with China was never about economics, never mind that the Chinese have been using subsidies and other forms of economic warfare to tilt the board in their favor for decades. It was about leveraging economics for geopolitical reasons, and protecting vital interests from a hostile regime. It can’t be judged on purely economic grounds. He also complains about not investing more in semiconductors and doesn’t mention the CHIPS act, which is one of Biden’s few legislative victories and directly addressed this issue. Overall, this is very sloppily written, IMHO.
How can you claim that a policy is “working” if you have not first defined what “working” means ? Which Mr. Pilkington has not here.
Sloppy work. But sadly typical from him.
It seems highly unlikely that the sucess of a policy which is only just starting and involves long term investments can be meaningfully measured over such a short term.
Unless “success” is based on *measuring inputs* (i.e. the amount of money spent). Rather than outputs. In the absence of any rigour from the author, we can only assume that is what he is doing here.
Beyond these obvious points, it’s reasonable to ask just why the US pursued its intensive outsourcing of manufacturing policy for so long. Hard not to conclude that this was cheaper and that changing is going to be inflationary.
Rank political posturing. This is the same hyperbole that says Clintons off-shoring “worked”.
$369bn of tax credits for clean energy technologies
Can we please just say what they are? If it’s just more cash for Wind and Solar, then that’s what the news should be. The jury is surely still out on whether they are “clean” when externalities are taken in.
Here is what the article leaves out, this has nothing to do with jobs, environmental policy or consumer goods. It is completely related to bringing back and propping critical defense areas of America’s industrial base.
Green technologies are “nice to have”. Semiconductors are essential as are chemicals, minerals and drugs – all of those essentials are captured by China. The investments need to be in finding ways to make chemicals, produce minerals and process drugs without huge environmental costs. We need technology improvements and innovations in those areas. If that gets under the green banner than we have a chance. Even better if the innovations can be adopted by others at scale.
The Renaissance and The Industrial Revolution in Britain occurred because people were able to become educated, think freely, act and keep the benefits of their hard work. If one looks at the education provided in N Italy and the grammar, public schools, grammar schools and Dissenting Academies of Britain, peoples maths and craft skills were probably superior than most of those leaving inner city schools today. Engineering is matter of reason and empircism not faith and theories. When maths is criticised as a western construct what hope if there for engineering?
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