SemiWiki.com - Podcast EP280: A Broad View of the Impact and Implications of Industrial Policy with Economist Ian Fletcher

Episode Date: April 2, 2025

Dan is joined by economist Ian Fletcher. Ian is on the Coalition for a Prosperous America Advisory Board. He is the author of Free Trade Doesn’t Work , coauthor of The Conservative Case against Free Trade, and his new book Industrial Policy for the United States Winning the Competition for Good Jobs and High-Value Industries. He … Read More

Hello, my name is Daniel Nenny, founder of SemiWiki, the open forum for semiconductor professionals. Welcome to the Semiconductor Insiders podcast series. My guest today is economist Ian Fletcher. Ian is on the coalition for a prosperous America advisory board. He is the author of Free Trade Doesn't Work and co-author of The Conservative Case Against Free Trade and his new book, Industrial Policy for the United States, Winning the Competition for Good Jobs and High Value Industries. He has been senior economist at the Coalition, a research fellow at the US Business and Industry Council, and economist in private practice and an IT consultant. Welcome to the podcast, Ian.

Thanks for having me. Can you explain the relationship between the CHIPS Act and industrial policy? Okay, the former is a case of the latter. One of the things I'd like to tell everybody about is the fact that the CHIPS Act, which has quite reasonably been the object of enormous attention in recent years, is not as unusual as a lot of people seem to think. That is to say, it's actually quite common around the world and even in the United States for a government to say that a particular industry or a particular technology

is so important for our economy, for our national security, for public health, for environmental protection, for our future economy, for the impact it has on the rest of the economy, for the impact it has on our ability to develop technologies further down the road, that we just have to be successful in that industry as a country and we're going to do whatever it takes to get there even if that sometimes means tearing up the rulebook that we know and love or think we know and love about free enterprise, free markets and government keeping its hands off of the private sector. And what kind of industry policy has the U.S. done in the past?

Well, the greatest industries of the post-war USA have actually been largely the result of Uncle Sam's industrial policies. And the interesting thing is this is something that's kind of hushed up, not a hard cover up, but it's something that people just don't really talk about that much. For example, the entire semiconductor industry was, although it was invented in the private sector, it was launched as a full-blown industry using government money, particularly military government money. As late as 1960, 100% of US production of monolithic ICs was going into the Titan missile, which was the ICBM. into the Titan missile which was the ICBM. And beyond that successive generations of this technology were funded and the science was paid for by the government,

the technology development was paid for particularly at defense contractors and government not only paid for the science paid for the technology they actually bought the product. So you have government literally driving the scaling government not only paid for the science, paid for the technology, they actually bought the product. So you have government literally driving the scaling up of production lines, causing the people to be trained. And then of course things flower in the private sector. And by the 1970s, the civilian IC market is many, many times the size of the military market, but that's where ICs got their start. Same case for jet aircraft. We take for granted the ability to fly to Disney World. And the reason that's possible is because you have wide-body jet airplanes, which means you have cheap

long-distance jet, fast air travel. planes, which means you have cheap long-distance jet fast air travel. And the precondition for having these beautiful widebody jets we fly around on is you have to be able to fabricate giant aluminum aircraft with special alloys and special construction techniques that were never used for anything else before. And you have to have what's called a high bypass turbofan, which is an efficient jet engine that gets adequate gas mileage so that it's viable for and you have to have what's called a high bypass turbofan, which is an efficient jet engine that gets adequate gas mileage so that it's viable for commercial use. The aircraft industry in this country was basically a ward of the state until the end of the 1960s. I think it was only in about 1975 that the civilian market for aircraft is even larger than the

military market for aircraft. The government developed these technologies. The first large aluminum aircraft was a B-29 we used to drop bombs on Japan. Jet engines were originally invented in Germany and the UK during World War II, but it was the US that scaled them up to the point where they became viable for commercial use. And there are other examples, I could go on and on, not least of which is the internet. And why doesn't the US do more industrial policy today? Well, that is the $64,000 question because historically the U.S. has been great and very aggressive and very successful doing industrial policy for national security reasons and also

