Bidenomics and Its Contradictions

Competition with China has reinforced President Biden’s commitment to industrial policy, but his vision for government intervention carries risks for the U.S. economy and allies

By Greg Ip. Excerpts:

"One policy they don’t consider a part of Biden’s industrial strategy is new restrictions on the export of semiconductor technology to China. Sullivan said in April that such restrictions are solely aimed at national security"

"basic economics tells us that capital and labor are finite, so they need to be allocated in a way that maximizes productivity and growth. Experience has shown, painfully, that governments are much worse at this than markets. Market failures exist, of course, such as pollution or military vulnerability, but they are exceptions.

Bidenomics accepts the value of markets but sees market failure all around, in everything from regional, racial and gender inequities to the lack of rural high-speed internet and affordable child care.

When market failure is so broadly defined, there is effectively no limiting principle on government intervention. And indeed, Biden and other leading Democrats have argued for special treatment for countless products and industries with only the most tenuous connection to military or economic security, such as the drywall and lumber used in infrastructure.

Ro Khanna, a progressive who represents Silicon Valley in Congress, wants the sort of subsidies now directed to semiconductors to go also to aluminum, steel, paper, microelectronics, auto parts and climate technology. “America needs to be able to make basic things here. I would go to factory town after factory town and see what we can do to revitalize that place,” he said in April.

But the U.S. doesn’t have the capacity to supply everything it now imports. Diverting workers to make things that can be imported more cheaply raises costs and takes scarce workers away from industries that might be more productive. Industrial policy “does not create jobs; it merely shifts jobs from one place to another,” wrote Adam Posen, president of the Peterson Institute for International Economics, in a recent critique. “As for idle workers with the right skills,” he continued, “they don’t really exist.”

Unlike solar panels, semiconductors are critical to both civilian industry and military defense, and even many neoliberals support subsidies to reduce U.S. dependence on China, Taiwan and South Korea. But in keeping with Bidenomics’ broad definition of market failure, the Commerce Department has said the subsidies are contingent on the willingness of recipients to meet a range of other administration goals: to offer child care, pay union-scale wages, hire unionized workers, refrain from buying back stock or investing in China, and share profits with the federal government. Saddling industrial policy with so many ancillary goals dilutes its impact.

The foreign and domestic arms of Bidenomics are also at odds with each other, despite Sullivan’s insistence that they are complementary. While seeking solidarity with like-minded partners against Russia and China, the buy-American policies of the Biden administration discriminate against those same partners.

Biden credits last year’s Inflation Reduction Act for a boom in newly announced electric-vehicle and battery factories in the U.S., but other countries have complained because the law’s most generous subsidies go only to vehicles assembled in North America. “The U.S.A. is our partner of shared values, but at the same time there is an enormously protectionist economic policy,” German finance minister Christian Lindner told a German newspaper."

"Unlike Donald Trump, Biden isn’t seeking to tear up existing free trade agreements or to raise tariffs. But neither is he interested in new trade agreements or lowering tariffs. His Indo-Pacific Economic Framework seeks cooperation with allies in the region on labor conditions, climate policy, tax compliance and corruption, but it doesn’t offer increased access to the U.S. market in return, as the TPP, its rejected predecessor, did. To foreign trade partners, it’s an underwhelming proposition. Instead of a carrot and stick, “it’s a stick and a stick,” one Indonesian official said.

So what’s the alternative to Bidenomics? By itself, more generous access to the American market won’t win over more Asian countries to the side of the U.S. in confronting China. But like the Cold War, the contest with China will be a long game. Without “a proactive trade strategy with the region, the U.S. absence creates a vacuum that makes China the only game in town, and the U.S. loses influence,” said Doug Irwin, a trade policy historian at Dartmouth College."

"Even if the U.S. stays out of TPP, there are ample other ways to deepen trade ties. Rahm Emanuel, who served under both Bill Clinton and Obama and is now the U.S. ambassador to Japan, has argued for exporting Alaskan liquefied natural gas to Japan, though that runs counter to Biden’s long-run climate goals. Asian countries “want our military leadership, our diplomatic leadership and our economic leadership,” Mr. Emanuel said in an interview.

Indeed, that’s a Cold War lesson that Bidenomics has failed to learn. Until very recently, U.S. presidents thought that trade and investment, by binding other countries more closely to the U.S., helped to sustain the U.S.-led international order. “Our maintenance of Western political unity depends in equally large measure upon the degree of Western economic unity,” President John F. Kennedy said in 1962, asking Congress for expanded authority to negotiate trade agreements."