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Two dirty words show how Donald Trump is changing the government’s role in the US economy

U.S. President-elect Donald Trump speaks to members of the news media as he tours a Carrier factory in Indianapolis, Indiana, U.S., December 1, 2016.
Reuters/Mike Segar
The government will pay for it!
  • Tim Fernholz
By Tim Fernholz

Senior reporter

This article is more than 2 years old.

If the campaign taught us anything, it’s that Donald Trump loves ugly language. However, it’s the two words used to describe his latest White House appointment—words that used to get your mouth washed out with soap by the Washington establishment—that show how much things are changing: “Industrial policy.”

Doesn’t sound like much, does it? But Trump up-ended the status quo when he created a new bureaucratic organ in the White House, the National Trade Council, and installed economist Peter Navarro as its “Director of Trade and Industrial Policy.”

Navarro was one of Trump’s earliest backers and has made his touchstone a critique of the US trade relationship with China, which he argues China is exploiting. It’s no surprise to find him in the White House now, but his critics are disconcerted because Navarro’s legitimate concerns about unfair trade and slow economic adjustment can shade into emotional, mercantilist rants about a “very likely” war with China.

Ironically, though, what he’s most upset about—China’s use of state subsidies that help their firms get an edge in the global marketplace—are the same tactics he’ll be called upon to employ in his new position as head of the National Trade Council. That’s what industrial policy is: Government efforts to help economic sectors get a leg up.

In the modern US, which hasn’t explicitly embraced industrial policy since Jimmy Carter was president, such interventions are generally frowned upon; to the right, they smack of socialism and central planning to the right, and to the left, they sound a lot like corporate cronyism. Make subsidies too explicit, and they can also violate trade agreements and lead to trouble on the world stage.

That doesn’t mean the US doesn’t have an industrial policy already. Politicians, especially liberal ones, just tend to hide it, for fear of conservative attacks on creeping socialism. In 2008, for example, the US stepped in to save the automotive industry as two major companies, Chrysler and General Motors, careened toward bankruptcy. First the Bush administration, then the Obama administration, kept the car companies afloat with massive investments, preserving hundreds of thousands of American manufacturing jobs.

They were, naturally, attacked for this. “Bankruptcy or not, the larger problem here is Washington’s industrial policy,” the conservative Wall Street Journal editorial page warned in 2009. “Even if Chrysler merges and GM restructures, Mr. Obama wants the companies to make the kind of cars the political class favors, whether or not consumers want to buy them.”

No, no, the Obama administration said. This is just an emergency effort. In the years to come, the US Treasury even sold all its stock in the companies before recouping the costs of the bailout in order to avoid any impropriety about government involvement in the automotive industry.

Yet the problem of falling manufacturing employment was as apparent in 2010 as it is today, and the government set about making a strategy to invest more in private manufacturing, while trying to appear not to do so.

“What America needs to regain its leadership in manufacturing is not an industrial policy, in which government invests in particular companies or sectors, but rather a coherent innovation policy,” one Obama administration report (pdf) read. An outspoken investment banker who often worked on behalf of unions, Ron Bloom, was brought in to coordinate these efforts, but beyond pilot investments, they never caught on.

And efforts to enact industrial policy via the tax code—with special giveaways to specific industries, like renewable energy, or even manufacturing as a class—were harshly criticized by the right. A 2012 American Enterprise Institute analysis, for example, whacked a proposal to offer tax gimmes for advanced manufacturing. Conservatives have spent recent years trying to shut down the Ex-Im Bank, a government-backed lender that subsidizes American exporters, especially aerospace giant Boeing.

But now Trump is the leader of the conservative party, and he exploited a gap between the Republican elite and their base on just how close government and business should be. Just as Richard Nixon had the political capital to go to China at a time when Republicans attacked Democrats who suggested normalization, Trump feels he has the ability to bring old-fashioned industrial policy back into the White House, whatever objections free marketeers may make. 

We saw this when he waved away objections to the $7 million in tax breaks handed to Carrier to keep 800 jobs in the US while 1,300 headed off to Mexico, and threatened punitive taxes on companies that shift jobs overseas.

Navarro will reportedly be in charge of various trade and manufacturing strategies, including Trump’s planned “Buy American, Hire American” program, which would require US contractors to obtain parts and labor in the states. That can potentially violate trade agreements, depending on how it’s enforced. Navarro has also been a backer of Trump’s proposals to impose punitive tariffs on importers or US companies that outsource labor, and the president-elect’s designs on establishing more public-private partnerships in everything from space to infrastructure.

It’s hard to say just how far Trump will go in using these tools in an attempt to boost jobs or how successful they will ultimately be; major corporations are leery of retaliation and trade wars, and economists are skeptical that ad hoc subsidies like the Carrier deal can allocate resources effectively over the long-term. Navarro has argued that China has succeeded because of industrial policy—but he rarely mentions China now faces a scary time ahead as failing loans from state banks clog its financial system even as it desperately spends foreign reserves to keep its currency more, not less, valuable.

However Trump’s industrial policy plays out, one thing’s for certain: Central planning is back in the Republican toolbox, at least if you call it by the right name.

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