How to re-industrialize your country: A guide for forgetful presidents
Every industrialized nation got that way on purpose, with state-led investment a required piece of the process. The U.S. will not be able to get back to mass prosperity until we remember that.
|Zack Exley||Apr 29||1|
In this New Consensus series on re-industrialization, I first covered why Biden’s plans don’t go anywhere near far enough to spark a wave of reinvestment into domestic manufacturing. Then I backed up to answer readers who asked, “Why do we need manufacturing anyway?” Now I’m going to attempt to paint a detailed picture of the opportunity that Biden is wasting and that the next president must seize if we’re to restore American prosperity while doing our part to save humanity from global warming and other existential threats.
Presidents in our era have the power to create new industries and make old ones competitive again—all as part of a sweeping conversion to a zero-emissions, high-wage economy. The only reason they don’t use that power is that they and their advisors, and just about all of us in America, can’t imagine that a comprehensive rebuilding and conversion of the economy is even possible.
We are stuck with an inaccurate story in our heads about how industries are created and transformed—one that doesn’t include political leadership. When we imagine how new national industries are born, we think of the tycoons like Henry Ford, Andrew Carnegie, and other entrepreneurs who started businesses, invested, competed, and next thing you know, controlled sprawling corporations. That is a huge part of the story but not all of it. Almost without exception, every major manufacturing industry in every nation was created with large quantities of state-organized capital and huge doses of political leadership. I’m not arguing that those inputs were more important than the ingenuity and hard work of owners, inventors, managers, and workers. I am, however, arguing that a nation can’t industrialize, and can’t re-industrialize, without vast quantities of capital and leadership from the state.
Because Biden and his advisors don’t know that story, they’re hoping to trigger re-industrialization by changing some minor regulations and making a little money available for “research and development.” But that is not how it works. Starting or restoring an entire industry requires the state to organize enormous amounts of not just money capital, but capital in almost every form—labor, resources, infrastructure, training, education, and more—and for political leaders to mobilize that capital just like they would have to for war or devastating natural disaster on a scale that we’ve never had before.
Why is the state required for re-industrialization?
Why is the state required? It’s because launching an entirely new industry or updating an old one requires an enormous investment with qualities that repel private capital: a substantial risk of failure, only a modest potential upside, and an extremely long wait before the returns come in. The Japanese government floated and protected Toyota for 60 years before any money came in. Private capital would never do that. It seeks either a guaranteed and constant modest return or a risky bet offering a potentially massive and relatively quick “exit.”
Virtually every industry in the world is another example. In the 1960s, the South Korean government financed, founded, and managed a brand new steel industry that no bank would touch because it was too risky objectively: South Korea had no experience making steel and didn’t have the raw materials for it. Very quickly, however, the South Korean steel industry was the most efficient and profitable in the world. South Korean steel, which no private capital anywhere in the world was brave enough to back, became the bedrock of the nation’s fast leap into prosperity.
In the 00s, China decided to build a laptop industry from a starting point of making no laptop computers at all. It did not launch new state-owned companies. National and local government bodies and state-owned banks convened existing foreign and domestic manufacturers to generate plans that included huge public investments into private companies’ projects, infrastructure, training, and guarantees of a domestic consumer market. In less than a decade, China was supplying more than half of the world’s laptops.
In the 1990s, the Danish, Swedish, and Finish states all provided the leadership and investment capital to convert the dying shipping radio industry into the world’s first cell phone industry. In one of many diverse initiatives, Denmark convinced (not coerced) its giant private pension system to put some of its capital into special national venture funds to back innovative new Danish companies.
In 2010, a techie in the U.S. with zero experience in manufacturing was seeking financing to expand an electric car company. Neither banks nor venture capitalists wanted anything to do with it. Only the U.S. government offered capital on the scale he needed, with a $500 million low-interest loan. Of course, I’m talking about Elon Musk and Tesla. (Sidenote: If the government had made an investment instead of a loan, it would have hundreds of billions in Tesla equity today.)
