In June 2021, Brian Deese, the director of Joe Biden’s National Economic Council, planted a flag in the ground. “I am excited to lay out our vision for a 21st-century American industrial strategy,” he said in a speech at the Atlantic Council in Washington, DC. This is a playbook to “strengthen our supply chains and rebuild our industrial base, across sectors, technologies, and regions.”
From his perch at the nearby Johns Hopkins University in Baltimore, the “money doctor” was watching on with shock.
Steve Hanke is the “privatization” guru who served as a senior economist to the Council of Economic Advisers in the Reagan Administration. He's traveled the world advising presidents from Argentina to Indonesia to Venezuela, including stints guiding Ecuador and Montenegro to successfully “dollarize” by dumping their wobbling currencies for the greenback, and he even helped craft free-market reforms in the former Socialist Federal Republic of Yugoslavia. Hanke noted to Fortune that even the French are amazed by the shift in America’s political economy. Quips the economist, “When France tells you that your industrial policy’s over the top, you know you’re in trouble. The Biden folks never talk about how U.S. policy is looking more and more like Europe’s. The Biden agenda could be sporting a beret."
Industrial policy is generally defined as government action that promotes, or directly subsidizes, the health and growth of favored sectors or companies over others. Put simply, it’s state intervention that steers money to different places than it would go if channeled by the market’s unfettered currents. The principal features are cash subsidies, tariffs, quotas, tax breaks, easy credit, and technical requirements used to curb imports and protect domestic producers.
Hanke refers back to the Inflation Reduction Act, a grab-bag of policies that seeks to turbo-charge investment in key areas identified by the White House, particularly electric vehicles. The French hate it, Hanke says. “The U.S. used to bitch to the EU about their industrial policy, and look who’s bitching now? It’s France, the ‘enfant terrible’ of industrial policy is saying because of the Inflation Reduction Act, they can’t compete with our EVs!”
Indeed, when you go back to Deese’s speech, he lays out exactly the plan that would become law a little over a year later, when the Inflation Reduction Act passed in August 2022. Back in 2021, Deese said investments in “decarbonization, power, and transportation” are at the forefront of the White House agenda, “supporting research, development, and deployment in these sectors as well as supply-side production incentives that drive private sector growth and increase US market share.”
This is something that was tried out before the French Revolution, Hanke notes, citing the example of Jean-Baptiste Colbert, finance minister for “The Sun King” Louis XIV, the monarch who built the Palace of Versailles.
To hear the money doctor tell it, the Biden White House is picking out ideas from the waste basket of history—and it got its inspiration from its predecessor, the Trump administration. Full industrial policy, sanctions and trade barriers included, Hanke marvels, is now coin of realm for the current administration and the Democrats in Congress. As for Trump, the other Republican presidential contenders, and most GOP members in Congress, they’re sold on sanctions and fans of widespread tariffs. “Not in many decades has interventionism gone so mainstream,” says Hanke.
Two farmers’ sons share a phone call
In July 2020, Hanke took a phone call from Mike Pompeo.
The U.S. Secretary of State told Hanke that the Trump Administration was weighing a move to hobble Hong Kong’s financial system that ties its dollar to the U.S. greenback as retaliation against Beijing for undermining the island’s freedoms. “We’re meeting with the president at the White House tomorrow to decide whether to go forward. I was advised to get your expert opinion,” he told the money doctor.
As he recounts to Fortune, “it was a heated conversation.” Hanke recalled telling Pompeo over 35 minutes or so that as a free market and free trade economist, he adamantly opposed clobbering the currency system that held Hong Kong prices in check and formed the foundation of its economic might. “But I remembered that Pompeo’s a farm boy from Kansas. I told him I’d grown up baling hay in Iowa, where I heard his wife hailed from, too. Pompeo said he was heading to Iowa soon to accompany his wife to a reunion she was attending there. So our talk ended on a friendly note.”
The next day, Hanke got a message from a Trump Administration official whom he knew well, and who’d attended the White House session. “You won, Hanke,” wrote the insider, revealing that Hanke’s stance had helped sway the Trump team scrap the proposed sanctions that would have so handicapped one of the world’s most vibrant economies.
