WASHINGTON, DC – Industrial policy is all the rage nowadays. In the United States, President Joe Biden has signed laws offering hundreds of billions of dollars in incentives and funding for clean energy and domestic semiconductor manufacturing. Similarly, Donald Trump launched a trade war with China in the name of reviving US industry. Rank-and-file Democrats and Republicans alike are on board with this shift from free markets toward government planning.

But industrial policy always works better in theory than in practice. Real-world factors are likely to thwart efforts by the state to revitalize the manufacturing sector and significantly boost the number of manufacturing jobs.

Current US policies raise all the same old questions that have been asked before about industrial policy. Why should we expect the government to do a good job of picking winners and losers, or to allocate scarce resources better than the market? If the government intervenes in markets, how will it avoid mission creep, cronyism, and corruption?

In the real world, government planners simply lack the control to make an industrial policy succeed over the long term. Biden can subsidize semiconductor manufacturing with the stroke of a pen, but he cannot wave a magic wand to create workers who are qualified to staff chip-fabrication plants. Deloitte estimates that the US semiconductor industry will face a shortfall of 90,000 workers over the next few years. Just this month, Taiwan Semiconductor Manufacturing Company announced that it must delay production at an Arizona fab, owing to a lack of workers with the right experience and training.

Nor can US policymakers prevent other countries from retaliating and intervening to boost their own favored industries. Consider the Trump tariffs, which then-Secretary of Commerce Wilbur Ross defended as a case of concentrated benefits and diffuse costs. Though all Americans might have to pay 0.6 cents more for a can of soup, he argued, the country would get a boost to manufacturing employment in return.

This claim seemed to assume implicitly that no other countries would retaliate. But Aaron Flaaen and Justin Pierce, both economists at the US Federal Reserve, find that the US suffered greater losses in domestic manufacturing employment from retaliation than it gained from import protection. And because the tariffs increased the cost of intermediate goods used by US firms, Flaaen and Pierce conclude that shifting an industry from relatively light to relatively heavy tariff exposure was associated with a 2.7% reduction in manufacturing employment.

Biden’s Inflation Reduction Act provides $370 billion in tax credits and other incentives for clean-energy projects in the US. Its subsidies put American allies at an artificial disadvantage in industries such as battery production and electric-vehicle (EV) manufacturing. Not surprisingly, South Korea and the European Union have responded with their own subsidies. French President Emmanuel Macron has warned that the IRA could “fragment the West.”

None of this bodes well. Tit-for-tat industrial policies distort relative prices, and reduce economic efficiency by prioritizing political whim over comparative advantage. As more countries adopt subsidies, they will blunt the impact of subsidies elsewhere. Industrial policy lights taxpayers’ money on fire.

Yet another reason industrial policies fail is that politicians cannot resist the temptation to use public funds to advance unrelated goals. For example, in February, the Biden administration required companies receiving federal subsidies for semiconductor manufacturing to ensure affordable childcare for their workers. But what if there are not enough workers immediately available to run daycares near chip plants? Such add-ons reduce the effectiveness of the subsidies.

Moreover, companies that adhere most closely to the administration’s broader social-policy views could become politically favored and entrenched, reducing market competition, discouraging new entrants, and sapping economic dynamism. All too often, social-policy goals conflict with industrial goals. The Biden administration wants to support organized labor, but it also wants to hasten the green transition. Yet the United Auto Workers are making aggressive demands in negotiations with automakers just as those companies are facing increased costs to shift to EV production. If workers follow through with a strike next month, that will further derail US industry.

This is not to say that industrial policy should never be used. Operation Warp Speed (which accelerated COVID-19 vaccine development and deployment) and the Defense Advanced Research Projects Agency are two good examples of the government successfully orienting a specific industry toward specific goals. “Specific” is the keyword, here. Restoring the entire manufacturing sector (with particular focus on swing states in the 2024 presidential election) to an unspecified semblance of its former glory is too vague, too broad, and too ambitious an objective – especially when it is combined with fighting climate change, advancing progressive social goals, and protecting US national security.

