The New Economic Consensus
Industrial policy is now a bipartisan issue in the US and will become so here
Towering columns
On his Substack, Noah Smith says British critics of American industrial policy do not understand its purpose: to shore up national security.
Without manufacturing industries, it is very hard to fight an industrial war. Fine wine, management consulting, and overpriced eldercare may command high prices in peacetime, but when bombs are dropping on your city, they will not offer a means of fighting back. If the U.S. and its allies find themselves without substantial manufacturing industries during a war with China, the result could be far more dire than higher consumer prices or slower adoption of EVs…A world ruled from Beijing and Moscow is unlikely to value the economic rules and institutions that the writers of the Economist and the Financial Times hold so dear. Instead, a world where the power of the U.S. and other democracies have been smashed is likely to be a dirigiste one, where global trade is arranged primarily for the benefits of strongmen like Xi Jinping and Vladimir Putin. Such strongmen are unlikely to listen to British pundits lecturing them about David Ricardo. In fact, they are unlikely to listen to British pundits about much of anything. (As far as I know, Russians and Chinese people generally lack the peculiar American reverence for anything uttered in a British accent.)
Every single one of the Biden administration policies that the Economist and FT writers revile — the tariffs, the subsidies, the export controls, and so on — is aimed at making sure the U.S. does not lose critical manufacturing industries that it would need in order to mount a defence against China and Russia. We do not know — at least, I do not know — if they will be effective in this task. But this is undoubtedly their core purpose and reason for existence. Export controls are intended to stop China from dominating high-end semiconductors — the most strategic of all industries. Investment restrictions are intended to prevent China from appropriating America’s remaining technological secrets and handing them to its own military-industrial complex. Tariffs and industrial policy are intended to prevent America from deindustrializing in the face of Chinese competition. It’s all about national defence.
And yet the British writers basically never acknowledge this at all. Only Luce mentions potential national security benefits from Biden’s policies, and only in passing, and only regarding chip export controls. Otherwise, crickets. When the Economist declares that “first principles” prove that “it makes sense” for the U.S. to engage in unilateral trade liberalization with respect to China, the “principles” and the “sense” are purely economic, with zero mention or consideration of the benefit of a strong national defence. I know David Ricardo’s theory well; I have taught it to undergraduates. Regardless of whether it’s a good theory of the gains from trade, it does not contain any provision whatsoever for national security. There are things that matter in the real world that Econ 101 simply doesn’t tell you how to deal with. And yet we must deal with them all the same.
In The American Conservative, Kevin L. Kearns and Robert W. Patterson say US Republicans cannot allow Joe Biden’s Democrats to become the party of industrial revival.
In revitalizing manufacturing, Trump confronts the same obstacle he faced in his first term: a legion of influential GOP policy players, encompassing supply siders, libertarians, and neo-liberals, whose economic objectives few Republican, or, for that matter, Democratic voters share. These ideologues soured on the president when he imposed tariffs on steel and aluminium in 2018. The top White House economic adviser, Gary Cohn from Goldman Sachs, resigned in a huff. Trump gets the same shabby treatment from rabid free traders at the Wall Street Journal, who trashed his beefed-up tariff proposal last August. The newspaper’s editors, steeped in discredited neoclassical trade theory, remain happy campers when Trump talks about extending his 2017 tax cuts, but sneer at his goal of restoring the very “America first” trade and industrial policies upon which the GOP was founded, and which reaped a massive growth surge, lasting more than 100 years, leading to dominant superpower status.
Favouring the financial sector over manufacturing, these entrenched influencers think trillion-dollar merchandise trade deficits don’t qualify as a “useful measure economic performance.” They base such claims on a mistaken extrapolation from the maxim that a one-country or one-year trade deficit doesn’t matter because markets correct such imbalances. Yet the market has yet to reverse our cumulative net losing streak of the last 30 years—now approaching a whopping $20 trillion and counting, representing the loss of prime wealth-creating industries and millions of family-wage jobs with good benefits. If we don’t change the trajectory, as Trump would say, we won’t have a country.
Lost in the details of GDP numbers and tax rates, the free traders can’t see the faulty economic models in their own eyes; nor can they spot currency manipulation, inflexible labour markets, the overvalued dollar, and the trade-distorting practices of foes and friends alike. Their cherished abstractions don’t work in the real world. Meanwhile, the constant fixation of their supply-side fellow travellers—corporate and business tax rates—are less determinant of national success and well-being than keeping the United States on top of the innovation and manufacturing game by moving
promising ideas quickly from R&D into useful commercial production.