Trump got bandwagon rolling by advocating for protectionism
To Hanke, industrial policy has two cousins that, when added to the classic version, make the blow to growth and productivity far worse than “picking winners” alone. Sanctions is one of them. The second: Trade barriers imposed on a broad swath of goods as an overall protectionist mindset. “Those two join industrial policy as part of the interventionist family,” he says. “They’re all ways that government policy comes between willing buyers and sellers, and politicizes economic transactions.”
The ascendance of industrial policy marks what Hanke characterizes as a screeching U-turn from the trade liberalization and deregulation that’s mainly guided this nation since the 1960s.
“The U.S. was at the center of eight rounds of multilateral trade negotiations, we had the opening with China, and the deregulation of everything from the airlines to the financial markets,” he says. Countries such as Japan and France took a different course by protecting and funding pet industries, Japan by employing the “keiretsu” system that shields domestic manufactures from competing imports, and heavily subsidizing such sectors as chipmaking and heavy machinery, and France by bolstering so-called “strategic sectors” from steel to aerospace to cinema.
But in the U.S., the aid and trade benefits the government traditionally afforded specific industries was extremely limited by global standards. The special help went mainly to bolstering three declining, “sunset” industries: clothing and apparel, steel and agriculture, sheltered categories to this day. A recent study from the Peterson Institute for International Economics found that furnishing subsidies and erecting barriers to low-priced imports flopped at saving jobs, raising production, and advancing technology in all three areas. U.S. steel production dropped from 90 million to 70 million metric tons from 1990 to 2019, while employment cratered by the end of that span to 400,000 from one million in 2004. And each position saved cost consumers and businesses over $900,000 a year. The report concludes, for example, that “Import protection has not been a winning formula for industrial policy.”
The misadventure started big time under Trump, although it wasn't the full-throated embrace of industrial policy you see under Biden, says Hanke. "Trump never really embraced industrial policy per se. Instead, he promoted old-fashioned protectionism that’s once again, part of the same interventionist clan." He added that there were some "modest" steps toward industrial policy in the Obama Administration, for example through subsidies for solar panels.
In 2018, Trump fixed his grip on trade and went in bigly on it, imposing 25% and 10% tariffs, respectively, on most steel and aluminum from abroad, burdening imported solar panels and washing machines. The same year, Trump hit $362 billion in Chinese imports, raising our prices for sundry products from semiconductors to computer equipment, furniture to video gear. China riposted by slamming $134 billion in U.S. exports; Beijing heaped the highest duties on agricultural commodities such as soybeans and pork. To placate farmers, Trump demonstrated how industrial policy breeds more of the same by paying farmers $43 billion in 2017 and 2018 as compensation for their lost sales to China.
Biden installs industrial policy as a cornerstone of America’s economic model
Trump’s protectionist ramp, Hanke maintains, opened the route for Biden to take the next big leap. “Trump delivered the one-two punch of sanctions and trade restrictions that went a long way towards winning public acceptance of Biden’s industrial policy,” says Hanke. “Trump got people to thinking of all this turning of the dials in Washington including sanctions ranging from full embargoes to bans on energy exports to the freezing of overseas assets as just a new normal.”
Hanke cited an April 2023 speech by National Security Advisor Jake Sullivan as the first time the Biden regime made explicit an economic canon that veered so dramatically from decades of past practices.
In his talk, Sullivan praised “public investment,” lamenting that it had given way to deregulation and liberalization and that the term “industrial policy” went unjustly out of fashion. He criticized the market's ability to "allocate capital,” and said this was a weakness Washington needed to correct. Under Biden, declared Sullivan, America is now “pursuing a modern industrial and innovation strategy” that would “forge a new consensus,” ensuring more plentiful jobs and greater prosperity than if policymakers allowed the private sector freer reign.
“It was one of the most significant economic statements of the 21st century,” says Hanke. “Before Biden, the move towards industrial policy, even under Trump, was ad hoc and incremental. But the Sullivan speech institutionalized the revolution that Biden had set in motion. For the first time, the philosophy was down on paper.”
As a starting point, Biden’s perpetuated the trade decoupling that his predecessor started, by retaining virtually all the Trump tariffs, or replacing the ones he withdrew with quotas.
