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A Hebrew in Pharaoh’s Court: Industrial Policy as Statecraft

Anthony Barr
Anthony Barr
Anthony M. Barr is a first year MPP candidate at Pepperdine University. He has done research on political theory, education policy, and civic and moral virtue for various nonprofits, businesses, and independent publishing companies.

Imagine what might have happened in Egypt had there been no one available to correctly interpret Pharaoh’s dream. One year of unexpected abundance is a miracle; seven is a reliable pattern. Seven years of abundance leads your economic advisors to talk about adjusting your monetary policy to worry less about inflation. You’re not as worried about increased spending leading to increased deficits, and so you shift your fiscal policy. Seven years of abundance encourages your average Egyptian consumer to put just a little bit more on the credit card, to buy that nicer house he’s been eying that puts him at just above the “30% of annual income on housing” mark. Seven years of abundance feels like a promise about the future. 

But then in the eighth year, a famine. In the ninth year, famine. And in the tenth, eleventh, twelfth, thirteenth, and fourteenth years. 

Thankfully, Joseph had an advantage over everyone else in that he was uniquely chosen by God to decipher the meaning of Pharaoh’s prophetic dream. But notice in the story that God did not tell Joseph what to do in response to the information regarding the future contained in the dream. It is Joseph, acting according to his own capacity for reasoned judgment, who prudently conceives of (and successfully pitches!) the public policy initiative to save the excess abundance from the fields surrounding each city and store them in granaries to be accessed during the years of famine. 

The story of Joseph’s advice to Egypt is a great example of a concept Nassim Nicholas Taleb calls “Antifragility” in his book of the same name. Taleb is a successful hedge fund manager who fundamentally altered how we think about risk with his concept of Black Swans, those extreme outlier events that catch us by surprise precisely because their low probabilities mean they do not register as risk until after the fact. In Antifragility, Taleb builds on his multi-decade exploration of risk. Mere resilience, he says, is about enduring a crisis with gritted teeth, hopefully not losing too much in the process. But antifragility is about identifying potential weaknesses, anticipating crises, and being in a position to find upsides in times of distress, disorder, and chaos. 

The key detail that marks the story of Joseph as an example of antifragility and not mere resilience is that in the years of famine, it is not simply Egyptians who benefited from this policy: the Genesis account says “all the world came to Egypt to buy grain.” In other words, Joseph’s policy not only allowed his nation to survive seven years of famine, it also gave the nation an absolute advantage in trade with other nations. While trade (of course, and by definition) isn’t a zero-sum game, especially in times of natural disasters it is certainly the case that nations that are well-prepared for such exigencies stand to gain the most from being the broker of aid. 

Trump Was No Joseph (and Neither Were His Predecessors)

In 2020, the United States was neither antifragile nor even all that resilient. The Covid-19 pandemic was not a Black Swan event; the risk of a global pandemic was calculable. Nevertheless, it caught us completely unprepared, and indeed found us with a presidential administration that actively downplayed the crisis in its earliest days rather than responding decisively with strong policy. Rather than stockpiling our supplies like the grain of Egypt, we donated and exported vast amounts of our PPE to China in February – despite the fact that 50% of PPE production is already based there – only to then to be forced into a position where state governments had to fight with the federal government over the remaining PPE left here, which was severely less than what is needed. A year into the pandemic, and doctors and nurses are still forced to re-wear PPE because we just simply don’t have enough. 

The specific governmental failures in response to this crisis – ranging from lack of ongoing stimulus money to unorchestrated regional plans for slowing the spread to the outright misinformation campaigns – should not distract us from the grim reality that even with a more competent presidential administration and Congress, we would not have been in a good position for the simple reason that we do not make things. Or at least, not as many things as we need to. The state of American production is weak.   

