What is the correct economic strategy for a nation? Rob and Jackie sat down with Marc Fasteau and Ian Fletcher, authors of Industrial Policy for the United States, to discuss how industrial policy, done right, will develop the kind of economy the United States wants.

Mentioned

• Marc Fasteau and Ian Fletcher, Industrial Policy for the United States, (Cambridge University Press, November 2024).
• Ian Fletcher, Free Trade Doesn't Work: What Should Replace It and Why, (Coalition for a Prosperous America, February 2011).
• “Are You a “Marketist” or a “Producerist” on Economic Policy?,” (ITIF, December 2024).

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Rob Atkinson: Welcome to Innovation Files. I'm Rob Atkinson, founder and president of the Information Technology and Innovation Foundation.

Jackie Whisman: And I'm Jackie Whisman. I head development at ITIF, which I'm proud to say is the world's top-ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. So if you're into this stuff, be sure to subscribe. It really helps.

Jackie Whisman: Today we're talking to Marc Fasteau and Ian Fletcher, who have co-authored a new book, Industrial Policy for the United States, which explores how industrial policy fell out of favor and has been branded progressive, but is now appealing to both the left and the right. And we're happy to have both of you here. Maybe we'll start with you, Marc, tell us why you all decided to write this book.

Marc Fasteau: Well, the story is we both got involved in this issue by thinking about trade, trade policy and tariffs and the big trade deficit and why that really mattered and what its causes were and so on. And then Ian wrote a book about it, quite a good one, a long time ago. In fact, that's how I met him, reading his book. But sooner or later, when you think about trade, you sort of back up a level and the trade policy you want is the one that gives you the kind of economy that you want in five to 10 years. And so what do you want? And that's the bigger question and that really leads to industrial policy.

The other factor is, if you know what you want, you quickly find out that trade is one of the, I'd say, the three trade policies, one of the three critical elements in industrial policy. So I think Ian said to me first, "Well, you should write a book about industrial policy." And I said, "Well, no, you should write it." And so we ended up doing it together.

Jackie Whisman: And Ian, can you give our listeners an overview of what you wrote, what you both wrote and what you both found?

Ian Fletcher: Well, when I wrote my first book, was called Free Trade Doesn't Work, came out in 2010. I said you don't want free trade. That's not the right economic strategy. If that's true, the question then arises what is the correct economic strategy for a nation? It's going to be protectionism and then some other stuff as well. So that's how I got into industrial policy because if you look at the protectionist countries, the US and the 19th century, China now, Japan after World War II, so on so forth, they all have these industrial policies. In the US, we've forgotten and we deny doing it, but we certainly did have. And in East Asia, nobody feels any need to hush it up.

So our view of industrial policy is basically three things. The first is the idea that some economic activities, which means some industries are better than others, they're more profitable, they pay better wages, they have better synergies in terms of driving the rest of the economy forward. The second premise is the free market, which we certainly respect to a huge extent, will not automatically give any given nation the greatest quantity of the most desirable economic activities. We call these advantageous industries. An industry is a package of economic activities. We usually shorthand it to industries, but we're well aware that industries have supply chains and so forth. But anyway, the free market for all its glories won't serve up to America, or any other country, the greatest quantity of these advantageous industries.

And then the third idea is that government interventions, if competent can increase a country's capture of advantageous industries. And this includes not only protectionism, it includes governmental support for those steps of the innovation supply chain that are difficult or impossible to do for a profit. For example, the internet wasn't invented for a profit. Lots of things on the internet we know and love were done for profit. The internet itself was created by government scientists to share data. You have policies like directed credit where nations direct their limited available investment capital to industries they think are going to go somewhere in the U.S. The corresponding issue is kind of the reverse. It's pushing back against financialization, which is the propensity of our current financial system to perversely direct capital in ways that undermine the real economy, that drive up the dollar overseas, that encourage speculation rather than long-term investment in industry.

Rob Atkinson: So I think Ian and Mark, yeah, that, a hundred percent agree. I know you talked about financialization in the book. We could do a whole episode on degrading components of financialization, but I did want to have just a clarification, and it's maybe a language thing, but I think it's important for listeners. You talked about some Asians like the Asian Tigers as protectionists, I would call them, first of all, strategic protectionists and also promotionists. It wasn't just enough to protect, but they also had to promote. I assume you agree with that and maybe you could say a few words about that.

