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America's new era of industrial policy

Jan 03,2023 - Last updated at Jan 03,2023

By Laura Tyson and Lenny Mendonca

BERKELEY  —  A new breed of industrial policy is taking hold in the United States. Under President Joe Biden’s leadership, the federal government has created major new programs through the Infrastructure Investment and Jobs Act ($550 billion), the CHIPS and Science Act ($280 billion), and the Inflation Reduction Act ($394 billion). These are not traditional spending measures to stimulate demand. Rather, as Secretary of the Treasury Janet Yellen explains, they are supply-side investments to boost US economic capacity, both overall and in key sectors such as semiconductors and renewable energy.

While the individual provisions and funding processes differ, all three programmes are based on the public-private model that has been critical to US competitiveness over the past century. They are designed to crowd-in and accelerate private investment, not substitute for it. Hence, a significant part of their funding, in fact, the majority, in the case of the IRA and CHIPS, comes in the form of tax credits for businesses.

The programmes also will encourage more supportive regulatory changes, for example, in the permitting and siting of green-energy projects, by state and local governments, which are responsible for the bulk of economic development in the US. And they share various features that have come to define a new “sustainable and equitable” approach to industrial policy. These include a focus on regional economic development based on local priorities, with an emphasis on capacity-building in marginalised communities; explicit links to post-secondary education and workforce development; and cross-sector integration with key services, such as health care and education.

While the success of these programs will require collaboration by state and local governments, those authorities will also be competing for the new funding and investments. For example, the CHIPS Act’s $39 billion for investments in domestic semiconductor manufacturing will be allocated by the Department of Commerce, which will assess companies’ proposals for grants and loans partly on the basis of support from state and local governments. Accordingly, several states are now developing generous incentives to help their companies.

The states will also be competing, alongside their companies, civic organisations, and non-profits, for $122 billion in climate-related funding under the IRA. While the Department of the Treasury oversees tax credits, a new $27 billion Environmental Protection Agency grant programme, the Greenhouse Gas Reduction Fund, makes $7 billion directly accessible to cities and states, and earmarks $20 billion for non-profit entities that invest directly in green projects using other financing entities such as non-profit green banks. Twenty-three green banks already exist in 17 states, including California, and have leveraged $2 billion in public funds to mobilise $7 billion in green investments.

All three bills include place-based programmes designed to promote inclusive growth, and these have elicited complementary efforts at the state and local level. California, for example, has introduced a Community Economic Resilience Fund with a four-year $600 million budget to support regional collaboration and inclusive development; and Phoenix has committed significant local funding and made regulatory changes to attract a $40 billion investment by TSMC in new semiconductor production.

Broadband deployment is especially important for regional economic development. As the COVID-19 pandemic showed, the US still has a glaring digital divide, with more than 24 million Americans lacking high-speed broadband, and many more lacking digital literacy. Thanks to the infrastructure program and the American Rescue Plan before it, however, more than $100 billion in federal funding has been allocated to bring broadband to every household. It is the largest public investment to connect Americans since the creation of the interstate highway system. Still, closing the gaps in middle- and last-mile connectivity is a highly local challenge, and coordination across all levels of government is crucial.

Finally, a healthy, skilled workforce is the most important factor in attracting and retaining employers and businesses in key sectors. Hence, many states, cities and regions have been increasing their investments in workforce development to ensure that their residents have the right skills to benefit from new job opportunities in infrastructure, semiconductors, and climate-related industries.

California is a case in point. The state spends more than any other on higher education, and has invested in new community-college apprenticeship programmes and career pathways for technical education in its public schools. At their best, programmes to develop the workforce run from preschool to higher education and then to employer engagement.

The Biden administration’s three big industrial policy programs all recognise the importance of human capital in building supply capacity, and each provides some support for skills development, primarily through tax credits to employers. The IRA, for example, contains a dozen energy-related tax credits to expand access to apprenticeships and jobs at prevailing wages. But a proposed $40 billion provision for workforce-skills development did not make it into the final bill, which means that the task has been left largely to cities, states, employers and individuals.

By design, the new regional economic-development efforts are cross-sectoral and cross-governmental, from the state and local level to the federal level. Often, regional development efforts have one or more backbone institutions leading the charge and engaging with other community-based organisations and key sectors and institutions, such as education and healthcare providers. In California, the Central Valley Community Foundation has created a development plan (of 19 priority investments totaling roughly $4 billion over the next decade) under the guidance of a steering committee comprising 300 community leaders. Many similar efforts are in the works around the country, and many more are needed.

Industrial policy is central to Biden’s economic agenda. Getting an industrial policy right is never easy, and getting a place-based one right will prove even more challenging. But doing so is now essential to achieving more equitable and sustainable growth.

 

Laura Tyson, a former chair of the President’s Council of Economic Advisers during the Clinton administration, is a professor at the Haas School of Business at the University of California, Berkeley, and a member of the Board of Advisers at Angeleno Group. Lenny Mendonca, senior partner emeritus at McKinsey & Company, is a former chief economic and business adviser to Governor Gavin Newsom of California and chair of the California High-Speed Rail Authority. Copyright: Project Syndicate, 2023. www.project-syndicate.org

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