Developmentalism Requires Direction

Developmentalism Requires Direction

The second Trump term offers the opportunity to set America on the path to economic renewal—if culture wars don’t distract.

(By cindylindowphotography/Shutterstock)

The impression that neoliberalism is finished is widespread. As Julius Krein has rightly pointed out, whether among populists or elites, on the left or the right, you won’t find anyone who believes that tax cuts would suddenly boost growth, or that a new free trade deal would turn China into a democracy. The whole world is rather keeping an eye on what will replace neoliberalism in the most dynamic part of the West: the U.S.

The election of Donald Trump and the resulting upheaval led to a reconsideration of political economy. Tariffs and protectionism are no longer considered outlandish ideas; in this regard, Biden is continuing the policies of his predecessor.

According to Robert D. Atkinson, who coined the term “national developmentalism,” a new consensus has already emerged around Biden’s “Neo-New Deal” project. It has garnered support across the political spectrum, and is enveloped in an aura of inevitability reminiscent of the neoliberal mantra “there is no alternative.” 

But has a shift of economic paradigm really occurred? On the contrary, one might contend that what we are witnessing is rather a directionless drift.

Example of this confusion is provided, for instance, by the Biden administration’s report on supply chains. It states that subsidized childcare enhances supply chain resilience. Similarly, the Department of Energy identifies “energy justice” as the most important principle for its vision to achieve clean energy. One gets the impression of a buzzword bingo, rather than of an intellectual renewal.

The crystallization of the new paradigm is hindered by barriers within economic thinking. So-called “sector agnosticism” would be one of them—the notion that all sectors are of equal importance. This means the persistent devaluation of manufacturing, despite its outsize influence on capital investment, productivity, trade, and R&D.

Another neoliberal tenet impeding reflection on a new political economy is the conviction that any state intervention is necessarily wrong. Here, neoliberals continue to use arguments that went unchallenged primarily due to the post-Cold War euphoria. Often forgotten is that monumental endeavors that led to important technological spillovers—from nuclear power to microchip to the Internet—were results of industrial policy.

Yet neoliberalism is not the only barrier to the renewal of the American political economy. On the left, there is a misconception that growth is fundamentally pernicious, a belief that underpins one of the principles of Biden’s green industrial policy. Advocates of “neo-New Dealism” belong to a school of thought that maintains productivity growth inevitably harms workers, and innovation poses a threat to both humanity and the environment, being at best a necessary evil. For many today, growth is an illusion to be abandoned in the name of more expansive social policies and climate change prevention.

Growth is vital not only because it is easier for a society to solve internal problems when it has more resources at its disposal. Geopolitics are an equally important factor. Beijing can afford to do extraordinary things when it comes to manufacturing. As Richard Baldwin reminds us, “China’s industrialization is unprecedented. The last time the ‘king of the manufacturing hill’ got knocked off the throne was when the U.S. surpassed the UK just before WW1. It took the U.S. the better part of a century to rise to the top; the China-U.S. switch took about 15 or 20 years. China’s industrialization, in short, defies comparison.” Moreover, as Baldwin observes, as recently as 2002, China was more dependent on American inputs. Now, the situation has reversed, with the U.S. being three times more exposed to Chinese manufacturing.

For Xi Jinping, achieving high growth constitutes the Party’s core task. China’s economy may experience turbulence, temporarily lose its confidence (such as in the face of a real estate crisis), but it will never deviate from the dogma of growth. To paraphrase Peter Thiel, when you hear degrowth, you should think CCP.

Ideas have consequences, and economics is no exception to this rule. They are not everything, however. As Michael Lind argues, it is not sufficient that a certain theory gains a majority in one party that wins elections. It takes an upheaval to trigger a paradigm shift. With the China shock, the Great Financial Crisis, the pandemic, and now the war in Ukraine, it seems the system has been disturbed enough to finally get rid of its ideological assumptions.

Unfortunately, the debate about the economic future has been reduced to the realm of culture wars, with Democrats pushing racialized welfarism and Republicans fighting against “woke capital.” Neither one nor the other has emerged with a positive project: The left proposes a purely negative program, anti-fascism, anti-racism, defunding the police, while the right is stuck in “neoliberalism of fear,” distrustful of the state, which it views solely as a dangerous tool wielded by the left.

Today, American developmentalism—still a loosely defined current of thought focused on developing the country through state activism—either leans heavily on abstract digressions or gets lost in historical case studies. As a result, it often fails to present concrete solutions or address the specific problems that need solving. Debates surrounding the American political economy risk repeating the mistake Christopher Caldwell criticized Reagan for: the belief that winning the argument automatically leads to political victory. Proving that social programs were ineffective did not bring the Reagan administration one step closer to dismantling them.

The fundamental question has shifted from the size of government—big or small—to the focus on building an effective state and designing an effective industrial policy. Let’s take a look at a few crucial domains that are largely neglected today by abstract debates and outdated economic ideologies.

Young companies are the primary drivers of innovation. However, in America, the number of new manufacturing companies has declined year after year for the past thirty years. One of the main reasons is the lack of funds to scale-up their operations. Capital-intensive, long-term industrial projects, while beneficial to investors and the economic and technological fabric in the long run, do not yield quick returns that venture capital is looking for. China has a myriad of financial vehicles in place to overcome this problem. One of these mechanisms is the so-called guidance funds.

These financial devices bring together market and state actors who pool their resources to meet industrial policy goals and generate returns on investments. Offering financing at the crucial stage of scaling up, they enable rapid expansion. Industrial guidance funds help companies navigate the “valley of death”—a period when production requires significant capital expenditure while future profits remain uncertain—allowing them to survive and develop.

