While debates over the merits of industrial policy continue to rage in the West, US President Joe Biden’s administration hasn’t waited to pick a side. Since 2021, the United States has introduced bold policies to support critical sectors, accelerate innovation, and strengthen the economy’s productive capacity – including by imposing tariffs aimed at protecting domestic industry from Chinese competition.

According to the ZOE Institute’s Jakob Hafele, the European Union must urgently follow suit. While the EU’s “economic powerhouse countries” are propping up their traditional industrial bases and investing in new clean industries, “weaker regions’ economic potential remains largely untapped,” resulting in “major inefficiencies.” Only by introducing a unified industrial policy at the EU level, based on “targeted, progress-dependent support for high-potential locales,” can the EU achieve a “prosperous, sustainable future.”

To those who oppose the use of industrial policy, Harvard’s Célestin Monga responds, what looks like a controversy is “largely a matter of semantics.” Virtually all economic policy aims to “improve the economy’s structure or to achieve a social goal” and requires “the use of instruments that will directly or indirectly favor some industries, sectors, or firms.” The real question, then, is not whether to use industrial policy, but “how to do so transparently and well.”

According to Columbia Business School’s Tano Santos and the University of Chicago’s Luigi Zingales, the key is to avoid supporting “industries with no viable path to profitability” – the hallmark of the failed Western industrial policies of the past – and instead to pursue a “knowledge policy.” Since “[n]ot every country can realistically aspire to be a technological frontier,” policymakers should “focus less on creation of knowledge than on its diffusion,” including from abroad.

For his part, Harvard’s Dani Rodrik advocates “industrial policies for services” as the basis of a “credible program of creating good, productive jobs throughout the economy.” Such a program is essential to enable the “new left that is emerging in Europe and the US” to “confront head-on both the new structure of the economy and the productivity imperative,” thereby establishing itself as a “credible alternative against today’s populist far right.”

James K. Galbraith of the University of Texas at Austin, however, thinks that the progressive and center-left economists who are now touting industrial policy as a means of addressing “the public’s anger after four decades of neoliberalism” have taken a wrong turn and are overlooking the “real problem.” Policies aimed at boosting “innovation to create wealth ‘for the many’ and to deal with climate change” will make little difference, he argues, if we remain “unwilling to confront the banks, the military contractors, or the tech tycoons who now run the West.”

BERLIN – Now that the quinquennial electoral tussle for seats in the European Parliament is over, European politicians must shift quickly from competing againstone another to helping Europe compete globally. Even though Europe desperately needs to strengthen its collective industrial might, internal divisions and rivalries have long stood in the way. Now, the newly agreed intergovernmental priority list confirms this as a core theme for the European Union in the years ahead.

Although European Commission President Ursula von der Leyen has been nominated by heads of state for another term (subject to the approval of the newly elected Parliament), her record on industrial policy is lackluster. To boost Europe’s industrial competitiveness under a renewed mandate, she will need to appeal across national borders and political boundaries.

As matters stand, major industries that are critical to the green transition are dominated by China, which has increased its exports of electric vehicles by 70% since 2022 and now produces 86% of all solar photovoltaics. But the rules of the game are changing fast. US President Joe Biden recently imposed 100% tariffs on Chinese EVs, and his historic Inflation Reduction Act will allocate up to $1 trillion of investment in domestic clean-energy production by 2032.

Meanwhile, the EU’s response has been slow and timid. The Net-Zero Industry Act was a good first step; but because it lacks the ambition and the resources of its US and Chinese equivalents, it leaves the EU at risk of falling behind in key sectors. New tariffs on Chinese EVs were the EU’s only real option in the current geopolitical climate. But singular protective measures like these won’t be enough to secure long-term competitiveness.

A fundamental part of the problem is that Europe is running at two speeds. While its economic powerhouse countries simultaneously prop up their traditional industrial bases and invest in new clean industries, weaker regions’ economic potential remains largely untapped. This applies to whole countries and also to regions within member states.

This geographic distribution of industries is based not on economic potential but on member states’ fiscal firepower. Between March 2022 and June 2023, Germany and France accounted for a staggering three-quarters of state aid granted in the EU, while many other countries struggled to offer any industrial support at all. As a result, companies are concentrated in areas that are already well off, rather than in those that make the most strategic sense.

