Industrial Policy 2.0

Update 645 — Industrial Policy 2.0:
A New Era in Economic Investment?

As the 117th Congress draws to a close and the 118th Congress draws closer, most major legislative priorities outside of the FY22 budget and NDAA have been disposed of. A signal accomplishment of this Congress — obscured from view but present in some of the big packages like IIJA, most obviously in CHIPS — are the new laws setting the stage for an updated paradigm of industrial policy in strategic and forward-looking fashion. 

The midterms will have much to say about this departure from the decades-old Washington consensus of industrial neutrality and modified laissez-faire trade. Congress has now built the foundation for new industrial policy from R&D to competition policy that recognizes that policy should be deliberately chosen.

In this update, we cover the new industrial policy paradigm of the Biden administration and what this means for the future of our economy… if the Democrats can hold onto Congress.




A break from the old regime of ad hoc policies that accumulated into a happenstance mess of industrial policy with perverse incentives, the new industrial policy of the Biden White House is seeking to build a democratic economy that works for all, or as Ezra Klein likes to call it, “A liberalism that builds.”

The New Paradigm

Once a hallmark of American policymaking, industrial policy built a prosperous economy focused on the production of tangible goods that few other countries could produce. The industrial policy of the post-war era cemented the United States as an economic powerhouse whose fruits could be reaped by many – but still excluded far too many. 

In the latter decades of the 20th century, the prevailing modified laissez-faire approach to economic policymaking relied on global market efficiency, low consumer choice, and pricing arguments. Policy was no longer made with deliberate strategic goals in mind but rather to maximize speed and optimize shareholder return.   

The result was a mixed bag of policies with no national purpose leading to disastrous impacts:

  • Companies began to offshore jobs – particularly in the manufacturing sector – as they found cheaper labor in other countries;
  • The United States lost control of critical industries in various supply chains; and
  • The domestic economy grew more unequal as income and wealth became even more concentrated at the top. 

The following decades reinforced the problems that had emerged and led to a supply system built on last-minute fulfillment and just-in-time production, leaving the system vulnerable to disasters like the COVID-19 pandemic, for example. Global production and growth slowed as entire industries were left scrambling for key components. As economies reopened, supply chains were not able to ramp up in time, and the concentration of particular items like semiconductors in other countries continued to cripple industries like automobile manufacturing and appliances. 

As President Biden took office, he swore to not only combat the crises caused by the pandemic but to also challenge the fundamental problems of the economic system that led us here. Congress had already begun moving in this direction with a bipartisan coalition working to bring home the semiconductor manufacturing industry through the CHIPS for America Act in 2020. But it wasn’t until Biden entered the White House that a cohesive vision for industrial policy gripped the federal government: a vision to expand the productive capacity of the American economy to build a more democratic and secure world. 

Litany of Legislative Successes

As the new Congress and presidency began, both branches quickly got to work outlining the investments necessary to build out our productive capacity, bring home critical manufacturing, and restore energy independence. 

A series of legislative initiatives over the last two years began to flesh out the new industrial policy paradigm:

  • Infrastructure Investment and Jobs Act:  Biden sought and managed to secure over half a trillion dollars in new infrastructure funding designed to promote economic growth, enhance competitiveness, create good-paying, union jobs, and make our economy more sustainable. The investments are expected to add around two million jobs per year over a decade. 
  • CHIPS and Science Act: Originally a bipartisan proposal, both the executive and legislative branches worked together to secure $39 billion to incentivize domestic production of semiconductor chips and $13 billion for semiconductor industry R&D and workforce development. There is also another $170 billion for broader R&D and manufacturing investments. The legislation will bolster our supply chains and create critical redundancies in an area with important national security interests.
  • Inflation Reduction Act:  Though the only partisan legislation of the three listed here, the IRA goes the furthest to invest in renewable energy as part of a long-term focus on building energy independence and energizing a key industry for the new industrial policy regime. With $369 billion for clean energy production and deployment, $250 billion in loan authorizations from the Department of Energy, and the Greenhouse Gas Reduction Fund to launch a National Green Bank, the renewable energy industry will finally be granted the support it needs to become a key part of the American industrial portfolio. 

These legislative successes highlight both the administration’s desire to reimagine industrial policy and Congress’s willingness – across both sides of the aisle – to meaningfully engage with the question of what industrial policy in today’s America should look like. The bipartisan buy-in to rewriting the rules of industrial policy is no small feat considering the divisions between the parties today, including the hostility to democracy itself from elements of the Republican Party. Support from both parties provides a strong foundation for the new industrial policy paradigm that could augur well regardless of midterm outcomes. 

The bipartisan recognition of the necessity to engage in intentional, well-structured industrial policy builds the case that democracy can work and reinforces the strength of democracy on the global stage. 

The Industries of Tomorrow

The industrial policy accomplishments of the last two years will take some time to implement and deploy, and effectively doing so will be the ultimate test of whether the United States can truly lead on an intentional industrial policy. The White House has already begun pivoting towards the implementation of the various industrial policy programmes enacted. Quick implementation is necessary as the future of the Democratic trifecta is in peril with the upcoming midterms suggesting a Republican takeover of at least one chamber of Congress. 

Retaining majorities in both chambers – especially one that can end the filibuster in the Senate – would allow for further investments in industrial policy, particularly in sectors that would provide critical support to the sectors already invested in. A renewed Democratic trifecta could revisit items cut from Build Back Better to craft the Inflation Reduction Act:

  • Housing: Ample affordable housing will be crucial to helping people move to where good-paying jobs are available and to connect them to the bounties of economic growth.
  • Transit: Moving people across regions and the country will be a vital part of ensuring our industrial policy is effective, and well-funded public transit will multiply the positive impacts of such.
  • Education: A highly-educated, technical workforce is necessary to take advantage of the new R&D funding, otherwise that money could be wasted.  

Republican control of one chamber of Congress could stall any efforts for investments in these sectors, but it would not necessarily mean the end of industrial policy. There are other innovation-intensive sectors and manufacturing that could receive significant federal support to build on America’s global preeminence as a hub for innovation. In addition, a bipartisan deal could be struck on permitting reform to help unleash energy production in the United States.   Building on the successes of this Congress would show the government can work to ensure a better future. Doubling down on our new industrial policy regime will protect democratic legitimacy by making the case for a government that supports its population and move us closer to an economy that works for all. 

But there is more to be done beyond the upcoming Congress. We need to build new public institutions to lock in the gains from industrial policy and to support the capacity we can create for industrial policy. Formalizing a National Green Bank from the Greenhouse Gas Reduction Fund in the IRA, reimagining community-level input, and setting up a public bank to finance industrial projects are a few of the ways we can flesh out our industrial policy to ensure the masses reap the benefits of our new paradigm. 

The new industrial policy paradigm should continue despite the outcome of the midterms but would be strengthened by returning the majorities that leaned forward to create it.