Issue 01 - July 9, 2019
“If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”
— Andy Grove, 1936 - 2016
The late Andy Grove, co-founder of Intel, pioneered the modern semiconductor industry. Yet despite his enormous contributions, he had deep misgivings about the type of economy he helped to create.
Between globalization and the rise of information technology, Grove observed America’s “industrial commons” being hollowed out. Well-paying manufacturing jobs were lost to offshoring, while the wage premium for lucrative “knowledge work” soared. As he wrote in 2010, "What kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?”
Grove thus called on policymakers to pursue “job-centric” policy, by which he meant strategies to scale high quality employment opportunities in the United States. More recently, Dani Rodrik and Charles Sabel have called for “building a good jobs economy” based on similar concerns.
The Niskanen Center’s Struggling Regions Initiative is animated by these same ideas. Since our launch three months ago, we’ve made the case for “good jobs” industrial policy in the New York Times, The Hill, The Bulwark, and The American Conservative, and earned great coverage from the Washington Post and the Washington Free Beacon. The flood of emails I’ve received from fellow travellers has reinforced my view that D.C. is starved for creative thinking on economic development policy—for alternatives to both myopic trade wars and a deny-the-problem approach that gets trade warriors elected in the first place.
Through this newsletter, we plan to highlight the best and most thought provoking writing on industrial policy, including our own. But as this is our inaugural email, first, a definition.
What is Industrial Policy?
What is industrial policy? One definition, mentioned above, is a “good jobs” policy. As Rodrik and Sabel argue, “good jobs”—stable jobs with decent pay and which don’t require oodles of education—are a source of a positive externality:
Bad jobs lead to lagging communities with poor social outcomes (health, education, crime) and social and political strife (populist backlash, democratic malfunction). A private employer fails to take these costs into account, unless prompted to do by the state.
Timothy Meyer and Ganesh Sitaraman provide another definition in the title of a recent American Affairs essay: “It’s Economic Strategy, Stupid.” Industrial policy isn’t Soviet-style central planning, but it’s also not pure laissez faire. Instead, it’s about having a deliberate strategy for overcoming the substantial coordination and information failures that prevent an economy from reaching its full potential.
Another definition comes from the title of an essay by writer Dan Wang: "How Technology Grows." Wang roots his understanding of industrial policy in the nature of knowledge. Some knowledge is explicit, the sort of thing you can Google. But the most valuable knowledge is often tacit, embedded in the “know-how” of an experienced workforce. Wang calls this “process knowledge:”
When firms and factories go away, the accumulated process knowledge disappears too. Industrial experience, scaling expertise, and all the things that come with learning-by-doing would decay. I visited Germany earlier this year to talk to people in industry. One point Germans kept bringing up was that the US has de-industrialized itself and scattered its production networks. While Germany responded to globalization by moving up the value chain, the US manufacturing base mostly responded by abandoning production.
These three definitions of industrial policy—good jobs, strategic coordination, and the accumulation of process knowledge—point to a synthesis. Industrial policy refers to coordinated, strategic investments designed to upgrade our workforce, preserve process knowledge, and expand our productive capacity.
Andy Grove understood the role of industrial policy behind America’s dominance in semiconductors and ICT, but grew worried that this heritage was being forgotten. Today, “industrial policy” is a four-letter word, and what little of it we do goes to intangible sectors like finance, services of dubious productivity like health care, or large incumbents like Boeing and the Walt Disney corporation.
The conventional wisdom, meanwhile, says America is done developing, and thus the value of industrial policy has run its course. This forgets that the U.S. was also at the technological frontier when federal investments spawned everything from modern machine tooling to GPS. Rather than take that frontier as a given, we defined a new frontier, and moved the economy to a higher equilibrium. In an era of wage stagnation and labor market polarization, we must reject de-industrialization as inevitable, and rediscover the definite optimism required to create the industries of the future.
— Samuel Hammond
Director Poverty and Welfare Policy