This results in major inefficiencies. Consider, for example, that 60% of Europe’s solar-energy supply comes from less sunny northern countries – with the highest photovoltaic capacity being in Germany. Establishing green production facilities in areas with the highest economic potential not only would boost Europe’s overall competitiveness; it also would bring jobs and investment to regions in dire need of economic revitalization.

In the case of European steel, for example, the most energy-intensive parts of the regional value chain could be relocated to places with the cheapest energy, thus reducing prices. The European steel industry and all industries downstream from it would become more cost-competitive, and economically weaker and stagnating regions would benefit from modernization, jobs, and new investments. With a coordinated approach to identifying and capitalizing on regional advantages in renewable-energy capacities, workforce availability and skills, and other cost factors, sectors essential for the transition could become more competitive.

Moreover, some of the unique strengths of regions within the EU remain under-used. The success of “heat-pump valley” in Poland, Slovakia, and the Czech Republic is a good example of what regional innovation and production hubs can achieve. But seizing this opportunity requires politicians and policymakers to see the value of a unified European approach. Given the scale of the US and Chinese industries, no individual member state can hope to succeed alone in today’s fast-changing international industrial landscape.

Although green industries are expected to dominate markets in the future, much of the needed technology does not yet allow investors to break even. Approximately 60% of the investment needed to make the EU carbon-neutral by 2050 lacks a short-term business case. State support will be needed to fill this gap until these technologies are mature enough to compete on their own; and governments also must ensure that European companies can avail themselves of adequate infrastructure and qualified labor.

The success of the €723 billion ($780 billion) post-pandemic Recovery and Resilience Facility shows that the EU is able to provide such targeted financial assistance. EU-level funding dedicated to supporting industries in strategically selected regions can help those economies eventually thrive without state aid. And by making subsidies “progress-dependent” (according to various social and environmental benchmarks), ineffective spending can be minimized, and improved competitiveness can be almost guaranteed.

In fact, targeted, progress-dependent support for high-potential locales can be the basis of a unified industrial policy at the EU-level. A pan-European strategy can enhance economic cohesion, bring “future-fit” jobs to left-behind regions, and break inefficient path dependencies. Moreover, the current industrial centers would also gain from this approach, because relocating some production to cost-efficient regions would reduce their own input costs.

With a shift in mindset that sets aside internal rivalries and focuses on harnessing Europe’s untapped potential, EU policymakers can give European industry what it needs to power the continent toward a prosperous, sustainable future.

CAMBRIDGE – After being disparaged and disdained for decades, industrial policy is back on the global economic agenda. Perhaps the strongest evidence of industrial policy’s rehabilitation is a recent international conference on rethinking structural transformation, cosponsored by the International Monetary Fund and attended by some of the world’s most influential economists.

Industrial policy is back in vogue for many reasons, including fears of deglobalization, the emergence of a multipolar world, supply-chain disruptions, the return of economic nationalism, and trade tensions (most notably between the United States and China, but also among Western countries). Governments in the United Kingdom, the United States, France, Vietnam, Brazil, and South Africa have all issued industrial-policy blueprints.

But despite renewed global interest in industrial policy, intellectual and policy elites remain confused about its precise meaning, its specific instruments, and how it differs from other economic policies. This is true of economists who advocate it, as well as those who disparage it.

In a famous 1791 report, the first US secretary of the Treasury, Alexander Hamilton, framed industrial policy as government measures to boost manufacturing and so-called “productive” sectors. That definition has evolved and expanded over the past two centuries to reflect economic transformations and the need to think beyond manufacturing.

The term now encompasses all government interventions – from subsidies and tax incentives to public procurement and the design of intellectual-property protection – “that explicitly target the transformation of the structure of economic activity in pursuit of some public goal.” By that measure, industrial policies are those that are designated as selective and intentional. But these labels remain random, and the focus on policymakers’ stated intentions is risky: would anyone use public proclamations by politicians to measure democratic governments’ policies?

