Washington, D.C. shouldn’t run the nation’s economy

In the popular mind, nearly every American city owes its prominence to one private industry or another: steel barons built Pittsburgh, modern finance defined New York City, San Francisco and Austin have ridden high on technology. The one big city without a defining private industry, of course, is Washington, D.C., home of America’s federal government. That’s why it’s so odd that many on the right are now championing “industrial policy” efforts that would try to transform D.C. into a center of economic innovation.

Indeed, proposals for this heavy level of government engagement in the economy, once considered by many on the right as a crony-capitalist venture favored mostly by Democrats, has become increasingly popular with Republicans ranging from presidential candidate Donald Trump to Florida Sen. Marco Rubio. The sheer size of the federal government – more than a fifth of the economy – means that a totally hands-off attitude towards industry is impossible. But, even if the government can’t stay out of the economy entirely, recent history shows it can still foster innovation without picking winners and losers.

The actions typically thought of as industrial policy have an undeniable allure: nearly all experts consider important certain sectors such as artificial intelligence, energy production and biomedicine. By earmarking resources, changing regulations and imposing tariffs on non-U.S. industries and companies, the thinking goes that D.C. can secure prosperity. This is the fundamental approach taken by the Biden administration’s Inflation Reduction Act subsidies for green energy as well as proposals from Republicans to bolster heavy manufacturing and fossil-fuel production.

But expecting these efforts to work flies in the face of history. Since World War II, nearly every president has picked out a favored industry and tried to slant things in its direction. The Trump administration proposed billions of subsidies and even more costly regulations on competitors intended to benefit coal companies which slumped anyway. Bill Clinton’s administration spent millions on a “supercar” project that angered environmentalists and set back America’s efforts to build hybrid vehicles. Richard Nixon’s Department of Housing and Urban development launched an ambitious effort to change how housing got built and ended up making housing more expensive.

American economic leadership in the 20th century was not the result of a bureaucratically overseen industrial policy. Our nation’s dynamism flows from a broadly supportive government role that involves multi-use infrastructure, limited but important support for science and regulatory certainty.

The government’s role has been most visible in major projects like the interstate highway system and modern internet. While both would not have existed without heavy federal subsidies, neither of these projects was intended to benefit one specific sector. Nobody wanted “leadership” or “jobs” in asphalt or fiber-optic cable production. Instead, the architects of both intended to create accessible scaffolding upon which the private sector could experiment, innovate and scale. Fast-food restaurants probably gained more from the interstate system than roadbuilders.

Similarly, the breakthroughs in technology emerged from regulatory environments where the government’s role was to lay the groundwork – funding basic research, experimenting with a few pilot programs, and then stepping back to allow the private sector to take the lead in development, commercialization and scale. This approach succeeded because it created new knowledge in every field of human endeavor rather than having politicians decide what was important.

Most important, the establishment of limited, efficient regulatory systems that offer clarity and certainty for private enterprises has been critical. Such frameworks enable businesses to plan for the long term, secure in their understanding of the rules of the game. Right now, the American tort law system punishes entrepreneurs and burdensome regulations favor slow-moving incumbent companies. Furthermore, many legacy regulations are ill-suited to the characteristics of new technologies.

For example, the foremost challenge faced by green industries is regulatory burdens, whereas most green subsidies in the Inflation Reduction Act constitute corporate welfare. Comprehensive reforms to outmoded power-industry regulation and permitting and siting processes could do more to reduce emissions than the trillions of dollars the IRA is likely to cost taxpayers.

As policymakers grapple with the best path forward, it is imperative to remember that the strength of the U.S. economy lies in freedom, diversity and innovation. Principles that emphasize a limited government role could pave the way for a new era of American leadership in the global economy in a way that picking winners and losers never has. It is a no-brainer that Washington, D.C. shouldn’t run the economy.

Eli Lehrer is president of the R Street Institute.