For The Critic, Gavin Rice says Britain must seek to reindustrialise and improve its balance of trade by adopting a new economic model.
The root cause [of the UK’s stagnant growth] lay elsewhere — Britain has too few productive sectors, with too little capital formation going into machinery, equipment and technology. Manufacturing has declined far below international comparators as a share of GDP. National savings are ill-deployed, stuck in stagnant bonds or real estate instead of UK industries. Our country has one of the lowest rates of overall investment in the OECD. Supply chains are more precarious than ever, with Britain reliant on imports from some of the world’s least stable regions and most authoritarian economies.
Inequality is more of a problem than in the recent past. Those on lower incomes have largely been protected by the National Living Wage, but average incomes have failed to move for years and property ownership is becoming a remote prospect for many – the average age of first purchase is now 34, with astonishingly low rates of ownership among younger cohorts. Intergenerational wealth transfers are becoming a more important part of our economy, with 40% of 18-34 year-olds still living with parents. Despite stagnating average wages, executive pay has continued to skyrock relative to workers. For those stuck renting, rent rises continue to outstrip pay growth, making the journey to ownership even less achievable.
It is meaningless to talk about “equality of opportunity” when the main thing younger workers want to do — buy a house — is out of reach. Cutting the higher rate of tax will not fix this. Likewise, cutting corporate taxes will not magically transform investment and output. Inequality also prevails across regions – only London and the South East sustain themselves fiscally, with all other UK regions net recipients of public money. Unless the output of those regions can be improved, our expensive internal transfer union will only become more costly.
Key to all of this is Britain’s trade deficit. The deficit on the UK’s current account — the measure of earned income from export of goods and services relative to what is imported and consumed — stands at over 3% of GDP. We have become used to this as a feature of our national economy, but it only emerged as a permanent deficit under New Labour. This means the UK buys more from the rest of the world than it sells. This must be financed through overseas persons and entities buying UK assets – we rely on foreign investors and speculators to buy our houses, companies and debt. This is one reason we are subject to such high levels of overseas ownership. Some 58% of UK quoted shares are beneficially owned overseas, and Britain is reluctant to interfere in complex ownership structures of its infrastructure and assets – from nuclear power stations to Thames Water or even Admiralty Arch (now to be turned into a Qatari owned hotel).
In the New Statesman, Helen Thompson warns that China will seek to achieve control of world trade as part of its strategy to become the new global hegemon.
Like the US at the start of the 20th century, China now has the same interest in trade across the world’s two principal oceans. While 14 per cent of maritime trade in and out of the US still passes through the canal, China controls ports at both its Atlantic and Pacific ends. Washington’s own policy under Trump of encouraging China to import liquefied natural gas from the Gulf of Mexico only intensified Beijing’s strategic interest in the canal. Iran’s navy has also been asserting itself. Since transit through the canal must be non-discriminatory, and Panama has enjoyed sole operational authority since 1999, the US was unable in February 2023 to force Panama to warn off two Iranian naval vessels from a loudly threatened sail through the canal.
Intensifying the stakes, Latin America holds over half the world’s reserves of lithium and copper, two metals that are essential for the transition to low-carbon energy. Much of China’s investment in the region has been in the resource sector, especially lithium. One purpose of Bidenomics is to develop competing US-centred supply chains for critical minerals. But Washington had already allowed Chinese companies to dominate mining and processing in the lithium triangle of Chile, Bolivia, and Argentina before it joined the new Great Game for resources. The right-wing Argentinian president Javier Milei ran for office promising to turn away from Beijing, but since taking power in December 2023 he has not acted to push China out of the country’s lithium industry. Whatever Milei’s pro-US ambitions, which include wanting to join Nato, Buenos Aires cannot simply turn away from China, especially because it is at risk of defaulting on its sovereign debt and wants China’s help. In April, Argentina’s foreign and finance ministers were in Beijing to try to resurrect a currency swap that Beijing froze after Milei’s election.
Since a global geopolitics emerged at the start of Mackinder’s Columbian Epoch in the 15th century, China’s relationship to the Western Hemisphere has been history-making…Preoccupied with coal-fuelled railways, Mackinder missed the reality that oil-fuelled vehicles, such as ships and aeroplanes, would drive the military geopolitics of 20th-century Eurasia. Where, including in China, there was the prospect of oil and weak empires or states, there would be great power competition. After the US had to adjust to becoming the world’s largest oil importer in the 1970s, its leaders entertained hopes well into the 1980s that China’s supposed offshore oil resources – then imagined to be the size of the onshore fields around the Persian Gulf – would deliver new supply. The Sino-American accommodation from 1972 upon which that ambition rested has largely shattered and given way to intense technological competition. In this unfolding historical moment, the attempted global energy revolution is starting to play out as a conflict between China and the US over metal resources in the Western Hemisphere, leaving Europe for the most part a bystander.