Recent IMF research has gone a step further, distinguishing between “vertical” industrial policy favoring specific sectors – putatively a source of market distortions, state capture, and rent-seeking opportunities – and “horizontal” economic policy focused on improving the business environment for all industries and firms. The horizontal approach is deemed fair, and even desirable.

But this new conventional wisdom reflects a misleading consensus on the proper scope of government intervention. Perhaps more importantly, the distinction between industrial and economic policy is fundamentally false. Drawing a line between “good” (“horizontal” and “neutral”) and “bad” (“vertical” and “targeted”) government intervention may be politically attractive, but does not hold water either conceptually or in practice.

Almost all items in a national budget could be classified as industrial policy because they implicitly or explicitly favor particular places, sectors, or businesses. The decision to build any type of productive infrastructure in a specific location always provides (unfair) advantages to certain regions or firms.

Moreover, the macro-financial policies often presented as the antithesis of industrial policy are, in fact, not wholly neutral. For example, exchange-rate measures favor some sectors and industries more than others. Likewise, financial-sector regulation, often portrayed as the most “neutral” and “horizontal” government policy, shapes an economy’s sectoral allocation.

The benefits that accrue to some industries and firms are not always obvious. The US banking sector is a case in point: the Federal Reserve (a branch of the government) lends money to banks at an interest rate of 1%, which the banks then use to buy Treasury bills (from the same government) yielding roughly 4%. This represents about $30 billion in subsidies per year, more than any developing country would ever grant to one industry.

Social safety nets to mitigate poverty and progressive income taxes to reduce inequality also affect the economic structure, because they imply winners and losers, often in specific geographic areas or social groups. The World Bank’s public-expenditure reviews and benefit-incidence analyses often capture important distributional issues regarding who benefits from this type of spending.

On a more fundamental level, policies always have indirect effects. For example, in countries with limited fiscal space, well-meaning social programs presented as neutral cross-cutting projects – not intended to favor particular industries or regions – can still change the economy’s structure if they cause public-debt levels to rise and pose risks to financial stability, which would disproportionately harm certain sectors and groups.

Given this, it is delusional to think that the effects of “vertical” industrial policy can be detached from those of broad macroeconomic or regulatory policies and studied in isolation. Both types of policies always have economy-wide repercussions, whether direct and observable effects on other sectors or industries, or indirect opportunity costs for various economic agents.

Attempts to disentangle these outcomes will almost always result in noise, not signal. Empirical studies using tariffs and quotas to assess the effectiveness of industrial policy in any given country often fail to consider that such measures help generate additional fiscal revenue and achieve terms-of-trade gains, in addition to protecting non-competitive or infant domestic industries.

Almost all economic policy aims to improve the economy’s structure or to achieve a social goal, and requires the use of instruments that will directly or indirectly favor some industries, sectors, or firms. The controversy over industrial policy is largely a matter of semantics: governments implement these banal strategies of economic transformation on a daily basis.

Just as Monsieur Jourdain in Molière’s The Bourgeois Gentleman discovers that he has been speaking prose all his life without realizing it, economists should finally acknowledge that almost all economic policy is, in fact, industrial policy. The question, then, is not whether to use it, but rather how to do so transparently and well.

TURIN – Industrial policy is back in vogue. After decades of eschewing the use of market-shaping policy tools like tariffs and subsidies, many Western governments have embraced them, spurred by the COVID-19 pandemic, which exposed vulnerabilities in global supply chains, and by broader fears about Chinese technological and commercial dominance, which could cost the West countless well-paying jobs. If these efforts are to succeed, however, an emphasis on knowledge is crucial.

Industrial policy has a poor track record in the West. When postwar governments tried it, they usually failed to achieve their goals, because they supported industries with no viable path to profitability. By the 1970s and 1980s, they abandoned industrial policy altogether. But if we view industrial policy as knowledge policy, its comeback can succeed.

An effective knowledge policy would focus less on creation of knowledge than on its diffusion. While innovation is clearly valuable, it is also expensive and challenging, requiring a particular combination of conditions that is often difficult to ensure. Not every country can realistically aspire to be a technological frontier. But a country does not have to produce cutting-edge innovations of its own to be able to reap the benefits (including higher productive capacity, greater wealth, and stronger military capabilities) of new processes, methods, and ideas produced elsewhere.

