As economists and policymakers increasingly question longstanding neoliberal orthodoxy, and with geopolitical tensions generating new threats to economic security, efforts by governments to take a proactive role in shaping the economy by intervening in selected industries has been gaining steam. But industrial policy’s record is mixed, particularly in the West, raising questions about whether – and in what form – it is useful.

The University of Chicago’s Raghuram G. Rajan has serious reservations about the state-led approach. While industrial strategy “brings sensible ideas to bear” on how to “manage government in the areas where government works best,” it “always saps the vitality of private economic efforts,” by undermining competition, disrupting price signals, and insisting that “corporate performance be judged according to criteria other than profitability.” Compounding the problem is “the lobbying, cronyism, and corruption that surrounds any government initiative where billions of dollars are on offer.”

But for J. Bradford DeLong of the University of California, Berkeley, context matters. For decades, he writes, opposition to “government-led development” – in the United States, at least – was driven by the sense that the state lacked the capacity to undertake it. Moreover, the “agencies that would manage and direct economic development” were “captured by investors, managers, or oligopolies of one sort or another.” In his view, however, new threats to economic security – including “the need to reorient the US economy from coastal finance and plutocracy to middle- and working-class prosperity nationwide” – have now made industrial policy in the US “unavoidable.”

Harvard’s Dani Rodrik identifies a major problem with this, warning that combating climate change and boosting the middle class in advanced economies – two key goals of industrial policy – might come at the expense of reducing global poverty. And yet this “new trilemma” is not inescapable, as long as policymakers recognize that the tradeoffs between combating climate change, boosting the middle class, and fighting global poverty are often “more apparent than real.” For example, the “vast majority of the good, middle-class jobs of the future” will have to come from largely non-traded services sectors, which can be promoted without creating trade tensions.

Designing good industrial policies, points out Yale’s Pinelopi Koujianou Goldberg, also requires us to recognize their limits. While government support can give selected firms or sectors a boost, success – particularly in high-tech industries like semiconductors – also requires access to foreign technology. In this sense, the US – with its “technological leadership and scale” – has a distinct advantage, though “it is unclear why chip manufacturing must be brought back to the US, as opposed to other allied countries that may be able to produce at a lower cost.”

CHICAGO – Despite all the white elephants that dot today’s world as a reminder of industrial policy’s past failures, governments are again pursuing subsidies, regulation, and protectionism to ensure that their economies’ commanding heights are occupied by domestic firms creating domestic jobs.

Invoking the success of the US moon mission in the 1960s, the new evangelists of industrial policy, with even grander ambitions in mind, have rebranded it as industrial strategy. To its credit, as a way to manage government in the areas where government works best, industrial strategy brings sensible ideas to bear. Starting with a pressing challenge such as halving a country’s emissions by 2035, the task is broken down into specific “missions” with broad but measurable goals, and the country’s relevant players are brought on board.

Less compelling is the vision of a large new bureaucracy, with a central board advised by experts (academics always find a place for themselves!) coordinating all missions (each with its own board). By putting so much trust in top-down coordination across ministries, the private sector, unions, and civil society, the evangelists sometimes seem naively optimistic about bureaucratic capacity or the absence of turf battles. In articulating their neo-statist dream, they are giving license to all governments’ innate instinct to intervene and expand.

Nevertheless, as long as the new industrial strategy is offering ideas for better public governance, it is useful on balance. But it becomes positively dangerous when it advocates intervening in the private sector. With the support provided by subsidies, loans, tax breaks, tariffs, government procurement, and so forth, select market participants will be enlisted to pursue not just economic but also social and environmental outcomes.

Like the industrial policy of old, this approach undermines competition, disrupts price signals, and insists that corporate performance be judged according to criteria other than profitability, including parochial national interests.

For these reasons, industrial strategy – even if launched with the best intentions – always saps the vitality of private economic efforts. Add in the lobbying, cronyism, and corruption that surrounds any government initiative where billions of dollars are on offer, and it is hard to believe that this approach could ever be the ideal solution to the world’s biggest challenges.

Since industrial policy (sorry, industrial strategy) is implemented by a government, it reflects perceived national interests, not global or individual needs. To see why this is a problem, just look at chip manufacturing. Every country of reasonable economic size now wants a domestic fabrication plant to protect against global shortages, and to sustain military production in case of war.