What should the US do instead? First, to safeguard national security, it should identify a narrow set of specific goods that genuinely warrant export and investment controls. Second, it should invest public funds in basic research and infrastructure – not because that will create manufacturing jobs, but because it will increase productivity, wage growth, innovation, and dynamism more broadly. 

Third, it should adopt a carbon tax to lower the relative price of green technology. That would accelerate technological development and allow the market to determine which technologies are the most promising. If widespread global adoption of green technologies is the overarching goal, trade barriers are particularly problematic, as they will slow uptake – particularly among low-income countries – and reduce green tech’s role in fighting climate change.

Finally, America should invest in all workers, rather than try to turn back the clock to the heyday of manufacturing. That means increasing earned-income subsidies to support participation in the workforce, investing in training to build skills and increase wages, and reducing the barriers workers face from social policy and anticompetitive labor-market institutions.

One of the few redeeming features of American populism has been its renewed focus on workers. But populist and nationalist solutions won’t work. We owe it to workers to focus on policies that will advance mass flourishing.

CAMBRIDGE – As policymakers around the world embrace industrial policy in pursuit of a wide variety of objectives – supply-chain resilience, green technologies, geopolitical advantage, good jobs – the debate over its effectiveness is reaching fever pitch. Typically, this debate is portrayed as one where sound economics is squarely on the skeptics’ side. “There is a strong case against industrial policy in economics,” intoned one recent commentary, and embracing it “just wastes money and distorts the economy.”

But this is an increasingly outmoded view. While it is generally true that mainstream economists have responded to industrial policy with knee-jerk hostility since at least the 1970s, things have been changing fast, owing to new academic research that is less driven by ideological hostility to government intervention and better grounded in rigorous empirical methods.

This recent crop of research provides more authoritative evidence on how industrial policy really works, improving the quality of debates that in the past shed more heat than light on the issue. And researchers’ more nuanced and contextual understanding of such policies yields a generally more positive assessment.

Industrial policies are complex, and quantifying them for the purposes of analysis can be difficult. Consider, for example, China’s recent push in the shipbuilding industry. Seeking to become the largest shipbuilding country within a decade, China deployed a multitude of policies, including production subsidies, investment subsidies, and entry subsidies. There were many changes along the way, as in 2009, when policymakers turned away from promoting entry and instead focused on industry consolidation.

In the past, economists too often focused on simple indicators such as import tariffs, capturing only limited dimensions of industrial policy and conflating its objectives with others (such as raising government revenue or playing special-interest politics). A number of recent research efforts have taken a more productive approach.

For example, a comparative project at the OECD quantifies industrial policies through deep accounting of government activity, focusing on government expenditures allocated specifically for industrial-policy objectives. A team of economists led by two of us (Réka Juhász and Nathan Lane) apply natural language processing to publicly available policy inventories to generate a detailed classification of industrial policies.

The latter work is yielding important new insights. For starters, industrial policy has been ubiquitous, and its prevalence predates the recent rise in its use and prominence in public discussions. Moreover, it is no longer appropriate, if it ever was, to identify industrial policy with inward-looking, protectionist trade policies; contemporary industrial policies typically target export promotion. And the prevalence of industrial policies tends to increase with income: advanced economies use it more often and intensively than developing countries do.

Improved methods of causal inference are also leading economists to revise their views. Traditionally, economists assessed the effects of industrial policy by examining whether industries receiving more government help performed better – generally reaching a negative conclusion. It is now recognized that such correlational work is uninformative, because it cannot distinguish between cases where industrial policy is useful and not.

The more recent research uses modern statistical techniques to avoid misleading inferences. Such techniques have been applied to a wide variety of cases, including historical episodes of promotion of infant industries (such as textiles, shipbuilding, and heavy industries); large-scale public research and development efforts (as in the “space race” between the United States and the Soviet Union); and selective place-based policies targeting specific firms or industries (as in the US manufacturing drive during World War II and contemporary regional European subsidies).

