Recent legislation has been touted as industrial policy. However, it has not reduced income inequality, and he decline in unionization in the manufacturing sector dropped to 7.7 percent.
Since our goal in promoting clean technology is to have it adopted as widely as possible, as quickly as possible, we should very much want to see prices lowered by having all research in the public domain. If the price of solar panels would fall by 25 percent by eliminating any intellectual property claims, this would have the same effect in increasing demand as an additional government subsidy to purchasers of 25 percent of the sale price. This is a big deal.
The False Promise of Manufacturing Jobs
Much of the discussion around both the CHIPS bill and the IRA highlighted provisions in the bills that would lead to more manufacturing in the United States. The view that we should be seeking out jobs in manufacturing specifically, rather than jobs in other sectors of the economy, rests on a misunderstanding of the current nature of manufacturing jobs.
Historically, manufacturing had been a source of relatively good-paying jobs for workers without college degrees. Jobs in manufacturing paid substantially more than jobs in other sectors, after controlling for factors like age, education, and location. This is no longer true. The manufacturing wage premium has fallen sharply in recent decades, so that it is now close to zero.
Trade has been a big factor in the reduction of the manufacturing wage premium. The country lost millions of jobs to imports in the 90s and 00s. The jobs that remained often paid far less than the jobs that were lost. A big part of this story was the decline of unionization in manufacturing. In 1980, close to 20 percent of the manufacturing workforce was unionized. This had fallen to just 7.7 percent by 2021, only slightly higher than the private sector average of 6.1 percent.
Furthermore, there is little reason to believe that the return of manufacturing jobs will mean a substantial increase in unionized manufacturing jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing actually dropped by 400,000 over this period.
In short, our trade policies had a devastating impact on manufacturing workers and workers without college degrees more generally, but reversing these policies now will not help the problem. We want these workers to be able to get good paying jobs, but they are no more likely to find them in manufacturing than in any other sector. (It is worth noting that manufacturing employment is still more than 70 percent male.)
There is an issue about the need to have more domestic production for national security reasons, as well as protection against events like the pandemic. This point is true, but often exaggerated. Clearly there is a national security issue when most of our semiconductors come from Taiwan when a conflict with China could quickly choke off this source of supply. However, we could be reasonably comfortable importing semiconductors from Canada, Mexico, and many other countries.
The pandemic did disrupt imports from our trading partners, but we also had many domestic factories shut down during the pandemic. Furthermore, if we think of the range of potential disasters, certainly there are many areas in the United States where production could be stopped for extended periods by hurricanes, floods, or other extreme weather events. What we really need are diverse sources of supply, not just domestic production. A focus on domestic production that doesn’t recognize the need for a diversity of sources, will not create resiliency.
Conclusion: Better Industrial Policy Would be Good, but We Need to Approach it With Clear Eyes
There is much that is good in the recent legislation that has been touted as industrial policy. However, these bills have not been well-structured from the standpoint of reducing income inequality. They also won’t necessarily help to make the economy more resilient in the ways many have claimed.
Industrial policy cannot just be a mantra, whereby calling something industrial policy implies better outcomes. It has to be carefully designed to meet specific goals. If we want to reduce inequality and speedup the adoption of clean technology, we can do much better than the CHIPS Act and the IRA climate provisions.
[1] There would need to be some agreement on sharing research costs and findings internationally, but we already have this problem with the existing IP system. Patent obligations and related protections have been a major source of conflict in the negotiation of recent trade agreements.