Financial markets have had one of the most tumultuous winters in more than a decade. Last November, we witnessed the collapse of FTX, once seen as the model for relatively safe crypto businesses. Earlier this March, we saw the domino-like cratering of Silvergate, Silicon Valley Bank, and Signature Bank, three mainstream banking institutions that serviced clients in the tech and crypto industries.
It is no coincidence that the current banking crisis began in the tech and crypto sectors. These sectors boomed during a period of low interest rates and cheap money. As these conditions reverse, there is a moment of inevitable reckoning: Maybe yet another scheduling app or tradable token was not going to generate sustainable use values after all. But there is a bigger lesson we are learning from the financial system’s exposure to these sectors. The health and stability of our banking system cannot be separated from the health and stability of the broader economy. Yet, for many decades, finance has been growing increasingly speculative and divorced from productive activity.
This is where the Biden Administration’s turn to industrial policy can play a vital role in reconnecting finance to the real economy—but only if industrial policy is seen holistically, and not just as a way to onshore the making of particular widgets.
A New American Industrial Policy
Industrial policy was long a forbidden term in Washington. On the left, there was skepticism toward the military-industrial complex, perhaps the most iconic example of Beltway industrial policy. On the right, there was a libertarian skepticism that government would ever have the same quality and quantity of information that the private sector supposedly has to plan economic activities. And across the political spectrum, there are those that fear the government doling out subsidies will pick winners among firms that have good lobbying connections but poor business acumen.
Fast forward to 2023, and industrial policy is now at the center of policy accomplishments and aspirations for progressives and even some Republicans. Thus far, this effort has focused mainly on building up the nascent industries that policymakers want to see grow. Domestic semiconductors and “infant industries” like green hydrogen and floating offshore wind are examples of such budding sectors in need of state support if they are to scale.
Notably, funding for these initiatives, largely out of the Departments of Energy and Commerce, is coming with strings attached. Chip manufacturers are being encouraged to provide their workers quality child care and refrain from stock buybacks. Green energy projects receive more generous subsidies if they pay at least prevailing wages and support supply chains rooted in North America.
Some critics accuse the Administration of trying to do too many things at once. Washington Post columnist Catherine Rampell and Wall Street Journal reporter Greg Ip have asked whether these conditions increase the chance of project failure. New York Times columnists Ezra Klein and Peter Coy have questioned why U.S.-based production is being required when it might slow down deployment of clean energy or increase procurement costs to taxpayers.
However, these critiques miss the point of industrial policy, which is really that it is a comprehensive economic development strategy. As the economist Isabel Estevez writes in a coming report for the Roosevelt Institute, it is relatively uncontroversial that agencies like the World Bank that engage in development lending attach a wide range of conditions to their loans and grants. That’s because the point of this money is not just to produce more of a given widget, but to usher in a self-sustaining economic growth dynamic. Seen through this lens, the bigger risk is trying to do too little with industrial policy, not too much. Industrial policy in 2023 in the United States should be thought of as the massive economic transformation that it is.
Industrial Policy as Economic Wind-Down
Just as this transformation can wind up certain sectors, it can also wind others down. Indeed, industrial policy should be thought of as helping to prevent dangerous overgrowth of those sectors that generate potentially significant public harms, that exacerbate existing (or create new) structural imbalances in the economy, or that otherwise undermine the overall effort at rebuilding domestic production. Such preventative action is often necessary in order to direct resources toward strategically targeted activities and to maximize the impact of industrial policy. These policy tradeoffs can be difficult, but they must be recognized and confronted.
The crypto bubble in the 2010s and early 2020s is a case in point. During that period, burgeoning trading in cryptocurrencies and other digital assets gave rise to a whole new “industry” with its own new breed of “captains” and lobbyists. Crypto was touted by insiders and celebrities as a hedge against inflation, an efficient way to transfer money across borders, and a means of democratizing finance. Most of these promises have not materialized. In the wake of the dramatic failure of FTX, moreover, we are beginning to see the human and financial costs of allowing the crypto market to grow without adequate policing and oversight.
These risks are becoming increasingly visible. According to the Department of Energy, crypto’s carbon emissions are doubling every year and already exceed the total emissions of Finland. That’s a high price to pay for the luxury of letting anyone with a computer speculate on anything that can be tokenized. Yet even the so-called “greening” of crypto trading as undertaken by Ethereum presents serious challenges. Crypto is consuming growing quantities of scarce resources, such as semiconductors and minerals, that are needed for the development of innovative clean technologies and products. It competes for the limited supply of such resources against emerging sectors like the high-power batteries that are essential for America’s future energy independence.