for public health, which I didn't previously mention, but most of the drugs in your doctor's arsenal were developed not by private drug companies which figure out how to commercialize them, but the actual drugs, what are called new molecular entities, they are developed at the National Institutes of Health, which is the country's largest civilian science agency. And so I like to say that the government has always been very willing to have industrial policy to protect you from scary communist foreigners or from scary diseases. And then what Joe Biden added to that in his term in office was the US had a massive push to do industrial policy to protect us from environmental problems, specifically climate change. But that's what the Inflation Reduction Act, Bipartisan Infrastructure Act, and also part

of the Chips and Science Act was about. It was about government money to develop new technologies for solar, wind, electric cars. And also the subsidies for electric cars were about launching the market, about getting the production scale up, because it's not enough to have the technology. You actually have to be producing these things. So now, in 2025, you have an industrial policy triad consisting of national security, public health, environmental protection. What we don't have that our economic rivals abroad, a lot of countries above all China,

but also other East Asian countries, Japan, Korea, and the countries I refer to as greater Germany, that is Germany, Austria, Switzerland, Scandinavia, and Holland. They also do industrial policy focused on prosperity per se. That is to say, they do these policies with technologies, with science, with trying to scale up demand by having early adopters in government, and a certain amount of trade protectionism, to be quite honest. They do these policies

purely for the sake of economic success. That is to say, to make themselves a richer country, to increase the average income. And that has been something that we have not yet really embraced in the US because it's part of our national ideology, or you can call it our principles, or you can call it our mythology if you don't like it, that this is the land of free markets and that we rely on the public sector for everything beyond the pure science. People have always understood that pure science can't do it for profit so government pays for it.

But we have this belief in this country that free markets are enough and we've been able to sustain this belief because we kind of cheated for decades using the military and the doctor's office and now environmental protection as ways to do a lot of very effective industrial policy while pretending that we don't. What about the objections to industrial policy that people raise such as that it requires picking winners and outguessing the market? That's an excellent question and I have no intention to dismiss this question as I advocate for industrial policy. I mean, I just wrote

the book Industrial Policy for the United States, Winning the Competition for Good Jobs and High Value Industries with my co-author Mark Fesso. I am generically in favor of industrial policy. But one thing we were very careful to do in the book is to talk about all the failures of industrial policy, both individual technologies like the legendary Concorde aircraft, which was a spectacular technological achievement, but it was never commercially viable, like synthetic fuels, oil from coal, which is something that the US was preparing to throw tens of billions of dollars at in the 1970s, but we stopped that when the price of oil went down again. And we talk about entire countries where they've screwed up their industrial policy. The UK, India, Argentina, France kind

of succeeds and doesn't succeed and so forth. And the reason is, if you're going to embrace industrial policy as a country, you have to get it right. It's not an idea which the idea simply on its own strength is enough. When I say industrial policy, I mean industrial policy done right. Now, you've mentioned a couple of key objections. You talk about picking winners. You're absolutely correct that it is almost always wrong for government to pick winners. That is deciding who gets to make money, who gets to make a profit in an economy. That's why we have markets in the first place. But

picking winners is not the same as picking technologies because there's a market layer between picking a technology, saying, for example, that AI-enabled robotics are obviously going to be a very important technology over the next 30 years. So the US has to be strong in this industry, so it deserves federal support. So you support science development, you support technology development, but in terms of actually building and commercializing these machines and somebody makes a profit, somebody goes out of business, that part you can leave to the market. So picking winners is not really called for very often. There are going to be a few cases where you kind of

get cornered into this, and this is a dilemma that's facing the semiconductor industry right now, with Intel. Because if the US was going to be strong, indeed competitive at all, in the most advanced nodes of semiconductor production, 3 nanometer, two nanometer and so forth. Intel was the best company we had, so the decision was made to get behind them. And then there are all these shortcomings that now it's up for debate what's going to happen. That is one of the toughest problems in technology policy, economic policy ever. I don't have a magic solution to that, but I strongly

suspect no one else does either. And most industrial policy problems are not going to corner you into the situation of having to decide the fate of a specific company. What other industries other than semiconductors do you think the U.S. should have industrial policies for? Well, historically we've actually had a very good industrial policy for aviation, which is why aviation is the single major industry in which the US has the longest lasting and strongest record of global dominance. I mean, a Boeing 747 is one of the few things that

