The massive federal spending supposedly justified by Covid-19 served as cover for the Biden administration to transform the American economy into something more like China’s state-managed one. Left-leaning Keynesian economists had long desired to do just that, and the Biden administration put it into practice: the American Rescue Plan, the Investment and Jobs Act, the CHIPS and Science Act, and the misnamed Inflation Reduction Act pushed trillions of federal dollars into the consumer economy. Predictably, inflation in consumer prices reached the worst levels since the Carter presidency.
Biden’s economic ventriloquist seems to have been Brian Deese, director of the National Economic Council from 2021 to 2023. Last October, Deese announced the first-ever peacetime use of industrial policy by the U.S. government, which he baptized as a “modern American industrial strategy.”
To appreciate the hazards of this policy, one needs to understand industrial policy as it operates in Europe, where various nations explicitly work to protect their oldest and biggest companies. These firms are seen as bedrock institutions that define the economies in which they exist. They have enjoyed decades of protection from competition and have never been allowed to fail.
The principal danger of this government-centric approach is that it pushes aside more organic methods of innovation. When government agencies use subsidies to assert dominance over the innovation process, entrepreneurs will tend to pursue the opportunities that government planners see as important. The federal government is disturbing the nation’s ecosystem of innovation and entrepreneurship. The end result will be fewer startups.
Therein lies the third and biggest worry related to industrial policy: cronyism. Business owners have sought privileged relationships with the government since Robert Fulton and Robert Livingston obtained a patent giving them a monopoly to operate a steamboat on the Hudson. But the United States has generally been able to rely on courts committed to principles of private property and free markets to provide some balance of interest. Historically, government-business ties commonly were initiated by companies seeking protection and subsidy for massive projects like canals and waterways that were cloaked in public benefit. With the coming of the Biden industrial policy, however, entrepreneurs and businesses inevitably will see it in their interest to pursue innovations that the federal government prescribes—not ideas that arise from their own experience or initiative.
In describing the new industrial policy, Deese promised enhanced worker productivity, a higher standard of living, reduced carbon emissions, and—of course—greater “inclusion.” As an added benefit, he said, the new industrial strategy would focus on localities. Even assuming that an industrial policy could deliver on any of these promises, the fulfillment would come at a serious cost: slowing American economic growth for decades to come.
My GMU Econ colleague Bryan Caplan appropriately applauds economic historian Price Fishback’s excellent June 1998 Journal of Economic Literature article, “Operations of ‘Unfettered’ Labor Markets: Exit and Voice in American Labor Markets at the Turn of the Century.”
Deference might have been relatively harmless if agencies engaged in a good-faith effort to carry out unclear statutes. But beginning in the Clinton administration, Chevron changed the way they go about their business. Instead of asking what Congress meant, agency lawyers and decision makers hunt for ambiguities, real or imagined, to justify their policy objectives.
As agencies relied more on Chevron to pursue policy agendas, judges were forced to confront a greater range of asserted “ambiguities” with no standard to distinguish among them. Judicial review is the essential check on executive overreach, yet Chevron put a brick on the scale by committing the courts to favor the government’s positions. It is all too easy for courts, when faced with difficult or contentious interpretive questions, to waive the ambiguity flag and defer.
By aggrandizing the power of unelected bureaucrats, the Chevron doctrine also diminishes Congress. Witness the unseemly but now-routine spectacle of lawmakers hectoring the president and agencies to enact policy programs—from student-loan forgiveness to the expansion of antitrust law and greenhouse gas-regulation—rather than legislating themselves. The prospect of achieving an uncompromised policy win through executive action has replaced the give-and-take of the legislative process.
Chevron’s rule of deference is an abdication of judicial duty, not an exercise in judicial restraint. It has proved unworkable and corrosive to the constitutional separation of powers. Forty years later, the court should correct its mistake.
This week’s Chevron deference case, and the recent SEC and CFPB cases, are just three examples where a realistic appraisal of history cuts against modern agencies’ favor. The 1935 precedent affirming the constitutionality of “independent” agencies, for example, might have made practical sense (though much less constitutional sense) in its own time, and maybe even as recently as the 1980s and 1990s. It makes much less sense today, when a turbocharged FTC, SEC, and FCC are profoundly more activist, political, and ambitious.
Trump’s cascading legal distractions, driven by progressive prosecutors, have strengthened his grip on his party. If, however, Trump is inaugurated 371 days after Monday’s Iowa caucuses, progressives will have accomplished perhaps the largest self-inflicted wound in U.S. political history.