But the self-insurance benefits are invariably overstated. Since no country can make all the chips its industry needs, a domestic manufacturer does not assure protection from all shortages. Moreover, if a shortage is global, there must be some global reason for it, such as a pandemic. Why would the domestic chip manufacturer be immune?

When there is free trade in chips – driven by market prices and the profit motive – supply will be allocated where there is the greatest need. But if governments control output because they have subsidized domestic chip manufacturers, everyone can end up worse off. I write “can” because the profit motive is hard to suppress entirely. Each country can direct the use of the chips it manufactures only if there is no smuggling. But if there are multiple user countries with severe shortages (and therefore high prices), what is to prevent chips from being smuggled from the countries that have plenty to those that don’t? We get near-market outcomes but with higher costs.

The national-security rationale suffers the same problem. Even though Russia is heavily sanctioned by much of the chip-producing world, it has been able to conduct a full-scale war with modern armaments containing many chips – and without a significant chip manufacturer of its own.

In any case, having a chip fab in one’s country does not assure resilience, since the chip supply chain runs through other countries. For example, the machines that make the most advanced chips are produced by ASML in the Netherlands, which can shut them down remotely with “kill” switches. If designs, wafers, machines, and key chemicals all need to be produced within the same country to achieve true security, only a vast continental economy like the United States – and maybe China and the European Union – can obtain significant manufacturing independence, and only at tremendous cost.

Part of the cost is the subsidy needed to move uncompetitive domestic manufacturers closer to the technological frontier. Through the CHIPS and Science Act, the US is pouring enormous subsidies into Intel, which gave up global leadership in chip fabrication a while back. As part of an industrial strategy, this money has strings attached, including restrictions on the use of foreign talent and procurement, and requirements to promote various social and ethical goals – such as creating skilled technical jobs that do not require a bachelor’s degree. With so many additional burdens imposed on an already-flailing manufacturer, and a fundamental shortage in the US of the kind of personnel that sophisticated chip plants require, it is no wonder that Intel and even industry leader TSMC’s new plants in the US have fallen far behind schedule.

Nor are these one-time costs. When every large country is willing to pour subsidies into an industry, the entire industry will become dependent on state support. Investments will be driven not by profits and competition, but by subsidies, national-security policies, and bureaucrats, leading to periodic gluts and losses. Innovation also may suffer, despite research subsidies, because subsidized laggards will drive down profits industrywide, leaving the leaders with smaller surpluses to invest in research and development.

It would make sense for mid-size economies to sit this frenzy out. But industrial strategy – especially when it has the imprimatur of leading economies – is all too tempting for political leaders who want to get credit for creating shiny new industries. Thus, after promising $10 billion in chip subsidies and securing only the promise of a few jobs and facilities producing older-generation chips, India is doubling down with another $15 billion in subsidies it can ill afford. Would this money not be better spent opening tens of thousands of high-quality primary schools, thousands of high-quality high schools, and hundreds of top-notch universities?

With China’s industrial strategy prompting reciprocal moves by developed democracies, the same trends have swept up electric vehicles, solar cells, and batteries. Instead of allowing competitive markets to drive greentech innovation and cheap production for the global good, we are balkanizing and weakening these critical sectors with tariffs, subsidies, and government-supported zombies. We will have won the battle for domestic production while losing ground in the war against climate change.

We need a global dialogue on the proper place for industrial strategy, or else we can expect many more ruinously expensive pale pachyderms.

BERKELEY – By the end of the 1970s, the US economy appeared to be in serious trouble. Years of inflation had caused deep discontent; measured productivity growth had fallen from its post-World War II pace of 2% per year to almost zero; and America’s resilience in the face of geopolitical and geoeconomic shocks seemed to be waning. The proposed solutions to these problems fell into two categories: neoliberalism and activist industrial policy. The neoliberals won.

Neoliberalism called for shrinking the state, deregulating as much as possible, curtailing antitrust enforcement, and accepting higher economic inequality as a reasonable price to pay to reinvigorate private enterprise and motivate “job creators.” The central assumption was that markets would always deliver better outcomes than government programs could. Yet the consensus today is that this approach failed spectacularly.