If you’re asking why a nation should make an investment that’s so unattractive to private capital, then please read my previous post on why all rich nations need a healthy manufacturing base. Here’s the short version: Manufacturing creates high-value products that you need and can trade for other things you need. It does that by employing a lot of people. Even with high-tech automation, there are scores of manufacturing companies in the United States that each employs far more people than Facebook (44,000 people). But most of the highly-valued tech companies in the U.S. employ less than a few thousand people. When Instagram was becoming a significant competitor to Facebook, it had only 13 employees! Meanwhile, the average salary at a tech company is somewhere around $120,000—equivalent to what a significant portion of America’s 12 million manufacturing workers earn with overtime included.
A thought experiment to trigger the memory of industrialization
I fear that my little examples of states launching companies have not fully rekindled your ability to imagine how a U.S. president could lead a full-scale, sweeping re-industrialization and transition to a clean economy. It’s a difficult challenge because we’ve been so conditioned to believe that industry and state are and always must be as separate as church and state. It’s as though we believe that there is a law, a natural law, that prevents political leaders from leading private industry. In reality, there is no such law. But a belief in that law nevertheless dominates our thinking. There are some special circumstances where we can imagine the law being suspended—for example, natural disasters. I want to use that exception as an opening to get your imagination going. So please join me in the following thought experiment:
Imagine the earth was hit by a meteor shower that, in a one-in-a-trillion fluke, just happened to destroy 99% of everything in the world that burned fossil fuels. For a moment, climate activists cheer. But then a billion or two people die of thirst, famine, and disease, as communities are cut off from the water, food, power, medicine, and other essentials produced and transported by factories, machines, and vehicles that no longer exist.
In this context, it’s not hard to imagine the president getting on TV and making an Independence Day speech (referring here to Bill Pullman, not Thomas Jefferson) about how we must stop at nothing to rebuild before another billion die.
What would happen after the speech? Again, it’s easier to imagine how we would rebuild when we have no other choice. Top industrialists would be summoned to the White House to hammer out a plan. Executives from every industry would come with lists of factories and systems that needed to be rebuilt. The surviving factories would be running 24/7 to churn out the materials, tools, and machines needed to get started.
But with limited supplies from the few surviving factories, what should we rebuild first? Water systems? But that requires vehicles and machines. And those require steel, aluminum, and many other machines, materials, and supplies. How to prioritize? What’s the right order? Lots of chicken-and-egg problems that need to be solved. Different camps of business leaders and experts would develop competing plans. Which do we go with? Who pays?
This is where political leadership comes in. It’s for situations just like these, where a decision must be made for how public resources should be used, that we spent the past few thousand years developing stable governments. When inaction means death, or decline towards death, that’s when societies with decisive leadership have a chance at survival, while societies with corrupt and timid leadership die.
In our apocalyptic thought experiment, in which America elects a leader willing to act boldly and intelligently, our president chooses a plan. She has no choice. Perhaps she hires people from industry to help make sure it will be executed well. In America, we don’t have a centrally planned economy, so the president would rely on leadership and persuasion, not coercion. That doesn’t mean incentives and regulations. With billions dying there would be no time for that, but there’d also be no time to change over to some kind of command and control economy even if that were desirable (which it wouldn’t be).
The president’s job as the leader of the nation would be to get all the business and labor leaders on board to enthusiastically carry out the plan that they had participated in developing. She’d accomplish that partly by getting on TV over and over—like George W. Bush did to persuade us to go to war in Iraq, for example—explaining her plan to the American people and asking them to support it.
And then what? Who makes adjustments when the plan begins to fail, as plans always do? Who pushes the business leaders when their businesses move too slowly or refuse to cooperate where necessary, or refuse to compete where necessary? No one else can do that other than the president.
All the while, she’d have to use all of her powers of inspiration and persuasion to keep the support of Congress, the business community, labor, state and local leaders, and everyone else in society. She’d have to keep making those Bill Pullman Independence Day speeches on TV all the time.
The memory of industrialization right under our nose
How did my wacky sci-fi thought experiment work? Did it help get your imagination going?
