On Agency Structure

Prominent leaders across the political spectrum have argued in recent years that the United States needs an industrial strategy. These advocates recognize that some kind of industrial policy is inescapable. When government adopts tax incentives or regulations that differ by economic sector, for example, it is engaged in a kind of ad hoc industrial policymaking.

Advocates also recognize that a variety of contemporary challenges – from geo-economic competition with China to pandemics to climate change – could be better addressed if America had an industrial policy that fits within a broader strategy for economic resilience. Such a strategy would consider vulnerability in our supply chains, address economic inequality and ensure good paying jobs, guarantee economic security from foreign technological theft, and invest in research that will keep the United States on the frontiers of science.

But even if advocates succeed in persuading the White House to convene a blue-ribbon commission, organize an inter-agency task force, or deputize some trusted advisor to develop a strategy for economic resilience and a plan for industrial policy that includes rebuilding domestic supply chains, we will still need a government that can execute that strategy – and right now, we don’t have it.

Institutional Capacity and Industrial Policy

Many people think reorganizing government is futile and unproductive – and proposals to do so are unhelpful. But the reality is that structure shapes substance. If we want government to pursue a specific mission with gusto, there must be an institution within government equipped for that mission. Right now, there is no single department or agency within the federal government whose core mission is to develop a comprehensive industrial policy and facilitate its execution across government. Offices that are relevant to a coherent strategy are split across multiple departments and agencies. Commerce houses the Economic Development Agency and Minority Business Development Agency, but the Small Business Administration (SBA) sits alone as a cabinet-level agency. The U.S. Trade Representative (USTR) does too – but Treasury handles economic sanctions, and Commerce houses the International Trade Commission. Labor, meanwhile, administers Trade Adjustment Assistance (TAA). Importantly, none of these agencies see themselves as doing industrial policy or quarterbacking the economic resilience strategy of which it should be a part.

In addition to being split across the government, the work of industrial policy needs to change. Current programs cover a dizzying range of topics – from loan programs for small businesses to export controls. But one of the core aspects of industrial policy – supply chain resilience and domestic production capacity – is not a systematic feature of U.S. economic policy outside of the Pentagon. Understanding supply chains is difficult, resource-intensive work. It requires investigating sectors of the economy to identify the links in the chains that could be relevant in different crises. A pandemic might lead to one set of supply chain needs; a drought which led to the 1930s Dust Bowl a different set; a massive earthquake in the Bay Area a third set; and a hurricane tearing up the Eastern Seaboard yet another. And that is before evaluating possible global disruptions. Moreover, serious supply chain analyses are not a one-and-done proposition. As both the economy and its risks evolve, analyses will need to be revisited in order to maintain preparedness. In other words, this is not work that can be done on an occasional basis by politically appointed advisors who serve for a couple of years before their next gig. It is the work of civil servants.

If we are going to take industrial policy seriously, we will need a government that understands where the risks and vulnerabilities lie, can develop a strategy to address them, and can execute on that strategy. That is why we need a new Department of Economic Resilience. The Department should subsume the Department of Commerce, take on USTR, SBA, TAA, export promotion agencies, economic sanctions, and a smattering of other agencies and offices, and organize them into five cones: international trade, export promotion, economic security, industrial policy and economic development, and statistics. The Department should also have an office of policy planning, akin to the State Department’s Policy Planning Staff, that would report directly to the Secretary and be tasked with developing a quadrennial national economic resilience strategy, akin to the national security strategy or national defense strategy.

A single department would have a variety of benefits. First, the Department would be able to develop a strategy that integrates international trade, the dislocations and shocks to domestic industry that accompany trade, and economic security- and supply chain-related issues that emerge from global interconnectedness (including with great power competitors like China and Russia). It would both have capacity to gather information to inform a strategy and have the bureaucratic capacity to execute on the strategy.

Second, the Department would gain heightened status within the federal government, elevating the importance of these issues and creating a series of cascade effects. With the Department articulating a strategy every four years, think-tank experts will spend more time working on industrial policy-related issues; academics will have much fodder for research, creating a pipeline of scholars who study industrial policy and a body of literature on what works and what doesn’t; and civil servants who develop expertise in these currently sleepy areas will have a path to greater influence and prominence.

While some might rightly point out that interagency coordination will still be necessary, there are significant benefits to reducing interagency frictions and having a single Department with a single leader who can coordinate agencies to align with the strategy. Rather than having to elevate issues to the White House, the Secretary will be able to coordinate a wide range of economic resilience-related issues within the Department. This should alleviate, not exacerbate, interagency coordination challenges.

Industrial Policy without Industry Capture

Perhaps the strongest objection to industrial policy, and therefore to organizing government to be better at it, is that industrial policy invariably attracts interest-group capture. If government is setting policies to protect some industries from foreign competition, to prevent some industries from foreign operations, to invest domestically in some industries, or to regulate any aspect of some industries, those industries will do whatever they can to influence decision-making.

Preventing capture must be a primary focus for anyone interested in industrial policy because capture threatens the entire enterprise. A captured government wastes taxpayer money and reduces faith in the government’s integrity on economic issues. It could also backfire and make the United States more vulnerable, not less. For example, if companies at essential points in the supply chain are able to lobby government to avoid resiliency policies, the U.S. might find itself without critical supplies in the next pandemic or during a geo-economic crisis with China. Or imagine if companies influence government to prevent export controls on certain technologies: they might actually help great power competitors innovate faster than they would have otherwise.

