Politics makes strange bedfellows, as the old quote has it. Personally, I have no in-principle objection to tariff policies or even to industrial policy and yet I find myself in broad agreement with what Samuel Gregg on these topics with respect to the United States: they will not solve the economic problems that plague America. Where I depart from Gregg, however, is in recognising that serious problems exist.
Let us start with the cure proposed, rather than debating the existence of the disease. And let us start here with industrial policy – which Gregg appears to disapprove of far more than protectionism. We now have four years of a Biden administration that did indeed attempt to employ industrial policy in the form of the bizarrely named Inflation Reduction Act (IRA). Now that we have seen how the industrial policy sausage is made in DC it is hard not to agree with Francis Fukuyama who observed way back in 1992 that:
An industrial policy worked in Taiwan only because the state was able to shield its planning technocrats from political pressures so that they could reinforce the market and make decisions according to criteria of efficiency—in other words, worked because Taiwan was not governed democratically. An American industrial policy is much less likely to improve its economic competitiveness, precisely because America is more democratic than Taiwan or the Asian NIEs. The planning process would quickly fall prey to pressures from Congress either to protect inefficient industries or to promote ones favored by special interests.[1]
The results of the IRA have not just been slipshod, they have been downright hideous. Gregg mentions the case of the $535 million loan to Solyndra in the Obama administration’s American Recovery and Reinvestment Act (ARRA) of 2009. Solyndra was but a minnow when compared to the IRA whale.
The IRA pitched itself as industrial policy and it had a few industrial policy components to it. But in reality, it was a repackaging of the Green New Deal that the left-wing of the Democratic Party pushed during the 2020 election campaign. The Green New Deal was roundly dismissed by Democratic Party leaders – with then-Speaker of the House Nancy Pelosi referring to it as the “green dream” – reflecting the fact that it had little in the way of public support. But the architects of the IRA cleverly redefined industrial policy to mean supporting the green energy sector in an effort to force the American economy to stop emitting carbon. In 2023, Malcolm Kyeyune and I published an essay outlining just how large the green giveaway embedded in the IRA was:
The largest tax credit ever granted to the fossil fuel industry was in 1985, when the federal government provided $8 billion in credits (about $19 billion in today’s dollars). With the IRA, we expect to see tax credits for renewables peak in 2023 at $36.2 billion, or $41.5 billion if we include nuclear. It is not clear that either the American public or policymakers comprehend just how large and how radical these subsidies are. The picture becomes more dramatic still if we consider the entire IRA stimulus package. In the seven years between 1985 and 1992, the tax preferences assigned to the fossil fuel industry added up to around $31 billion (or $70.2 billion in today’s dollars); this is a far cry from the $230 billion that will be spent on renewables in the coming years ($260 billion if we include nuclear). Note as well that while fossil fuel subsidies went to a tried and tested industry, the renewables subsidies are going to an experimental industry.[2]
Who is receiving these subsidies? We do not know. But it seems likely that it is Democratic Party insiders tied to the green movement and its increasingly large lobbying arm – which we also expose in the paper.[3] On its face the IRA looks like a golden parachute system in which Democratic Party activists and lobbyists “cash out” by becoming green entrepreneurs and applying for government grants.
The aspects of the bill that contained actual industrial policy have largely failed. For example, in November 2024 it was reported that Intel was finalising a $7.9 billion grant with the Commerce Department. This grant was part of the CHIPS Act, attached to the IRA, and it aimed at onshoring semiconductor fabrication in the United States. But at the very same time as this grant is being finalised, market analysts are concluding that Intel is a failing company with its stock price falling around 56% over the past year. Intel itself posted an enormous $17 billion loss in mid-2024. It is hard not to think that the market analysts are right and that the United States government is throwing money into a bottomless pit.
In principle, I disagree with Gregg. Industrial policy can work and has worked in countries like South Korea and Taiwan. But the fact that Congress apportions money in the United States opens far too much room for industrial policy to be used to launder giveaways for insiders. Biden’s DC shows us that these giveaways no longer come in pork barrels but are rather flushed through green energy startups many of which will likely fail, much like Solyndra. In short, Fukuyama was right: the United States’ system of government is likely too democratic to engage in serious industrial policy.
If industrial policy under Biden has been ugly, attempts to engage in aggressive protection has been downright destructive. Take the example of the ban on selling advanced semiconductors to China. The so-called “chip ban” started under Trump and was nominally to prevent Chinese military usage of advanced chips. But the impact of the policy was mainly to stop Huawei from producing cutting edge smartphones. While those who supported the policy chalked this up as a major win, company leaders in the semiconductor industry warned that it would push China to simply start building these chips domestically. It took a few years, but in the summer of 2023, Huawei announced the release of its Kirin 9000S, the company’s new chip that was embedded in its Mate 60 Pro – a phone that easily competes with iPhone and is now fully domestically produced. Since then, anxieties have started rising that China will now start to commodify chip production, drive down costs, and outcompete Western companies. Just as the Catholic Church learned that banning the printing press could not stop the Reformation, American policymakers are learning that there is no obvious way to ban your way to prosperity.
