What is the role of government in promoting the strength of its economy? Every country has wrestled with this question. This issue traces back even to the early founding of the United States. Alexander Hamilton and the Federalists battled Thomas Jefferson and the Democrats (a different party than from today) over this question—one data point in the long history of countries imposing tariffs to protect domestic industries. A good deal of debate in our early years as a country involved building infrastructure to promote economic growth. Governments, after all, can create instruments and organizations to loan money to businesses to subsidize commercial activity. The United States has had its history of industrial policy, long before that label was ever used.
In modern times, the term industrial policy became a partisan debating point. President Jimmy Carter, facing a stagnant economy, formally launched an official U.S. industrial policy in August 1980, just months before he was defeated by Ronald Reagan. President Reagan wasted no time in repudiating it in the early months of his presidency. And thus, the term “industrial policy” was thrust into the vortex of partisan politics. For Republicans, it has become a tribal totem to condemn industrial policy. Democrats have not found a way to make it attractive as a political slogan. It remains stuck in a conceptual limbo, with psalms of condemnation chanted almost immediately when the term is uttered.
The concept of a national strategy to guide the economy has become far more topical during the past two years as policymakers and Americans generally awaken to the enormous competition that lies ahead with China. In 2015, the Chinese government (through Premier Li Keqiang) issued a now-famous master plan called “Made in China 2025.” The Chinese government announced its goal to transform itself from the world’s producer of low-cost inputs and low-quality products to become the global master of the most advanced technologies. The race is on. China now has a strategy, and the United States does not.
So, what is the role that the government plays in the economy? In the United States, we have a long-held and widely accepted view that the role of government is to establish the rules and institutions of fairness. The government is to be the umpire, not the team coach or the quarterback.
We Americans have long believed the federal government is responsible for maintaining fair and transparent markets. It has a responsibility to manage a stable currency and a responsible federal budget. (We are clearly failing there.) It is responsible for establishing a system of widely accepted standards, weights, and measures so that any lightbulb can screw into any socket, no matter who produces either product. The government is responsible for establishing a legal framework to protect private property, and that includes intellectual property. The government actively regulates such things as the electromagnetic spectrum to ensure that a new radio station does not electronically interfere with a competing station.
We leave it to the private sector to decide what products to produce and at what price. Consumers (in a fair market) are able to judge best value and we leave it to them to pick winners and losers.
But the United States has also felt that at times the government should make major investments in either physical or intellectual infrastructure, making it available broadly to citizens and to industry.
President Abraham Lincoln championed the Pacific Railway Act of 1862, massively subsidizing the first transcontinental railroad linking the East and West Coasts. Lincoln was also the great champion of the Morrill Act of 1862 that used the proceeds of federal land sales to support the building of universities throughout the states. At times, the government acted dramatically to jumpstart economic development in a region, such as with the Tennessee Valley Authority, a federally owned corporation managing electricity generation in the wider Tennessee River region. In modern times, the Department of Defense invested over $36 billion to launch a network of satellites to provide precise navigation and location services. GPS may have been intended for military use, but it now is the unseen backbone for every bank transaction, every time you use a credit card at a gasoline station to fill your tank, every time a pizza delivery guy looks for the right house. And even more recently, the federal government made massive investments to map and sequence the human genome, which now is the foundation for the miraculous development of Covid-19 vaccines in only one year.
We might not call it “industrial policy,” but the federal government has regularly made major investments in the development of knowledge infrastructure that becomes the foundation of the next generation of technology breakthroughs and future prosperity.
The Trump administration was instrumental in creating structural programs and incentives to advance quantum technologies, artificial intelligence, robotics, and more. The Biden administration has promised equal enthusiasm for building programs to promote innovation.
Our politics does not let us call this “industrial policy.” Fine. But we surely should have a “strategic innovation strategy.” China has one and is marching smartly to implement it. We are stumbling around with dozens of initiatives. All of them are important, but we lack that transcending vision to direct our collective industries.
The good news here is that this is an agenda widely shared by both Democrats and Republicans. There is authentic bipartisan support for building the foundations of innovation for our future prosperity. We are going to need it. Our massive deficits today are digging a hole for future generations. The most effective way out of that hole is to boost aggressively the productivity of our economy and to transform our workforce to be competitive in the newest industries. The bad news is that we are behind in the great race with China. The good news is that we are now awake to the challenge, and the two parties are pulling together on the oars moving the board forward, and not beating each other over the head with their paddles.
CSIS has just launched a major program we call “Renewing American Innovation.” The simple mission statement for the U.S. government is to “survive as a nation and to prosper as a people.” This is the purpose of our new program.
John J. Hamre is CEO and president of the Center for Strategic and International Studies in Washington, D.C.
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