On Onward’s Science Superpower Substack, Allan Nixon and Anastasia Bektimirova say public investment in R&D and applied research needs to be strategically targeted at innovation and economic goals.
Why should the UK bother to lead in frontier technologies? Countries that lead in these technologies will be both more prosperous and secure. Leading means turning insight into power, but the UK still performs poorly at turning these strengths into economic success and military advantages. While the UK’s R&D expenditure makes up around 5% of the world’s R&D resources, its share of global value-added output from R&D-intensive industries has decreased steadily to 2.6%. Crudely, it is getting out half of what it is putting in compared to the rest of the world.
The UK is also falling behind other countries. Even in areas where the UK is still strong, such as pharmaceuticals, its global market share has halved in recent decades. Meanwhile China’s has increased five-fold. If urgent action isn’t taken, the UK is going to lag even further behind its rivals. As frontier technologies grow in importance, picking and finding ways to secure strategic advantage will be ever more crucial. To have any kind of leadership in this arena, the UK must choose the specific areas where we can and should lead. We need to invest in public goods and get out of the way to unlock private enterprise. But too often, we fail to do this.
…The Government is spending record sums on R&D, but not on the critical capacity needed. Funding by governments past has been disproportionately focused on supporting basic research through academia over applied research such as publicly-funded labs similar to Germany’s Fraunhofer institutes. The result is a public research sector that is ill-equipped to drive the state's strategic priorities and deploy technologies into the economy.
The creation of the Catapult Network – centres promoting R&D and innovation through business-led collaboration across academia, Government and industry – was an attempt to address this, but the Catapults are still underpowered. The Network is modelled on Germany’s Fraunhofer institutes, but they receive eight times the funding.2 And there are gaps in the Network too, with no Catapult focused on quantum technologies. In manufacturing, other G7 nations are reshoring capabilities and rebuilding domestic know-how. Yet the UK languishes. It has seen the largest comparative decline of goods exports of all the G7 nations since 2018.
Wonky thinking
The Secretary of State for Levelling Up, Housing and Communities, Michael Gove, gave a keynote speech condemning the rise of extremism and anti-Semitism in Britain, enabled by campus protestors and the extreme Left.
[On] the extreme Left, academics such as Professor David Miller and groups such as the Socialist Workers’ Party, the Socialist Party and the Revolutionary Communist Party jostle to share platforms with Islamist groupings, deploy aggressive language about “Zionists”, support calls for intifada and praising te the resistance - a synonym for Hamas - in terms that Jewish students say cause them physical fear.
And extreme Islamist groups then weaponise this growing antisemitism to divide Muslim from Muslim. Islamists have demanded that mosques become no-go zones for “Zionists”, that inter-faith dialogue exclude any Jewish voice sympathetic to Israel’s existence, and that believers show that they are truly faithful by demonstrating their commitment in the fight against Israel. By making ardour against Israel and hostility to Jewish voices the litmus test of how good a Muslim you are, Islamists polarise and divide our Muslim communities.
…The encampments which have sprung up in recent weeks across universities have been alive with anti-Israel rhetoric and agitation. But more than that they have been deeply, profoundly intimidatory to Jewish students and others. Yet they have not appeared in a vacuum. They have followed years of ideological radicalisation. The encampments, in their slogans, programmes and demands reflect the prevailing intellectual fashion: of decolonisation.
The radical left, the extreme left, rejects the idea that successful states - whether the United Kingdom, Israel, South Korea, the United States or any European nation - can have prospered because of free markets, enlightenment values, liberal parliamentarianism, property rights and capitalism. and so on. The hard left finds it impossible to acknowledge that higher material living standards - and indeed greater human flourishing – in some states rather than in others – is better explained by reference to Adam Smith, John Locke, Edmund Burke and Karl Popper rather than Karl Marx, Vladimir Lenin, Franz Fanon and Edward Said. That historic fact is unconscionable for the dedicated activists of the radical hard left.
