The No-More-Chokepoints Economy: How TO craft a modern industrial policy based on the prior one we abandoned.

AuthorLynn, Barry C.

What a glorious moment it seemed, the mid-1990s. The Soviet Union had collapsed, and peoples around the world were embracing American-style liberal democracy and capitalism. Better yet, America was a hegemon with no need ever to twist another arm. Economists had begun to speak of a revolutionary new approach to managing power. Three great natural forces--globalization, digitization, the market itself--were remaking the world for us, by destroying all antidemocratic concentrations of political and economic control.

The business corporation, we were told, was melting away. America was becoming a nation of "free agents" able to work with whoever we wanted, bound by little more than a s gossamer-thin net of contracts. At the social level, this meant I no more need for regulation of business, or for checks and balances between the state and private enterprise. Give free rein to these forces, and they would evolve the economy all but automatically toward a world characterized by, as Robert Reich wrote in The Work of Nations, the "diffusion of ownership and control" within a "global web."

More radical yet, the nation-state itself was vanishing into the mists of history. The 1980s had been a decade of alarms about new Soviet arms systems, and how Japanese and Germany industry threatened U.S. factories and jobs. Then suddenly these worries vanished. Deep industrial interdependence, we were assured, was tying the people of the world into a single borderless economic community, which would ensure not just mutual prosperity but peace on Earth. As a book titled The Pentagon's New Map put it, the world had a new "operating theory" in which "connectivity" would "trump" all the old tensions and rivalries. Indeed, within "globalization's Functioning Core" of industrialized nations, armed conflict had already become impossible.

So for a quarter century we cruised, with hardly a thought about how and where the goods, foods, and drugs on which we depend were made, grown, and traded. Sure, there were a few glitches in the new global matrix--September 11th, the Lehman crash of 2008. But on we went, largely heedless of how the capitalists were using their corporations to concentrate control over factories and foundries and chemical plants, and were then shifting these capacities to the far side of the ocean in ways that destroyed far more than jobs. Even when Donald Trump howled the words "America First," most college-educated liberals dismissed the idea as silly--just angry white racists, pining for a moment that efficiency and social progress had rendered obsolete. Soil and grease under our nails? Ha! Fingers were for summonsing Ubers and pushing "buy" buttons.

Well, the coronavirus pandemic, Russia's invasion of Ukraine, and China's blockade of Taiwan have slapped us awake. And what we see is terrifying. Just in the past three years we have found ourselves suddenly without face masks to protect against a pandemic, without the chemicals we need to test for viruses, without container ship and rail capacity to move basic goods, without semiconductors to build airplanes and medical devices, without formula to feed babies, without natural gas, and with roaring inflation in almost every sector of the economy. Worse, we've realized that it's not hard to imagine far more catastrophic industrial crashes, and, indeed, the White House recently warned that a conflict in Asia could cause $2.5 trillion in damages the first year alone. Rather than harmonious interdependence among peoples we may soon be forced to choose between dependence on autocratic regimes and wider war.

Josep Borrell, the European Union's head of foreign affairs and security policy, put the problem succinctly. "We have decoupled the sources of our prosperity from the sources of our security," he said in a recent speech. For decades, the West as a whole relied on China for manufactured goods and on Russia for energy, he said. But that "world ... is no longer there."

It's not surprising that Americans and Europeans are suddenly scrambling to devise "industrial policies" able to ensure that we can build what we need to be secure and to live well. And that in the United States, President Joe Biden and Congress have already pledged hundreds of billions of dollars to build new semiconductor foundries and components for electric vehicles.

That's a very good thing. But these still modest advances are already threatened from every side--by the monopolists and the people in their pay, by the Chinese Politburo and the people in their sway, even by the temptation to load every progressive dream onto every individual project.

Done right, a new industrial strategy can help America and its allies solve most of the great crises of this moment. But left incomplete, industrial policy will make many of the biggest problems only worse. And unfortunately, today we still lack a clear hierarchy of threats to guide our decisions, an understanding of how to use competition principles and policies to achieve our ends, and a political narrative that explains why we must see this grand effort through to success.

The extreme concentration of capacity today is something largely new in the world. At the end of the Cold War, most industry was distributed widely. The United States, Europe, and Japan each manufactured their own vehicles, electronics, semiconductors, chemicals, and metals, all the way from subcomponent through finished product. Yes, many Americans drove Toyotas and many Europeans owned Fords, but those cars were usually built at factories within those regions. Today, by contrast, we see increasingly extreme choke-pointing within most industrial systems, often to the point where a vital product or key component is manufactured in a single location--sometimes even a single factory--on the other side of the world.

The most well-documented such chokepoint is in semiconductors. Here, lack of supply can trigger cascading shortages across entire global industrial sectors. This is what happened over the past two years with car production, which in turn led to shortages of used cars and rental cars. Taiwan alone manufactures 92 percent of the world's most advanced chips, and 75 percent of total semiconductor capacity is located in East Asia. But we see similar concentrations of capacity in the manufacture of pharmaceutical ingredients, antibiotics, agricultural chemicals, industrial food chemicals, industrial gases, and basic materials and minerals including polysilicon, graphite, cobalt, magnesium, and rare earths. Similarly, we see extreme choke-pointing of the capacity to assemble iPhones and laptops and to manufacture basic electronics components.

The cause of this concentration is easy enough to discover. Hidden behind the utopian rhetoric used to justify U.S. abandonment of industrial policy in the 1990s was simply an alternative industrial policy--basically, "Let the monopolists rule."

We can trace the origins of this ideology to the old feudal systems of corporate control that Americans rejected in the Revolution. In the 1970s, the United States faced a harsh combination of inflation, recession, and rising international competition. In response, left-wing pro-monopolists led by the economist John Kenneth Galbraith and right-wing pro-monopolists at the University of Chicago led by the economist Milton Friedman began to argue that antitrust and other regulation was inefficient and that it was smarter to allow big corporations to, in essence, regulate themselves. Thus unleashed, monopolist corporations at home and mercantilist states abroad ruthlessly consolidated power, then used that power to strip out industrial redundancies in ways that left vital production choke-pointed in all but a handful of places.

Japan, Taiwan, South Korea, Germany, and even the Netherlands all ended up holding concentrations of core industrial capacities. But it was China that captured the vast majority of such chokepoints, and the ones most important for maintaining day-to-day life.

The most pressing threat posed by this new structure is that entire industrial systems will simply crash due to a sudden loss of...

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