Vital Interests: Steve, thanks for joining us today on the Vital Interest Forum. You specialize in the political economy of advanced industrialized nations. Your most recent book is Marketcraft: How Governments Make Markets Work. As the Biden/Harris administration is preparing to take over, we are hearing about their notions of a new industrial policy for the United States.  What are we to understand regarding industrial policy in the context of what the new administration hopes to achieve?

Steve Vogel: Industrial policies are active government policies designed to change the structure of industry to shift priorities or to move from lower value-added sectors to higher value-added sectors.

VI:There has been a good deal of rhetoric during the presidential campaign from the progressive wing of the Democratic Party advocating for government involvement in sectors of the economy. Those opposed to such policy objectives have labelled them socialist. How do we differentiate a government- orchestrated industrial policy from a socialist economic policy?

Steve Vogel: Industrial policy is definitely not socialism. It does not substitute the government for the market, although its critics would like to say that's what it does. It uses the government in partnership with the market. It's still very much based on the market economy. It just recognizes that there are certain functions that the government and the private sector can accomplish more successfully together than the private sector alone.

VI What are the mechanisms by which the government does this? Is it by certain tax policies or directed incentives?  Are there agencies within the government that take control over certain sectors of the economy to achieve a particular national objective? 

Steve Vogel: This varies a lot by country and by sector, but let me give you a few examples. One is through direct government funding of research and development. Second would be government support for research and development through tax breaks or low-interest loans. In some countries like Japan a key element of industrial policy was the selective allocation of credit, basically using the financial system to favor investments in certain economic sectors over others.

The government can also organize R&D consortia, a team of private firms to work on early-stage development of some technology. An example of this would be SEMATECH in semiconductor technology in the United States. Also, the government can coordinate the setting of common technical standards.

There is also indicative planning, which is very much not central planning like what the Soviet Union did. It is where the government says, "We have a broad national economic agenda, for example, we're trying to move from fossil fuels into renewable energy sources. We are setting a direction and a broad plan, which is not binding." The government can play an important role in coordinating private firms and in forging linkages between different players, like upstream and downstream producers, or universities and industry. The government toolkit for this kind of action is extremely broad.

VI: Would an example be the way the American government subsidizes the agricultural industry because it wants the U.S. to maintain a robust farming sector? Most recently to make up for market losses that resulted from the tariffs the Trump administration imposed on China?

Steve Vogel: That's exactly right. That's industrial policy, which I guess brings us to an important point, which is that just because industrial policy is sometimes a good idea, that doesn't mean it's always a good idea. And it doesn't mean it's always done well. You can move industrial structure in the right direction or you can move it in the wrong direction. Any policy that is designed to affect industrial structure would count as an industrial policy.

VI: When talking about research and development, isn’t the sector which gets a large amount of government funds the military-industrial complex?

Steve Vogel: Absolutely. One of the interesting things about the U.S. is that we think we don't have an industrial policy. Or at least in popular discourse we speak as if we don't. But of course the United States has for decades had a very rigorous industrial policy that has been focused primarily on the military sector. Many of our leading commercial technologies have come out of military technology projects. One of the most famous that resulted from DARPA research is the Internet. 

Another mechanism I failed to mention in my list a moment ago is government procurement. Many American firms have benefited from government military procurement, which has provided a lucrative launch market. That's also spurred technological development.

VI: The country is in the midst of the devastating COVID pandemic. The government has mobilized various industries to produce PPE, ventilators, and effective vaccines. Is this an example of industrial policy or just emergency management?

Steve Vogel: It's both. You could certainly look at government support for research into vaccines as an industrial policy. Maybe it's not the way we typically think about it for high-tech manufacturing, but the pharmaceutical industry is strongly supported by government R&D. That helped make us a leader in that area, and that benefits the United States economically and promotes public health. 

If we want to have a resilient industrial structure - meaning not only extra supplies for an emergency but also the necessary supply chains and the capacity to ramp up production in an emergency – that hinges on industrial policy.

VI: To look behind the curtain and examine the preparedness of the United States to deal with a COVID type pandemic, the criticism is that in fact the government drastically underfunded necessary biotech research. There was awareness from SARS that a novel coronavirus was a looming national security threat. Isn’t this a default in a national industrial strategy to be so unprepared for this kind of threat to the nation?

Steve Vogel: I think you can track both the successes and the failures to what we might broadly call industrial policy. If we start with the medicines, that's a prime case of where the private sector, rationally seeking profits, might not make the investments that are best for public health. They might favor incremental improvements in sleeping medicines over new coronavirus vaccines because that's not where the highest expected profits would be. The government has to step in if it wants to prioritize public health goals.

