Industrial policy is back in Washington, D.C., and its supporters are already crediting it with an American manufacturing “boom.”
In one narrow sense, they have a point: Shortly after Congress and the Biden administration authorized trillions of dollars in federal subsidies for renewable energy and semiconductors under the Inflation Reduction Act and the CHIPS and Science Act, U.S. manufacturing investment and construction increased significantly.
Two other matters, however, show why these trends are less promising than they appear and why people should worry that the subsidies, and protectionism, supposedly fueling a U.S. manufacturing renaissance will repeat America’s long history of industrial policy failure.
First, the recent increase in U.S. manufacturing investment must be put into context. Before the CHIPS Act and Inflation Reduction Act were enacted in 2022, market factors had pushed companies to reconsider semiconductor supply chains. Private demand for, and investment in, green energy was soaring. And several major U.S. projects had also been announced. It’s thus unclear how much manufacturing spending has been caused by, instead of just coincident with, new U.S. industrial policies.
Furthermore, recent increases in industrial spending are still a relatively small percentage of total private investment, making up just 3.6% of private investment in the first quarter of 2024, and 0.6% of the United States’s GDP. The spending might still be important, but it’s not currently the economic game changer it is often made out to be.
Indeed, actual U.S. manufacturing performance — employment, output, orders, and capacity utilization — has been flat since mid-2022. Private surveys have been pessimistic, and 2024 projections are now softening. Maybe a “boom” eventually arrives, but it is just as likely we’re again seeing what critics of targeted tax credits, subsidies, and tariffs have long cautioned: They don’t generate sustainable, long-term growth but instead redistribute existing resources to favored companies at a net loss to the U.S. economy.
Second, we must also consider the actual return on these investments.
When the government showers preferred companies with trade restrictions and trillions of taxpayer dollars, the policies will inevitably produce something. The real question is what, exactly, all that government support is getting us.
Is it generating dozens of innovative and globally competitive American factories and a strong U.S. economy? Or will it produce a few narrow successes and many other failures — not just unfinished projects but entire industries dependent on government support, plus unintended and unseen costs elsewhere?
Today, it is too early to say, but there are already warning signs here and abroad — ones we’ve seen before.
Here at home, the cost of building, staffing, and starting production at subsidized facilities has skyrocketed thanks in large part to supply-side barriers, such as environmental permitting regulations, tariffs, Buy American Act restrictions, and immigration backlogs. High costs and other unforeseen problems have also now delayed or canceled many semiconductor, electric vehicle, and solar projects, even some in which construction had begun.
Just as worrying are initial signs that factories eventually completed in the U.S. will not produce cutting-edge technologies that compete globally without open-ended government help. Solar panels, for example, still cost more in the U.S. than they do abroad, even with billions in subsidies and multiple rounds of tariffs. The industry’s solution? It’s seeking even more tariffs.
Finally, politics is again distorting industrial policies’ implementation. Social policies such as free child care and diversity initiatives have been attached to CHIPS subsidies. Inflation Reduction Act dollars have been disproportionately funneled to swing states. Companies have openly complained about slow and complicated bureaucracy, and investment uncertainty has increased in the run-up to the 2024 presidential election.
These and other matters remind us there’s a huge chasm between celebrated investment announcements and actual, productive factories. They also show the risk that today’s industrial policies produce small benefits at a massive cost — both the usual budgetary overruns and the diversion of finite taxpayer and private resources away from better targets.
There are also concerns abroad because subsidies here have prodded the European Union, Japan, South Korea, Taiwan, India, China, and others to offer subsidies of their own — thousands of new industrial policy measures, likely worth trillions of dollars. If history is any guide, this uncoordinated and predictable “global subsidy race” could generate gluts and trade wars that would undermine the very domestic investments U.S. industrial policies are trying to encourage. In the end, almost everyone would be worse off, especially developing countries that can’t afford big subsidies and, in the case of “green” goods, the environment itself.
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In sum, American industrial policy has long faced challenges that limit its effectiveness and inflict unintended economic and geopolitical damage. It’s too soon to conclude that we’re following the same path today, but signs do point in that direction. This doesn’t mean that Congress should just sit back and watch things unfold, simply hoping its trillion-dollar gamble pays off. Instead, it should repeal the industrial policies and implement the long list of proven tax, trade, regulatory, immigration, and other reforms that free marketers have long recommended to boost strategic industries and address strategic challenges.
Subsidies and protectionism, however, still aren’t on that list.
Scott Lincicome is the vice president of general economics and Cato’s Herbert A. Stiefel Center for Trade Policy Studies.
