Trump's Surprising Embrace of Industrial Policy to Fight China

Hi,

Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to write about the Trump administration’s surprising rejection of the traditional Republican free market orthodoxy. He is embracing a more traditional American concept for organizing the economy: Industrial policy.

But first, happy new year. I started writing BIG last June to get my thoughts out on the politics of monopoly power, and I’ve had a good time exploring some of the nooks and crannies of commerce. I’ve been surprised how much traction this newsletter has gotten, and which parts of the business and political world in which it is resonating.

The ten popular posts last year were:

  1. WeWork and Counterfeit Capitalism (9/25/2019)

  2. The Coming Boeing Bailout (7/3/2019)

  3. The Slow Death of Hollywood (7/9/2019)

  4. Why Taxpayers Pay McKinsey $3M a Year for a Recent College Graduate Contractor (12/5/2019)

  5. Why Private Equity Should Not Exist (7/30/2019)

  6. Why New York City Is On the Verge of Disaster (8/20/2019)

  7. Airplanes and Accounting Games: The Coming Boeing Collapse (12/19/2019)

  8. It’s Time to Break Up Disney (11/5/2019)

  9. How Bill Clinton and American Financiers Armed China (10/1/2019)

  10. Google’s Dangerous Monopoly-Based Foreign Policy (12/17/2019)

I sort of happened upon a niche, which is to connect the corruption of management consultants, finance, and monopolization to the current moment of political crisis. The newsletter (and the book) seems to be making a difference, and though it’s always hard to tell how ideas move, a lot of the themes I’m writing about are gaining popular traction. I intend to continue writing BIG as long as it’s fun, as long as you enjoy it, and as long as I think it’s making a difference.

And now…

Trump Rejects Libertarian Politics

Late in 2018, Donald Trump signed into law the National Quantum Initiative Act, which authorized the government to create centers on quantum computing. Many such laws are passed, and they usually mean little. There’s a big difference between authorizing - which allows an agency to do something - and appropriating, which means funding it. An authorized program is a wish, a funded program is a priority.

Usually, something like the National Quantum Initiative Act would have been relegated to that of a wish. That’s what happens to lot of authorized programs in an age of austerity. Members of Congress get to brag about passing something but nothing actually emerges into existence because Congressional appropriators refuse to write the check. Jeff Connaughton wrote about a particularly toxic example in his book The Payoff, in which Senator Ted Kaufman helped pass a law authorizing a financial crimes prosecution unit during the height of the financial crisis, but the Senate Appropriator Barbara Mikulski refused to fund it.

Surprisingly, however, the Senate followed through on the quantum computing law, with appropriators putting in a request for $195 million in the funding bill (see p. 112). The final bill that passed last month will add this money and more to quantum computing research through a variety of government agencies (specifically the National Science Foundation, the National Institute of Standards and Technology and the Department of Energy Science Office).

This chart on spending is from the American Institute of Physics, which shows an interesting shell game.

The Trump administration has been asking for deep cuts in science agencies every year through its formal budget requests, but in practice has been bumping up spending on science fairly dramatically. They play act libertarian but spend like they are trying to have the government do something.

This turn isn’t a one-off. There are of course the tariffs, with the goal of moving supply chains out of China. And a few months ago, Congress appropriated $1 billion to help rural telecom providers replace Huawei equipment. Even more interesting is a provision passed last month to have the U.S. government explicitly subsidize exports in areas in which China has staked out a claim to global leadership. This is being done through the Export-Import Bank, which has to set up a “Program on China and Transformational Exports” to neutralize Chinese subsidies by having the government offer competitive American financing subsidies in every hot button industrial area: AI, biotech, 5G, quantum computing, renewable energy and batteries, semiconductors, fintech, and water treatment.

And then there’s 5G, the communications technology which will serve as the platform for future mobile networks and data transmission. I’ve written about how the U.S. used to lead the world in telecommunications, but now we have no telecom equipment makers to compete with Chinese giants Huawei and ZTE. It turns out the Trump administration has noticed, and is trying to do something about it by moving money to Nokia and Ericsson, European rivals of Huawei.

One senior government official said: “We gave up our superiority in making telecoms equipment decades ago, and now we are realising that this might not have been the best choice for national security reasons. Almost every department and agency is desperately looking right now for ways to get back into this game.”

“If we don’t, Huawei could soon be the only option for anyone wanting to roll out 5G networks.

Another said: “This is one of the big concerns of the government right now. Everyone from the defense department, to the commerce department, to the department of homeland security, is looking at this.”

In other words, Donald Trump is overseeing the explicit shaping of corporate behavior by the state, which is a stark break from the libertarian framework that has guided U.S. policy since the 1990s.