China have also responded to the chip sanctions by announcing a halt of exports of gallium and germanium to the United States, two elements that cannot be produced in large quantities with large-scale zinc and bauxite refining industries and which are needed to produce many electrical products – including military products. We have not yet seen the impact of this ban, but it could do untold damage to the American electronic industry. We are starting to see that the globalisation of supply chains is much like an omelette: once the eggs have been whisked together, there is no obvious way to separate them. For these reasons, I find myself defending free trade even more aggressively than Gregg: even attempts to ban products to China on the basis of national security should be undertaken with great caution; the bans themselves may just lead China to innovate and the blowback from countersanctions could do untold damage. In short, trade wars are bad – and they are doubly bad in a world of globalised supply chains.
Where I diverge from Gregg, however, is in thinking that the United States does in fact have enormous economic problems. They are the problems that the Trump movement has discussed: deindustrialisation, the loss of good jobs, and so on. But from a macroeconomic perspective the problem is much simpler to summarise: it is America’s yawning trade deficit. The United States can run a large trade deficit because of the reserve status of the US dollar. Countries are willing to send the United States goods and services in return for either paper currency or paper financial assets like stocks and bonds. Even if you are in favour of this arrangement, it is becoming increasingly clear that it may be coming to an end. Since the seizure of Russia’s foreign exchange reserves at the start of 2022, central banks across the world are starting to buy up enormous amounts of gold. They are doing this as part of a conscious effort to diversify out of their dollar holdings, which they now see as having sanctions-risk attached to them. A simple model shows that if this process continues in an unmanaged fashion, American living standards could fall by up to 27% as the rest of the world stops sending goods and services in exchange for American paper.[4]
What is needed then is a global system to manage trade imbalances. In fact, we have been here before. In 1944 at Bretton Woods an international monetary architecture was set up to do just that. The dollar-based Bretton Woods system aimed to prevent the emergence of serious trade imbalances, which economists viewed as being a primary cause of the Great Depression and the political upheaval of the interwar period that led directly to the Second World War. The Bretton Woods system ultimately collapsed because it could only function if the United States ran roughly balanced trade and yet the system itself put huge demands on dollar assets abroad, thereby pushing the United States to run a trade deficit and blow up the system. In economics this is known as the Triffin Dilemma.
In fact, another system was proposed at the conference in 1944 by the economist and British delegate John Maynard Keynes. This system, which is known as the bancor, would be a truly multilateral global monetary system that cleared trade using units called ‘bancors’ that are like the Special Drawing Rights available to countries at the International Monetary Fund (IMF). The bancor system has inbuilt mechanisms that strongly disincentivize countries from running trade imbalances – either surpluses or deficits. I discuss these in-depth together with the basic architecture of the new system in a recent paper published with the Hungarian Institute of International Affairs.[5] The incoming Trump administration should embrace this new plan and make it the centrepiece of his economic, trade and diplomatic program. An updated bancor system will allow free trade to continue to deliver prosperity without the downside of encouraging destabilising trade imbalances. It might also provide the basis for global dialogue in a geopolitical situation that is fast becoming dangerous. Trade wars, on the other hand, will only create inflation in the United States – which will discredit the economic policies of the incoming administration – and increase global tensions. We can have our cake and eat it. The ingredients are on the table. We just have to make it.
Philip Pilkington is a macroeconomist, investment professional, and author of “The Reformation in Economics.“
NOTES
[1] Fukuyama, F. (1992). The End of History and the Last Man. Free Press. P125.
[2] Kyeyune, M. & Pilkington, P. (2023). ‘Greening the Void: Climate Change and Political Legitimacy’. American Affairs. Winter 2023, Volume VII, No. 4.
[3] “Since 2000, the fossil fuel industry has in its very best year managed to secure $84.69 for every $1 spent on lobbying. This is not a bad return on investment, and clearly the money that the fossil fuel industry is spending on lobbying is well worth it. But when we look at renewables, the picture that emerges is on a different scale entirely. In 2012, during the ARRA stimulus, the industry received $690.95 in tax preferences for every dollar spent. In 2023, we are on track to see that rise to $740.38 thanks to IRA distributions. Although the fossil fuels industry still spends more on lobbying in absolute terms, the returns on green lobbying are significantly higher. We call the green lobby’s outsized capacity to extract money from the government the “virtue premium.””
[4] Pilkington, P. (2024). ‘Reimagining Bretton Woods: How International Agreement Could Resolve Economic Imbalances’. Magyar Külügyi Intézet.
[5] Ibid.