Marc Fasteau: I do and we do for sure. The key to industrial policy, as Ian mentioned, is selective support of key industries. And that means you can have broad, across-the-board tariffs, and there are arguments for them and against them. But what we're really focusing on is selective tariffs also that support not only the existing innovative, what we're calling advantageous industries, but also those who want to get back and those you hope to have in the future.

The one departure I think that we think is very important economically and politically is to also support mid-tech, sizable industries that pay a lot of people and pay good wages. They don't have to be the highest wages because not everybody's going to work in high-tech industries. They don't employ enough people today and they probably never will. And other than the moral reasons to do that, which I happen to believe in, if you want political support the long-term for this whole set of policies, you better make it work for people who work or used to work in mid-tech industries and no longer have those jobs because they've all, a lot of them, gone overseas.

Ian Fletcher: Yeah, it's important to understand that our argument is not just high-tech, high-tech, high-tech. I live in California, which is by far the high-tech capital of the United States. It's also correctly measured the highest poverty state in the country. That is not the strategy you want, simply focusing on the very top end of the economic food chain. But one thing I would point out is that if you want good assembly line jobs at automakers, this is dependent on the high-tech end developing these electric cars, developing the factory automation that makes it possible to be competitive with $30 an hour US auto workers, as opposed to cheap foreign labor and so forth. So both the high-tech and the mid-tech ends go together.

Rob Atkinson: Yeah, well we certainly a hundred percent agree with that. I mean, we issued this report, which I'm sure you've seen, the Hamilton Index. And we identified what we called, what we identified as 10 major strategic industries that we need to retain and grow for national power vis-a-vis China. Chemicals is one of those. I'm not talking biotech. Biotech's high-tech. Chemicals is mid-tech. Machine tools, machine tools are mid-tech, not high-tech. So a hundred percent agree with that.

I guess though there's a sort of, I don't know if you want to call it pro-manufacturing movement, which has emerged. I remember the first time we did a manufacturing event probably back in 2007, and somebody came up to me and they said, "Hey, what do you guys doing manufacturing? I thought you were all about technology." But there is much more of a manufacturing movement, and you guys are reflecting that and adding to that, in particular with this wonderful book. But I do think there's a little tension there because there are folks who are, I would put myself in that camp, that the most important thing we need to do with manufacturing is help with the trade deficit and confront Chinese power. And out of that we'll get jobs. And then there are other people who look at that as more of a domestic policy thing. We need to create good blue-collar jobs. Do you see that as a tension? And if so, where would you come down on that?

Marc Fasteau: Well, I'll take a crack at this first. I don't really see a tension in it. To deal with China, you have to protect not only high-tech industries, but anything that you want to keep. And one way we like to think about it is that industrial policy should ... Germany does a great job at this, making sure that the entire supply chain, and this would be through an expanded manufacturing extension program, has access. They have to be capable of doing it. That's probably a small percentage of the total number of small companies to the best technology, training how to use it, and the best business practices and assistance and exporting and all that other stuff that big companies get and protection against heavily subsidized competition. I mean, if they can't make it, then maybe that's an industry that we ought to let go of, like shoes and toys and stuff, but that's kind of the way we square the circle on this one.

Rob Atkinson: Yeah, that makes sense. You mentioned NIST, the National Institute of Standards and Technology, the Manufacturing Extension Partnership. I was at NIST way back when it was called the Bolert Rockefeller State Technology Extension Program, and then it merged into MEP. But what's striking about MEP, and you point that out in the book, is just how underfunded it is compared to what our competitors are doing. The Germans, the Japanese, a lot of other countries really, really help supply chain SMEs and manufacturing. We do some, and MEP is a very good program for what it is, but it seems, yeah, hard.