The results of this research are much more favorable to industrial policy, tending to find that such policies – or historical accidents that mimic their effects – have often led to large, seemingly beneficial long-term effects in the structure of economic activity. For example, the disruption to French imports during the Napoleonic blockade stimulated French industrialization in mechanized cotton spinning long after the end of the Napoleonic wars. These results are consistent with what proponents of nurturing infant industries would argue.

Studies of recent public programs to subsidize investment in lagging regions of Britain and Italy have similarly found strong positive effects on employment creation. While these studies cannot provide a definitive answer to whether industrial policy works in general, they are informative about the prevalence of the market failures targeted by the policy and about the policy’s long-term effects.

Newer studies also shed light on the long-standing controversy over the contribution of industrial policy to East Asia’s economic miracle. The early economic literature on East Asia’s rise had argued that industrial policies were at best ineffective. Newer analyses paying closer attention to the structure of upstream and downstream linkages in these economies reach considerably more sanguine conclusions.

To cite one example, studies of South Korea’s Heavy-Chemical Industry Drive (HCI), a landmark – and controversial – industrial policy pursued by President Park Chung-hee in the 1970s, found that the policy promoted the growth of targeted industries, both in the short and long run. HCI’s effects on productivity and export performance were both positive.

Critics of East Asian policies thought governments could never pick the right sectors because they lacked information on where market failures were more prominent. Princeton economist Ernest Liu has recently provided a useful guide for policymakers confronting an economy where market imperfections occur across multiple, linked sectors. In such settings, subsidizing upstream sectors generally minimizes policy mistakes. Liu shows that the actual policies used in China and during South Korea’s HCI were in line with this guidance.

Some commentators have recently criticized US President Joe Biden’s industrial policy because it “lacks a rigorous economic foundation.” The reality is that there is already plenty of good economic research on industrial policy. While more research is always beneficial, the new literature is already providing us with better assessments of industrial policies in all their diversity, evaluating the consequences of historical and contemporary examples, and illuminating how such policies work or fail depending on their instruments and objectives, and on prevailing economic structures.

NEW YORK – With the enactment last year of the Inflation Reduction Act (IRA), the United States fully joined the rest of the world’s advanced economies in combating climate change. The IRA authorizes a major increase in spending to support renewable energy, research and development, and other priorities, and if estimates about its effects are anywhere near correct, the impact on the climate will be significant.

True, the design of the law is not ideal. Any economist could have drafted a bill that would deliver much more bang for the buck. But US politics is messy, and success must be measured against what is possible, rather than some lofty ideal. Despite the IRA’s imperfections, it is far better than nothing. Climate change was never going to wait for America to get its political house in order.

Together with last year’s CHIPS and Science Act – which aims to support investment, domestic manufacturing, and innovation in semiconductors and a range of other cutting-edge technologies – the IRA has pointed the US in the right direction. It moves beyond finance to focus on the real economy, where it should help to reinvigorate lagging sectors.

Those who focus solely on the IRA’s imperfections are doing us all a disservice. By refusing to put the issue in perspective, they are aiding and abetting the vested interests that would prefer for us to remain dependent on fossil fuels.

Chief among the naysayers are defenders of neoliberalism and unfettered markets. We can thank that ideology for the past 40 years of weak growth, rising inequality, and inaction against the climate crisis. Its proponents have always argued vehemently against industrial policies like the IRA, even after new developments in economic theory explained why such policies have been necessary to promote innovation and technological change.

It was partly owing to industrial policies, after all, that the East Asian economies achieved their economic “miracle” in the second half of the twentieth century. Moreover, the US itself has long benefited from such policies – though these were typically hidden in the Department of Defense, which helped develop the internet and even the first browser. Likewise, America’s world-leading pharmaceutical sector rests on a foundation of government-funded basic research.

US President Joe Biden’s administration should be commended for its open rejection of two core neoliberal assumptions. As Biden’s national-security adviser, Jake Sullivan, recently put it, these assumptions are “that markets always allocate capital productively and efficiently,” and that “the type of growth [does] not matter.” Once one recognizes how flawed such premises are, putting industrial policy on the agenda becomes a no-brainer.