Politics makes strange bedfellows, as the old quote has it. Personally, I have no in-principle objection to tariff policies or even to industrial policy and yet I find myself in broad agreement with what Samuel Gregg on these topics with respect to the United States: they will not solve the economic problems that plague America. Where I depart from Gregg, however, is in recognising that serious problems exist.
Let us start with the cure proposed, rather than debating the existence of the disease. And let us start here with industrial policy – which Gregg appears to disapprove of far more than protectionism. We now have four years of a Biden administration that did indeed attempt to employ industrial policy in the form of the bizarrely named Inflation Reduction Act (IRA). Now that we have seen how the industrial policy sausage is made in DC it is hard not to agree with Francis Fukuyama who observed way back in 1992 that:
An industrial policy worked in Taiwan only because the state was able to shield its planning technocrats from political pressures so that they could reinforce the market and make decisions according to criteria of efficiency—in other words, worked because Taiwan was not governed democratically. An American industrial policy is much less likely to improve its economic competitiveness, precisely because America is more democratic than Taiwan or the Asian NIEs. The planning process would quickly fall prey to pressures from Congress either to protect inefficient industries or to promote ones favored by special interests.[1]
The results of the IRA have not just been slipshod, they have been downright hideous. Gregg mentions the case of the $535 million loan to Solyndra in the Obama administration’s American Recovery and Reinvestment Act (ARRA) of 2009. Solyndra was but a minnow when compared to the IRA whale.
The IRA pitched itself as industrial policy and it had a few industrial policy components to it. But in reality, it was a repackaging of the Green New Deal that the left-wing of the Democratic Party pushed during the 2020 election campaign. The Green New Deal was roundly dismissed by Democratic Party leaders – with then-Speaker of the House Nancy Pelosi referring to it as the “green dream” – reflecting the fact that it had little in the way of public support. But the architects of the IRA cleverly redefined industrial policy to mean supporting the green energy sector in an effort to force the American economy to stop emitting carbon. In 2023, Malcolm Kyeyune and I published an essay outlining just how large the green giveaway embedded in the IRA was:
The largest tax credit ever granted to the fossil fuel industry was in 1985, when the federal government provided $8 billion in credits (about $19 billion in today’s dollars). With the IRA, we expect to see tax credits for renewables peak in 2023 at $36.2 billion, or $41.5 billion if we include nuclear. It is not clear that either the American public or policymakers comprehend just how large and how radical these subsidies are. The picture becomes more dramatic still if we consider the entire IRA stimulus package. In the seven years between 1985 and 1992, the tax preferences assigned to the fossil fuel industry added up to around $31 billion (or $70.2 billion in today’s dollars); this is a far cry from the $230 billion that will be spent on renewables in the coming years ($260 billion if we include nuclear). Note as well that while fossil fuel subsidies went to a tried and tested industry, the renewables subsidies are going to an experimental industry.[2]
Who is receiving these subsidies? We do not know. But it seems likely that it is Democratic Party insiders tied to the green movement and its increasingly large lobbying arm – which we also expose in the paper.[3] On its face the IRA looks like a golden parachute system in which Democratic Party activists and lobbyists “cash out” by becoming green entrepreneurs and applying for government grants.
The aspects of the bill that contained actual industrial policy have largely failed. For example, in November 2024 it was reported that Intel was finalising a $7.9 billion grant with the Commerce Department. This grant was part of the CHIPS Act, attached to the IRA, and it aimed at onshoring semiconductor fabrication in the United States. But at the very same time as this grant is being finalised, market analysts are concluding that Intel is a failing company with its stock price falling around 56% over the past year. Intel itself posted an enormous $17 billion loss in mid-2024. It is hard not to think that the market analysts are right and that the United States government is throwing money into a bottomless pit.
In principle, I disagree with Gregg. Industrial policy can work and has worked in countries like South Korea and Taiwan. But the fact that Congress apportions money in the United States opens far too much room for industrial policy to be used to launder giveaways for insiders. Biden’s DC shows us that these giveaways no longer come in pork barrels but are rather flushed through green energy startups many of which will likely fail, much like Solyndra. In short, Fukuyama was right: the United States’ system of government is likely too democratic to engage in serious industrial policy.
If industrial policy under Biden has been ugly, attempts to engage in aggressive protection has been downright destructive. Take the example of the ban on selling advanced semiconductors to China. The so-called “chip ban” started under Trump and was nominally to prevent Chinese military usage of advanced chips. But the impact of the policy was mainly to stop Huawei from producing cutting edge smartphones. While those who supported the policy chalked this up as a major win, company leaders in the semiconductor industry warned that it would push China to simply start building these chips domestically. It took a few years, but in the summer of 2023, Huawei announced the release of its Kirin 9000S, the company’s new chip that was embedded in its Mate 60 Pro – a phone that easily competes with iPhone and is now fully domestically produced. Since then, anxieties have started rising that China will now start to commodify chip production, drive down costs, and outcompete Western companies. Just as the Catholic Church learned that banning the printing press could not stop the Reformation, American policymakers are learning that there is no obvious way to ban your way to prosperity.
