I’ve been thinking a lot over the past several months about industrial policy: actions by the public sector to help promote a fledgling industry so as to ensure, foster and/or accelerate its emergence.
In the cleantech sector, questions about industrial policy are particularly salient. It’s no secret that many aspects of cleantech – especially low carbon energy technologies – are not economically competitive at present, and that large profitable corporations in the U.S. are happier with the status quo than with supporting any push to accelerate a cleantech future. In other words, cleantech generally needs policy help to successfully penetrate the market, but helping cleantech is viewed by many as damaging to the economy.
Given that the incumbents have much more financial resources than the cleantech upstarts, they also tend to spend more on lobbying to preserve this status quo as much as possible, so it’s no wonder cleantech consistently faces such an uphill battle in the corridors of elected power.
Former Michigan Governor Jennifer Granholm is currently serving as a Senior Advisor to the Clean Energy Program of the Pew Charitable Trusts, and is doing a road-show to argue for Federal clean energy policies (excluding cap-and-trade as a non-starter in the current political climate) as a platform of long-term economic revitalization for the U.S. At her recent stop in Columbus at the University Clean Energy Alliance of Ohio annual meeting, I asked her what objection she most frequently encounters with her pitch, and how she attempts to overcome the objection. She was unhesitant: opponents don’t think that the government should be in the business of picking winners and losers.
What’s the retort? Granholm pointed to Pew’s recent report, The Clean Energy Race, and asserted the view that objections to industrial policy were “obsolete”, hangovers from an era in which the U.S. didn’t need proactive industrial policy because it was the only giant standing the wake of World War II and through the costly Cold War. Today, China, Japan, Germany, Spain, the United Kingdom and others are going gangbusters in cleantech, far more willing to pull the levers of industrial policy to pursue leadership positions in the cleantech future, and Granholm (and others) argue the U.S. will surely be totally left out of the biggest game of the rest of the 21st Century if we don’t act.
Let’s pause for a minute and consider the strategy of these other countries. Will their proactive approach to promoting the cleantech sector create many thousands of jobs and immense fortunes for investors in these countries? Or, does their instinct for meddling with the market lead them down the path towards a financial calamity at some point in the future when public coffers can no longer afford supporting the promises that were made?
Consider some of the carcasses littered along the road of history, in which U.S. energy policy to promote some market or technology has often failed miserably, costing U.S. taxpayers large sums of money and thereby adding to our woefully immense national debt. This sad history is amply chronicled in this paper written by Peter Grossman, Professor of Economics at Butler University.
Can we afford proactive cleantech industrial policy in the U.S.? Can we afford not to? Are the biases against industrial policy in the U.S. really “obsolete”?
“Industrial policy” is one of those terms fraught with baggage. To some, its very essence connotes “socialism” and just about everything negative that can be associated with government intervention. One of the great things about America has been that our capital and labor markets are very flexible, so that resources can be shifted quickly from one opportunity area to another as circumstances change. And, isn’t it the business of industry to spawn and grow new industries?
But, it would be inaccurate to claim that the U.S. doesn’t do industrial policy. As Jesse Jenkins of the Breakthrough Institute notes with his excellent report Where Good Technologies Come From, the U.S. Federal government is pretty much solely responsible for creating the market and therein seizing U.S. leadership in a host of innovations dating back to the birth of the nation. The government played an essential role in cultivating innumerable technologies – and just as importantly, the markets and hence the companies that commercialized them and brought benefits to American customers and jobs to American citizens. We’ve actually been picking winners for decades, centuries even.
More generally, the case can be made that the overarching U.S. industrial policy is to favor the industry of consumption. We have Federal taxes on income and capital gains, but with some minor exceptions, no Federal sales tax. We have deductions on home mortgages and accelerated depreciation of capital equipment, but precious little encouragement of productive investments in research.
These choices have broad implications on the shape of America: as Bruce Katz of Brookings noted in his excellent talk at the annual meeting of the Greater Cleveland Partnership in April, the cumulative effect of these policies has been to tilt the U.S. economy away from manufacturing and away from the Midwest, towards the coasts with its subsidized real estate and towards the service/consumption economy we know so well today.
Let’s face it: consumers are inherently fickle and are obsessed with the short-term. For the most part, individual Americans will not do what’s in the long-term strategic interests of their own selves, much less for their own country. For the sake of saving a few dollars, the average American is perfectly content to walk into Wal-Mart and buy clothing made in China, cheerfully saying hello to the greeter with the wan smile who used to work at the local textile mill, and worrying about how to pay the credit card bill later. If we in the U.S. want a more secure and sustainable future, putting it all in the hands of the customer is not the answer.
Unless you’re safely in the top few percent of American income or wealth and also don’t really care about the rest or about the future of this country at large, you would probably agree that the consumerist-industrial policy the U.S. has followed for decades, as described above, hasn’t served us particularly well.
Dennis Bushnell, Chief Scientist at NASA Langley, noted in a recent talk at the Blue Tech Forum that “China has a thousand year strategic plan, but the longest planning horizon of relevance in the U.S. is four years, associated with the Presidential election cycle. As a result, America is terminally tactical.” If one’s greatest strength is also one’s greatest weakness, then America’s fondness for market forces at the expense of industrial policy represents not only economic and social lubricity, but also a case of attention-deficit disorder in a deficit-laden society and economy.
While it’s true that industrial policy mitigates the flexibility of a fully free-market system, it also prevents the possibility of taking our eye off the ball for awhile if circumstances become unfavorable for a period — as it did for energy in the U.S. between 1986 and 2006, or for manufacturing since the 1970s.
An American cleantech industrial policy offers the possibility for the resurgence of manufacturing – a sector in which the U.S. used to excel. The status quo represents the ongoing dominance of resource-extraction – a sector that historically is highly correlated with corruption and kleptocracy, in addition to environmental degradation and social injustice.
This doesn’t mean stopping resource extraction in the U.S. But, it does mean making sure that resource-extraction to feed rampant consumerism isn’t the primary leg of the future economic stool of the U.S.
Also, it’s eminently reasonable to be concerned about the unintended consequences associated with a cleantech-oriented industrial policy. Accordingly we should be careful before acting, thoughtful in designing any programs, and diligent in our ongoing review of impacts.
Even despite these risks and caveats, I nevertheless conclude that it would be hard to do any worse than what we’ve got now.
Alas, industrial policy involves a kind of public-private collaboration that chafes at both the left (which often distrusts private enterprise and the profit motive) and the right (which dislikes government intervention and would rather let markets sort things out). This is the uncomfortable middle-ground in which I frequently tread, and in today’s political climate in America, it’s akin to the no-man’s-land between the trenches, getting ripped by machine gun fire from both sides.
It’s no wonder, then, that stalemate prevails, and little of importance gets accomplished these days in developing a sane cleantech industrial policy for the U.S.