The Case for a New U.S. Industrial Policy | Ian Fletcher
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What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.

My guest in this episode is Ian Fletcher, one of America's foremost experts on the problems of free trade and the promise of industrial policy, having predicted the demise of the neoliberal trading system as early as 2007. Ian and I spend the first hour of our conversation laying the foundations for the argument that he and Mark Fastow make in their book, Industrial Policy for the United States: Winning the Competition for Good Jobs and High Value Industries.

This includes a comprehensive critique of free market economics and a systematic exploration of the tools that can be and have been deployed by countries around the world, including the United States, in the service of building out critical industries and igniting a flywheel of innovation that is critical for the long-term success of a modern economy.

In the second hour, Ian and I explore a series of international and historical examples of both successful and unsuccessful implementations of industrial policy, including a discussion about what went right, what went wrong, and how those lessons can be applied to the development and implementation of a successful modern industrial policy for the United States in the 21st century, along with a series of policy recommendations for the White House and Congress.

If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

And with that, please enjoy another phenomenal episode about industrial policy and how to revitalize the American economy with my guest, Ian Fletcher. Ian Fletcher, welcome to Hidden Forces. Thanks for having me on your show, Demetri. I'm very excited to have you on, Ian. And I'm very excited to continue building on this theme that we've been exploring in our two most recent episodes with Patrick McGee and Kyle Chan having to do with industrial policy.

In our episode with Patrick, industrial policy, specifically Chinese industrial policy, was a background element to the larger story, which was about how Apple inadvertently helped build out China's advanced manufacturing ecosystem through its presence and hundreds of billions of dollars of investment in the country. Our episode with Kyle Chan, which published last week, was very much focused on Chinese industrial policy.

Our conversation today is going to focus much more on US industrial policy, but we're going to also look at several different country cases, including China, when thinking through what the most advantageous policies for the US should be. It looks like you've been arguing against free trade for about at least the last two decades, if not longer. Is that generally right?

Yeah, I sat down to write my first book, which is Free Trade Doesn't Work, in 2007, when free trade was still pretty much a sacrosanct concept. And there were only about half a dozen intelligent people in the country I could even discuss the subject with.

Yeah, I was going to say, I was going to ask you if you'd been laboring in obscurity most of your life and all of a sudden now have found yourself getting a lot of podcast interview requests. Does that generally track? Yeah. My original career was as an IT consultant, so I haven't been laboring in poverty. But yes, I've been trying to get people's attention for quite a long time. I should mention that Edward Ludwak wrote the forward to your book, Free Trade Doesn't Work. He was on the podcast about a year and a half ago.

He's quite an interesting character with a fascinating life story. How did he end up writing the forward?

Oh, I met Edward Luthwak. Go look up his Wikipedia page. He is an extraordinary individual, if you don't know about him. He wrote two very good books on economics. The one is called The Threatened American Dream, and the other is called Turbocapitalism. And this came out even before I wrote my books. I don't recall the exact publication date, but it's either not long before or not long after Y2K published.

And he's one of the few people, because there were a few, who saw the trouble economically that the United States was getting itself into, despite the fact that during the Bill Clinton era, a lot of people thought everything was just fine, that unconstrained globalization was an obviously correct choice with no significant downside. So let's switch now to your book, the latest book you've written, which is titled Industrial Policy.

And you've written that with your co-author. It's titled Industrial Policy for the United States, Winning the Competition for Good Jobs in High Value Industries. Your co-author on this book is Mark Fastow. Before we get into the book and what led you to write it, I just want to learn a little bit more about you. What led to your initial interest in economics and especially in the optimal role that should be played by the state in the economy?

Well, in the mid-2000s, I started to become aware of the fact that the United States was experiencing non-trivial economic problems. I mean, it was obvious that the Bush economy was just puffed up on a housing boom.

And we were losing all this industrial capacity and so forth. It was kind of hushed up at the time, but this was there if you were listening. And in retrospect, a lot of people have documented it. And yet we were constantly being told that we were doing everything right. We're

embracing the maximum of free markets at home, the greatest capitalist incentives, maximum openness to the global economy, a very laissez-faire mentality. We're supposed to believe that free trade is always optimal for everyone. This is something that's just been proved on the strength of very theoretical arguments that go back to David Ricardo. And yet not everything is good. So I

started looking into it. And it was very frustrating. And it took me about a year. Around that time, a friend of mine started getting a PhD in finance at MIT. And so I was arguing with him about free trade for about a year before I finally found a hole in the logic of free trade economics, according to mainstream neoclassical econ.

