Introduction

What Is Industrial Strategy?

The Economics Discipline Should Not Be Looked Upon to Shape an Advanced Industry and Technology Strategy

We Live in an Innovation World, Not a Commodity World

China

A Framework for Thinking About an Advanced Industry and Technology Strategy

The American Tradition Is In Fact Developmentalist

Endnotes

Introduction

With the rise of China, the U.S. economic and technology environment has fundamentally and inexorably changed. China is a technology juggernaut, with the Communist Party aiming to achieve global dominance in most advanced industries and technologies. Against that backdrop, lawmakers in Congress are now considering measures that until recently would have been decried as “industrial policy,” including steps to strengthen U.S. advanced industries including semiconductors, artificial intelligence (AI), robotics, and biopharmaceuticals, among other industries and fields.[1]

This is as it should be: Just as the Great Depression compelled the United States to jettison long-standing economic doctrines that were ill-suited to effectively responding to new challenges, the United States today must do the same by abandoning the prevailing economic doctrine that disparages a more active role for government in promoting industrial competitiveness and technological innovation. Tired old contentions such as “government can’t pick winners” were never right; but now they only serve as a millstone around the neck of needed change. Keynes had it right when he stated, “The difficulty lies, not in the new ideas, but in escaping from the old ones.”[2]

It is time for U.S. policy analysts, pundits, and policymakers to take a fresh and unbiased look at the role of the state in industry and technology advancement. An unwillingness to do so will mean, at best, the incremental development of a weak, generic form of advanced industry policy that will almost surely fail in addressing the existential China technology challenge.

The United States must jettison the prevailing economic doctrine that disparages a more active role of government in promoting industrial competitiveness and technological innovation that reflects the complex and hence public-private character of modern technologies and the industrial supply chains that deliver them.

Casting off the shadows of long defunct (and also current) economists who conceive of innovation industries as the same as commodity-based “widget” industries, and who deny the very validity of the concept of national industrial competitiveness, is a necessary first step because it opens the debate to fresh, empirically-based, pragmatic analysis, rather than the ideological edicts related to industrial strategy that now pass for expert insight from economists.

But as important as that is, this new recognition needs to be translated into concrete policy action. There are many steps Congress and the Biden administration should take—steps the Information Technology and Information Foundation (ITIF) has detailed in numerous reports.[3] Near the top of the list should be passing and funding the Endless Frontiers Act, including charging (and funding) the National Institute of Standards and Technology (NIST) with expanded functions; significantly expanding the research and development tax credit; and instituting within the federal government a role for sector-by-sector industrial strategy analysis. Regardless of what path Congress takes, the country needs big, bold, and sustained action if it is to maintain its technological and advanced industry leadership.

What Is Industrial Strategy?

Ever since the concept of a national industrial strategy was first proposed in the late 1970s, it has received scorn from virtually all neoclassical economists, who advocate it be treated as the economic equivalent of chiropractors (who are looked down upon by medical doctors). But the idea is getting a new life, largely because of the growing awareness of the economic, technology, and national security threats posed by China.

Policymakers on both sides of the aisle are rejecting the dead-end, intellectual straightjacket of conventional economics. The House Republican’s China Task Force Report calls for a national industrial strategy, including doubling federal funding for basic science, expanding industry-university-federal lab partnerships, expanding funding to help spur innovation in lagging regions, and doubling the research and experimentation tax credit.[4] Democrats Chris Coons (DE), Chuck Schumer (NY), Krysten Sinema (AZ), and Mark Warner (VA) and Republicans John Cornyn (TX), Tom Cotton (AR), Marco Rubio (FL), and Todd Young (IN) have all sponsored or co-sponsored key competitiveness legislation. Similar bipartisan efforts have been introduced in the House. And President Biden’s Build Back Better plan includes funding for industrial strategy programs.[5]

The definition of an advanced industry and technology strategy (AITS) is simple: It is a set of policies and programs explicitly designed to support specific targeted industries and technologies.

But what exactly is an industrial strategy (or as it has also been termed, industrial policy)? As Robert Reich once quipped, industrial policy “is one of those rare ideas that has moved swiftly from obscurity to meaningless without any intervening period of coherence.”[6] But this lack of coherence is because, just as in other areas of policy—energy, transportation, health, defense, and others—the ideal policy not only differs depending on who is advocating for it, but evolves over time. Industrial policy is no different. Critics know that if they can define industrial policy so broadly that it includes Brazil putting tariffs on imports as well as Defense Advanced Research Projects Agency (DARPA) funding GPS and the Internet, they make the term meaningless.

The definition of an advanced industry and technology strategy (AITS) is simple: It is a set of policies and programs explicitly designed to support specific targeted industries and technologies. As figure 1 shows, the R&D tax credit would not qualify as an industrial or technology policy tool because its focus is not on any particular industry or technology, but rather on R&D generally. It is, however, an overall innovation or competitiveness strategy tool. Likewise, the CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act, which was designed to spur the domestic growth of the semiconductor industry, is a component of AITS because it targets a particular industry. But it is also a component of a broader competitiveness or innovation strategy. Expanding funding for the NSF-led National Robotics Initiative would be an AITS policy because it is specifically designed to support the development of a particular technology. In contrast, any program that expands STEM (science, technology, engineering, and math) education would not be an AITS tool, but would be an innovation or competitiveness strategy tool.

Figure 1: Conceptualization of industrial strategy tools