Obama's Right, America Needs an Industrial Policy

We can’t afford to keep borrowing money from the Chinese to pay for oil from Saudi Arabia.

By + More

“Industrial policy.”

In tonight’s State of the Union address, President Obama won’t utter those exact words. Instead, he’ll talk about “innovation” and “infrastructure” and  “education”—things we’ll need to invest in as a nation in order to remain competitive in the global economy.

[See photos of the Obamas behind the scenes.]

In so many words, the president thinks we need an industrial policy: a national economic strategy in which, on some level, the public and private sectors form a partnership.

And he’s right.

Andrew Liveris, the chairman and CEO of Dow Chemical, argues for such a strategy in his book Make It in America: The Case for Re-Inventing the Economy. Liveris echoes many of the themes of another important recent book I’ve mentioned here: Clyde Prestowitz’s The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era.

The situation is this: America has been consuming more than it produces for decades, a bargain we’ve been able to pull off because we’re the country that prints dollars. But emerging economies like India, China, and Brazil aren’t going to play along forever. [Take the poll: What Should Obama's State of the Union focus be?]

To stop running large trade deficits, America will need to revive its manufacturing base—to start making things again.

Which things? This is where “industrial policy” comes in.

The phrase has gotten an unnecessarily bad rap in the modern era. It smacks of heavy-handed government: socialism, corporatism, even fascism. Call it whatever you want, but America used to do it unapologetically. It’s how we were able to build a transcontinental railroad system. It’s how we got the telegraph, companies like RCA, and the Internet.

And we still have one now. The problem is, it’s ad hoc; it's aimless and, in some cases, counterproductive. We subsidize agriculture, and we maintain an energy policy that favors cars and airplanes. More positively, under a Republican administration, America doubled funding for the National Institutes of Health (NIH). Unsurprisingly, we’re an industry leader in biotechnology. [Check out a roundup of political cartoons on Obama.]

How did this come to pass?

As Prestowitz notes, during the Cold War era, geopolitical concerns trumped economic ones. It was more important to secure the loyalty of Western Europe and Japan, and eventually the oil of the Middle East, than it was to see the world in terms of nonapocalyptic economic rivalries.

We can’t afford to think that way anymore. We can’t afford to keep borrowing money from the Chinese to pay for oil from Saudi Arabia. 

The “smiley curve”—a phrase used to describe how the West makes the big bucks: design, engineering, and retail, while low-wage Chinese snap together parts— is going to start bending unfavorably.

Liveris notes that, increasingly, the countries that snap together the parts are going to be the ones that generate the next big ideas—a phenomenon often referred to as the “innovation ecosystem.”

China, South Korea, and other countries that have successfully maintained export-led growth strategies are far less impressed by free-trade doctrines such as “comparative advantage.” Prestowitz argues that Korea wanted a semiconductor industry. So it invested in one. [Read A Brief History of the State of the Union.]

Comparative-advantage theory says China should leave aircraft manufacturing to established companies like Boeing and Airbus. But China, realizing the benefits of building its own airplanes, blithely ignores comparative-advantage theory.

America needs to start doing the same thing.

The occasion of Ronald Reagan’s 100th birthday has inspired lots of recollections of the former president’s dictum that “Government isn’t the solution. Government is the problem.”

But that’s no longer the case. The choice we face today is between smart government and dumb government.

  • Read A Brief History of the State of the Union.
  • Take the poll: What Should Obama's State of the Union focus be?
  • Check out a roundup of political cartoons on Obama.