Biden’s industrial policies need private investors to supercharge the economy 

President Biden recently has gone from being indifferent about the slogan “Bidenomics” to embracing it. This about-face is an attempt by the president to get across his message to the public that prospects for the U.S. economy are improving as a result of policies his administration has enacted.  

Still, for many Americans, the slogan is a mystery. Biden himself conceded as much in a speech where he said, “I don’t know what the hell it is. But it’s working.”  

A recent Monmouth University poll showed that only one-third of Americans feel the U.S. is doing a better job improving the economy relative to the rest of the world since the COVID-19 pandemic. 

So how should the public think about Biden’s economic programs? 

The main objectives initially were to combat the COVID-19 pandemic and to embark on the most ambitious government programs since Lyndon Johnson’s Great Society. Thereafter, three key pieces of legislation were enacted — the Infrastructure Investment and Jobs Act,  the Chips and Science Act and the Inflation Reduction Act, which contains $500 billion in new spending and tax breaks to boost clean energy (nearly $400 billion), reduce healthcare costs and increase tax revenues.  

All told, Biden argues that these programs, which tally more than $1.75 trillion over 10 years according to one estimate, will reshape the U.S. economy and create more jobs for the middle class while also promoting clean energy.  

Morgan Stanley’s economists already see a boom in large-scale infrastructure and rebounding business investment in manufacturing. As a result, they recently raised their estimate of real GDP growth in the first half of this year to 1.9 percent from 0.5 percent, and they also upped their forecasts for the second half of this year. The U.S. economy grew at a faster-than-anticipated rate of 2.4 percent in the second quarter partly as a result of strong business investment in structures, as well as fiscal policy tailwinds linked to the CHIPS Act and the Inflation Reduction Act. 

Critics view Biden’s programs as a sweeping foray into industrial policy in which the federal government directs resources to favored sectors and industries. While the federal government is involved in many areas of the economy, Greg Ip of the Wall Street Journal maintains that Biden’s industrial policy differs in one crucial way from fiscal policy, monetary, health, education and other policies — namely, “It lacks a rigorous economic foundation.” Indeed, many economists are skeptical that the government can do a better job in picking winners than the private sector, and some worry that it will crowd out private investment.  

Nobel laureate economist Michael Spence counters that public sector investment in infrastructure, education and science and technology is generally considered an essential complement to private investment. What makes industrial policies more controversial is they go a step further in trying to reshape the supply side of the economy.  

For example, investment in science and technology and human capital as part of the Chips Act is generally accepted, whereas the attempt to reshape global supply chains is more controversial because it overrides market outcomes in a key sector. Spence claims the real issue is not whether industrial policy is worth pursuing, but how to do it. 

Along these lines, Gary Hufbauer and Euijin Jung of the Peterson Institute for International Economics have produced a comprehensive study of U.S. industrial policy from 1970-2020. Their report examines 18 case studies and assesses the outcomes based on whether they enhanced competitiveness in international markets, saved jobs in an industry at a reasonable cost and advanced the technological frontier through government assistance. 

One of the report’s main findings is that support of public and private research and development via the Defense Advanced Research Projects Agency (DARPA) has the best track record of various industrial policies. The agency was created by President Eisenhower to maintain U.S. military superiority following the Soviet launch of Sputnik in 1957. Meanwhile, other federal departments have sought to emulate DARPA’s success, and the Biden administration has proposed projects fashioned after it.  

As the authors of the study note: “Renewable energy R&D, Florida’s biotech region, and the North Carolina Research Triangle all attest to this industrial policy approach.” 

There is also more recent evidence that public investment does not necessarily displace private investment, and the two may go hand in hand.  

Vijay Vaitheeswaran, global energy and climate innovation editor of The Economist, told the crowd during a recent event at the Lotos Club in New York that he is encouraged that venture capitalists are becoming actively involved in climate change since the passage of the IRA created incentives to do so in the form of subsidies and public spending. Indeed, Goldman Sachs estimates that the clean energy legislation will cost roughly $1.2 trillion, or three times more than the official forecast. Goldman also believes the IRA will spur a third energy revolution in which about $3 trillion in renewable energy technology could double the volume of energy produced by the shale revolution.  

Weighing these considerations, it is clear that what President Biden is attempting to pull off is highly ambitious and could fall short of attaining the stated goals. At the same time, the American public and businesses should be open to the possibilities. While the original infrastructure bill was too grandiose, the bill that was enacted could be the most transformative legislation since the Interstate Highway Act of 1956. 

Similarly, while parts of the Inflation Reduction Act are questionable, the attempt to develop alternative energy sources to address climate change could be path-breaking, especially as the costs associated with it are becoming more apparent.

 In the end, the best chance of success is for the Biden administration to target areas where government sponsorship creates incentives for the private sector to innovate. 

Nicholas Sargen, Ph.D., is an economic consultant to Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including Investing in the Trump Era: How Economic Policies Impact Financial Markets.