Nothing played out the way neoliberalism’s advocates had envisioned, unless you count the sharp increase in wealth and income inequality over the past four decades. While many wealthy people with large megaphones see this feature of our Second Gilded Age as a sign of success, I do not, and I suspect that most Americans share my view.

As for activist industrial policy, it arrived stillborn, because the main argument against it proved to be quite convincing. The argument was not that markets always get things right, or that governments had never successfully engaged in pro-development industrial policies in the past. On the contrary, there was a consensus that government “interventions” to create and fund schools, banks, and railways, and to introduce the right kind of tariffs and other barriers to protect genuine “infant industries,” had enabled countries to grasp the economic opportunities generated by industrial technologies.

Nor was anyone seriously arguing that America’s post-WWII prosperity was the result of an overarching laissez-faire policy. The big exception was the school of ostriches at the University of Chicago, who studiously ignored the role played by the US government, since 1933, in directing and subsidizing investment, stabilizing demand and markets, and committing huge amounts of resources to scientific and technological research and development. But they could only pretend that US prosperity did not rest on the public sector’s role in creating and orchestrating scientific knowledge and technological expertise, and in nurturing the communities of engineering talent needed to make the rubber hit the road.

No, the only convincing argument against activist industrial policy in the 1980s (and the only one ever since) was that post-1970s America lacked the state capacity to undertake it. As Charles L. Schultze, a former chairman of the White House Council of Economic Advisers, wrote in the Fall 1983 issue of The Brookings Review:

“Not only would it be impossible for the government to pick a winning industrial combination in advance, but its attempt to do so would almost surely inflict much harm. There are many important tasks that only governments can do – and, with constant effort and watchfulness, they can do those tasks passably well. But the one thing that most democratic political systems – and especially the American one – cannot do well at all is to make critical choices among particular firms, municipalities, or regions, determining cold-bloodedly which shall prosper and which shall not. Yet such choices are precisely the kind that would have to be made – and made explicitly – for an industrial policy to become more than a political pork barrel.”

This argument was broadly convincing. The sense at the time was that too many government decisions were driven not by considerations of the public interest, but by the fact that, as Senator Barbara Boxer once said, in a slip of the tongue: “the B-2 carries a large payroll [in my state]” (she meant payload). Too many of the agencies that would manage and direct economic development seemed to have been captured by investors, managers, or oligopolies of one sort or another. Too many glass-and-steel buildings on K Street (the Washington lobbying industry) were funded by too many interest groups and staffed by too many former legislators and their aides. How could technocratic cost-benefit analysis in the public interest ever be more than a sham?

Now, however, the United States has three overwhelming reasons to go all in on industrial policy. First, there is the looming disaster of runaway global warming, which requires action on a scale much larger than Al Gore correctly called for nearly a half-century ago. Second, there is the need to reorient the US economy from coastal finance and plutocracy to middle- and working-class prosperity nationwide. And, third, Chinese President Xi Jinping announced a “no-limits” partnership with Russian President Vladimir Putin just before the latter launched his full-scale invasion of Ukraine. Since then, it has been clear that we are undergoing a historic geopolitical and geoeconomic transition in which, as Adam Smith wrote in The Wealth of Nations, “defense … is of much more importance than opulence.”

For these reasons, the most important economic-policy question for America today is not whether we should pursue an industrial policy. We have no choice. The question, then, is this: What can we do to prove Schultze wrong?

CAMBRIDGE – I wrote a speculative article in 2000 on what I called “the political trilemma of the world economy.” My claim was that advanced forms of globalization, the nation-state, and mass politics could not coexist. Societies would eventually settle on (at most) two out of three.

I suggested that it would be the nation-state that would give way in the long run. But not without a struggle. In the short term, the more likely consequence was that governments would seek to reassert national sovereignty, to address the distributive and governance challenges posed by globalization.

To my surprise, the trilemma proved to have long legs. My book The Globalization Paradox, published a decade later, developed the idea further. The concept of the trilemma has become a handy way to understand the backlash against hyper-globalization, Britain’s exit from the European Union, the rise of the far right, and the future of democracy in the EU, among other issues.