I think it's fair to say that we did not invest enough in preparing for the pandemic. With 20/20 hindsight, you can see how that would happen. Despite all the warnings, it's a low probability in any given year. Yet when it does hit, you should be ready. We failed to prepare enough for this.  Thankfully, some people were thinking about it. AstraZeneca and Moderna were doing work on vaccines that could be accelerated to address the current COVID pandemic. 

VI: Where does the responsibility lie to make sure such preparedness has some priority in the United States? Is this part of the responsibility of the Department of Health and Human Services, the CDC, or perhaps the Department of Defense? 

Steve Vogel: Let’s start with a fairly stark contrast. Postwar Japan is considered one of the most successful cases of industrial policy. The policy was centered in the Ministry of International Trade and Industry. It was the master coordinator of the industrial strategy for the entire country.

In the U.S., we tend to have a much more fragmented and decentralized government and that's not all bad. For an effective industrial policy today, you actually need a combination of central coordination and decentralized implementation. The decentralization provides some of the linkages I was talking about, matching universities and industry, or upstream and downstream production. This actually requires a lot of local expertise and deeply ingrained knowledge. You need people around the country in different agencies to implement micro-level industrial policies.

Having said that, it would be nice if there was some central governmental direction, but it's not obvious how you make that happen given the structure of the U.S. government. Would you want an industrial strategy headquarters in the White House, or would you want to elevate an existing department? I see potential liabilities for each approach.

The Department of Defense is the government agency that has been most successful with industrial policy to date. But its priorities obviously skew toward the military side. Yet the Commerce Department might be vulnerable to industry capture. It might start making industrial policy to please industry rather than for long-term national goals. So probably the best approach would combine strong leadership from the top, plus a new coordinating body, with more decentralized implementation.

VI: Let's look at the situation where an external threat drives the need to insure the United States has a strong economy. China is now often mentioned as the reason that the U.S. must adopt a more rigorous and strategic industrial policy. The Chinese model of state capitalism relies on long term industrial planning to achieve their goal of becoming a dominant high tech power. The Chinese government has announced the Made in China 2025 initiative which is intended to put them on the path to be a global technological leader. Can you talk about how external pressures are driving a U.S. industrial policy mandate?

Steve Vogel: We don't have to imagine whether China has an industrial policy or a long-term strategy. They are very clear that they do. The Chinese leadership has set Made in China 2025 as an essential goal and they have targeted many of the sectors that the US now leads in. Their strategy is pretty clear. They want to catch up and overtake the United States in the areas of high technology. Since I work on Japan, this seems a little bit like a repeat since the last round of American debate over industrial policy was in the 1980s in response to Japan. The idea was that Japan was threatening our economic leadership in many areas and we had to have our own industrial policy.

The U.S. never developed an industrial policy in the sense of one cohesive national strategy. But there were a lot of smaller initiatives that constituted a de facto American industrial policy. Now, China is certainly the impetus for the renewed debate. I think it's also an opportunity, because the ideas right now are coming from both sides of the aisle. At this moment of political transition, we have an opportunity. There's not a consensus within either party, but there are advocates for industrial policy on both sides.

Marco Rubio is the most prominent advocate on the Republican side, but there are also think tanks on both sides that are strongly supporting industrial policy. The other thing that's changed, interestingly, is that some economists have emerged as proponents of industrial policy. The professional economists in the 1980s were overwhelmingly opposed to industrial policy. Now you have some very prominent voices like Joseph Stiglitz and Dani Rodrik who are openly advocating industrial policy. 

The intellectual case was already there in the 1980s, but it was largely ignored. Now people are revisiting it and making a very compelling case. China is forcing people, both politically and intellectually, to consider the necessity of some form of industrial policy. If we think about national strategy, we have to consider whether we want to cede our technological leadership to China. If not, what are we going to do about it?

VI: What were the economists’ objections to any kind of industrial policy? Did they consider that government manipulation or interference in the market would be a mistake because government agencies do not really understand market forces and would do more harm than good?

Steve Vogel: Yes, that's right. The two words that were most often used to dismiss industrial policy were “picking winners.” The idea was the government can't pick winners: only the private sector can make investments wisely. The government doesn't have the information it needs. It doesn't have right incentives since it doesn't have money on the line the way that a private company does. And it doesn't get the same feedback from market competition. If something doesn't work for a private company, it will quickly change course, whereas the government might just keep doing it forever.