The Biden agenda breaks new ground by adding gigantic aid to specific sectors
What’s radically new under Biden: A campaign to choose sectors that the administration believes should play the central role in America’s economic future, and ensure they meet that destiny by providing massive support they won’t get from the markets. The offensive deploys gigantic subsidies, as well as new curbs on trade, to achieve two objectives: greatly expanding the green energy sector, and growing semiconductor production in the U.S., an effort that encompassed carrots for “reshoring” production that had moved abroad.
All three of Biden’s signature legislative measures contain multiple programs that promote those goals. For example, The CHIPS and Science Act passed in mid-2022 awards $77 billion in cash grants and tax breaks to chipmakers that build or expand plants stateside, as well as $200 billion earmarked for “R&D and commercialization.” The bill has helped spawn a number of big projects, including giant facilities for Micron in upstate New York, Taiwan Semi and Intel in Arizona, Wolfspeed in North Carolina, and Samsung and Texas Instruments in the Lone Star State.
The Infrastructure Act of 2021 mandates $7 billion for seven “regional hubs” of plants and suppliers for developing and manufacturing hydrogen fuel cells. The initiative tilts toward social goals. It earmarks a number of facilities for “disadvantaged” locales, including Appalachia and the Dakotas, and decrees that the centers pay the “prevailing wage” for their areas. That condition “puts a floor” under labor costs, guaranteeing that workers will earn at least as much as highly-compensated union workers in each trade.
A pillar of the Inflation Reduction Act: Raising the amounts available under the Department of Energy’s Loan Programs Office tenfold, from around $30 billion to $350 billion. The LPO is using the extra resources to help EV-makers boost production, and secure ample capital for ventures that recycle lithium-ion batteries into chemicals that can be used in EV batteries, build solar ranches, and produce transportation fuel from plants. Clean energy stalwart Sunnova, for example, is receiving $3 billion in loan guarantees for expanding its production of solar panels.
The justification for these programs asserts that the private sector often views them as too risky, so that public money’s needed to get them going. But the government funding is supposed to provide a temporary lift until the enterprises become profitable and self-sustaining. Once venture capital firms and established companies see the battery recyclers and solar farms making good money, the theory goes, they’ll rush to provide fresh funding, enabling those advanced-tech and clean energy pioneers to repay the federal credits, and the subsidies to recede.
As the LPO explains its rationale, “The LPO fills the gap in commercial deployment by serving as a ‘bridge to bankability,’ [providing] loans and loan guarantees that lenders cannot or will not receive until a given technology has reached full market acceptance.”
These programs arrive just as the economics of green energy are weakening. The solar panel industry is struggling with waning demand and high interest rates. As for EVs, Ford just put a $12 billion expansion program on hold as CEO Jim Farley stated that customers aren’t willing to pay a premium for its electric vehicles. GM revealed $1.3 billion in losses in EVs for Q3, delayed plans to build electric pickup trucks, and canceled a joint venture with Honda for building "affordable" EVs.
Hence, a huge portion of the Biden aid is going to a green industry whose future profitability is anything but assured. The danger is that these benefits may not prove temporary at all, and that the aided enterprises will keep needing the government cash and guarantees to stay in business. The history of tariffs and subsidies suggests that once anointed industries get them, they keep the benefits via fervent lobbying.
In fact, all the assistance and protection may make enterprises weaker, and even ensure they never become globally competitive. Getting money from the government eases pressure to create truly profitable products that succeed sans subsidies, and to achieve the lowest possible costs. A primer for what can go wrong: the collapse of solar-cell maker Solyndra that cost taxpayers $500 million, and the bankruptcy of Crescent Dunes, beneficiary of $737 million in guarantees for erecting energy-gathering mirrors in the Mojave Desert, where the grand vision proved a mirage.
The huge growth of sanctions that frequently backfire
Hanke said his phone call with Mike Pompeo marked a rare instance of restraint where Washington for once sheathed rather than wielded the sword of economic sanctions. These are penalties piled on national governments, as well as their companies, officials and tycoons, usually leveled as punishment for violating human rights at home, or unleashing their platoons and planes to grab territory from another sovereign state. They range from full embargoes to bans on energy exports to the freezing of overseas assets.