Lately, another trilemma has preoccupied me. This one is the disturbing possibility that it may be impossible simultaneously to combat climate change, boost the middle class in advanced economies, and reduce global poverty. Under current policy trajectories, any combination of two goals appears to come at the expense of the third.

During the early postwar decades, policies in the developed and developing world alike emphasized economic growth and domestic social stability. The advanced economies built extensive welfare states but also progressively opened their markets to poorer countries’ exports, so long as the distributional and social consequences were manageable. The result was inclusive growth in the rich countries, as well as significant poverty reduction in those developing countries that were pursuing the right policies.

Successful as this strategy was, it sidestepped the risks of climate change. Over time, the consequences of economic growth powered by fossil fuels have become increasingly difficult to ignore.

The postwar Keynesian-social democratic bargain in the advanced economies was further undone by the internal contradictions generated by my original trilemma. As hyper-globalization replaced the earlier Bretton Woods model, labor markets in the advanced economies experienced greater disruption, undermining the middle class and democracy itself. Both of these developments required new strategies.

In the United States, President Joe Biden’s administration has tackled these new realities head-on. It has broken new ground by promoting substantial investment in renewables and green industries to combat climate change. And it deliberately aims to restore the middle class by promoting labor’s bargaining power, reshoring manufacturing, and creating jobs in regions that were badly hit by imports from China.

This new focus on climate and the middle class is long overdue. But what US and European policymakers see as a necessary response to neoliberalism’s failures looks, to poor countries, like an assault on their development prospects. The recent crop of industrial policies and other regulations are often discriminatory and threaten to keep out manufactured goods from developing countries.

Green subsidies in the US incentivize the use of domestic over imported inputs. The EU’s carbon-pricing mechanism will soon require “dirty” exporters from developing countries to pay additional tariffs. Governments in poor countries believe that such measures will sabotage their efforts to replicate East Asian nations’ export-oriented industrialization.

We can imagine an alternative combination of policies that focus on poor countries and the climate. This would entail a large transfer of resources – financial and technological – from the North to the South, to ensure the requisite investments in climate adaptation and mitigation in the latter.

It would also require significantly greater access in the North’s markets to goods, services, and workers from the poor countries of the South, to enhance these workers’ economic opportunities. This policy configuration is morally appealing; it would effectively apply the philosopher John Rawls’ principles of justice on a global scale.

But here, too, the trilemma rears its ugly head. Such an approach would work at cross purposes with the imperative of rebuilding the middle class in advanced economies. It would create much greater competition for workers without college or professional degrees, driving down their wages. It would also reduce the fiscal resources available for investment in their human capital and physical infrastructure.

Fortunately, some of these conflicts are more apparent than real. In particular, policymakers in advanced economies and poor countries alike need to understand that the vast majority of the good, middle-class jobs of the future will have to come from services, not manufacturing. And economic growth and poverty reduction in developing economies will be fueled mainly by the creation of more productive jobs in their service sectors.

Labor-absorbing sectors such as care, retail, education, and other personal services are non-traded for the most part. Promoting them does not create trade tensions in the same way as in manufacturing industries. This means that the conflict between the middle-class imperative in rich economies and poor countries’ growth imperative is less severe than meets the eye. 

Similarly, it will be virtually impossible to address climate change without significant cooperation from developing countries. While emissions from the US and Europe have been declining, developing-country emissions are still rising, in some cases rapidly, and their contribution to global emissions (excluding China) will soon exceed 50%. Hence it is in rich countries’ self-interest to promote green-transition policies that poor countries regard as part of their own growth strategies, not just as pure cost.

Climate change is an existential threat. A large and stable middle class is the foundation of liberal democracies. And reducing global poverty is a moral imperative. It would be alarming if we had to abandon any of these three goals. Yet our current policy framework imposes, implicitly but forcefully, a trilemma that appears difficult to overcome. A successful post-neoliberal transition requires us to formulate new policies that put these trade-offs behind us.

NEW HAVEN – Contrary to expectations, the Taiwan Semiconductor Manufacturing Company (TSMC) semiconductor plant in Arizona is reportedly on track to meet its 2025 production targets. This announcement poses a challenge to the many observers who predicted that the effort to bring chip manufacturing back to the United States would fail. What went right this time?