The truth is that we had a very similar moment in our history not long ago. After World War I, our arms industry disappeared in a wave of isolationism and outrage at war profiteering. At the same time, Germany and Japan developed new war industries, such as aircraft industries cranking out fighter planes and bombers. By the time the U.S. was forced, against strong anti-war public opinion, to enter World War II, we were caught with an almost total absence of the industries we needed. We were very much in the position I described in my extreme thought experiment with regard to planes, ships, tanks, jeeps, bombs, guns, bullets, steel, aluminum, synthetic rubber, chemicals, plastics, electronics, and even military uniforms. We had to build those industries as close to immediately as possible. And we did it.
How did we do it? Just like I described in my hypothetical scenario: Roosevelt made many “end of the world unless we…” speeches to get people fired up and committed to the war effort. He summoned CEOs and labor leaders to DC and charged them with making plans. He hired the president of General Motors to help organize the whole effort, made him a general in the army, and gave him a plane so he could go breathe down the neck of any lagging factory manager at a moment’s notice.
If you listen to Roosevlt’s wartime speeches you’ll be amazed at how they were both practical and persuasive. And if you look at the history of how Roosevelt governed, you’ll see that he did the follow-up and course corrections too. He was constantly evaluating plans, checking on progress, holding business leaders accountable when things slowed down, and clearing away bottlenecks. Sometimes he went out to Detroit when things were stuck to yell and people and help get them unstuck.
The result was that we far more than doubled the size and output of our industrial economy by investing nearly half of GDP in growth and transformation for several years in a row. It was an astounding achievement. Not only did this effort stop the Nazis from taking over the world, but it created the foundation for middle class prosperity for about half of America.
There are no good excuses not to lead
Over the years, I have gotten tired of using the World War II example, though, because the response is always, “Well, that was a war!” I guess my astroid example is just as vulnerable to the same objections.
I don’t think it’s fair. Neither wars nor natural disasters automatically turn bad leaders into good ones. We failed to mobilize adequately for World War I. Many countries around Germany failed to mobilize their defenses even given several years of warning as the Nazis were arming and talking about taking over the world.
There is nothing inherent about any culture or political system that makes it better able or less able to respond to crises. These days, Chinese culture and its top-down system are credited as the reason for China’s effective responses to every manmade and natural disaster. But in the 1800’s and early 1900’s, China crumbled in the face of European and Japanese attacks even though it had the manpower, military might, technology, and resources to resist. The only thing it lacked was determined political leadership. Chinese leaders before the revolution were committed to decline managers, just like American and European leaders today.
Today it’s very popular to make excuses for bad American leadership. “If we had the Chinese authoritarian system.” “If we had a more effective democracy.” “If we were a smaller country, like Denmark.” “If we were a larger country, like China.”
But there is nothing stopping president Biden in our current moment of crisis from leading. There is nothing stopping him from making dramatic speeches every week from the White House that set goals and follow up. There is nothing stopping him from saying America will be the world leader in electric vehicles and batteries, clean steel, hydrogen-powered long-haul trucks, next gen nuclear, stratosphere-kite-powered freight ships, and more. There’s nothing stopping him from hiring an accomplished industrialist to lead execution—maybe the current President of GM, Mary Barra, who used to be in charge of GM’s supply chains. There’s nothing stopping him from cajoling the Fed into providing the financing, mobilizing public opinion into a frenzy if they don’t, and pushing Congress to pass some laws reminding the Fed of its original purpose as investor of last resort.
OK, there is one thing that is stopping him from doing all that: The fact that he and his advisors have never thought of it, and can’t imagine it. They don’t know that this is how we built and rebuilt our economy several times in our history. I told you about Roosevelt. There isn’t room to tell you about Lincoln and Hamilton. They don’t know that this is how every industrialized nation has done it.