So they argue that the prosperity of states such as the US, the UK, France, Spain and even Australia or Canada must be built on exploitation and empire. That argument, as my colleague Kemi Badenoch has brilliantly shown, and historians from Niall Ferguson to Nigel Biggar have reinforced, is inherently flawed. But these ideas are deeply congenial to those authoritarian states who are, increasingly, arrayed together against us. For Iran, for China and even for Russia, the decolonisation narrative is meat and drink.
The idea that the success of liberal Western nations is built on plunder and exploitation, that we seek even now to dominate others through illegitimate means and that our attachment to freedom is mere hypocrisy is central to their efforts to advance their goals.
That is why forces within those powers seek to influence the debate in our country. They want to weaken our collective resolve in support of democratic values and fellow democracies. And they know that if they can undermine support for Israel by encouraging a broader lack of self-confidence in the West’s values, they have secured a signal victory. It is no mere coincidence that Iran, Russia and China are sources and spreaders of antisemitic and anti-Israel narratives. They know those intellectual currents erode our shared defences.
And they know that if the decolonisation narrative and the delegitimization which follows can prevail in the case of Israel then it will be a profound breach in the West’s collective defence. Because nowhere is the narrative more ahistorical and illogical than when it comes to Israel. But they know that if they Undermine Israel and the other dominos will fall.
The Information Technology and Innovation Foundation (ITIF) published a report arguing that corporate concentration is good for productivity and growth.
In recent years, a growing group of neo-Brandeisian, anti-big business proponents have argued that rising concentration is causing a series of economic ills in order to advocate for policy that will weaken and shrink large businesses. These advocates assert that concentration is causing problems ranging from poor job reallocation to declining new business formation. More recently, the neo-Brandeisians and their allies have doubled down on the link between concentration and productivity, arguing that concentration has negatively affected productivity growth in the economy.1 Similarly, they have argued that rising concentration has depressed wages. However, many of these assertions about the link between concentration and productivity or wages are based on weak or nonexistent evidence. Nevertheless, the calls for the breakup of large businesses continue unabated.
In fact, the effect of concentration on productivity and wages is theoretically ambiguous. Rising concentration can negatively impact productivity if firms become “fat and happy” and reduce investment. However, it can also boost productivity if firms are gaining market share because of more-productive practices, especially through economies of scale and other efficiencies. Similarly, rising concentration could hurt wages if firms use their rising labour market power to depress wages, although that is extremely difficult to do because, unlike some product markets, virtually all labour markets are highly competitive. On the other hand, concentration can also increase wages. This is because concentration enables firms to boost productivity and, in turn, raise wages—although much of the benefits of productivity are, in fact, passed on to consumers in the form of lower prices (which has an indirect effect of increasing real wages). In support of this, a study by Kwon et al. finds that the profit rates of the top 1 percent of corporations for multiple sectors have remained about the same while concentration (share of receipts for the top 1 percent) has risen since the 1960s, meaning firms are passing on productivity gains to workers and consumers rather than keeping them.
As such, rather than focusing principally on the purported downsides of firm size, policymakers should not discount the benefits to the economy from firms that can gain efficiencies from the scale. This means policymakers need to reject neo-Brandeisian ideology and instead empirically examine the impact of rising concentration in each industry. Moreover, they need to revise the 2023 Merger Guidelines to encourage more mergers, especially those that result in minimal increases in concentration but generate significant productivity gains. This would ensure that larger, highly productive firms can continue to operate in the market, benefiting consumers, workers, and the economy alike.
This report 1) rebuts the neo-Brandeisian claims that concentration invariably negatively affects productivity and wages, 2) shows that concentration and productivity can have a positive relationship, and 3) shows that concentration and wages can have a positive relationship.
Book of the week
We recommend The Park Chung Hee Era: The Transformation of South Korea, edited by Byung-Kook Kim and Ezra F. Vogel. The authors chart the period of rapid Korean modernisation under Park, who seized power in a coup in 1961 before embarking on a radical plan for economic growth.
Some say that the rise of South Korean automakers was a miracle. Others portray it as a necessary outcome of the work of a technocratically driven developmental state, visionary entrepreneurs with a “can do” spirit, or their partnership based on asymmetric political exchanges. Still others argue that it was neither a miracle nor a product of a superior state or chaebol institutional capabilities. They brush automaker success aside as growth generated through a massive injection of resources rather than as a continuous improvement of productivity. For some, the automakers had an easy way to growth, with the state subsidizing their entry into new lines of production, taking over the costs of adjustment during crisis, and awarding rents with which to make up business losses. Chapter 10 takes the South Korean auto industry as a case study to critically review all three schools of thought. By tracing the industry’s volatile history of hypergrowth, structural crisis, and top-down restructuring, and through identifying the formidable challenges of forging a national champion, it will argue that, in contrast to developmental state theories, the South Korean state pursued a strategy technocratically full of limitations, but successful in achieving an auto industry take-off because it not only backed the automakers with massive support but also let failing ones go under.