Marc Fasteau: There are all sorts of little things that make things life difficult for them. For example, a lot of OEMs extend their payment terms to these SMEs. Canada, for example, the government has a program to finance those receivables. It's a big problem for small SMEs. So there are a whole bunch of those things, but it's not just MEP and small manufacturers that are underfunded. Manufacturing USA Institutes, they're terrific. We only have 16. The Obama administration recommended 45. The president's PCAST committee comes up with great lists of what they should do. We have some more in the book, but appropriations were cut last time around. It's 840 million spread over five years. It's peanuts compared to Germany and the Fraunhofer Institutes. A billion a year for a country 20% our population.

Rob Atkinson: Or China. I was talking to the NIST folks who'd been over to China. And background for our listeners, the reason we have that program was ITIF proposed it and got the Biden administration to do it. We actually wrote the report that said 45 and all. But the Chinese, the first 13 or so they picked where exactly ours. Now they're going to 45 in China and they're order of magnitude more funding for center for most of them than we are. And we just seem to miss all that.

Marc Fasteau: Yeah, 200 times of what I ... I may have gotten it from your report. 200 times the budget of manufacturing, they say.

Ian Fletcher: That's a speculative figure because no one's been able to nail it down very well. But one thing I wanted to point out in reference to some of your earlier remarks is that the anti-manufacturing bias of the American establishment is in part due to a completely wildly ignorant misunderstanding of what manufacturing is like. People think of manufacturing as low-grade final assembly, where you have long lines of poor people in East Asia sticking Lego bricks together. They think that's manufacturing or they think manufacturing is like an old black-and-white movie of a steel mill. One of my favorite comments came from Leo Gerard, used to be head of the USW. He said the people who operate those big ladles in the classic steel pouring process, which they still do because the metallic chemistry hasn't changed, they are required to have more training than the pilot of a 747.

Now, if you think about that, if you know anything about steel, if you know how sophisticated modern steels are with all their alloys so that, for example, you can pump millions of gallons of boiling hot, corrosive crude oil through them and they don't break. And if you think of that process, incredible temperatures, pressures, how dangerous and how difficult to control, it makes sense that this is a high-tech industry. A lot of people don't seem to realize the average American, the biggest computer they own, it's not their iPhone, it's not their laptop, it's not even their desktop computer, it's their car. The average car has 150 chips in it of various sizes now.

In the course of writing this book, I visited five manufacturing facilities. In fact, I was actually at a place last night that's doing carbon capture right here in San Francisco. They're turning agricultural waste into oil you can inject into wells. And one of the things you just see is that modern manufacturing is not this old crude metal bashing process with proletarians lined up in a factory. Half the workers in modern factories, like one of the plants I saw was Honda's Maryville, Ohio facility. They're not really workers, they're engineers. They're people who sit in offices close to the assembly line making sure that these processes ... The one they had that impressed me the most is they had a laser-guided welding system for attaching the top of the car to the rest of the car body. And it's fully automatic, but it's attended by people who make sure that it's working properly. And the idea that this is just some 1930s image is just absurd. But that's what a lot of people appear to think.

Marc Fasteau: There's another major way in which manufacturing is misunderstood. And that is if you measure its value-added, I think it's around 10 or 12% of the economy. But there are many other jobs that wouldn't exist except for manufacturing, all of the non-manufactured inputs and services and so on. And if you measure it that way, you lose that. If you lose all 18%, in fact, you're taking out, what is it like 35% or 30 some percent of US GDP? So that's such a simple error, but it's just, it's kind of unthinking, okay, what percentage of GDP is, and that's the appropriate measure of its importance in the economy and it just isn't.

Rob Atkinson: Yeah. Ian, when you mentioned the car being the most chips, I actually thought it was going to be the microwave because I just bought one and they're like, I don't know how to program, but they want me to set it up to my phone and crap. I have no clue what to do. I just press the button, but ...

Jackie Whisman: Why do you think so many economists think industrial policy is equivalent to malpractice?

Marc Fasteau: Ian, you want to have some fun with that one?

Ian Fletcher: Well, they're basically two reasons, both of which go to the overarching assumption of contemporary economics in the US, which is, "The market is always right, and if it isn't, there's nothing you can do about it." And maybe there's some exceptions. Like we accept politically necessary welfare programs. We accept the defense budget, we accept Keynesian countercyclical spending, but at the productive core of the economy, it's a 100% private sector or very close to it.