The idea is that the private sector should be making these choices, that the private sector will respond to market signals and take action. If something's worth doing, the argument goes, then the private sector will figure that out. Government industrial policy is inefficient because it distorts market signals and disrupts the operation of the free market.

The other critique was one of capture. Industrial policy would end up being captured by certain industries. It would be driven by politics rather than by economics. The government would end up giving subsidies to the most politically powerful industries. That critique also reflects a fundamental distrust of the American government's competence - the notion that the American government is just not smart enough, not capable enough, and not organized enough to successfully manage an industrial policy. It doesn't have the institutions that could make industrial policy work in a country like Japan or China.

You put those two points together and that's the standard case against industrial policy. 

VI: You have studied Japan and the industrial policy they followed in the 1980s which contributed to their successful growth. But the Japanese economy was not able to sustain this and today they are not the dynamic force in the world they used to be. What was the cause of their retrenchment?

Steve Vogel: Japanese industrial policy began in the 1920s and really took hold after the war in the '50s and '60s. By the 1980s, they had caught up and surpassed us in key sectors. That was our industrial policy “Sputnik” moment, when we said "Well, now what do we do to counter this threat to our economy?" 

As it turned out, the Japanese economy had its own crisis starting in 1990. There are lots of opinions about what caused it. But to simplify a complicated debate, I would say they made some critical errors in macroeconomic policy, which caused a bubble and a crash, something which may sound a little bit familiar to an American audience.

Since then, I would argue that one of their key mistakes was actually abandoning industrial policy. I'm not saying that they should have stayed on the same path. As the economy becomes more advanced – and China is going to eventually face this –  you have to change your strategy from catching up to trying to advance on the frontier. In the 1990s, when the Japanese economy was sinking and the American economy was surging, those same Ministry of International Trade and Industry officials that I was talking about started to lose confidence in themselves.

They started saying, "Hey, whatever disease the U.S. has, we want to catch that  because it seems to be working." They didn’t completely dismantle industrial policy, but they became much more cautious. That was true of the government leadership and also the private sector. The private sector, which had been much bolder in the '50s and the '60s, became more conservative. They started to rely more on the large domestic market and to take fewer big risks in international competition. Because of slower economic growth and industrial malaise, the Japanese lost some of their technological leadership.

Having said that, the Japanese economy has performed reasonably well on a per capita GDP basis. It's still a remarkably rich and stable country, so they've done okay.

VI: The United States is reluctant to look at other models, but perhaps it is worth noticing what is currently happening in Europe. There is an active group in Germany very interested in promoting industrial policy with a new National Industrial Strategy 2030 recently announced. There has also been a Franco-German manifesto for European Industrial Policy for the 21st Century being discussed. Are there lessons to be learned or policies to be followed that the Europeans are going to be undertaking?

Steve Vogel: I think you can learn something from each of these models - the Germans, the Japanese, the Chinese - but the broader lesson is that in these challenging economic times you need some sort of industrial policy. You have to match it to the capabilities of your particular country, both your governmental capacity and your private-sector strengths. The U.S. still leads in a lot of areas of technology. In some ways the Europeans feel like they're playing catch up. Obviously, they lead in certain niches, but overall I don't think that they are operating from a position of strength. It's more that they want to be able to somehow keep up with the United States and China.

To address your question, I wouldn't say we should take initiatives in other countries off the shelf, but we should certainly be aware of what the other countries are doing and then select our lessons carefully.  I don't think we can, or we should want to adopt the full Japanese model of industrial policy, for example. But the lesson from Japan would be that it helps to have a career civil service that is relatively insulated from short-term political pressures, with a mission orientation, and with strong ties to industry. Those are all important elements of an effective industrial policy.

That last one is important. It sounds contradictory to be both insulated from industry and engaged with it, but that's actually the combination you want for a successful industrial policy. The government has to be close enough to industry to understand what's going on, what the specific needs are, and what specific linkages need to be encouraged. But it cannot become captured by industry.

VI: Let's look at some of the possibilities under the Biden administration that can revitalize American industries, create incentives for new enterprises, and onshore critical supply chains. What could the new Biden team do to implement an industrial policy that in the short term would move the American economy forward in creating jobs and new directions?

Steve Vogel: You just hit the crux of the issue when you added “short term” because the reality is that industrial policy is largely a longer-term endeavor. I'm not saying it doesn't have any short-term benefits, but the whole point of industrial policy is to make investments that might be too long-term or too large-scale for the private sector. 