Guidance funds don’t always yield the expected results promptly, as proven by the Chinese semiconductor sector. Yet the outcomes can be remarkable, as seen in the electric vehicle sector, where a combination of state subsidies and loans, coupled with the entrepreneurial drive of private firms, has led to the emergence of major players conquering the world markets. Similar success has come from the billions that have financed telecom companies like Huawei and ZTE. As one Gavekal analyst put it, “China’s well-rehearsed industrial policy can be staggeringly wasteful but still produce stunning results.”

Reform is also urgently needed within the American innovation system. The disappearance of corporate R&D labs has led to a situation in which the U.S. has lost crucial institutions responsible for not only achieving technological breakthroughs but also coordinating their commercialization. The technological advances emerging from the ecosystem have benefited not just the companies that produced them, but the entire economy. Reclaiming the American industrial standing will be difficult without addressing that gap.

Implementing an ambitious industrial strategy will require nothing less than a reform of state institutions. An interesting approach was proposed by Caleb Watney, who argues that “laying the seeds for effective institutional growth in small ways today can pay dividends down the road. And launching a new office or sub-agency is almost always an easier political lift than creating a new agency from scratch.” 

Inspired by the institutional experiment successfully conducted by Netflix, he proposes something similar for government. Originally a DVD distribution service by mail, the streaming company was inspired by YouTube and aimed to develop its own platform. To this end, a new division was established, exempt from traditional procedures and structures. Eventually, this division grew and created the company we know today.

Achieving success required a departure from established conventions and standards, adopting new practices, tapping into different talent pools, and utilizing criteria unlike those the organization was previously accustomed to. An effective national development strategy, as Watney highlights, demands a focus on the technical aspect, on issues such as financing mechanisms: “When is an innovation prize a better fit for a technical problem than a loan guarantee, advance market commitment, or a milestone payment? Mastering the nitty-gritty of government procurement best practices is not exactly a sexy policy topic, but it will be essential for building an entrepreneurial state.”

When it comes to procurement, one of the most successful mechanisms was introduced by NASA. When the Agency decided to replace the Space Shuttle, it held a competition which rules diverged from the standards prevailing in the federal government. Three factors, as Eli Dourado explains, “shared development costs, milestone-based fixed-price payments, and goal-driven evaluation—were all geared toward reducing the amount of oversight NASA had to exercise. It allowed the companies to move at their own natural speed, not waiting for NASA to approve specific elements.”

Two companies each qualified for subsequent phases of the project—each time, one of them was SpaceX. If not for the new milestones mechanism, taxpayer money would have been wasted on SpaceX’s competitors, whose projects experienced delays and failed to deliver. The total cost of the program was $800 million, and the result is a new rocket that will take America back to the Moon. NASA’s own project, the new space shuttle, is still behind schedule and has already cost more than $20 billion. Dourado suggests that every agency should have a similar option when it comes to procurement, combining market competition with government financial support.

No industrial strategy can be successful without an adequately educated workforce. America finds itself in the midst of a STEM crisis. The launch of Sputnik represented a moment of realization that without engineers and scientists the U.S. would not win against the Soviets. Today, Americans’ diminishing interest in engineering and science could significantly weaken the country’s position in the 21st-century geopolitical rivalries.

The data paints a damning picture. The Trump administration’s report, “Charting a Course for Success: America’s Strategy for STEM Education,” states that while America has produced 10 per cent of the global total of STEM bachelor degrees over the past 15 years, India and China combined have produced nearly half.

It’s not so much that the level of American universities has declined as that the interest of American students has. National security will pay the price for this significant misallocation of talent, as foreign students are filling the vacancies left by technology-indifferent Americans. The survival of many science faculties already depends on a steady stream of foreigners. According to the National Foundation for American Policy, 81 percent of graduates in electrical engineering are foreigners, 79 percent in computer science, and in industrial engineering that number is 75 percent. Addressing this talent crunch should be a top priority for industrial policy. Especially against the backdrop of Xi’s assertions that he intends to turn China into a scientific and technological superpower. Just as after Sputnik, today education should be wrested from the hands of bureaucrats and recognized as a matter of national security.

Pessimists who claim that American institutional sclerosis is irreversible and that vested interests will block any attempt at reform have many solid reasons on their side. Optimists point to Operation Warp Speed.

The speed and efficiency with which OWS was carried out was remarkable, especially when contrasted with the many shortcomings of U.S. state capacity in other areas. Some argue that it provides a working model for industrial policy that can be applied in other domains.

Alex Azar, former Secretary of the Department of Health involved in OWS, explains how, during the Bush administration, he attempted to secure funding for a pandemic preparedness plan. The sum demanded was not astronomical, but he could not obtain it. In contrast, during the pandemic he received the signal that money is not an issue. “I have to be quite pessimistic about the ability to, on the financial side, execute something like OWS in the absence of a catastrophic, systemic-type crisis,” Azar stated. If Congress had to be persuaded to support Warp Speed, it probably wouldn’t have gotten off the ground at all.

Azar stresses that OWS was based on two key factors: unusually brave and efficient personnel, and exemption from bureaucratic interference. Add to that a great deal of luck coupled with a sense of urgency. Azar cautions against the belief that OWS can be repeated on demand. “We needed a miracle and we got one,” the former secretary reiterates. While OWS is an important case study, one must be careful so it does not build up a sedating conviction that all will end well.

The right must cultivate a passion for technical solutions, exploring specific financing mechanisms and reforming institutions. The culture war won’t serve as a substitute for the effort Americans have long neglected: thinking about their economic development. Tomorrow belongs to those who start reflecting on it seriously. 

The post Developmentalism Requires Direction appeared first on The American Conservative.

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