Knowledge diffusion – which depends on both access to knowledge and the ability to absorb it – is the key to a prosperous society. The German and Japanese economies recovered rapidly after World War II largely because, while their physical infrastructure was in ruins, their stock of knowledge was intact. Both countries had a cohort of engineers, doctors, scientists, and managers capable of absorbing, spreading, applying, and building upon the advanced knowledge brought by occupying American forces.

Recognizing the value of such knowledge transfers, one might ask why the state needs to get involved. The answer is that knowledge diffusion is the quintessential externality. When an individual or a firm invests in knowledge, it typically captures only a fraction of the returns: knowledge acquisition often brings far higher social returns than private gains. This explains why the state has long supported and incentivized knowledge production, such as by creating a patent system and strengthening education.

An effective knowledge policy must include both domestic and international components. On the domestic front, it requires a targeted education policy, subsidies encouraging local actors to import knowledge, and a flexible intellectual property (IP) framework, which strikes the right balance between motivating innovation and encouraging its diffusion. Countries that are far from the technological frontier are better off with lax IP regimes, such as the one that enabled India to build a thriving pharmaceutical industry. (Membership in the World Trade Organization has since driven India to adhere to stricter rules.)

In a geopolitically fragmented world, such domestic measures must be complemented by free-trade zones to facilitate knowledge-sharing among partner countries. These zones would allow for specialization in some areas, but not in all. Economists’ obsession with comparative advantage notwithstanding, this is not necessarily a bad thing. After all, a country at the technological frontier – or close enough that it can continue to absorb new knowledge – is likely to be a more productive and prosperous economic partner.

When it comes to importing technology, countries should erect barriers only in sectors where catch-up is both achievable and desirable (the same sectors where direct subsidies might also be justified). In this sense, the United States and the European Union have much better reason to invest in strengthening their domestic semiconductor industries than India, which is so far behind in this area that any resources spent on catching up are probably wasted. But even the US risks failing to achieve its semiconductor ambitions, unless it also implements an education policy that encourages the study of engineering. Taiwan leads the world in semiconductor production thanks not only to its vast knowhow, but also to its appropriately educated workforce.

But even for an economy with the right capabilities, if too many of its peers are trying to catch up in the same area, the costs of the strategy will rise, and the probability of success will drop. This brings us to another reason why free-trade zones are useful: they can facilitate policy coordination, at least among allies. India would be far more willing to abandon its semiconductor ambitions if it knew it could rely on a steady supply from a trusted partner.

To be sure, that partner might make demands of its own – say, for India to strengthen its IP enforcement, which would be very costly. But, in today’s tense and divided world, such trade-offs are practically inevitable. A sensible knowledge policy must recognize the constraints under which allies operate.

Western governments are bringing back industrial policy at a particularly fraught moment. Strategic considerations cannot be ignored, as they were during the decades when globalization was progressing rapidly, and Pax Americana remained firmly in place. Instead, leaders must rise to the challenge and devise sophisticated industrial-military strategies – including knowledge policies – that account for a wide range of risks, objectives, and pressures.

CAMBRIDGE – Recent elections in France and the United Kingdom, together with America’s current presidential campaign, reflect the dilemmas left-leaning parties confront as they try to fashion new identities and present credible alternatives to the far right. It was the far right that first capitalized on the backlash to neoliberalism and hyper-globalization that grew in the aftermath of the 2008 global financial crisis. A decade ago, one could justifiably complain about the “abdication of the left.”

To their credit, leftist parties are in a better position today. The Labour Party in Britain has just won in a landslide, ending 14 years of Conservative rule. The left-wing New Popular Front (NFP) coalition in France has a far better chance to stop the rise of the far right than the centrist forces allied with President Emmanuel Macron. US President Joe Biden has taken his country into uncharted territory with new industrial and green policies, though he lags behind Donald Trump in the polls.

As the Democrats’ difficulties in the United States indicate, there is still considerable work to be done for the left. Biden’s age and evident failure to convince the public of his mental fitness is a big part of the problem. But so is the mixed message Democrats have been sending about what they really stand for and who they represent.