Now that "markets are always right" philosophy comes from two things. One, it comes from the obvious pressure of the business community, which basically wants government hands off. Now, you presumably realize that free markets is not government hands off. Laissez-faire is government hands off. So what these people are really lobbying for is not for a free market. They're lobbying for governments stay out of any interventions that might undermine my pricing power because no rational business person wants to be in a free market where profits are competed down to zero. Everybody wants to be the only coffee shop on the block. That's basic. So that love of free markets, which is just saturated in our political rhetoric on both sides of the aisle is just disingenuous because the people promoting it don't really believe in it. The other origin of-

Rob Atkinson: Well, the question was, why do economists believe it?

Ian Fletcher: Ah, I had-

Marc Fasteau: I think Krugman believes it.

Rob Atkinson: He sure does.

Ian Fletcher: Yeah. But you got to remember in the overall social-cultural ecosystem who boards of trustees are, what economists get funded. There's a big constituency for that side of it. On the purely intellectual side, the real problem goes back to Paul Samuelson in 1948 with his famous paper that set forth the basis of mathematizing, the conceptual foundations of economics. Now, that was actually a good idea. I had an exchange with Samuelson just before he died. He didn't agree that we're right, but he's actually a reasonable fellow who doesn't believe in the far more extreme version of that idea, which is not just mathematizing the intellectual foundations of economics, but mathematizing the whole structure, like you're doing some kind of imitation of what economists think physics is like.

And one of the consequences of that, which is kind of strange, it's somewhat abstract, but it's real, is if you want to mathematize everything, you basically, you have to have closed-form solutions. You have to have stories about the economy where the master equation will tell you everything that's going to go on. Now, if you bring in ... And Krugman has actually talked about this, though he doesn't follow up on the shocking implications. If you bring in increasing returns, then you can't have generally equilibrium because the big outcomes are too dependent on contingent events like individuals, corporations, nation-states that make the right moves to cause a giant industry to take root in one particular place rather than another. You have to assume diminishing returns for everything to produce this nice equilibrium outcome.

Marc Fasteau: And that's what you can model. Nobody's figured out how to model in these exogenous causes of growth, the paths which growth take, which depend on what you're in before. And the biggest thing is that these models, including the models, for example, that talk about the bad impact of tariffs are snapshots in time. They don't tell you what's going to happen, what opportunities you're giving up or you're creating with these decisions. If you're so much more efficient making potato chips today than computer chips, those efficiencies are assumed not to be changeable, which seems like such a ridiculous assumption now because we see what other countries ... We've done it too, of course. It's absolutely useless, except as the snapshot is not useful as a way to make policy that extends by its very purpose into the future.

Rob Atkinson: Yeah, we have a test going to be on our website next week. Well, it'll be on when this is aired called Are You a producerist? And we compare producerists to marketists. Most 99% of economists are marketists. They believe in these market things. Really this is about being a producerist. You have to have strong, innovative, dynamic producers. That's really what it's all about. Mark, you remind me of a famous quote by Heilbron, Robert Heilbroner, the Economist. He said mathematics brought rigor to economic, but it also brought mortis.

Marc Fasteau: That's good. I'm going to use that one.

Jackie Whisman: We don't have a ton of time, but I did want to get one last question. Given we're recording this one week after the presidential election in the US, what would you advise President-elect Trump to do here? His last administration was more focused on tariffs, but as you noted, much less on domestic industrial policy like MEP, Chips and Science Act and other related initiatives.

Marc Fasteau: Well, speaking only to industrial policy by design here, but there's plenty to do, as I mentioned. I think the administration is into tariffs. They'll probably figure out what to do next, but he is going to have to fight. The tendency among traditional Republicans, and certainly what he did in the last administration is to not want to spend money, tax money, on being a producerist to support producers. He's going to want to rely on the tariffs, in other words, the protection. And he's going to want to, instead of spending money, he's going to want to cut taxes. And however he distributes it, that's money that's not going to build out the manufacturing USA Institutes or MEP.

