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Before we can understand the risks of President Biden’s industrial policy, we have to first recognize the extent to which the government is already involved in structuring markets and directing capital. The idea that we have been pursuing free market capitalism for the last four decades is a self-serving myth promoted by those who benefitted from the upward redistribution of this period.
In reality, the government has shaped the market in fundamental ways from granting patent and copyright monopolies to bailing out failing banks. These interventions cannot realistically be called »free market,« although it is politically easier to justify policies by attributing them to faith in markets rather than a desire to redistribute income upward. Before assessing the interventions proposed by Biden, it’s important to be clear about the actual track record and not live in the myth of a free market.
Patent and Copyright Monopolies
The most blatant form of intervention we have seen in the last four decades has been the system of patent and copyright monopolies. These government-granted monopolies, which have gotten longer and stronger over the last four decades, are 180 degrees at odds with free markets.
There is far too little appreciation of how important patent and copyright monopolies are to the economy and the distribution of income. To take a notable example, people in the United States will spend over $550 billion this year on prescription drugs. Without patent monopolies and related protections, these drugs would almost certainly cost less than $100 billion. The difference of $450 billion is equal to roughly 1.8% of GDP, or more than 20% of all after-tax corporate profits.
And, this is just from prescription drugs. If we add in the rents earned in medical equipment, computers and software, pesticides, fertilizers and other areas where intellectual property rents are a large share of the price, we would likely be over $1 trillion.
These rents are a substantial part of the upward redistribution of the last four decades. Bill Gates would likely still be working for a living if the government did not threaten to arrest anyone who copies Microsoft software without his permission.
To take a more recent example, the government let Moderna keep control over the Covid vaccine that it had paid Moderna to develop and test. As a result, we now have five Moderna billionaires.
We also have hardly had a free market policy towards the financial sector. We explicitly exempt it from the sales taxes that are applied to most other items. We also are quick to bail out banks and other financial institutions whenever their greed and incompetence gets them into trouble. As a result, we have a hugely bloated financial sector which is the basis for the fortune of many of the richest people in the country.
We also have hardly had a free market policy towards the financial sector
Even our »free trade« policies have not quite lived up to the billing. We have pursued trade agreements that were intended to put our manufacturing workers in direct competition with low-paid workers in the developing world. The predicted and actual result of this policy was the loss of millions of manufacturing jobs and sharply lower pay for the ones that remain.
However, there has been no interest in having free trade policies for physicians and other highly paid professionals. The barriers that prevent foreigners from entering these fields have been left in place or even strengthened.
As a result, U.S. doctors get paid more than twice as much as the average for other wealthy countries. This adds close to $100 billion annually to our medical bill. By contrast, our manufacturing workers get paid less than their counterparts in Western Europe.
It is important to set this record straight in order to assess the Biden agenda, since we have to understand that we are not comparing his policies to anything like pure free market policies. We are comparing them to policies that created large inefficiencies in order to direct more money to powerful interest groups.
There are several important features of what is being billed as Bidenomics. First, he had his major infrastructure package, which will spend close to $1 trillion over a decade to modernize the U.S. infrastructure. Second, there is an effort to reestablish the U.S. lead in producing cutting edge semi-conductors, reducing our dependence on imports, most importantly from Taiwan. Third is the promotion of green technologies with subsidies and tax credits. Last, there is the effort to increase domestic employment in manufacturing (ideally with union jobs) by imposing tariffs and other barriers to imports.
These goals are of course intertwined. The effort to promote clean energy is also supposed to increase manufacturing employment in the United States, since the subsidies are designed to be more generous for products where most of the value-added is in the United States. Similarly, infrastructure projects should create many good-paying jobs, with a substantial portion of them being union jobs, since construction is still a relatively highly unionized sector.
Basis for future growth
In terms of their impact on the economy, some of the agenda really does not involve substantial trade-offs. Modernizing the infrastructure is laying the basis for future growth, in the same way that building the national highway system in the 1950s laid the basis for decades of future growth in the form of suburbanization and the promotion of the auto industry. This is especially the case with items like building up a national infrastructure of charging stations, which is necessary to make electric cars viable.
It would be no good to be dependent onTaiwan for cutting endge computer chips.
The effort to reshore the production of advanced semi-conductors can be seen as an arguably necessary national defense measure, whatever its economic merits. One unfortunately plausible future scenario for conflict would be a Chinese drive to forcibly take Taiwan. In that event, it would probably be good not to be dependent on Taiwan for cutting edge computer chips needed for both military and civilian purposes.
The push to promote electric cars and clean energy is an absolute necessity. The U.S. and the rest of the world is already paying a huge price for global warming. It is not possible to get private home insurance in parts of Florida and California due to the increased risk of flooding and hurricanes in the former and wildfires in the latter.
The U.S. alone can not prevent global warming by reducing its emissions, but as the world’s second largest emitter, it is a big contributor to the problem. And, it will be very difficult to maintain momentum for emissions reductions in other countries if the U.S. did not also push this path. Furthermore, since the price of clean energy has plummeted in the last twenty years, investments in this area are likely to have quick payoffs without even including the environmental benefits.
The last area is the effort to promote domestic manufacturing as way to generate good-paying and ideally union jobs. This area has probably raised more hopes and concerns than is warranted. President Biden is limited in what he can do to promote domestic manufacturing with the tools at hand. He has left many of the Trump era tariffs in place, especially against China. It is unlikely that he will do any major increases in tariffs against other trading partners.
The rules in the Inflation Reduction Act (I.R.A.) do provide increased subsidies for cars and batteries that are produced, or mostly produced, in the United States, but these are relatively limited. They will not exclude much better or cheaper foreign products from the U.S. market. For this reason, there are not likely to impose large costs on the U.S. economy, but they also are not likely to lead to the sort of employment boom that would transform the U.S. labor market.
The Inflation Reduction Act is not likely to lead to an employment boom.
In this sense, they can be seen as well-designed measures that will produce some good-paying jobs, while also rewarding an important political constituency. Union support remains important for the Democratic Party and was essential for President Biden’s election in 2020. It will also be important for his re-election in 2024, as well as being essential for providing a political base for a green transformation.
The modest preferences that President Biden has given for domestic production have to be seen in this light. If we imagine that we have been running the economy over the last four decades to maximize efficiency, without any government interference with free markets, then Biden’s policies here might seem like a radical departure.
But when we look at the economy with clear eyes and recognize how policy has been used to structure markets in ways which were often not at all efficient, then there is far less basis for concern. If we can pay hundreds of billions more for prescription drugs due to government-granted patent monopolies and twice as much for our doctors as other wealthy countries, paying 10-15 percent more for car batteries is not going to be a major economic cost.
There are definitely risks to Biden’s strategy, if it turns out that his subsidies and tariffs are insufficient to produce many manufacturing jobs, he could look to make them larger. At some point, a relatively small source of inefficiency can become a large one. It will be important that the Biden administration recognizes the risk of pushing these protectionist measures too far.
There is also the risk that these protectionist measures will undermine other goals, most importantly the green conversion. It is incumbent that we reduce greenhouse gas emissions as quickly as possible. If the push to have domestic manufacturing slows the adoption of electric cars or the installation of wind or solar capacity, we will be paying a huge cost for a relatively small number of jobs.
However, at the most basic level, the problem is not moving away from a free market policy that never existed in the first place. The problem in these instances would be badly implementing policies that would be very useful, if done right.