They don’t know that this is where the South Korean miracle economy came from, and the Japanese miracle economy, starting way back in the Meiji Restoration and then again out of the ruins of World War II. They don’t know that this is how Germany industrialized in the 1800s, and again in the 1900s (and no, it wasn’t Hitler). They don’t know the industrialization stories of Taiwan, Sweden, Finland, Denmark, and every prosperous industrial economy in the world. In all of these stories, political leaders knew their role in industrialization or re-industrialization, and they went for it.
I’ve spent a lot of time studying these examples. But I feel it was a waste of time, because when I try to use them to persuade people we can do this too, they point out how in every case, there was something different between the U.S. and the country I’m using as an example. The Nordic countries were so small. South Korea, Taiwan, Japan, and China all had Confucian culture (which Westerners used to cite as the reason East Asia would never industrialize). Germany was “German” (except that it was not “German” in the sense that they mean until after industrialization was complete. The U.S. World War II mobilization was only possible because of the urgency of war.
Insisting that these diverse examples of industrialization are all irrelevant to the U.S. would seem to suggest that deliberate industrialization can take place under any circumstances except the ones we live under today in the U.S.. But what are the chances of that being true? And even if you feel like the chances are significant, because you believe in your excuses very much, you can’t be sure, and therefore the only way to really know is to try.
Every country I mentioned above industrialized under much more difficult circumstances than we have today in the U.S.. South Korea, for example, had virtually no natural resources and began with hardly any industry at all. When South Korea launched its first state-owned steel company, it was so obviously doomed to fail that no bank or international financial organization would lend it a dime. In a short time, it was the world’s most efficient and profitable steel manufacturer. Don’t go saying it was because of low wages! Wages were a tiny slice of the company’s costs, and the savings there were offset by having to ship in all of the iron ore, coal, and other raw materials from far away.
There’s one last cause I want to mention that’s behind our embrace in America of the stateless story of economic development. The U.S. is almost unique in that one of our extensive industrial investment booms was led by brave industrialists and financiers, not government—though it was paid for by public funds commandeered by those business leaders through bribery and persuasion. This was the Gilded Age. American business leaders played a coordinating role for their own massive investment project. That era produced stories of larger-than-life industrialists like Carnegie and Rockefeller and bankers like Morgan Stanley who organized vast amounts of capital to make giant, long-term bets on entire new industries. These men became heroes of the national imagination and forged a permanent association between industrialization and individual tycoons.
The Tycoons deserve credit. They were visionaries and risk-takers. Their projects were still paid for, however, with public capital—including trillions of dollars worth of prime public land granted to industrialists, which was sold off to land speculators and settlers to finance investment. And it should be noted that our phase of Tycoon-driven industrialization led to far greater inequality than state-driven industrialization which tended to deliberately spread opportunities all around the nation and the class structure.
But the Gilded Age example is a wild outlier. It was almost the only time in the history of the world where private capitalists organized big, risky, multigenerational bets. As you might guess, the particular conditions of the time, partly created by chance and partly by government investment around the Civil War, made those bets not all that risky.
As soon as the great tycoons were in the grave, however, their heirs stopped investing in long bets, and U.S. industry began to rot on the vine. Henry Ford, active from the turn of the century through the 1930s, was one of the last industrialists who loved his factories more than his shareholders. His shareholders couldn’t wait for the old man to die. Everywhere else, and in all other eras, capitalists only participated in significant long-term industrialization when there were coerced and/or coddled into doing so.
There is no longer any reason to hope that Biden will attempt to lead in the way I’ve described to inspire and cajole American capitalism to invest in new and renewed industries. But New Consensus is going to keep trying to revive the memory of this mode of leadership and this duty of national leaders. Perhaps America will get another chance to hope for something other than a Decline Manager in Chief in 2024 if there’s a primary or a serious independent runs.
The sad thing about this situation is that it’s clear that Biden wants to be a transformational leader when it comes to the economy. Partly due to his age, and proximity to the World War II experience, he is probably better able than almost anyone around him to envision what a sweeping industrialization would look like. But the specific concepts are too rusty and dusty, buried under too many layers of debris. We’re going to keep laboring to resurrect them. Please stay tuned!