America has enjoyed seven times seven years of abundance and more, with only fairly minor downturns. In the aftermath of World War II, we emerged victorious and with a dominating economy. During the Cold War, we faced down our enemy, and it was the Soviets who lost, in part because they were forced to adopt the very market-based economics they deplored and that we championed. In the intervening years, our economy has shifted from one of production to one of consumption and service. We don’t need to make things, because we still get to buy cheap things: we’ve grown accustomed to inexpensive prices for the consumer goods we enjoy. Since the ‘90s, inflation rates have stayed reliably low and GDP growth rate has remained fairly constant. 2008 was the bursting of a bubble, but we rode that wave without falling into a second Great Depression.

But of course, there’s a less rosy way to tell this story. The darker version is that what we’ve grown accustomed to, in our fondness for cheapness, is slave labor. We’ve grown accustomed to unscrupulous firms which, in the face of lowered demand than anticipated, are willing to refuse to honor contracts for garments from Bangladeshi workers, as H&M and other retailers are currently doing. We’ve grown accustomed to “just in time” supply chains that operate with brutal efficiency, despite the obvious risk of being unable to quickly scale up production if needed (it turns out that using the National Defense Authorization Act to require manufacturing firms to manufacture essential supplies only works if you have enough pre existing manufacturing firms.) In addition, we have grown accustomed to not being the lead innovator in new technology. And finally, we have grown accustomed to closed factories, massive layoffs, regional poverty, and the despair of communities facing prolonged disinvestment in places like Detroit and West Virginia. 

For many of us, 2020 was not an anomaly, but rather the exclamation point. Hopefully, the failures of 2020 have convinced most of us that our current approach is not working. It’s time for something new. And what that new thing must be is the recovery of an old thing: an explicit industrial policy formulated as good domestic policy with foreign policy implications and goals.

Industrial Policy As Statecraft

In 1791, our first Treasury Secretary, Alexander Hamilton, published the Report on Manufactures, in which he outlined specific proposals for an industrial policy consisting of both mild tariffs and subsidies designed to encourage American manufacturing. Hamilton, who also famously recognized that public debt managed by a system of centralized banking could help finance a government precariously short on money, had one core aim in this report: to allow the new nation to survive. Hamilton recognized that if the American government didn’t get the political economy question right, the nation would go belly up, with Great Britain and France prepared to pick up the pieces of the experiment.  

Just fifteen years after the publication of The Wealth of Nations, Hamilton took aim at Adam Smith for his suggestion that the market alone could do the job of promoting that wealth, such that a conscious governmental effort towards cultivating a healthy political economy was unnecessary. Hamilton listed several main reasons why the fledgling nation should adopt some form of industrial policy. These reasons included the following: 

  1. “[T]he fear of want of success in untried enterprises;”
  2. “the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted;” and
  3. “the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own Citizens in the branches, in which they are to be rivalled.”

Hamilton’s proposals were controversial in his time. Antifederalists like Jefferson (and, to a lesser extent, Madison) were concerned that a federal industrial policy overstepped the constitutional boundaries of national power. And indeed, Hamilton’s proposals for subsidies were not ultimately accepted, though tariffs were implemented at various times to allow new U.S. firms to achieve economies of scale.

Today, discussions of industrial policy look remarkably like the historic debates between Hamilton and Jefferson. Supporters of industrial policy make the same three observations Hamilton made, and some (myself included) point to the government-funded space race against the Soviets as recent evidence of how industrial policy functions as good foreign policy. As I like to say, this kind of policy isn’t communist, it’s the grand strategy we used to beat the communists! Nevertheless, for those who (like me) object strongly to the individual mandate in the Affordable Care Act and the idea that the government can compel purchasing in commerce, the Jeffersonian concerns are not altogether unfounded. 

My point here is that in the contemporary debates on industrial policy, both sides are distinctly American, and both sides can appeal to the founding documents and esteemed statesmen. For those of us who see industrial policy as a paramount need, it will be important to learn to speak to the concerns of those following in the Jeffersonian tradition. But I think those of us who advocate for industrial policy should feel empowered knowing the deep American roots of the idea.

Whose Justice, Which Industrial Policy?