Having said that, there are obviously short-term effects. For example, if we strengthen investments in the kinds of infrastructure that would support industry, that will create employment in the short run as well as strengthen the economy in the long run. Or if you strengthen and subsidize workforce training programs, that creates jobs in the short run and builds productive capacity in the long run. I think that's what any reasonable administration has to balance. Government leaders have to think about what the country needs in the long term but also include elements that will pay off relatively quickly as well.

VI: To look at a specific initiative, the Biden transition team has demonstrated with the appointment of John Kerry to oversee a national response to the challenges from climate change, that the new administration will aggressively implement aspects of the Green New Deal. Does this qualify as an industrial policy?

Steve Vogel: Yes, it's one we need desperately. With the older versions of industrial policy, we were basically thinking: How can we transform our industrial structure to favor higher-wage, higher-skill sectors? That was a worthy goal, but one which could be evaluated largely in economic terms. What policy will deliver the most benefits? 

If you consider the industrial transition from fossil fuels to renewable energy, however, we have an even larger goal, which is to save the planet. That makes the case for industrial policy all the stronger because there are both economic reasons and public welfare reasons that transcend any narrow economic calculus.

Given the scale of the threat and the relative urgency, accelerating an industrial policy to mitigate climate change is an appropriate priority for the new Biden administration. Industrial policy is not the only tool, but it's an important one. When you invest in skills that will be helpful to moderate the damage from climate change, you invest in innovation that will be good for the economy as well as good for the planet.

VI: I recently read an opinion piece written by the mayors of eight cities in the industrial Midwest that was a plea for the federal government to pay attention to the plight of their populations. Even before the impact of COVID they've suffered  because of the closing down of major industries in their region. These mayors are calling for a domestic Marshall Plan to help rebuild and revitalize their economies. Is a kind of Marshall Plan to assist the economically depressed parts of the country a proper use of industrial policy?

Steve Vogel: It makes sense for the government to support productive investment since the private sector is probably going to underinvest in long-term technological development in these regions. And it makes sense to consider geographical dispersion. This is where decentralization can be a positive since you need local expertise to understand what are the strengths in a particular region. For example, what are the strengths of the university in that area, and what is the technology and skill base? What are the relevant companies in that region and what is the sector or sub-sector you'd want to develop?

That’s where things get technical and expertise becomes essential because there are certain industries in which local agglomeration is important. In other words, you need a certain concentration of capabilities in relatively close geographical proximity.

Here is where you would want a central national industrial policy headquarters with sector-specific expertise combined with expertise embedded in specific regions of the country. That type of coordination and network building is an important element of industrial policy and a promising one because it doesn't necessarily require a lot of money. 

VI: To come to a conclusion to our discussion on the prospects for an industrial policy to move the U.S. economy forward, what would be the consequence if there was no consensus, no political will to implement such a national program?

Steve Vogel: In the short term, we've got a lot to work to do. We have to conquer this pandemic. We have to revive the economy. The government will have to stimulate the economy to have a robust recovery. So there is a lot that could be done in the short term without industrial policy.

In the long term, however, the United States will need some sort of industrial policy to make the transition to a new energy regime and to maintain American technological leadership. Ideally, we would have strong leadership at the top. We would have a bipartisan consensus on goals, and we would have effective central coordination.

But there's a lot that can be done short of that ideal. Even without the ideal administrative capabilities and political conditions, the U.S. could do a lot with some administrative changes, coordination, increased funding, plus support for regional and sectoral initiatives.

You have to bear in mind we have had hidden industrial policies in the United States for decades, and many of these initiatives have been successful. We didn't have central coordination or a sense of national mission, but the programs had a positive impact.

VI: Steve, thanks very much for this conversation. We will have to pay attention to what the Biden administration can accomplish to realize the ideas they have articulated on industrial policy.

Steve Vogel: Yes, it will be interesting to see.

Steven K. Vogel is Chair of the Political Economy Program, the Il Han New Professor of Asian Studies, and a Professor of Political Science at the University of California, Berkeley. He specializes in the political economy of the advanced industrialized nations, especially Japan. His most recent book, entitled Marketcraft: How Governments Make Markets Work (Oxford, 2018), argues that markets do not arise spontaneously but rather are crafted by individuals, firms, and most of all by governments. Thus “marketcraft” represents a core function of government comparable to statecraft. The book systematically reviews the implications of this argument, critiquing prevalent schools of thought and presenting lessons for policy.