Chinese can't make yet. The Japanese can't make one. The only competitor is basically the French with the Airbus and the A380. So we should continue our strong industrial policy support for aviation, which is, if you're not living under a rock, obviously something you have to have for national security reasons alone. Beyond that, clearly electric mobility, electric cars and other types of electric vehicles are going to be enormously important in coming years. But if you don't do something like what Joe Biden did when he put a prohibitive 100% tariff on imports of Chinese electric cars, if he hadn't done that, there simply would not be an electric car industry in the U.S., period.

Which means, given that that's the way the world is going, there wouldn't be a car industry at all in the U.S. And I think most Americans understand that you can't be a serious developed country of our size and not have a car industry when everyone wants to drive a car. In terms of other industries, obviously the larger issue of green energy is looming bigger every day. There are all sorts of problems in the solar cell industry, which has been dominated by heavily subsidized Chinese production based on coal-fired power plants, check the irony of that, and legacy technologies, which has been interfering with America's ability to

scale its own solar cell industry. And another example is we currently have wind power is currently technologically and cost competitive in a lot of places. These giant windmills the size of skyscrapers. They're proposing to build some not too far from where I live here in San Francisco on the coast. And the Trump administration recently just tried to shut that whole thing down. They're not even trying to help. They're proactively trying to stop it because Donald Trump, for whatever reason, doesn't

like windmills. That is industrial policy, except you're pushing in the wrong direction. So that is something that I would correct. Beyond that, we're not only talking about super high tech industries. Not every American can work at Apple. And if you look at what is most high tech state in the United States is California, which also has, if you calculate it correctly,

the highest poverty rate in the nation. So a high tech only strategy is not what the country needs. You need to protect a lot of the mid-tech industries, which among other things, serve as the grounds of deployment for the more high-tech stuff. For example, if you don't have assembly lines producing automobiles and other durable consumer goods, you can build all the robots you want, but where are you going to put them? How are you going to have a thriving robot industry if you don't have demand in that industrial application? So that's why the US needs to have an appropriate trade

policy because tariffs and the larger issue, protectionism, are going to be a part of industrial policy because you can't have a thriving industry in this country if all your market is taken away by imports from foreign countries which are often subsidized or problematic in other ways based on stolen intellectual property for example. And the third thing you need to do which is not getting much attention but it's a gigantic sleeper issue in our economy right now is the fact that the dollar is overvalued. My own guess is it's probably overvalued maybe 15-16% but that's one of the biggest reasons

the US runs the horrendous trade deficit that it does, where we import nearly a trillion dollars worth of goods per year more than we export of goods. The total deficit is a bit less because of our exports of services. But when you have this tremendous trade deficit, not only do you lose jobs right now, you also lose productive capacity. You have plants go offline. You have plants that are never built. You lose technological skills. There's nobody in the

US who is expert on manufacturing flat panel displays at scale. And we lost that industry because we previously lost the liquid crystal display industry. Anyway, you wanna get rid of these giant trade deficits that are cut across industry after industry, you need to bring down the dollar, which of course not only reduces our imports by making foreign imports more

expensive relative to domestically made goods, but it also makes our exports more competitive. So they're just beginning to think about that, I believe, at the Treasury Department, but it's a giant issue that has not really drawn public attention yet. What do you think of the efforts of Trump and Biden in this area? issue that has not really drawn public attention yet. What do you think of the efforts of Trump and Biden in this area? Well, if you're talking about the larger issue of industrial policy, which includes key items being protectionism and trade, federal support for technology development and rebalancing the dollar to make it competitive. It's clear that Trump's election in 2016 was a very sharp turning point for the first

