(Bloomberg Opinion) — President Joe Biden’s next major legislative initiative is called an “infrastructure” bill, but it’s actually something bigger. It’s about transforming the nation to better fit the needs of our future economy — in other words, industrial policy.
In addition, Biden wants to build lots of things not normally counted as infrastructure — housing to relieve the nationwide housing shortage, schools and other education facilities, various resources for Native American tribes, and so on. And he wants to retrofit many existing buildings and transportation systems to be more energy-efficient and to run on renewable energy.
And on top of all that, the bill is expected to contain provisions to alter the shape of the U.S. economy. That includes a big boost in research spending, free community college tuition, and massively increased spending on child care. The idea is to upgrade both the high-tech competitive parts of the economy while also boosting the labor-intensive industries that provide mass employment.
In other words, Biden’s second legislative effort will be far more transformative than his first. It amounts to a serious and sweeping redirection of the entire U.S. economy. There are many reasons Biden is choosing, rightly, to do this now, when his Democratic predecessors were so much more cautious and incremental. The competitive and military threat from China, the nation’s demand for a burst of growth after the disaster of Covid-19, and the increasingly dire threat from climate change all figure into it. But the biggest reason is that the nation has come to a collective realization that the old industrial policy, fashioned in the late 1970s and 1980s, is no longer working.
We don’t often think of the Jimmy Carter and Ronald Reagan presidential years as a time of sweeping industrial policy, but it was. The deregulations that began under Carter and continued under Reagan, the tax cuts and tax reforms of the 1980s, and the more pro-business touch applied to labor and other regulations were all part of a package of policies designed to put more of the U.S. industrial destiny in the hands of the market.
As Brad DeLong and Stephen S. Cohen write in their book “Concrete Economics: The Hamilton Approach to Economic Growth and Policy,” letting the market decide what gets produced actually constitutes an industrial policy itself. And all too often, the industry that benefits is finance. From the 1970s through the 2010s, finance roughly doubled its share of total value added relative to nonfinancial businesses:
In other words, in the era of deregulation and laissez-faire, the U.S. spent ever more of its economic resources selling pieces of the rest of its economy back and forth to each other (and to foreigners). In theory that could have made productivity go up, as resources were funneled to the most productive enterprises. But if there was such a boost, it petered out in the mid-2000s, even before troubles in the financial sector crashed the economy.
As for international competitiveness, the U.S. did seem to do better versus Europe and Japan in the 1990s and 2000s than it had in the 70s and 80s. But against China, the U.S. has performed less impressively. Large numbers of Americans lost their jobs to Chinese competition in the 2000s, and the U.S. has been soundly outcompeted in many high-tech export markets:
Meanwhile, wage growth was only moderate in the age of deregulation and laissez-faire, while inequality increased substantially.
The results of this era weren’t disastrous — the U.S. outperformed most other rich countries on many economic metrics — but they were a bit underwhelming. Thus, there has been a growing realization that it’s time for a change. President Trump took the first crack at making that change, with his trade war and his attempt to hector American companies into reshoring production. His slapdash, ill-considered approach failed.
Now Biden is going to make a much bigger and more serious attempt. The infrastructure bill represents a complete swerve from the let-the-market-handle-it approach, instead hearkening back to the massive government investments of the New Deal and the Dwight D. Eisenhower administration. In those decades, the U.S. extended its electrical grid, created the interstate highway system, built the suburbs, upgraded and expanded universities and spent much more money on research. Biden’s bill basically looks like a repeat of that effort, but with more of a focus on climate change and racial inclusion.
This is a big risk, of course, as sweeping changes in industrial policy always are. But it’s not as big a risk as the first time the U.S. tried this approach, because we have the results of that earlier effort to guide us. Better transportation, more housing, cheaper energy, more research and more education were all successes during the Cold War. Biden isn’t so much charting a course into the unknown as tweaking a tried-and-true approach.
Anyone who opposes Biden’s approach should present an alternative that doesn’t involve simply stumbling along with more of the same.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.