But many of the biggest issues today are global and thus will require international cooperation. Even if the US and the European Union achieve net-zero emissions by 2050, that alone will not solve the problem of climate change. The rest of the world also must do the same.

Unfortunately, recent policymaking in advanced economies has not been conducive to fostering global cooperation. Consider the vaccine nationalism that we saw during the pandemic, when rich Western countries hoarded both vaccines and the intellectual property (IP) for making them, favoring pharmaceutical companies’ profits over the needs of billions of people in developing countries and emerging markets. Then came Russia’s full-scale invasion of Ukraine, which led to soaring energy and food prices in Sub-Saharan Africa and elsewhere, with virtually no help from the West.

Worse, the US raised interest rates, which strengthened the dollar against other currencies and exacerbated debt crises across the developing world. Again, the West offered little real help – only words. Though the G20 had previously agreed on a framework to suspend debt servicing by the world’s poorest countries temporarily, debt restructuring is what was really needed.

Against this backdrop, the IRA and the CHIPS Act may well reinforce the idea that the developing world is subject to a double standard – that the rule of law applies only to the poor and weak, whereas the rich and powerful can do as they please. For decades, developing countries have chafed against global rules that prevented them from subsidizing their nascent industries, on the grounds that to do so would tilt the playing field. But they always knew there was no level playing field. The West had all the knowledge and IP, and it did not hesitate to hoard as much of it as possible.

Now, the US is being much more open about tilting the field, and Europe is poised to do the same. Though the Biden administration claims to remain committed to the World Trade Organization “and the shared values upon which it is based: fair competition, openness, transparency, and the rule of law,” such talk rings hollow. The US still has not allowed new judges to be appointed to the WTO’s dispute-settlement body, thus ensuring that it cannot take action against violations of international-trade rules.

To be sure, the WTO has plenty of problems; I have called attention to many over the years. But it was the US that did the most to shape the current rules during the heyday of neoliberalism. What does it mean when the country that wrote the rules turns its back on them when it becomes convenient to do so? What kind of a “rule of law” is that? If developing countries and emerging markets had ignored IP rules in a similarly flagrant way, tens of thousands of lives would have been saved during the pandemic. But they did not cross that line, because they had learned to fear the consequences.

By adopting industrial policies, the US and Europe are openly acknowledging that the rules need to be rewritten. But that will take time. To ensure that low- and middle-income countries do not grow increasingly (and justifiably) embittered in the meantime, Western governments should create a technology fund to help others match their spending at home. That would at least level the playing field somewhat, and it would foster the kind of global solidarity that we will need to address the climate crisis and other global challenges.

MILAN – The European Union, like much of the rest of the world, is facing powerful economic headwinds. But whereas other major economies, such as China and the United States, are well-positioned to use industrial policies to help counter the challenges they face, the EU faces significant structural impediments on this front.

As it stands, EU economic growth is slow and decelerating, with some of the bloc’s economies doing worse than others. It does not help that the drivers of export growth are faltering, partly because of increased competition from China, which is moving rapidly into major industrial sectors like electric vehicles.

Moreover, while Europe’s commitment to leading the world on climate action and the clean-energy transition might eventually result in a competitive advantage, it is now acting as an economic impediment – and will continue to do so in the medium term – not least because carbon-intensive industrial sectors dominate exports. The Ukraine war has exacerbated this problem, not only by raising energy costs, but also, and even more so, by forcing the EU rapidly to diversify away from Russian fossil fuels – a very expensive process. As a result, carbon prices in Europe are significantly higher than in other regions.

Yet another problem lies in Europe’s technology sectors, which are underdeveloped relative to those in the US and China. Mega-platforms, cloud computing, supercomputing, and the development of advanced artificial intelligence are largely missing from the European economic and tech landscape. The consequences are far-reaching: these are high-growth sectors and important drivers of the structural change and productivity gains upon which an economy’s long-term well-being depends.