issue, that is to say protectionism, tariffs. There was this extremely strong consensus in favor of free trade and when I sat down to write my first book, Free Trade Doesn't Work, in 2007, there were fewer than half a dozen intelligent people in the English speaking world I could even discuss the subject with because it was so much just an axiom among economists that free trade is best and anybody who questions

that just doesn't know what they're talking about. Well Trump kicked in the door on that and when he did, America discovered that the ability of the establishment thinkers and their representatives of the established consensus to rebut what he said and what he had done was rather unimpressive. There was no killer argument against it. It didn't produce inflation. It didn't produce a trade war. It didn't cost America its relationships with its geopolitical allies, which is why Joe Biden, who's obviously at the opposite end from Trump on so many issues, continued Trump's protectionism when he was elected, and he actually doubled down on it with policies such as the prohibitive 100% tariff on Chinese electric cars. Now, the second part, of course, is technology support.

So that you start to get with Biden, with the CHIPS Act, with the Bipartisan Infrastructure Act, with the Inflation Reduction Act. These are all kind of peculiarly named. But that's where you saw a lot of industrial policy being brought in with respect to, above all, clean energy. Now in Trump's new term, right now we don't really know in March of 2025 where this is all going because Trump has this long history of making these

extreme policy moves like, oh we're gonna have a 25% tariff on Canada and Mexico, oh maybe we're not. So we're gonna have to wait and see where this is going. But I think we can tell that the shift in the American economic consensus away from an absolute free trade model and toward what I hope will become what's called open managed trade, which is nobody's in favor of autarky, but you do recognize that laissez-faire in trade, like laissez-faire in the rest of the economy,

which we haven't believed in since the robber baron era, though some people pretend to. Laissez-faire in trade gave us a gigantic mess, so we have to somehow come up with the right prudent, limited, appropriate regulatory pushback, tariffs, quotas, whatever it's going to be, to bring our trade situation in order. I think that will continue to unfold. How well Trump will do that, your guess is as good as mine. Now with respect to technology support, it's absolutely true that Trump has said some very negative things about, for example, the CHIPS Act. Now I'm going to prognosticate, just because I know that's what everyone wants,

it seems to me that a lot of money has gone out the door already. It's going to be hard to reverse. A lot of money has gone into the districts of Republican members of Congress, so he's going to get pushback in his own party. So that's going to be hard to reverse. And the third thing is that what Trump seems to want instead of the CHIPS Act, I mean he said this, he thinks that you can just apply tariffs to semiconductors and that on its own will relocate production back to the United States. Now your listenership presumably understands that when you're talking about something as advanced as a two nanometer microprocessor, you can't just relocate that as a straight up executive

decision. Oh, we had a plant here, we're going to open a plant here. Because the technology is so advanced that there are, there's only one company in the world, there's TSMC, and then there's Samsung, that's even operating at those nodes successfully, and now they have a plant in Arizona, which is supposedly producing, and then you have Intel trying to catch up.

The technology support side, if you're serious about the US being on the leading edge where it needs to be, the technology support side is unavoidable. You just can't get around it. Now, you can say whatever you want about Mr. Trump. I don't think he's stupid, and I think he's going to get cornered by this fact into doing what I think he should do, which is stop trying to wreck the CHIPS Act and indeed figure out ways to extend and expand it so that it becomes durable and so that it enables the entire U.S. tech ecosystem to be equal to the best in the world.

And final question, Ian, how do we find out more information about your books? Oh, my name is Ian Fletcher and I have a personal website at ianfletcher.com. I have a website for my new book, Industrial Policy for the United States, Win competition for good jobs and high value industries, you can find that at industrialpolicy.us. In fact, if you go to amazon.com and just search for a book and you type in industrial policy, our book is the first one that comes up. My co-author is Mark Fastow and he has a personal website at markfastow.com which is difficult to spell because it's M-A-R-C not K-F-A-S-T-E-A-U dot com. Great.

Ian, pleasure to meet you and thank you for your time. Yes, thank you very much, Dan. That concludes our podcast. Thank you all for listening and have a great day. Yes, thank you very much, Dad. That concludes our podcast. Thank you all for listening and have a great day.