Industrial Policy: Path to U.S. Competitiveness or Pitfall?

Industrial policy refers to an organized set of government policies intended to achieve specific economic goals, from reducing unemployment to boosting production within a certain sector. There is strong bipartisan interest in expanding U.S. industrial policy, which could have a major impact on U.S. competitiveness in the years to come—especially as other countries pledge significant government support for nascent industries and technologies.

The following highlights recent U.S. industrial policy efforts, as well as the opportunities and challenges ahead for lawmakers.

Why Policymakers Are Interested in Industrial Policy

U.S. policymakers are working across the aisle with a renewed interest in industrial policy for several reasons, among them:

1. Supply Chain Independence: The COVID-19 pandemic exacerbated already existing supply chain issues, leaving key industries vulnerable to interruptions in economic activity and shortages. Policymakers want to spur U.S. supply chain independence and market competitiveness to protect against future crises.
2. National Security: With the rise of China and its plan to lead the world in emerging technologies, some policymakers see it as imperative for the U.S. to intervene in markets to improve national security outcomes.

These driving factors have led to numerous legislative proposals over the past several years, some of which have made it all the way to the president’s desk for his signature.

Recent U.S. Industrial Policy Efforts

The bipartisan CHIPS and Science Act (CHIPS), signed into law in August 2022, is a prominent recent example of the bipartisan effort underway to expand U.S. industrial policy. The legislation provided nearly $80 billion for American semiconductor production through grants and tax incentives for domestic manufacturing.

Democrats in Congress also prioritized industrial policy in the Inflation Reduction Act of 2022 (IRA), providing “bonus” energy tax credits for firms that meet domestic content and labor policy goals. Meanwhile, Senate Majority Leader Chuck Schumer (D-NY) is leading a working group on artificial intelligence (AI) to ensure the U.S. is a leader in AI innovation. And an increasing number of policymakers and stakeholders, including some on the political right, have expressed an interest in increasing America’s involvement and investments in other areas of industrial policy.

Opportunities in Industrial Policy

There are several goals policymakers seek to accomplish under the industrial policy umbrella and many ways to measure success. These include, but are not limited to:

• GDP growth;
• supply chain resilience;
• technological innovation;
• development of high-quality products and services;
• creation of high-paying American jobs, and;
• furtherance of U.S. foreign policy goals.

If U.S. industrial policy is to be successful, policymakers must establish goals that are:

• targeted;
• implementable;
• realistic;
• consistent, and;
• measurable.

With so many goals included in expansive laws like CHIPS and the IRA—from creating U.S. jobs and countering China to strengthening national security and mitigating climate change—the impact and metrics of the individual policies can easily become murky or, even worse, contradict one another.

Drawbacks of Industrial Policy

While industrial policy offers opportunities for the U.S. to invest in 21^st century innovations and growth, there are many potholes to avoid. Shantayanan Devarajan at Brookings, economist Noah Smith, and Scott Lincicome at Cato—experts who share different views on the merits and drawbacks of industrial policy—all point to the fact that no set of industrial policies can resolve all market failures or distortions: fiscal, monetary, regulatory, or economic. Devarajan and Lincicome also cite risks of political capture—where favored industries or firms lobby successfully to capture industrial policy dollars that could more efficiently be spent elsewhere.

Additional drawbacks policymakers face when engaging in industrial policy, using passage and implementation of CHIPS as an example, include:

• Layers of Goals: There has been a lot of attention surrounding child care regulations attached to grant funding, the impact of which may be hard to quantify.
• Economic Inefficiency: The CHIPS 25% tax credit applies toward investments in semiconductor production independent of any involvement with certain foreign nations, including China. This may help incentivize domestic investment in semiconductor supply chains, but also adds complexity to the tax code and distorts business investment decisions.
• Deficit Increases: CHIPS is projected to increase deficits by around $80 billion. Adding to our national debt could negatively impact American competitiveness at the same time as industrial policies seek to positively impact competitiveness.

Measuring Success

With these opportunities and drawbacks in mind, it is critical that policymakers also carefully measure the success of these policies. Some quantifiable measures of industrial policy success include: 

• increase in output, wages, and productivity in the targeted industries (the semiconductor industry for CHIPS);
• increase in proportion of goods consumed in the U.S. that are from U.S. manufacturers (this could include semiconductors under CHIPS and the end-user products that semiconductors help create like phones and vehicles);
• increase in proportion of goods consumed abroad that are from U.S. manufacturers (similar to above for CHIPS);
• increase in share of a particular global industry or product captured by U.S. firms (under CHIPS, this could also be pegged to a historical average or an earlier, higher share for the semiconductor industry that policymakers would like to see the U.S. reach); and
• offsetting decreases in output, wages, productivity, exports, imports, and/or market share in non-targeted industries, reflecting distortions industrial policy can pose on the economy.

The Path Forward

Industrial policy is a tool that can be used to reduce the cost of capital for investments deemed in the national interest, creating jobs and incentivizing onshoring. However, industrial policy can also distort businesses’ investment decisions, preventing them from allocating capital in a way that’s most efficient for the economy. Measuring success can be further complicated when the same policy is used to address multiple goals. Policymakers must balance these considerations, create quantifiable benchmarks, and ensure industrial policy is narrowly targeted.