BiGS Actionable Intelligence:
The United States’ new industrial policy, born of historic investments by the federal government following the pandemic, can be a powerful force to boost the U.S. economy—if political support continues and implementation goes smoothly, according to a new report from Harvard Business School’s Institute for Business in Global Society (BiGS).
The report reflects the institute’s convening earlier this year with nearly 50 CEOs, White House advisors, business leaders and Harvard Business School faculty members. The group held candid conversations about how industrial policy is being implemented, the challenges it faces, and the possibilities and problems that may lie ahead. The stakes have arguably never been higher, faculty said.
“With the federal government investing far more aggressively in industrial policy than it has in decades, CEOs must heighten their vigilance in tracking policy and program changes,” said Debora Spar, the senior associate dean of Harvard Business School who founded BiGS and is the former president of Barnard College. “BiGS aims to play a crucial role in this unprecedented era by serving as a forum in which leaders across sectors can come together to collaborate and compare notes, and by delivering research-based analyses to help both businesses and government officials understand the implications of these shifts.”
Many attendees agreed that the prognosis, so far, is positive.
Construction employment is at its highest point in U.S. history; new factory construction has more than doubled since the pandemic; and the trade deficit with China is the lowest it has been since 2010. Other attendees were more skeptical, however, citing uncertainties stemming from workforce, capital, and supply chain shortages.
Of course, it's too early to declare the results. And the pivotal November 2024 federal election raises even more questions about the future, given its role in deciding party control of the White House and both chambers of Congress.
Birth of an era
This recent chapter in U.S. industrial policy emerged from three landmark pieces of federal legislation passed since 2021: the Infrastructure Investment and Jobs Act (IIJA); the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act; and the Inflation Reduction Act (IRA).
Together, the three bills allocated trillions of dollars and helped focus federal government efforts on boosting U.S. industry, an area that some experts say has been neglected in recent decades.
“We haven't talked about it for a long time in the United States, but it is an important set of ideas that goes way back in economic history,” Aaron “Ronnie” Chatterji, a professor at Duke University and former White House advisor, said in an interview with BiGS on the sidelines of the roundtable discussion. “In short, industrial policy is when the government provides support—often subsidies, grants, loans, tax credits—to key industries.
“A lot of countries in Asia and Europe have been doing this for a long time, but since the 1990s these policies haven't been in fashion in the United States. What's interesting about the CHIPS and Science Act and the Inflation Reduction Act and the bipartisan infrastructure law and other things is that they constitute a return to industrial policy.”
Participants at the roundtable agreed that the time may be right for such an approach. Support is high for assisting industries facing threats from China, for working to mitigate climate change, and for creating high-paying jobs in struggling areas of the United States.
One roundtable participant, Omar Vargas, vice president and head of global public policy for General Motors, said in an interview with BiGS that investments in electric vehicle charging stations from the IRA and the IIJA could play an important role in supporting his company’s goal of an all-electric future.
“There's a lot of public investment going into EV charging through the federal government and being led through state and local governments,” he said. “We're confident that in the next couple of years we're going to have a vigorous EV charging network in the United States.”
A precedent found in outer space
Today’s policies have a predecessor that offers lessons. In the late 1950s and the 1960s, the United States believed that dominating space exploration was so critical it could not be left to market forces. So, the government spent more than $791 billion on its space program and saw great success, including numerous technological advances and the Apollo moon landings.
By the 2000s, interest in space travel receded. The government switched its approach to the space program to one that relied on funding start-ups, which sparked a surge of private investments.
Now the government buys satellites from companies like SpaceX, which also has commercial customers.
The CHIPS and Science Act
National security concerns and job creation helped inspire the CHIPS and Science Act. In 1990, 37% of semiconductors, or “chips,” worldwide were made in the United States. Now, that number is only 12%. This drop in semiconductor production has long worried government leaders, who are concerned about being dependent on potentially hostile powers for an important component of the technology industry.
The CHIPS and Science Act is intended to bring back semiconductor manufacturing to the United States. It takes an innovative approach, more like a venture capital firm and less like a government bureaucracy. The act offers nearly $300 billion in subsidies but forces private firms to compete for them. As of June 2024, the government had awarded $29.5 billion in grants and $25.1 billion in loans.
But the legislation has risks, according to participants at the BiGS roundtable. It could fail to increase domestic production and be characterized as wasted subsidies to industry rather than productive investments.
Targeting China
The industrial policy’s three cornerstone pieces of legislation contain a total of $2 trillion in federal subsidies intended to compete with China, which gives large subsidies of its own to key industries. In addition, the Trump and Biden administrations have restricted investments with China and imposed tariffs.
These policies have already recorded successes: the United States has added 800,000 manufacturing jobs, and the trade deficit with China has reached a 14-year low.
“What we’re seeing now frankly, is industry leaders making bets on America again, because the Biden administration has said … we’re going to build chips in the United States again,” Chatterji told BiGS.
Still, potential problems remain, according to roundtable participants. The policies might harm U.S.-China relations, spark another trade war or encourage regional trading blocs that could reduce global trade overall.
Jobs and training
At the heart of the new industrial policy is the goal of creating well paid manufacturing jobs in places that have lost them over past decades and are suffering economically.
But what happens if there aren’t enough skilled workers to fill those jobs?
Roundtable participants addressed these concerns. Several recommended changes to the U.S. educational system to better prepare students. One suggested broader investment in Science, Technology, Engineering and Math (STEM) education. Another recommended making the education system more responsive.
Overall, participants at the roundtable were cautiously optimistic that the nation’s new industrial policy could achieve its goals.
“We have to think about what legitimizes industrial policy in a capitalist society,” said Joseph Fuller, a management professor at Harvard Business School and co-director of the school’s Managing the Future of Work initiative. “It takes a rallying cry to achieve ambitious goals. It’s doable, but it certainly won’t be easy.”
To learn more from the BiGS Global Leadership Roundtable in Washington, DC, please visit the BiGS Knowledge Hub.