This is a problem that afflicts other parties of the left as well. As Thomas Piketty has shown, leftist parties have become unmoored from their traditional working-class base and veered toward the educated elite.

The left has yet to forge an identity that is fit for current realities. How should they reposition themselves? Should they focus on redistribution, as the NFP in France appears to have done? Should they uphold fiscal responsibility, like the UK’s Labour Party? Should they embrace industrial policies à la Biden, and to what purpose? How should they handle issues such as immigration, the environment, or transgender rights, on which the cultural elite hold very different views from the general public?

If the left is to regain political strength, it must return to its roots and once again represent the interests of working people. This means focusing squarely on good, secure, productive jobs for workers without a bachelor’s degree. The increase in economic insecurity, the erosion of the middle class, and the disappearance of good jobs in lagging regions were at the heart of the rise of right-wing populism. Only by reversing these trends can the left present a credible alternative.

The difficulty is that old strategies will not work. Unionized workers in manufacturing formed the core of support for leftist parties in the decades following World War II. They were also the foundation of the middle class.

Today manufacturing employs an ever-smaller share of workers in the US and Europe. The bulk of the workforce is in services. When Biden took office in January 2021, the manufacturing share of US employment had already shrunk to 8.5%. Today it is below 8.2%, despite all his administration’s efforts to revitalize manufacturing. Some European countries, such as Germany, have higher shares of manufacturing employment, but none has managed to avoid a decline over time.

Parties of the left have not yet fully faced this fact. None of their talk about reshoring, competitiveness, digitalization, and the green transition sounds realistic when it comes to jobs. Nor does protectionism against China. Strategies that focus on manufacturing have considerably less political appeal when most workers are not in manufacturing and have no realistic prospect of being employed there.

Redistributive policies also have problems. There is a strong argument for making tax systems more progressive and increasing tax rates on top income earners. Higher social transfers and better social insurance would help, especially in the US, where social safety nets remain weak. But income transfers do not compensate workers for the loss of dignity and social recognition that accompany the disappearance of good jobs. Nor do they repair the breakdown in social and community life that ensues when factories close or move elsewhere.

What the left needs, then, is a credible program of creating good, productive jobs throughout the economy – especially in lagging regions and for workers with less than a university education. The representative target of such a program is not an auto or steel worker, but a care or retail worker.

Moreover, labor-friendly innovation must be at the center of the program. Boosting wages and jobs at the same time requires organizational and technological innovations that enhance the productivity of less-educated workers. Unlike automation and other forms of labor-saving technologies, labor-friendly innovations help ordinary workers perform a greater range of more complicated tasks. Digital tools that confer expertise are an example.

Because innovation and productivity are central to this agenda, the requisite policies look like successful industrial policies of old. We could call them industrial policies for services or, better still, productive policies for labor. They build on existing local cross-sectoral partnerships and national innovation programs, but with a focus on labor-absorbing services and technologies that are complementary to less-educated labor. My colleagues and I have sketched variants of such programs for the US, France, and Britain.

A new left must confront head-on both the new structure of the economy and the productivity imperative. Only then will it turn into the genuine political movement of the future and a credible alternative to the far right.

SIRACUSA, ITALY – At a recent “summit” in Berlin, prominent center-left economists announced a “new consensus” on industrial policy. Their joint declaration was then published in full by the Columbia University economic historian Adam Tooze, who described it as “remarkable both for its capacious agreement on economic and industrial policy principles and the way they are embedded in a reading of the political and geopolitical risks of the moment.”

According to the Berlin declaration, those risks are of two types. There are “real risks” such as climate change, “unbearable inequalities,” and “major global conflicts.” And there are risks such as “dangerous populist policies” driven by “a widely shared experience of perceived loss of control … stemming from globalization and technological shifts.” This second category, we are told, follows from “decades of poorly managed globalization, overconfidence in the self-regulation of markets, and austerity [which] have hollowed out the ability of governments to respond to such crises effectively.”