And the hole that I found was time horizons, which is that if you actually look at the math, the equations, because modern economics is all about equations. If you look at the equations that the theory of free trade is based on, they don't draw any distinction between a nation prospering in the long run

and a nation maximizing its short-run consumption at the cost of lesser prosperity going forward as a result of things like accumulating debt, depleting industrial capacity, and so forth.

If you know how to ask the question, this is right there in the math. Once you point it out, even the most dogmatic mainstream economists can't tell you you're wrong about this particular point because it's right there in the hard equation. So I grabbed a hold of that and I worked on a paper explaining why this was a problem. And that took me a while, but I had some help. And eventually my buddy says, you should try and get this published.

And I'm like, no, I'm not an econ PhD. I'm barely at the level of understanding. I wrote this one paper, but that's it. And he says, you won't get it into one of the top journals, but you should be able to find somebody who will publish it. And I did. And people start writing to me, Professor Fletcher, which is the biggest joke in the world, and so forth. But it's interesting to connect with people and discover there's all sorts of people out there who are like

Yeah, I always wondered about that. Or yeah, I knew about that, but it's not my specialty. Yeah, you got a point. Of course, people also write back to me. No, you're wrong. You're an idiot. This is why. This is why. But after I did that, I wrote a couple more papers over subsequent years and started to learn more.

a bit more. And eventually, I had a more comprehensive critique of free trade worked out in my head, and I was talking about it to people I know. And eventually, a wealthy friend of mine suggested that I write a book about free trade. And I said, you do understand this would be very expensive. I'd have to quit my real job.

And they offered to fund it. And I was lucky enough to get some support also from a small Washington think tank and lobbying organization called the U.S. Business and Industry Council, where I knew some people. And two and a half years after that, the first book is the product. Free Trade Doesn't Work, What Should Replace It and Why? Came out in 2010. The second edition came out in 2011.

When I go back and read it now, there are definitely things that I got wrong, the things I wouldn't have said the way I did, the things I got half right. But I can also say that it has stood up remarkably well for a book that was absolutely in the face of the conventional wisdom when it came out. When I first published it, I was terrified.

that somebody was going to write to me in the first week or the first month and say, no, you're all wrong because you forgot about X. And I would look at X and go, oh my God, they're right. This whole book is a waste of time. But that never happened. The overall thesis of

The book has stood up, and despite the things that I now cheerfully concede were not right, it was infinitely closer to what I think has ultimately turned out to be the truth than the mainstream view at the time. And it's still ahead of the curve on a lot of important questions where

Public understanding has lagged, but I assume people will eventually catch up because these things are too important to evade public scrutiny forever. What's an example of something that you feel that you got wrong in retrospect?

The biggest thing I got wrong is, although I identified the fact that trade is really a two-way street, because any act of international trade whatsoever in any context, even between communist countries, for that matter, has always got two components. You've got a component where somebody is sending goods to somebody, and somebody

you have a component where somebody is paying for it. They're sending them money. Now, most of the mainstream theory on this doesn't pay that much attention to the financial side. And I did pay some attention to the financial side. And I did say in the book that the financial side of trade, which basically comes down to an overvalued US dollar, is just the bottom line on all of this.

But the financial side of trade is at least as big a problem as the good side. That is to say, trade barriers, trade agreements, tariffs, quotas, you name it. If I'd written the book again, I would have made the financial side much more prominent. And the other thing that I don't think I got right, I mean, I go back and I read the book and

Bits of it are correct. Bits of it, I think, are incorrect. Is the question of where the causation in the system is. Because one issue that's quite hotly debated in certain circles, it's not really been much on radar during the Trump administration, but among people who seriously engage this stuff,

It's a big issue. Once you grant that we have a problem on the financial side of trade, that is to say, basically, the U.S. is sucking in foreign capital, which is what enables us to run this horrendous $700 billion a year trade deficit. And then you have the trade deficit on the good side.