The problem with the miracle thesis is that by focusing on the outcome of hypergrowth, it ignores the politically and economically challenging processes of coalition building, risk taking, innovation, and restructuring which brought about that outcome. Indeed, the outcome was beyond all imagination. The South Korean auto industry was born only in 1962 with the assembly of a Nissan passenger car model, but by 2001 it had become the fifth-largest automobile producer and the sixth-largest exporter in the world. The outcome, however, looks like less of a miracle when the processes of the industry’s development are analyzed. In a word, getting the industry to take off and grow into a major player in global markets was an extremely challenging task, and South Korea ended up paying massive political and economic costs in the process. What looked like a miracle was, then, a product of bold risk-taking, hard work, and great sacrifice over four decades.
The trajectories of the South Korean automakers show the challenging processes of developing a dynamic auto industry under national ownership. Saenara Motors, launched in 1962 as an assembler of Nissan passenger car models, fell only a year later in the midst of political and economic crisis. Sinjin Motors, allied with Toyota, took over Saenara in 1965, only to forge a joint venture with General Motors in 1972 amid the withdrawal of Toyota under the pressures of Zhou Enlai’s “Four Principles” and Park’s turn to the manufacturing stage of auto production. General Motors-Korea (GMK) underwent an equally rocky development, with its South Korean shares transferred from failing Sinjin to a state development bank (1976) to Daewoo (1978), while General Motors withdrew entirely from GMK (1981) in a dispute over management control and M&As (mergers and acquisitions). The MNC was to return to take over faltering Daewoo Motors in 2002.
The fate of other automakers was also tumultuous. Asia Motors produced cars with Fiat technologies for eight years (1968–1976) until Kia Motors—a latecomer with its own modern integrated assembly lines established in 1970—took it over to roll over Hyundai’s expansion of market shares. As part of the state’s effort to rescue the auto industry through competition-limiting industrial rationalization measures in 1980, Kia Motors was given a monopoly over production of commercial vehicles while Hyundai and Daewoo held a duopoly over the passenger car market. The market segmentation was lifted by the state in 1986 after the auto industry recovered from the worst of corporate distress. However, Kia Motors survived only twelve more years; it collapsed in mid-1997, dragging the entire economy into a severe liquidity squeeze. A year later Kia Motors was taken over by Hyundai.
The miracle, if there was any, was not that of the auto industry, but of Hyundai Motors, which introduced its own independent passenger car model in 1976 and began exporting to U.S. markets in 1986. By 2000 Hyundai Motors enjoyed a 70 percent share of the South Korean domestic market, boasted an annual production volume of 1.5 million cars, and annually exported more than 800,000 cars to over 180 countries. Even for Hyundai Motors, however, its “miracle” came only after it weathered severe crises in 1972, 1979–1980, and 2000. With its greatest patron—Park Chung Hee—assassinated in 1979, in particular, Hyundai Motors had to resist the pressures of economic stabilizers within the state to merge with GMK (now renamed Saehan) under unfavorable terms. Had it merged with GMK on the basis of 50:50 equity shares, as GMK demanded in spite of its limited market share and smaller asset size, Hyundai as a producer with the ambition to become a multinational with its own brand name rather than functioning as a subsidiary of an established MNC would have disappeared. That would also have removed much of the drive for export-led growth built into the chaebol-owned auto industry.
Quick links
Inflation fell to 2.3%.
The energy price cap will fall by 7% in July to £1,568 for a typical household.
Net migration has added 2 million people to the UK population during this Parliament - growth of 3% in 4 years…
…and non-EU migration is now over a million a year.
A 19 year-old was convicted of stabbing a 35 year-old man to death in Harlow.
A man has been convicted of killing for a second time after being released on parole in 2021.
The UK employs twice as many Diversity and Inclusion officers as any other country.
The UK exported £31 million worth of cars to Azerbaijan in March.
China’s sale of US treasuries rose to record levels.
16 pro-Palestine protestors have been arrested after occupying a building at Oxford University.
The US is preparing to send a $275 million military aid package to Ukraine.
There are still fewer Jewish people in Europe today than in 1933.