So that's going to be an ideological issue for many Republicans that Trump has had a pattern of not being interested in those kind of spending, either as domestic infrastructure or industrial policy. And then the last thing is to pay attention to the currency. Lighthizer is now a convert on that issue. It's in his last book, and we at CPA had something to do with that. So those are the big three, and I think they're sort of on track to do pretty well on the tariff front.

Rob Atkinson: Yeah. Mark, and you mentioned this, one of the things ... There's so many, I could go down the list on what drives me crazy about marketists, but where do I begin? But one of them is market should determine prices. Okay, then the market should determine the price of the dollar, and it doesn't, and they know it doesn't. And you point that out in the book. So I always get frustrated with kind of free-market Republicans, like start at home then. Let's have the dollar reflect its true value not propped up as a safety currency in a default currency.

Marc Fasteau: Yeah, it's supposed to. The idea which we all got in EC1 is that when the currencies float, if you're a surplus country, your currency will appreciate, and if you're a deficit country, your currency will depreciate until trade more or less balances. Well, it's not that that is not without any force, but the counter forces have been so graded. Now it's not just currency manipulation. It's a net, very large net inflow of capital into the United States from the private sector. It's not governments. It's the obvious reasons, we have the biggest, safest, best regulated markets in the world, great ... and pretty much for a long time the highest returns on your capital except for currency fluctuation, and it's reserved currency. So more people want into US securities, whether it's treasuries or stocks and bonds than wants to go out. And that just pushes up the dollar in a secular, continuing way. So that really has to be dealt with as well.

Rob Atkinson: So unfortunately, we need to stop. This is a fantastic conversation. We could go on forever. My closing remark would be, as Kane said, "In the long run, we're all dead." In the long run, currency has to fix itself, but I kind of like to be here to see that happen.

Marc Fasteau: I think we have to intervene, but [inaudible 00:25:36].

Rob Atkinson: Exactly.

Ian Fletcher: You and ITIF have been doing terrific work, by the way, it's been kind of lonely ever since I started working on my first book in 2007. You and your crew were one of a very small number of people who were talking any sense that were worth reading. When I discover them online, I'm like, "Oh, okay. Atkinson, shortlist."

Rob Atkinson: Ian super nice of you to say that. We appreciate it.

Jackie Whisman: I Venmoed him for that remark.

Marc Fasteau: I've read with fascination and fear, your recent publication on where China has caught up with or is about to overtake where we are. That is really scary stuff.

Rob Atkinson: This was actually a project asked, they asked us, the Sloan Foundation in New York asked us if we would undertake that. Initially, I said no. I thought it was just too impossible to do, but they really pressed us to, and I was happy to do it after a while. But I got to tell you, going into that, I really did have a sort of blank slate, neutral mind. I didn't know what we were going to find, and as we got into that, I was just like, "Oh, jeez, I can't believe what they're doing in robotics. I can't believe they're doing in chemicals. I can't believe what they're doing in nuclear power." Maybe it was a wake-up call, man. I think we don't understand it in the US.

Marc Fasteau: Yeah, at our peril.

Ian Fletcher: I think this country is going to be dragged kicking and screaming to reality. I think the fundamental facts are just going to force themselves so vigorously that unless we choose an absolute self-destructive debacle, we're not going to have any choice but to do what we should.

Rob Atkinson: On that positive note, we could actually have whole thing on scenarios of how this plays out, but we do have to stop. So Ian and Marc, thank you so much. This was really, really great.

Marc Fasteau: Thank you. It's a pleasure.

Jackie Whisman: And that’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website itif.org. And follow us on Twitter, Facebook, and LinkedIn @ITIFdc.

Rob Atkinson: No, Jackie, we got to change that to X.

Jackie Whisman: Oh.

Rob Atkinson: Not-

Jackie Whisman: X, formerly known as Twitter.

Ian Fletcher: Nobody calls it X.

Rob Atkinson: I know.

Ian Fletcher: Everybody calls it Twitter.

Rob Atkinson: I know. Alrighty. Thank you.

Marc Fasteau: Okay.

Rob Atkinson: We have great more episodes, great guests lined up. I hope you continue to tune in.