There's a question as to where the causation lies. Do we have an imbalanced trade situation that is passively accommodated by a misguided financial system? Or do we have, I don't want to say corrupted, because it's not necessarily clear that anybody's lying, cheating, or stealing, but do we have a messed up international financial system, which is causing an overvalued dollar, which is then a major cause of the trade deficit?

Now, untangling the causation here is tricky, particularly because you get tied up in a whole lot of verbal slipperiness. And it's quite amazing, the high-ranking people who I have now seen

make absolutely ridiculous statements about this. And I won't even name names, but I'm talking about people on the level of like, you know, presidential appointees that you would have heard of or the names you would have heard of 10 years ago or something. When you say ridiculous statements about this, can you give an example?

Yeah. Ridiculous statement is the entirety of the U.S. trade deficit is simply caused by America having too low a savings rate. And the only reason we have a trade deficit with China, Japan, Germany and all these other countries is because we don't save enough.

And this is the exclusive lever that controls the whole system. And if you can't find a way to raise the U.S. savings rate, you can do nothing about the trade deficit. And anything you try to do will simply fail or make things worse. There are genuinely intelligent people with extremely impressive credentials who will actually tell you that.

Well, I think we've had a number of them on this podcast, including Michael Pettis. I wouldn't be surprised. But I think there's something to that. So let's delve into this a bit more. When it comes to this sectoral balances debate over whether it's US uncompetitiveness that's responsible for the current account deficit, which then drives the capital account surplus, or whether it's the capital account surplus and foreigners' desires to own US assets that creates the current account deficit by making US exporters less competitive,

There are, as you've highlighted, people that take both sides of this argument, but it sounds like what you're saying is that it's actually a bit more complicated. Yeah. It sounds like an invitation to give you a taste of how complicated it is. Basically, when you understand that you've got these two interlocking flows, you've got flows of goods and you've got flows of capital, as you said, current account and capital account.

In a market economy, what's going to determine flows? Well, you have supply and demand. So what you're really looking at is you're looking at eight curves determining the U.S. trade deficit. You're looking at supply and demand for goods at home, that is in the U.S. You're looking at supply and demand for goods abroad.

You're looking at supply and demand for capital at home, and you're looking at supply and demand for capital abroad. The only way to get the answer to what the result is going to be is you have to consider all eight curves, which operate simultaneously. What most explanations of the situation do is

is they pounce on some of these supply-demand curves and say, this is what's in charge. And what that's tacitly saying is all the other curves don't matter. They're passive. They're epiphenomenal. They don't work like supply and demand works elsewhere in the economy. They're somehow fifth wheel to the process.

And my claim is that nothing is fifth wheel, that all of these dynamics have an impact. So I'd like to use this opportunity to delve into the central argument that you and Mark make in the book, which is broken into six sections. The first of which is a critique of free market orthodoxy, along with an argument for why some industries are more advantageous than others.

and an exploration of the tools that governments have historically used to implement industrial policy based on your alternative view of economics and how international trade, including foreign exchange rates and the concept of comparative advantage fits into your economic theory and policy proposals. Let's begin with your critique of free market economics or what's known as laissez-faire economics.

What is your central critique and is it based largely on how free markets play out in practice or how we understand them in theory? Well, I mean, it has a footprint on both because any decent theory is about the real world. I would say that there are- I know, but the theories of how the economy works really radically depart from how it works in practice. This has been consistently the case, which is why I think we constantly need to revise our frameworks. Okay. Okay.

I would say that the central critique we have of free market orthodoxy comes down to this. The first idea is that some industries are better than others, or to be more precise, some economic activities, because you can have different economic activities within a

a given industry, but for shorthand we say industries. Some are better than others in terms of their ability to generate high returns to both labor and capital. So your workers get a good salary and your capitalists get good profits.