The group has nine recommendations: to “reorient our policies” from upholding “economic efficiency above all” to focusing on “shared prosperity and secure quality jobs”; “develop industrial policies ... supporting new industries and direct innovation toward wealth-creation for the many”; direct industrial policy away from subsidies and toward innovation; design a “healthier form of globalization”; address “income and wealth inequalities”; “redesign climate policies” around carbon pricing and infrastructure investment; support the climate transition in developing countries; avoid austerity “while investing in an effective innovative state”; and “reduce market power in highly concentrated markets.”

As I have written before, a consensus of economists – even well-meaning progressives – is a dangerous thing. Consensus, by its nature, is the enemy of consistency and logic. My friends have taken a half-step away from the previous neoliberal consensus, but it is only a half-step, and they aren’t all marching in the same direction.

It is true that ordinary people are angry. Having been brought up on the promise of a middle-class democracy underpinned by stable industrial jobs, many find themselves toiling as serfs in the gig economy. They are ruled by oligarchs, and condescended to by entitled urban professionals, with economists among the worst offenders.

How did this happen? It may be comforting to blame China (or Mexico, or Japan, or even South Korea), but the story properly starts with the breach between labor and anti-war liberals that occurred within the US Democratic Party in the 1970s. That set the stage for President Ronald Reagan and Federal Reserve Chair Paul Volcker’s destruction of US manufacturing and associated unions, followed by the rise of Big Finance and Big Tech in the Clinton era.

Then came further militarization under George W. Bush, which was intended to consolidate US global power and control over resources, notably oil. The US economy, with Europe as an adjunct, came to rest on banks, bombs, bases, and informatics. Netting out gains and losses, hardly a single new manufacturing job has been created in America for four decades.

To address the public’s anger, my friends call for innovation to create wealth “for the many” and to deal with climate change, while also reducing market concentration and power. But innovation is the reason that market power becomes concentrated in the first place. It’s always about increasing wealth for the innovator and his financiers, and about doing more with fewer people, at less cost. That is how our tech oligarchs – Bill Gates, Jeff Bezos, Mark Zuckerberg, Elon Musk, Peter Thiel, Larry Ellison – came to be. Otherwise, we would never have heard of them.

Of course, addressing climate change is a noble goal. But one must not ignore the inconvenient realities standing in the way. The first is the Jevons paradox: increased energy efficiency allows for new energy uses, and thus tends to increase energy consumption. Just look at how much electricity cryptocurrency mining and AI models consume. Second, big renewable energy projects require big mines (which devour energy), vast new infrastructure (ditto), and – to be profitable – low, stable capital costs that are inconsistent with high interest rates. There is a reason why yesterday’s hot projects are now being downsized or canceled.

A third, decisive problem is that there is no connection between climate investment and the well-being of the larger population today or even in the near future. Will utility bills, taxes, or interest rates fall as a result? No, they will not. Will new products hit the market because hefty tariffs have kept out goods already produced in China? Of course not. The only way to distribute the wealth benefits of innovation to “the many” is to socialize the entire process. You would need a “soviet of engineers,” as Thorstein Veblen once proposed – like the Manhattan Project or the space program.

But to do any such thing requires state capacity, and the Berlin summiteers acknowledge that this has been “hollowed out” over 40 years of neoliberal neglect and predation. Who will supervise the new industrial policy? With no one home in today’s government, tariffs and corporate subsidies are the tools at hand, and the US Commerce Department has hired consultants from Wall Street to identify who should receive them. Good luck making that work.

The sad reality is that today’s advocates of industrial policy are often the same people who first advanced the idea more than 40 years ago to try to rescue the Democrats in the face of Reaganomics. Back then, at least, it was plausible. Yet now, as in the past, they seem unwilling to confront the banks, the military contractors, or the tech tycoons who now run the West. They do not call for definancialization, disarmament, or (as John Maynard Keynes once did) the socialization of new investment. They seek to rebuild state capacity while leaving in place all the forces that destroyed it.

Meanwhile, vast new political forces are filling the vacuum left by neoliberal policies in America and Europe. Given the damage done, there may be no way to assuage the anger driving those “dangerous populists” toward power. Alas, the kumbayas of an outdated idea are not likely to help very much.