Biden’s Economic Plan Gets a Lot of Big Things Right / Noah Smith

Biden’s Economic Plan Gets a Lot of Big Things Right

By Noah Smith

bloomberg.com

5 min

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Presidential candidate and former Vice President Joe Biden has just released a major industrial policy plan for reviving U.S. manufacturing. The proposal is the first in a four-part series called Build Back Better, which will also address economic recovery, infrastructure, clean energy, racial equity, and modernization of health care, child care and elder care.

Biden’s plan should immediately make one thing clear: The era in which free trade was a centerpiece of the elite economic consensus is well and truly over. Although President Donald Trump embraced a blunt form of protectionism and thinkers on the right have been floating ideas about industrial policy, there was always the possibility that Democrats would hew to a Clintonite free-trade position. But Biden’s announcement proves that Democrats, too, are squarely in the industrial policy camp.

But even though Democrats and Republicans now agree that some sort of industrial policy is desirable, the harder question is what to do. Trump’s tariffs have resulted in economic losses for the U.S. and offended key allies, while failing to stem the decline of manufacturing or the out-migration of high-tech industries.

Stalled Out

Index of manufacturing production*

Source: Federal Reserve Bank of St. Louis

* Index 2012 = 100

One good part of the proposal is a large federal investment in research and development. Biden’s plan would spend $300 billion on R&D, even more than the amount now being considered in Congress. This not only would revitalize the competitiveness of U.S. industry, it would help sustain college towns under threat from cuts in state funding and declining tuition revenue.

A second strength of the plan is education. Biden would invest in community colleges, apprenticeships and other alternatives to expensive four-year colleges. Alternative education of this sort has been used to great effect by Germany, and it has helped that country maintain a solid manufacturing base even in the face of Chinese competition. In addition to manufacturing competitiveness, this could shrink the gap between the educational haves and have-nots.

Another potentially good idea, if well executed, is supply-chain internalization to protect against pandemics and other disasters. The coronavirus outbreak has left top economists scratching their heads as to how the world’s greatest economy could fail to produce items as prosaic as face masks and cotton swabs. The problem is that during normal times, U.S. companies concentrate on the profitable parts of the supply chain -- design, marketing and the provision of final goods and services -- instead of on the boring, low-margin stuff. That makes economic sense right up until the point where a crisis strikes.

Biden’s plan would leverage public-private partnerships to identify the missing pieces of the U.S.’s internal supply chains and fill in those gaps. He’d use a number of other incentives, including taxes and subsidies, to encourage companies to retain the ability to make everything the country would need in an emergency. Though pandemic preparedness is the obvious goal, there’s also another concern -- the ominous possibility of intensified tensions or even conflict with China. Biden’s plan would also try to internalize the supply chains for semiconductors, electronics and other high-tech equipment that would be crucial in any clash.

With regards to the revitalization of U.S. manufacturing, Biden strikes the right notes -- public-private partnerships and manufacturing extension services.

Finally, Biden appears to take the correct approach to China -- rallying allies against predatory trade practices and intellectual property theft, while taxing the carbon content of imported goods in order to encourage China to pollute less.

All this is good. One troubling part of Biden’s plan, however, is his commitment to have the government buy $400 billion worth of U.S.-made goods. Domestic procurement orders can have positive effects, such as when technology companies can use government contracts to gain sufficient scale and know-how to compete in international markets. But Biden’s plan also proposes to have the U.S. government buy domestically made concrete, building materials and other products.

This is problematic, because there’s no need for the U.S. to specialize in mundane products like this; concrete, unlike cotton swabs, is not a strategic industry that the U.S. will suddenly find itself unable to produce in the event of a pandemic or war. “Buy American” provisions also have the potential to raise costs for U.S. government contractors, just as Trump’s steel and aluminum tariffs raised costs for U.S. automakers. That would make U.S. companies less competitive, not more. It might also annoy U.S. allies by restricting imports from Canada, Europe, South Korea and so on, in addition to China. It could increase the price tag for needed government projects such as green energy and infrastructure. And it could become a vehicle for political patronage and pork.

Finally, there’s one big additional strategy Biden should add to his plan: export promotion. Competing on world markets often forces companies to raise productivity, but some businesses need a push to leave the comfort and familiarity of the domestic market. Successful developing countries often use a technique known as export discipline: Incentivizing companies to sell abroad, helping them to get started, then culling those that fail in international markets. For the U.S., this could involve implicit export subsidies -- trade credit, overseas marketing assistance, free consulting, R&D support and so on. It could involve destination-based corporate taxes that encourage domestic content. It could even involve explicit monetary subsidies for exporting, though this would require rewriting of World Trade Organization rules. But the assistance would have to be temporary, to avoid creating a conduit for political patronage.

So Biden’s plan needs a little bit of work. But overall, it’s a solid start toward the kind of industrial policy that the U.S. needs after a long period of laissez-faire.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:

James Greiff at jgreiff@bloomberg.net

Published on July 10, 2020, 6:30 AM EDT

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