Throughout much of the 20th century, United States policymakers organized its political economy framework by having the state structure domestic and global markets to meet social goals involving more than shareholder value. The U.S. constructed an aerospace industry and much of its industrial infrastructure through its defense build-up in the 1930s and 1940s, and then continued to build out new industries like electronics, computing and semiconductors through a robust space program and aggressive funding of scientific and academic institutions.

In the 1980s, for instance, the Reagan administration engaged in a mixture of protectionist and state support of the semiconductor industry to ward off the attempt by the Japanese to take over the memory chip market. Some of the Reagan industrial policy framework was corrupt and done through the Pentagon, but there was financing that went into a host of domestic industries. But in the 1990s, the Clinton administration essentially got rid of much of our industrial policy apparatus by enabling consolidation among defense contractors and then enabling financiers to take over and erode the research capacity of private industrial giants like General Electric, Lockheed and Lucent. Clinton, Bush and Obama further eroded American industrial sovereignty by allowing Chinese acquisition of much of this apparatus.

The consequence is that today China has monopolized or is attempting to dominate key areas of industrial might, including electric battery production, artificial intelligence, renewable energy and 5G telecommunications equipment. China does this the way any savvy monopolist would, with subsidized predatory pricing and merger policy to buy technology. It also can use its vast espionage apparatus, and does. But mostly the Chinese have benefitted from the absence of American governance, with American leaders foolishly imagining that the ‘invisible hand’ is a real thing.

The Senator with the most aggressive take on industrial policy is Marco Rubio, who gave a speech last month at the National Defense University. As he put it, “For public policy makers, the common good can’t just be about corporate profits.” Rubio’s rejection of free market doctrine was stunning.

What I am calling for us to do is remember that from World War II to the Space Race and beyond, a capitalist America has always relied on public-private collaboration to further our national security.

And from the internet to GPS, many of the innovations that have made America a technological superpower originated from national defense-oriented, public-private partnerships.

This kind of collaboration is not a rejection of capitalism. It is a call to encourage and harness the dynamism of our economy’s most productive private industries to further our national security and ultimately our national economic development.

It is a call for a 21st-century pro-American industrial policy.

When it comes to Chinese firms, our companies aren’t competing with private enterprises; they are competing with a large and powerful nation-state.

And in the long run it is a competition that market fundamentalists won’t win.

The Trump administration’s recent moves suggest Rubio is winning the debate within the Republican Party and across government. It isn’t just spending, but a new attempt to organize corporate behavior. Take this interesting suggestion from the Pentagon R&D shop.

Lisa Porter, who oversees research and development at the defense department, has asked US companies to develop open-source 5G software — in effect opening up their technology to potential rivals — warning they risk becoming obsolete if they do not.

The Pentagon is now asking U.S. companies to undertake specific product design strategies to ward off Chinese competition, which since the 1990s has been an unusual line for the DOD. Getting 5G hardware vendors to have their products interoperate, is a way of reducing the market power of corporations like Huawei that can provide a full suite of products to build a network. The Trump administration is taking an even more hands on approach to generating an American alternative asking Oracle and Cisco whether they would try to build key radio transmission technology to compete with Huawei. Both corporations have said no.

There are many problems waiting for the Trump administration going forward. American corporations like Cisco and Oracle are run by executives with little interest in national security; many multi-nationals have leaders who scoff at the idea of the nation-state itself. Moreover, the U.S. government just doesn’t have a bureaucracy anymore capable of structuring key industrial sectors on behalf of the national interest. There’s a fairly reasonable likelihood that the money that is supposed to go to quantum computing research goes instead to McKinsey white papers and powerpoint presentations about quantum computing. In addition, even if the Trump administration can build out some new industrial or scientific capacity, can they bring themselves to stop private equity goons from buying it up? That’s not clear. Certainly their antitrust division and Federal Trade Commission is not up to the task.

At any rate, it’s inevitable that things get screwed up, and part of the process of restoring a government means trying things and iterating by fixing problems as they crop up. The Trump administration’s lack of organization and lack of ideological coherence is actually sort of helpful here, because it means new things emerge out of the chaos.

Regardless of what happens, the libertarian era is over. Going forward, U.S. government policymakers are beginning to think of themselves once again as key actors in structuring industrial outcomes. This is likely to continue regardless of who wins in 2020. If Democrats win, there will be a lot more carbon emission reduction embedded in the industrial policy framework, if it’s Trump it will tilt more towards defense oriented technological development. Regardless, someone’s going to need to deal with the fact that our industrial capacity is radically diminished, that we can’t produce 5G radio equipment ourselves anymore, and that Boeing is a catastrophe. And that someone, as the Trump administration has made clear, will increasingly be the U.S. government.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. Let me know what topics you’d like me to cover in 2020.