Trump’s Defective Industrial Policy

CAMBRIDGE – US President-elect Donald Trump has yet to take office, but his brand of flawed industrial policy has been on full display since his surprise win in November.

Within weeks of the election, Trump had already claimed a victory. Through a mix of inducements and intimidation, he prevailed on the heating and cooling firm Carrier to keep some of its operations in Indiana, “saving” around 1,000 American jobs. Touring the Carrier plant subsequently, he warned other US firms that he would impose stiff tariffs on them if they moved plants overseas and shipped products back home.

His Twitter account has produced a stream of commentary in the same vein. He has taken credit for Ford’s decision keep a Lincoln plant in Kentucky, rather than move it to Mexico. He has threatened General Motors with import tariffs if it continues to import Chevrolet Cruzes from Mexico instead of making them in the United States.

Trump has also hounded defense contractors for cost overruns, berating the aerospace giants Boeing and Lockheed Martin on separate occasions for producing planes that are too expensive.

Trump’s policy style represents a sharp break from that of his predecessors. It is highly personalized and temperamental. It relies on threats and bullying. It is prone to boasting, exaggeration, and lies about actual successes. It is a type of public spectacle, staged on Twitter. And it is deeply corrosive of democratic norms.

Economists tend to advocate an arm’s-length relationship between government and business. Public officials are supposed to insulate themselves from private firms, lest they be corrupted and engage in favoritism. This is a prized principle in the US – but one that is more often breached than observed. An obvious example is the undeniable influence over US government policy exercised by finance moguls during the last three decades.

Yet close business-government interactions also lie behind many of America’s successes. The history of US economic development is one of pragmatic partnerships and collaboration between the public and private sector, rather than arm’s-length relationships and rigid rules. As historically minded economists and policy analysts such as Michael Lind, Stephen Cohen, and Brad DeLong have reminded us, the US is heir to a Hamiltonian tradition in which the federal government provides the investment, infrastructure, finance, and other support that private enterprise needs.

US technological innovation owes as much to specific government programs, such as loan assistance or government purchases as it does to American entrepreneurs’ and inventors’ ingenuity. As Harvard Business School professor Josh Lerner notes, some of the most dynamic technology companies in the US, including Apple and Intel, received financial support from the government before going public. The electric carmaker Tesla was a beneficiary of the same public loan guarantee program as Solyndra, the solar cell company that went bust in 2011 in a spectacular public collapse.

As the Solyndra example illustrates, many public initiatives fail. But the ultimate test is whether the social return on the portfolio as a whole is positive, taking successes together with the flops. Such broad evaluations tend to be rare. But one analysis found that US programs to boost energy efficiency had produced positive net benefits. Interestingly, the bulk of the benefits were attributable to three relatively modest projects.

Sociologists Fred Block and Matthew Keller have provided perhaps the best analysis of the US “developmental state” – a reality that they say the reigning market-fundamentalist ideology has obscured. Block and Keller describe how a “decentralized network of publicly funded laboratories” and an “alphabet soup” of financing initiatives, such as the Small Business Innovation Research (SBIR) program, work with private firms and help them commercialize their products. They and their colleagues have documented the extensive role of both federal and state governments in supporting the collaborative networks on which innovation rests – whether in biotech, green technologies, or nanotech.

Such industrial policies, based on close collaboration and coordination between the public and private sectors, have of course been the hallmark of East Asian economic policymaking. It is difficult to imagine China’s transformation into a manufacturing powerhouse – and the attendant success of its export-oriented model – without the Chinese government’s helping and guiding hand. It is ironic that the same people who extol Chinese gains from globalization are often alarmed that a US administration may copy the Chinese approach and explicitly endorse industrial policies.

Unlike China, of course, the US purports to be a democracy. And industrial policy in a democracy requires transparency, accountability, and institutionalization. The relationship between the government and private firms has to be calibrated carefully. Government agencies need to be close enough to private enterprises to elicit the requisite information about the technological and market realities on the ground. For example, what are the fundamental reasons for the loss of manufacturing jobs in, say, automobile production, and how can the government help, if at all? But they cannot get so close to private firms that they end up in companies’ pocket, or, at the other extreme, simply order them around.

And that is where industrial policy à la Trump fails to pass the test. On one hand, his appointments to key economic positions indicate he has little intention of severing government ties to Wall Street and big finance. On the other hand, his policymaking-by-tweet suggests he doesn’t have much interest in building the institutionalized dialogue, with all the required safeguards, that sound industrial policy requires.

This means that we can expect the Trump administration’s industrial policy to vacillate between cronyism and bullying. That may benefit some; but it will do little good for the overwhelming majority of American workers or the economy as a whole.