As Hanke points out, sanctions now stand as a prime weapon of U.S. foreign policy. That’s a huge shift from their relatively minor role two decades ago. “The trend started to take off in the Bush Administration during War on Terror following 9/11, then Obama accelerated the drive by hitting Russian banks and officials following the Crimea invasion, and targeting Syria for its crackdowns on protests,” explains Hanke. “But sanctions expanded on steroids under Trump, who did everything from blacklisting [Chinese telecom equipment-maker] Huawei to outlawing oil exports from Iran and Venezuela.”
Despite denouncing Trump’s economic policies, says Hanke, President Biden’s been just as ardent in embracing sanctions, matching if not exceeding his predecessor’s record pace of deploying new ones. The Biden Administration’s been targeting Russia’s energy and financial sectors since the invasion of Ukraine in early 2022, and keeps pounding China with ban after ban, barring its companies that allegedly aid Beijing’s crackdown on the Uyghur Moslem minority from purchasing U.S. components, and sharply curbing exports of our advanced semiconductors and microelectronics to the world’s second largest economy. All told, the volume of active sanctions mandated by the U.S. Department of Treasury has quintupled from 2,000 in the year 2000, to 10,000 today––and half the giant ramp has come under Presidents Trump and Biden.
Hanke acknowledges that “sanctions are hard to counter, because they’re always wrapped in the flag.” Indeed, administration after administration makes a strong case that striving to punish rogue nations for human rights abuses is America’s moral obligation, and that it only makes sense to marshal trade policy as a lever for ensuring our national security.
Hanke objects to sanctions both on principle and practice. He believes that they amount to bad economic policy that uncork unintended consequences and impose heavy costs on the U.S. while failing to deliver on the righteous goals. “Sanctions penalize U.S. businesses and consumers by raising prices for oil, semiconductors and all restricted foreign goods that Americans would choose to buy were it not for the sanctions,” he explains. Plus, when the U.S. slaps, its opponent slaps back by restricting our exports or denying access to crucial imported materials, as China just did in stopping the sale of chipmaking metals to American manufacturers.
In most cases, America pays a high price for salvos that fizzle and fall rather than delivering a payload, argues the economist. “The nations the U.S. zaps find ways around the blockages. Besides, their leaders rally support by vilifying America for trying to impoverish its citizens,” he says. Hanke notes that by switching energy exports to China and India, Russia will grow at a sturdy 2.2% this year, according to the IMF, waxing France at 1.0% and Germany at -0.5%. “Look at Venezuela,” says Hanke, “they’ve had hyperinflations of over 50% per month in two episodes during Maduro’s 10-year reign, yet he’s stayed in power, in part by harping on the pain the U.S. causes his people.”
Sanctions emblematic of an historic bad choice
Hanke’s opposition to sanctions is highly controversial, and distances him from the hawkish views of the current administration, the Congress, and apparently, most folks in America––who appear to accept that whatever the hit to their wallets, these trade barriers are essential to keeping their nation from harm’s way, and displaying that Washington is “doing the right thing.”
But Hanke holds that whatever you believe about sanctions’ costs versus benefits, their stunning rise exemplifies, and helped perpetuate, the historic transformation of the U.S. economic objectives leading to the widespread acceptance of industrial policy.
“Once Americans bought the logic behind sanctions and got used to them, going all in on industrial policy was an easy step to take,” says Hanke. “It’s been a slippery slope. The thinking that began with sanctions has led to a protectionist, high-subsidy, high-tariff economic policy that’s a shocking departure from the past strongly free-market orientation.”
According to Hanke, the sudden shift towards industrial policy is even changing how his former students think as businesspeople. “They used to think about creating products people will love and that make good money,” he says. “Now, they’re all talking about how to launch infrastructure projects that get the biggest subsidies.” For Hanke, the current regime is selling a new generation on the premise that partnering with the government beats winning in a free marketplace. That course, asserts the globetrotting money doctor, will stifle the economy of the future by reprising a failed model imported from other nations, one that's destined to fail America as well.