China have also responded to the chip sanctions by announcing a halt of exports of gallium and germanium to the United States, two elements that cannot be produced in large quantities with large-scale zinc and bauxite refining industries and which are needed to produce many electrical products – including military products. We have not yet seen the impact of this ban, but it could do untold damage to the American electronic industry. We are starting to see that the globalisation of supply chains is much like an omelette: once the eggs have been whisked together, there is no obvious way to separate them. For these reasons, I find myself defending free trade even more aggressively than Gregg: even attempts to ban products to China on the basis of national security should be undertaken with great caution; the bans themselves may just lead China to innovate and the blowback from countersanctions could do untold damage. In short, trade wars are bad – and they are doubly bad in a world of globalised supply chains.
Where I diverge from Gregg, however, is in thinking that the United States does in fact have enormous economic problems. They are the problems that the Trump movement has discussed: deindustrialisation, the loss of good jobs, and so on. But from a macroeconomic perspective the problem is much simpler to summarise: it is America’s yawning trade deficit. The United States can run a large trade deficit because of the reserve status of the US dollar. Countries are willing to send the United States goods and services in return for either paper currency or paper financial assets like stocks and bonds. Even if you are in favour of this arrangement, it is becoming increasingly clear that it may be coming to an end. Since the seizure of Russia’s foreign exchange reserves at the start of 2022, central banks across the world are starting to buy up enormous amounts of gold. They are doing this as part of a conscious effort to diversify out of their dollar holdings, which they now see as having sanctions-risk attached to them. A simple model shows that if this process continues in an unmanaged fashion, American living standards could fall by up to 27% as the rest of the world stops sending goods and services in exchange for American paper.[4]
What is needed then is a global system to manage trade imbalances. In fact, we have been here before. In 1944 at Bretton Woods an international monetary architecture was set up to do just that. The dollar-based Bretton Woods system aimed to prevent the emergence of serious trade imbalances, which economists viewed as being a primary cause of the Great Depression and the political upheaval of the interwar period that led directly to the Second World War. The Bretton Woods system ultimately collapsed because it could only function if the United States ran roughly balanced trade and yet the system itself put huge demands on dollar assets abroad, thereby pushing the United States to run a trade deficit and blow up the system. In economics this is known as the Triffin Dilemma.
In fact, another system was proposed at the conference in 1944 by the economist and British delegate John Maynard Keynes. This system, which is known as the bancor, would be a truly multilateral global monetary system that cleared trade using units called ‘bancors’ that are like the Special Drawing Rights available to countries at the International Monetary Fund (IMF). The bancor system has inbuilt mechanisms that strongly disincentivize countries from running trade imbalances – either surpluses or deficits. I discuss these in-depth together with the basic architecture of the new system in a recent paper published with the Hungarian Institute of International Affairs.[5] The incoming Trump administration should embrace this new plan and make it the centrepiece of his economic, trade and diplomatic program. An updated bancor system will allow free trade to continue to deliver prosperity without the downside of encouraging destabilising trade imbalances. It might also provide the basis for global dialogue in a geopolitical situation that is fast becoming dangerous. Trade wars, on the other hand, will only create inflation in the United States – which will discredit the economic policies of the incoming administration – and increase global tensions. We can have our cake and eat it. The ingredients are on the table. We just have to make it.
Philip Pilkington is a macroeconomist, investment professional, and author of "The Reformation in Economics."
NOTES
[1] Fukuyama, F. (1992). The End of History and the Last Man. Free Press. P125.
[2] Kyeyune, M. & Pilkington, P. (2023). ‘Greening the Void: Climate Change and Political Legitimacy’. American Affairs. Winter 2023, Volume VII, No. 4.
[3] “Since 2000, the fossil fuel industry has in its very best year managed to secure $84.69 for every $1 spent on lobbying. This is not a bad return on investment, and clearly the money that the fossil fuel industry is spending on lobbying is well worth it. But when we look at renewables, the picture that emerges is on a different scale entirely. In 2012, during the ARRA stimulus, the industry received $690.95 in tax preferences for every dollar spent. In 2023, we are on track to see that rise to $740.38 thanks to IRA distributions. Although the fossil fuels industry still spends more on lobbying in absolute terms, the returns on green lobbying are significantly higher. We call the green lobby’s outsized capacity to extract money from the government the “virtue premium.””
[4] Pilkington, P. (2024). ‘Reimagining Bretton Woods: How International Agreement Could Resolve Economic Imbalances’. Magyar Külügyi Intézet.
[5] Ibid.
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