How Can Policy Help Left-Behind Americans?

New think-tank project aims to articulate American industrial policy

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April 10, 2019

A new project, announced Wednesday by the libertarian-leaning Niskanen Center, aims to define a comprehensive program to help put regions struggling despite the roaring economy back on their feet.

The Struggling Regions Initiative (SRI), a project of the Center's Poverty and Welfare Policy program, is intended "to push the frontier of research into the issues facing struggling regions with the goal of developing new ideas for broadly shared economic growth," according to its website. Funded by the Rockefeller Foundation, the SRI will focus on finding ways to overhaul federal policy in order to better support those regions that are increasingly left behind.

Samuel Hammond, who runs the Poverty and Welfare Policy Program, framed it as being about designing "the right framework," so that "ordinary workers can benefit from change rather than suffer from it."

"It's not Washington's responsibility to micromanage local economies or to pick winners and losers. Yet no one can deny that national policymaking has ripple effects throughout the country," Hammond wrote in an article introducing the project. "The Struggling Regions Initiative is premised on identifying realistic ways — from trade agreements to the structure of the tax code — to strengthen and diversify America's industrial economy, and in a way that promotes economic growth and dynamism."

Support for ailing regions is likely to feature heavily in electoral pitches from the left and right come 2020. What makes Niskanen's plan different is sort of sub-textual: In order to fix what's hurting these regions, it suggests, the American federal government needs to, for the first time in decades, articulate a comprehensive, coherent industrial policy.

What does that mean? Put simply, "industrial policy" means a government using its power to try to influence the direction and balance of national industries. If a nation is entirely focused on producing widgets, but the government thinks it would be better if some people produced gadgets, it could use loans, subsidies, employment and training programs, and other measures to induce people and capital to shift. This might be to encourage movement into a more socially beneficial domain—like encouraging a change over from fossil fuel to renewables—or to more effectively compete with other countries' industries.

For decades, the federal government has largely avoided a comprehensive industrial policy. While it has sometimes opted to intervene in certain industries, there has been no coherent plan. The government has also had a fairly liberal approach to trade, often declining to protect American businesses from competition with other countries (predominantly China).

There have been real benefits to this hands-off approach. Absent oppressive oversight, American specialization in high-tech sectors like finance and computing have kept us top dog, economically speaking. At the same time, work in these sectors concentrates in the hands of a few highly skilled people in a few dense cities; as the Niskanen report notes, "over half of total U.S. GDP is produced by only 20 metropolitan areas."

Similarly, liberalized trade policy (indifferent to which industries are affected) has net-benefited millions of Americans through access to a wider variety of cheaper goods and services. At the same time, its negative effects—closing factories, lost jobs, and all the associated economic blight—have concentrated in rural, formerly industrial America, i.e., those states that turned red for Trump.

The goal of the Struggling Regions project, then, is to use government intervention to move a little industrial capacity away from those high-tech, concentrated industries, and into 21st century manufacturing. Doing so would ideally create high-paying jobs for the millions of blue-collars workers faced with a collapsing manufacturing sector.

Niskanen is not the only voice pushing for a more comprehensive industrial policy. Sen. Marco Rubio (R., Fla.), in a recent report, highlighted how China's own industrial policy poses a grave threat to American prosperity, and called for a response in kind.

"In a world of state competition for valuable industries, a domestic policy of neutrality is itself a selection of priority. 'Not choosing' is a choice, however it is made. The relevant policy consideration, then, is not whether states should organize their economies, but how they should be organized," Rubio's report reads.

Advocates of a new industrial policy thus think that the federal government needs to make a choice, and that that choice should balance the interests of the high-productivity few with the many who are battling the negative effects of outsourcing and globalization. Figuring out what that would look like, concretely, is what the SRI is all about.

Although much of its research is ongoing, the project's website offers some key areas it will focus on. A lot of it has to do with making sure that poorer states are getting support, by reforming how they receive federal funding in proportion to wealthier ones. The project will also track the implementation of so-called opportunity zones, a special program created by the Tax Cuts and Jobs Act which allows certain low-income areas to be exempt from capital gains taxes, thereby spurring innovation.

Other focuses target increasing spending and incentives to drive innovation in underserved regions. As a percentage of GDP, federal spending on research and development has fallen by a third since 1976. The SRI expects to research the efficacy of increased federal R&D grants, as well as a federally chartered development bank for America’s struggling regions. Reform to the Small Business Administration, meanwhile, would help spread its loan portfolio around more effectively.

All of this, in Hammond's telling, is about creating new, 21st century manufacturing jobs that will help restore ailing America to full health. He points to Germany, a nation that has retained a manufacturing base despite high unionization and first-world wage standards.

"There's still much we can learn from countries that have preserved a robust working class," Hammond writes. "In particular, they show how smart investments can enable a country to climb the global value chain, to the benefit of both worker's wages and broader measures of productivity."