To make progress on tech, scale matters. For example, it takes a huge amount of computing power to train the most advanced generative-AI models. While it is possible that advances in AI technology will reduce the requirements in this area, the idea that limited computing power would not hamper progress is a bad bet. In any case, mega-platforms are currently the only entities with the required computing power (with the possible exception of the US federal government).

And it is the US federal government – not US states – that dominates investment in science and technology. This is particularly notable if one considers that California’s economy, which totaled $3.6 trillion in 2022, is larger than every national economy in the EU except Germany’s (worth roughly $4 trillion). No US state, not even California, could afford the 2022 CHIPS and Science Act, which supports semiconductor research, development, manufacturing, and workforce development.

The US government recognizes that, in a federal system, decentralization is a recipe for underinvestment. It also leads to inefficiency, since state-level investment inevitably targets local actors, whereas federal investment is distributed based on competitive merit in the wider economy. In today’s context, where anything short of large-scale structural transformation implies relative stagnation, the costs of decentralization are particularly high. This is true not only for tech, but also for national security and defense.

Herein lies the problem for Europe. While China and the US take advantage of scale to pursue industrial policies that include large-scale investment in critical sectors, the EU struggles to follow suit, owing to its decentralized fiscal policies and rules limiting government subsidies to industry.

The EU’s 2021 Recovery and Resilience Facility (RRF) – a €723 billion ($769 billion) program aimed at mitigating the worst effects of the COVID-19 pandemic and advancing structural change, growth, and stability in the digital age – was a step in the right direction. But it had serious flaws.

Imagine if, in the US, all investment under the CHIPS and Science Act and the (misleadingly titled) Inflation Reduction Act was distributed to states in proportion to their size, to be deployed in accordance with pre-approved proposals, which all 50 states had been required to submit before any funding was disbursed. This would clearly be inefficient, yet it is essentially the approach taken by the RRF.

The point is not to criticize the RRF, which was established as a response to an immediate set of common challenges and proved to be far more constructive than the fiscal response to the 2008 global financial crisis and the European debt crisis that followed. Rather, it is to highlight the constraints associated with long-term European public investment.

Today, a new European investment program is urgently needed; but, unlike the RRF, it must be neither limited nor temporary. If Europe is to achieve growth and dynamism in the twenty-first century, federal investments must be expanded and made permanent. They should be funded through the issuance of EU sovereign debt, and administered centrally.

In a recent commentary, former European Central Bank President and former Prime Minister of Italy Mario Draghi argues that the prospects for fiscal union in Europe are improving, because “the nature of the needed fiscal integration” has changed considerably since the euro’s creation. Instead of federal fiscal “stabilization,” Europe needs to mobilize “vast investments” – in defense, the green transition, and digitization – in a “short time frame.” Though this does not demand full fiscal centralization – no federal structure would achieve that, anyway – it does mean that Europe must find a way to federalize critical investment in public goods that produce shared benefits.

This would greatly enhance the competitiveness and dynamism of European economies, enabling them to avoid prolonged stagnation. More concretely, it would help to ensure that the EU’s talented people – especially the young – have the opportunities they need to reach their potential.

LONDON – From high-level policy debates and political manifestos to everyday news coverage, anxiety about economic growth is everywhere. In Germany, the government’s latest budget identifies stronger growth as a top priority. In India, national leaders are eager to reclaim their country’s place as the world’s fastest-growing economy. In China, where the prospect of deflation looms, the government is undoubtedly worried about hitting its 5% growth target for the year.

In the United Kingdom, Keir Starmer, the leader of the opposition Labour Party, has vowed to secure the highest sustained growth in the G7 if given power, and the ruling Conservatives express similar ambitions (recall former Prime Minister Liz Truss’s now-infamous mantra: “growth, growth, and growth”).