Skepticism surrounding the Arizona plant stemmed from the belief that chip manufacturing benefits heavily from learning-by-doing and dynamic economies of scale, both of which give incumbents a significant cost advantage. That is how TSMC maintains its dominant market position, especially in cutting-edge technologies, producing around 92% of the world’s most advanced logic chips at its Taiwan plant.

It was this high concentration that prompted calls to diversify production in the interest of ensuring supply-chain resilience. But the same learning-by-doing imperative is an obstacle for new entrants, casting doubts on projects like the one in Arizona. Moreover, with anti-immigration sentiment on the rise, concerns about America’s ability to attract skilled labor added to the pessimism.

Yet the gloomy predictions turned out to be overstated. While learning is crucial in chip manufacturing, new entrants’ ability to compete with incumbents depends more on the nature of the learning. In new research, my colleagues and I find that in semiconductors, learning-by-doing is not as technology-node-specific as it is firm-specific. Thus, TSMC’s advantage isn’t necessarily in producing advanced chips more efficiently, but in transferring its knowledge and expertise across different technologies. That means its success could well be replicated in other locations, as long as new plants can build on the Taiwanese parent’s experience, rather than starting from scratch.

Another important factor is the cross-border spillover of knowledge. The same research finds substantial spillovers in the transmission of learning across borders. While the exact mechanisms are unclear, foreign technology transfers – including through foreign direct investment and cross-border recruitment of skilled professionals – are likely to play a significant role.

Moreover, since the semiconductor supply chain is structured on the “fabless-foundry” model (whereby chip design companies outsource chip fabrication), it, too, facilitates knowledge transfers between countries. Chip design and manufacturing involve close collaboration between buyers and manufacturers around the world, with buyers often a major player in the dissemination of practical knowledge.

These beneficial cross-border knowledge spillovers suggest that government support alone cannot guarantee success in an industry. Taiwan and South Korea owe their dominance in chip manufacturing not only to significant government subsidies, but also to access to foreign advanced technologies. By contrast, China, despite heavy government support, has not yet reached the frontiers of semiconductor technology. China’s experience shows that while government support can be beneficial, access to foreign technology is crucial. China’s struggles – set against Taiwan’s successes – offer valuable lessons for technologically innovative sectors.

In fact, a similar pattern appears in China’s far more successful industrial policy for the automobile sector, where joint ventures between domestic firms and more technologically advanced foreign manufacturers proved instrumental. As with semiconductors, collaboration between firms in different countries stands out as the main driver of technology and product-quality improvements.

Such cross-border learning spillovers have three big implications for current policy. First, the US does indeed stand a strong chance of catching up with Taiwan in semiconductor manufacturing, given the close cooperation between the two countries and America’s leading position in research and chip design. Second, efforts to slow China’s progress in semiconductors are likely to succeed, considering that US export restrictions have effectively cut China off from foreign advanced technology.

Lastly, other countries looking to become major players in the semiconductor industry (such as India) are dependent on US technological leadership. No matter how much financial support these countries provide, they are unlikely to succeed without US technological backing. An industrial policy that might work for the US, the technology leader, won’t necessarily work for others.

The key takeaway is that the US remains in the driver’s seat. With its technological leadership and scale, it is poised to meet its semiconductor policy goals: strengthening supply-chain resilience and weakening China’s position. Still, one must ask whether these objectives are worthwhile.

While diversifying the supply chain away from a single, geopolitically sensitive location makes sense, it is unclear why chip manufacturing must be brought back to the US, as opposed to other allied countries that may be able to produce at a lower cost. Moreover, the need to slow China’s chip-making progress remains debatable, except in specific cases where there are legitimate national-security concerns.

Historically, the US achieved technological leadership while also lifting up many other countries. America stayed on top in innovative activities such as research and design, but the gap between it and the rest of the world narrowed. In recent years, however, the strategy has shifted to one in which the US remains on top by pushing others down. Yet as Vice President Kamala Harris argued at the recent presidential debate: “The true … leader actually understands that strength is not in beating people down, it’s in lifting people up.” This applies not only to people, but to countries.