Everyone’s talking about industrial policy these days. The incoming president says it’s the key to bringing back jobs; war hawks in both parties tell us it’s the secret weapon to win our current great power competition; leftists tell us it’s vital for restoring the social contract in the form of a new New Deal; and right-of-center policy wonks (inheritors of the reformocon movements) tell us it’s the key to counteracting the market fundamentalism of the libertarians in order to allow for a flourishing middle class.

But what is industrial policy exactly? For many on the right, any whisper of it screams “socialism” (looking at you, Nikki Haley). And to be fair, “free market” is a phrase that is largely self-explanatory in a way that the phrase “some government shaping but it’s still market-based but also it’s not market fundamentalism” is not. Given all the possible expressions of what might be considered industrial policy, we’re left to ask: what techniques should we be using? Are we talking about protectionist tariffs designed to limit imports, or tax credits for infant industries to offset risk and help them develop economies of scale, or rebates to firms that commit to opening factories and keeping jobs over here, or increased grant money for defense-aligned R&D initiatives in the private sector, or greater reliance on unionized work to support better worker wages, or the breaking up of monopolies to encourage more innovation through competition, or the giving of stimulus money to small businesses in a pandemic, or modern monetary policy-based financing of infrastructure reforms and universal college?

Or what?

It almost goes without saying that different political coalitions have different priorities: some of the examples of industrial policy listed above will fit with those priorities, and some won’t. And as for bipartisan agreement on industrial policy? While hyper-focused individual bills like the 2020 Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act can generate some bipartisan support, broader initiatives will require broad consensus.

In general though, I think we can develop broad consensus around three strategic goals for an American industrial policy in the post-COVID era. These three goals are:

1) Strengthen vital supply chains, to better prepare for the next big crisis.

At the very least, we should be able to identify a few core areas like medical supplies where we can focus attention on making sure we have adequate capacity for stateside production, including the possibility of rapidly scaling up if necessary. We can also look at our pharmaceutical dependence more broadly, and think about ways to become more self-sufficient. Once we have identified a few core areas, we can then begin to perform regular audits that seek to calculate what our exposure would be in various disaster scenarios. Notice that this is different from calculating the percentage risk that we will face a given disaster. We are not seeking to determine if there is a 2% or 10% chance of X event occurring. We want to ask instead, “if X event occurs, what percentage of required supplies could be realistically produced stateside?” 

2) Strengthen the relative power of the US dollar.

In December 2020, Real Clear Markets reported that “for the first time on record, the U.S. dollar no longer was the dominant currency in international payments, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). More transactions were conducted in euros. Eventually, China’s RMB will challenge the dollar as well.” A month prior to that report, China announced the Regional Comprehensive Economic Partnership, a trade agreement which NPR reports is “unites China, Japan and South Korea in a trade deal for the first time and includes 10 Southeast Asian countries plus Australia and New Zealand.” Noticeably absent from that trade deal is the United States. If we want the U.S. dollar to retain its value, and if we want our economic soft power to continue to make itself felt in the world, then we will need to explicitly counter the economic maneuverings that are leading to our displacement.

3) Strengthen our national security, especially as regards digital technological innovation.

It’s not just our inability to develop 5G technology at the same pace as other nations that we should be worried about, it’s also our embarrassing vulnerability to cyberwarfare. The reality is that when we and our allies are not the leaders in developing digital technology, our risk grows exponentially. Remember Hamilton’s insight that even if we don’t want to use industrial policy to develop an edge, other nations absolutely will? We can’t afford to keep sitting on the sidelines.  

We cannot see into the future, and God has not seen fit to give us dreams replete with insights for our grand strategy or political economy. Nevertheless it is true that Joseph does not have a monopoly on prudence, and we can learn from his statecraft lessons for our own. Resilience is not enough. We need to be antifragile: we need to position ourselves to find the upside in the next crisis that threatens to destabilize the world. This robustness will be good for us, and, as was the case with Egypt’s antifragility, good for the world. It’s time to reclaim the legacy of Joseph, and of Hamilton. It’s time for an American industrial policy.