But putting growth at the center of economic policymaking is a mistake. While important, growth in the abstract is not a coherent goal or mission. Before committing to particular targets (be it GDP growth, overall output, and so forth), governments should focus on the economy’s direction. After all, what good is a high growth rate if achieving it requires poor working conditions or an expanding fossil-fuel industry?

Moreover, governments have been most successful in catalyzing growth when they have been pursuing other goals – not treating growth itself as the objective. NASA’s mission to land a man on the moon (and bring him back) yielded innovations in aerospace, materials, electronics, nutrition, and software that would later add significant economic and commercial value. But NASA didn’t set out to create these technologies for that reason, and it probably never would have developed them at all if its mission had been simply to boost output.

Similarly, the internet emerged from the need to get satellites to communicate with one another. Owing to its widespread adoption, digital GDP has been growing 2.5 times faster than physical GDP for the past decade, and now the digital economy is on track to be worth an estimated $20.8 trillion by 2025. Again, such growth figures are the result of active engagement with the opportunities that digitalization presents; growth itself was not the goal.

Rather than focusing on accelerating digital GDP growth, governments should instead aim to close the digital divide and ensure that current and future growth is not based on Big Tech’s abuse of market power. Given how rapidly artificial intelligence is advancing, we urgently need governments that can shape the next technological revolution in the public’s interest.

More broadly, pushing growth in a more inclusive direction means departing from the financialization of economic activity and recommitting to investment in the real economy. As matters stand, far too many nonfinancial companies (including manufacturers) are spending more on share buybacks and dividend payouts than on human capital, machinery, and research and development. While such activities can boost firms’ stock price in the short term, they reduce the resources available for reinvesting in workers, widening the divide between those who control capital and those who do not.

Financialization is more often than not about value extraction and short-term profit maximization, rather than value creation for the sake of society as a whole. To achieve inclusive growth, we must recognize that workers are the real value creators, and their interests should feature prominently in discussions about income and wealth distribution.

In this sense, the UK Labour Party’s new stance on workers’ rights is worrying. In a knee-jerk attempt to appeal to corporate leaders and counter claims that it is “anti-business,” Labour has softened its previously stated commitment to stronger protections for gig workers. Yet investment-led growth and workers’ rights should not be regarded as competing priorities. Balancing corporate engagement with a commitment to workers is not only essential to achieving inclusive growth; it has already been proven to boost productivity and growth over the long term.

The economy will not grow in a socially desirable direction on its own. As I stressed ten years ago, the state has an important entrepreneurial role to play. After governments’ recent attempts to kick-start their economies following the pandemic, it is clear that we still need new thinking about how to achieve growth that is not only “smart,” but also green and inclusive.

Governments need economic-policy roadmaps with clear goals, based on what matters most to people and the planet. Public support for businesses should be made conditional on new investments that will “build forward better” toward a greener, more inclusive real economy. Consider the United States’ CHIPS and Science Act, which aims to boost the domestic semiconductor industry. The law prohibits funds from being used for share buybacks, and one could easily imagine additional provisions requiring that future profits be reinvested in workforce training.

But to help steer growth in the right direction, governments also must make goal-oriented investments in their own capabilities, tools, and institutions. The outsourcing of core capacities has undermined their ability to respond to changing needs and demands, ultimately reducing their potential to create purposeful growth and public value over time. Worse, as the public sector’s capabilities and expertise have been hollowed out, it has become more susceptible to capture by vested interests.

Only with the right capacities and competencies can governments successfully mobilize resources and coordinate efforts with businesses that are willing to work toward shared goals. A mission-oriented industrial strategy requires the public and private sectors to work together symbiotically. Done right, such an approach can maximize long-term public benefits and stakeholder value: innovation-led growth becomes synonymous with inclusive growth.

The question we should be asking is not how much growth we can achieve, but what kind. To achieve greater economic output that is also inclusive and sustainable, governments will need to embrace their potential to be value creators and powerful forces shaping the economy. Reorienting public organizations around ambitious missions – instead of obsessing over narrow growth targets – will allow us to tackle the grand challenges of the twenty-first century and ensure that the economy grows in the right direction.