The story of Intalco, an aluminum producer in Washington state, vividly illustrates this conflict. Backed by a labor union and venture capital, Intalco is ready to go green—if only it can have access to carbon-free hydropower. Currently, the crypto industry has been given priority access by the Bonneville Power Administration, a Department of Energy agency. While the crypto industry’s outsized usage of fossil fuel electricity is extremely bad for the planet, allowing it to monopolize access to clean energy is not much better. Doing so is especially harmful to our industrial strategy—and, indeed, national interests—at a time when the Russian invasion of Ukraine has upended global aluminum markets. After a year of internal debate, the Biden Administration starting in April 2023 will effectively ban Russian aluminum from entering the U.S. market. In announcing the move, the White House cited rising energy costs to domestic aluminum producers due to the invasion as among the reasons for taking action. Indeed, one of the last domestic aluminum producers shut down in 2022 due to input price volatility. At a time when Biden’s industrial policy initiatives—the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act—are all trying to encourage more domestic aluminum production, it makes sense to try to get the rest of government (including the BPA and trade policy) to push in the same direction. (Notably, Biden’s 2024 budget includes an excise tax of 30 percent on digital asset mining’s electricity use—a first step toward disincentivizing further growth of the sector.)
The Need for a Public Option
As The Washington Post reported, Silicon Valley Bank was a destination of choice for many clean-tech start-ups, and over 60 percent of community solar projects had ties to the bank. The Post quotes consultant Jim Kapsis as saying: “I think everyone is going to press the pause button for a period of time to see how the macro environment shakes out. A lot of firms just had an existential, out-of-body experience that could have ended in a massive death of their start-up portfolio.” The worry is that finance or startups or both will be discouraged from pursuing the projects that are necessary for the green transition.
But this worry says more about the vulnerabilities created by the extreme financialization of recent decades than anything else. Too much money has sloshed around trying to chase the highest return rather than the best investments.
We need to harness the power of finance as a tool of industrial revival. That requires more direct and smarter public action inside financial markets. One thing we could and should do is offer institutional investors meaningful alternatives to speculative investments like crypto. To lessen the pressure on pension funds and other long-term investors to chase short-term returns, we need to give them more attractive and sensible opportunities to invest in cutting-edge infrastructure, clean manufacturing, and other productive sectors. We need a twenty-first-century “public option” for private equity-type investment.
Federal agencies, including the Departments of Energy and Commerce, can help to get this initiative off the ground. But they operate under multiple jurisdictional and budget constraints. To scale up this effort, we need a dedicated institutional platform: the public equivalent of Wall Street or Silicon Valley asset managers. It needs to be well funded, nimble, and staffed with top-brass business and science talent—a formidable market player rather than a bureaucracy. Unlike private financiers, though, it would be politically accountable and operate under an explicit mandate to promote America’s long-term economic growth and resilience.
In the New Deal era, the Reconstruction Finance Corporation (RFC) played a similar role with great success. Staffed by bankers and public servants, the RFC was the piggy bank that helped fund the New Deal and post-World War II economic conversion—big efforts that Wall Street could not and would not have pulled off. The RFC experience shaped the creation of the World Bank and Marshall Plan-established economic reformers like Germany’s KfW, which innovated by raising money on private bond markets to fund public activities.
Since the 1950s, though, the United States has fallen behind many of its allies abroad in not having a stand-alone public investment vehicle. Recent but as yet mostly unrealized proposals to establish a federal climate bank, an Industrial Finance Corporation, or a more ambitious and strategic National Investment Authority offer potential ways of filling that gap. The latter in particular would go beyond the RFC model and even the World Bank model by mobilizing private finance and more actively channeling both public and private investments into projects that will have meaningful and stable returns. The proposed National Investment Authority would not only lend or guarantee private companies’ loans but also set up and manage a public version of private equity funds, offering infrastructure investment opportunities to pension funds and other investors seeking stable long-term returns. These large pools of money, currently pressed to seek returns in speculative finance, would flow into rebuilding and innovating our real economy.
These proposals face political resistance because a public option of this kind threatens to end private fund managers’ grip on investors’ money. But the recent bank failures have opened up a window to shift the conversation. There is some bipartisan support for efforts in this direction, including work by Representative Ro Khanna and Senators Chris Coons, Marco Rubio, Todd Young, and others to stand up more public financial institutions to manage supply-chain risks. If these proposals can pass in 2023 or 2024, they can provide a foundation for further institutional innovation in the years to come. A similar dynamic was at work with the RFC, which was established by Republican President Herbert Hoover in a period of divided government in 1932 only to be expanded with solid Democratic majorities in 1933.
A democratic industrial policy is about letting the public have a say in which industries should survive and thrive. With so much at stake in today’s uncertain world, these decisions are simply too important to be left to profit-seeking private financiers alone. They might turn everything into crypto, when what we need is clean energy and good jobs.