State-focused industrial policy solves extinction

Why could this policy “not be named”? The short answer is that industrial policy was one of the many casualties of an international shift in economic policy that began in the 1980s and flourished under the administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. The emergent sensibility—what we now call neoliberalism—was codified in 1989 in the Washington Consensus, which championed privatization, deregulation, and free trade. Along with these central pillars came an emphasis on low budget deficits, independent central banks focused on low inflation, and the liberalization of trade and foreign direct investment. This outlook was deeply confident in markets and deeply skeptical of government action, beyond the state's limited role in enforcing property rules and investing in education and defense. “On the basis of an exhaustive review of the experience of developing economies during the last thirty years,” the World Bank summed up in the early 1990s, “attempts to guide resource allocation with nonmarket mechanisms have generally failed to improve economic performance.” Today it is precisely those “market mechanisms” that appear not to have delivered on their promise. An equally exhaustive review of the experience of several advanced economies during the last few decades—from the 2008 financial crisis, populist challenges to globalization, and vast increases in economic inequality to decaying infrastructure, climate change, and the broader pursuit of shortterm profit at the expense of long-term investment—has badly tarnished the reputation of neoliberal market fundamentalism. Under this regime, modern capitalist markets have proven themselves unable to create an even distribution of wealth and income, ecological sustainability, affordable shelter and health care, and a sufficient number of high-quality middle-class jobs. Amidst this policy crisis, industrial policy is making a comeback, shaping high-level discussions at the intersection of trade policy and economic growth on subjects from artificial intelligence to climate change. Yet how exactly industrial policy ought to be implemented remains very much an open question. Given that the U.S. government has been out of practice at industrial policy for four decades, some observers have called for a cautious, incremental approach. We think this is exactly the wrong strategy. Industrial policy should be ambitious in tackling the most serious challenges facing the world today. But precisely because many of these challenges are so expansive and open-ended, we also cannot simply return to the industrial policy of the postwar era, which tended to focus on more narrowly defined technological goals and specific sectors. We need a new vision, one that draws from the industrial policy of the past while responding to the unique conditions of the present. That is exactly what we aim to sketch here. By undertaking well-defined missions, investing in a wide range of sectors, and nurturing new economic landscapes, policymakers can steer the overarching course of economic growth while leaving it to private enterprise to fill in the details. Indeed, a great deal of success is already being made in this direction, from Germany's impressive green energy transformation to Sweden's decarbonization of its food system. This framework—what we call a mission-oriented approach to industrial policy—rejects many of the basic premises of market fundamentalism, especially its extremely limited vision for government. At the same time, it recognizes the risks, both political and economic, of excessively top-down planning by an overbearing state. Charting a course between these extremes, mission-oriented industrial policy instead uses government action to incentivize economic activity in the direction of ambitious social goals— whether reducing inequality, fostering sustainable development, or arresting climate catastrophe. If we are to solve such problems, the last four decades have shown, we must embrace an active role for government in creating and shaping new markets—not just in regulating them or intervening when they fail.