The coming industrial policy hangover

Can America beat China at its own game of top-down industrial policy planning? That seems to be the goal of two massive new spending bills in Congress. 

After lying dormant for roughly three decades, U.S. industrial policy is experiencing a major comeback. On Feb. 4, the House of Representatives passed the America COMPETES Act. The nearly 3,000-page measure went through largely along party lines and will now head to the Senate to be conferenced with the “U.S. Innovation and Competition Act,” a 2,600-page companion measure that passed last summer.

Don’t be distracted by extraneous provisions such as bans on the trading of shark fins and 70 pages on coral reef conservation. The real issue at hand is heavy-handed government economic meddling, premised on an apparently bipartisan belief that a country can simply spend its way to competitiveness and plan its way to prosperity.

The last big push for grandiose industrial policies came in the 1980s, when pundits and policymakers insisted that the United States was about to fall behind Japan in the race for global competitiveness. History turned out differently. America largely rejected technocratic planning, while the Japanese government eventually admitted that its industrial policy approach “was not the source of Japanese competitiveness but the cause of our failure.”

More recently, European industrial policies have attempted to spur “national champions” to rival America’s digital tech powerhouses. Those efforts have fizzled, too. Importantly, those U.S.-based computing and digital technology giants arose not through any central design, but instead through the rejection of old analog-era regulatory regimes. It was a policy culture of “permissionless innovation,” not industrial policy planning, that gave America a leg up in global tech markets.

But the rise of China has now become a catch-all excuse for passing some of the most audacious and expensive economic planning measures America has ever undertaken. China’s modern economic development is primarily a result of the catch-up growth it enjoyed after it allowed greater market exchange domestically and then opened itself up to global trade. More recently, however, strong-armed industrial steering efforts are becoming the norm in China, and the Chinese Communist Party (CCP) is increasingly cracking down on many of the country’s leading innovators.

This isn’t a model America should be following. While no one in Congress is talking about nationalizing sectors, they are looking to spread subsidies to favored interests ($52 billion for semiconductors alone) and micromanage supply chains. Lawmakers loaded up the Senate measure with so much pork and favors for special interests that Sen. John N. Kennedy (R-La.) labelled the effort an “orgy of spending porn.”

In the rush to pass legislation, we’ve barely heard a peep about the $250-$350 billion price tag. This follows a massive splurge of recent government borrowing, which led to the U.S. national debt hitting another lamentable new record: $30 trillion. China already owns over $1 trillion of that debt, making one wonder if we’re really countering China by adopting a massive, new and unfunded industrial policy that they will end up financing indirectly.

What happens when the bill comes due? Many economists agree with the Congressional Budget Office’s conclusion that runaway debt raises “the risk of a fiscal crisis.” It certainly does, especially if China is holding a large portion of that debt.

That danger hasn’t stopped both parties from surrendering their first principles. Democrats typically decry crony capitalism while Republicans say they’re the party of limited government and spending restraint. When it comes to industrial policy, both quickly cast those principles aside. 

Not everything in the bills is misguided. Immigration is crucial to ensuring America’s competitive edge, and the House bill contains some good provisions to attract more foreign talent to our shores. Funding for “basic” research and development is also less controversial compared with targeted efforts that are bound to devolve into the proverbial picking of winners and losers, which so often haunts industrial policy. 

But the mega-measures before Congress don’t address a far more critical issue for America’s competitive standing in the world: the deteriorating quality of math and science education in our schools. Worse yet, there are onerous new regulations in the House measure, such as expansions of federal antitrust power and a sweeping new process to oversee outbound investments made by U.S. firms. 

Eventually, an industrial policy hangover will hit America, the same way it did the Japanese and the Europeans. Every dollar government spends on risky bets represents a dollar that could have been invested differently, and likely better, by private investors and innovators. America’s greatest innovations weren’t the product of technocratic central planning but bottom-up innovation and free-market ingenuity. We must not forget that.

Adam Thierer is a senior research fellow at the Mercatus Center at George Mason University and author of “Evasive Entrepreneurs and the Future of Governance.”