It is difficult, perhaps even impossible, to block every single avenue for influence. But lawmakers must try to close as many as possible in order to maintain the integrity of industrial policymaking. Campaign contributions, congressional lobbying, and meetings to influence regulators are one set of problems. The revolving door in and out of government – for both political appointees and civil servants – poses another set of challenges. And a third issue is the cognitive capture that comes from cozy friendships and relationships, even down to regulators and the regulated hobnobbing at dinner parties and sending kids to the same schools.

Industrial policy advocates need to focus greater attention on how to combat these problems, even if they cannot stop all of them. For starters, policymakers should try to set industrial policy using structural rules, rather than technocratic market incentives or monitoring. Structural rules shape the structure of the market itself, while technocratic rules require bureaucrats to make case-by-case distinctions or monitor market activity on an ongoing basis. For example, the 1906 Hepburn Act created a structural rule in railroad regulation: railroads were not allowed to own companies that had goods that moved across the rails. If railroads could vertically integrate between their platform and commerce that trafficked across it, they could preference their own goods over other companies’ competing goods. This would make it difficult for competitors to get their goods around the country. A technocratic rule would not have prohibited all ownership and mandated a clean separation; it would have allowed for some ownership or investment, tried to figure out what amount would be risky from the perspective of conflicts of interest, and required regulators to monitor that practice or lawyers to sue the railroad after an alleged violation of the technical rules. The structural rule is simpler and clearer, and while it might be a little over- or under-inclusive, its virtue is that it does not rely as much on regulators or judges to make fine-grained distinctions.

In the supply chain and industrial policy category, competition laws are perhaps the best example of a structural approach. Rather than mandate particular production by particular firms, strong antitrust enforcement can ensure competition in entire sectors – leading to many competitors across a wide geography and, therefore, to more resilient supply chains. In the context of the COVID-19 pandemic, for example, medical device mergers contributed to a shortage of ventilators. This is not to say that there cannot be benefits to scale, but simply that even if there are efficiency gains at the extremes of consolidation (though, of course, there may not be), resilience requires making a trade-off – and we should be willing to make it.

Second, policymakers should adopt a new principle: the separation of information gathering and industrial policymaking. Industrial policymaking choices will require knowing about market structures and practices, and civil servants will have to work closely with companies to get information on suppliers, production levels, capacity, and fragility. Such close cooperation with corporations could make these information gatherers sympathetic to those with whom they work and skew their perspective on which policies serve the national interest. As a result, information gatherers should be akin to intelligence collectors and analysts—offering information, but not setting or implementing policies. In essence, the separation of information gathering and industrial policymaking is a structural rule within government, akin to a structural rule within the market.

Even with structural rules in the market and government, the likelihood of capture is still extraordinarily high. Political appointees might come from or exit to firms that benefit from industrial policy choices. Appointees might be influenced by aggressive informational campaigns. Congress might place undue pressure on administrators, driven more by campaign contributions or independent expenditures than by the public interest. As a result, organizing government for industrial policy will require a variety of stringent anti-capture provisions targeted at specific practices. These include adopting strict ethics rules to eliminate financial conflicts of interest, restricting lobbyists’ practices like contingency fees and foreign lobbying, closing the revolving door through bans on lobbying and employment in related sectors, and boosting transparency in the rulemaking process. There have been rigorous, effective proposals in each of these areas in recent years – and they are essential to making industrial policy work and retaining public confidence in it.

A Time for Big Changes

We are used to hearing objections to proactive, institutionally focused government reforms from the Right, but it is worth noting that similar objections come from the Left as well. People on both sides argue that structural change is not worth pursuing, and that it is an especially bad idea in the midst of – or even in wake of – a pandemic and economic crisis. Their arguments often presume that there are too many other urgent priorities and that a massive government reorganization and the passage of new anti-capture laws are too hefty a lift for Congress.

But these anxieties misjudge the moment. Big changes in how government is structured almost always happen during or immediately after a significant crisis for a simple reason: the American people recognize the need to act and to act decisively. Lincoln thus overhauled the entire banking system in the middle of Civil War. The SEC was created during the Great Depression. The National Security Act restructured the entire defense establishment immediately after World War II. The Department of Homeland Security came into being only a year after the September 11 attacks.  There are always challenges to creating, moving, merging, and eliminating government offices. But that is no excuse not to act – in fact, a crisis is precisely the time to act because everyone understands what is at stake.

Still other skeptics worry that reorganizing government isn’t possible because Congress will object to anything that changes its committee structures or oversight powers. This concern can be easily dealt with. Existing committees can retain oversight of the parts of the new Department over which they hold power, but Congress should agree to phase out this structure in favor of a more sensible one after twelve years. That would give members more than enough time to make choices about their committee preferences.

More than anything, however, we must reorganize the government because we cannot afford not to. If our government cannot create an economic resilience strategy and execute on it, our country will not be able to weather the challenges of the future successfully. Whether it is great power economic competition with China, climate shocks, or the next pandemic, Americans will suffer and America will be weaker if we do not prepare for the next crisis and have plans in place to endure and bounce back. That is a fate worth avoiding.