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TOKYO – The argument has been decided between American and other advocates of free markets and proponents of Asian and European-style industrial policy.
No matter what economists (including The Economist) might think, the United States government has come down squarely on the side of industrial policy.
It took a long time for the economic policies now promoted by President Joe Biden to become mainstream. For decades, Americans believing in the superiority of their own system refused to let their faith be dented by the emergence of Japan and Germany as the world’s preeminent manufacturing countries and the rise of the Asian “Tigers†– South Korea, Taiwan, Hong Kong and Singapore.
Even the rise of China failed to have much of an impact on American economic ideology until the connection between one-way free trade and the loss of millions of “good jobs,†on the one hand, and China’s development into a serious strategic competitor, on the other, became too plain to ignore.
It attests to the power of ideology that those who made the issue a major one were the victims of economic decline. They put Donald Trump in the White House while the majority of professional economists failed to see the problem.
There is an old Russian joke about a parade in Red Square in the latter days of the Soviet Union. An American official watching from the reviewing stand with his Russian counterpart becomes more and more alarmed as the crowd cheers more and more loudly for the passing soldiers, artillery, tanks and missiles.
“This is not good,†says the American.
“Wait,†says his host.
Finally, the parade ends with a half-dozen middle-aged men in rumpled dark suits shuffling along behind the last enormous missiles. The crowd goes berserk, jumping up and down, shaking the reviewing stand, screaming their heads off.
“I don’t understand,†says the American. “Your soldiers, artillery and tanks could overrun Europe. Your missiles could hit Western capitals. But who are those men?â€
“They are the economists. They destroyed the entire Soviet Union.â€
Although it was too late for the Soviet Union. America, it can be argued, has awakened from its ideological self-hypnosis just in the nick of time.
Prominent features of President Biden’s economic renewal plan include:
- More than $600 billion to be spent on roads and bridges, electric vehicles and charging stations, railways and other transport infrastructure.
- More than $1 trillion to be spent on a range of social infrastructure and service projects including the construction and renovation of low-cost housing, schools, hospitals and clinics; better health and personal care for the elderly and disabled; and high-speed broadband internet for all.
- $300 billion to be spent on measures to support domestic manufacturing, including $50 billion for the semiconductor industry and $180 billion to be spent on R&D and worker training.
The total is approximately $2.15 trillion, or 10% of America’s GDP. That is 2.8 times the $760 billion output gap (the difference between actual and potential economic output) through January 2024 calculated by the Committee for a Responsible Federal Budget using estimates from the Congressional Budget Office. It could take that long, if not longer, for Biden’s measures to take effect.
We might call it the political output gap – the gap between what the economy is likely to deliver without this stimulus and what the recently elected American government believes it should deliver. This, along with the loss of several important industries, is the legacy of a deregulated free market economy competing in a world dominated by industrial policy.
Much smaller in terms of funds committed, but very high-profile and important strategically, is public investment in advanced telecommunications technology. When Japanese Prime Minister Suga met with President Biden in Washington in mid-April, they agreed to invest a total of $4.5 billion in alternatives to Huawei’s proprietary 5G networks.
These include the Open-RAN (Radio Access Network) technology most actively promoted by Japan’s NEC and Rakuten Mobile and supported by the Open RAN Policy Coalition. The Coalition’s 60 members include Japanese, Korean and European companies, but are mostly American. Its director, Diane Rinaldo, is a former US government official.
All this adds up to a level of government involvement in the economy that may be regarded as normal in the EU and East Asia, but that hasn’t been seen in the US since World War II.
And what is Biden not doing? Unlike President Trump, he is not – so far – trying to change China’s economic structure or basic economic policies. And he is not criticizing the industrial policies of Germany, Japan and South Korea either.
Why not? Because America is now on the same page and he needs the allies’ support to form an effective economic coalition against China.
Some but not all Congressional Republicans are opposed to Biden’s plan, but the rank and file who supported Donald Trump probably are not. After all, rebuilding the nation’s infrastructure was a Trump policy that he never got around to implementing.
The following press release tells you what business thinks about it:
MILPITAS, Calif. – April 21, 2021 – SEMI, the industry association serving the global electronics design and manufacturing supply chain, today applauded the introduction of the Endless Frontier Act (S. 1260) to bolster US semiconductor innovation. This bipartisan legislation calls for the investment of more than $100 billion in science and technology initiatives to strengthen US capabilities to develop critical technologies, expand the US workforce, and foster federally funded research. The legislation was introduced in the Senate today by Senators Chuck Schumer (Democrat of New York) and Todd Young (Republican of Indiana) and a bipartisan group of co-sponsors.
To put this in context, SEMI’s breakdown of worldwide semiconductor production equipment sales in 2020 shows an overall increase of 19% to $71.2 billion. Sales were strong in China, Taiwan, South Korea, Japan and Europe, but declined by 20% in North America to $6.5 billion, or 9.2% of the total.
Roughly speaking, a government subsidy of $50 billion would close the gap with China, Taiwan and South Korea – individually, not as a group – for five years. This is a strategic investment that the private sector could not be expected to make.
Investors, of course, must assess the net impact of greatly increased government spending and the increase in corporate taxes that will pay for it.
And East Asia and Europe must consider the impact of the world’s largest economy becoming as interventionalist as they are.
Scott Foster is an analyst with Lightstream Research in Tokyo.
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