As they say, it matters whether your people make computer chips or potato chips. This goes back to a quote made by Michael J. Boskin, one of George Bush's economic advisors, which he subsequently denied, in which he said, it doesn't matter whether Americans make potato chips or computer chips. They're all just chips. It's a great quote. He says he never said it. That's for the historians to settle. But

The essence of our view, and when I say our, it's me and my co-author, it's not the royal we. The essence of our view is first that some industries are better than others. They're better for your economic prosperity. They're also better for things like national security. I mean, you can't defend a country with

websites and leveraged buyouts and movies, you can only defend it with pieces of machinery almost always made out of aluminum or steel and generally packed with electronics and explosives. So leaving that aside for a minute, from a purely economic standpoint,

Some industries are better than others. Now, the second idea is markets are great and we are not socialists. We are both people with long careers in private sector business. We are not preaching some disguised version of warmed over Marxist central planning. I mean, God knows that's a terrible idea. But while markets are absolutely essential,

And there are plenty of things only they can do, things only they can do well. A laissez-faire approach by a nation towards its industries and its international trade is not automatically going to result in that nation getting

the best, the most advantageous mix of industries that it could hypothetically have had. If you adopt a laissez-faire policy, you'll get something, but you could do better. Now, the third proposition, which is kind of where the rubber meets the road, is that correctly designed and applied governmental interventions can improve

the quality of what industries a nation gets. And this is not primarily a proposition you vindicate with a theoretical argument. It's a proposition you vindicate with historical case studies, like all the East Asian countries have believed in and practiced very interventionist industrial policies since World War II. I mean, they pick it up at different points. I

Then comes Korea, Taiwan, and then China joins later after they repudiate communism. But they're all very aggressive about this and they're very open about this. They, unlike Americans, don't have these ideological qualms where you can't say you're doing industrial policy, where you have an academic...

ideological commitment to the idea that industrial policy doesn't work and can't work. Well, all these countries, which is no secret, they've been the big success story of the world economy for a couple of decades now, they're all very big on it. And even if you look at US history, before World War II, the United States did an extraordinary amount of industrial policy of its own

starting with the fact that the US was, for most of its history, a tariff-protected economy. This goes back to Alexander Hamilton, the guy on the $10 bill, the guy they just made a hipster musical about, which I really wish had said more about his industrial policy, because that's his great contribution in my eyes, but it didn't.

So the U.S. was a tariff-protected economy. Some people are squealing about Trump wants to take us back to the 19th century with his tariffs. I actually think he knows that, and he's very proud of it. And the truth is that back in the era when the U.S. was a tariff-protected economy, we did not end up as this corrupt, impoverished basket case that

mainstream laissez-faire thinking would tell you is necessarily the result of having a tariff-protected economy. We went from being a backwater on the fringes of civilization to being the most advanced and wealthy economy the world had ever seen. Now, that's impossible according to the standard theory. And when you dig into the question of industrial policy, you discover

that it shows up all over the world in different places, and it shows up in world history more than you would think. It really goes back to the Renaissance. Like if you look at the Italian city-states of the Renaissance, right? Venice, Florence, and so forth. How did they get so rich? Well, conventional history just tells you how rich they were. This just happened.

The reason it happened is that they were the first systematic mercantilist governments in the Western world. And there's an even older history, believe it or not, in the Far East in Japan, but I'm not a specialist in that history. And it's also discontinuous with the narrative of the events that reached the United States. But

The British Empire that the United States rebelled against was a mercantilist construct. And it was very successful until Americans realized that they were suddenly being asked to pay a much higher share of the tax burden for running it than we ever had been. And that led to the revolt in 1776 and so forth. So industrial policy is actually the historic norm

And mercantilism is really the way international economics naturally works. Mercantilism is simply the proactive economic rivalry of...

capitalist-oriented countries. And I don't mean capitalist in the sense of a purely free market, but I mean in the sense of the basic model of private property, profit motive, and more or less free market. That is to say, you're not socialists or some medieval feudalism or whatever, but rivalry is the natural state of national economies. And the idea that was taught to us in the 1990s

that there's a kind of automatic free market celestial harmony among the economic interests of all the countries in the world. Because if a free market is always good for everyone all the time, well, then everybody wants the same thing and there's nothing to fight over because you want the same outcome, i.e. a free market that I want. So what are we going to fight over economically? We might fight over purely political matters, but economically, there's supposed to be this harmony.

And this idea was the foundation of the hopelessly ineffectual and I think now dead, for all practical purposes, World Trade Organization. Because the idea of a, quote, rules-based system of international trade depends upon there being somebody to enforce the rules.

People just gloss over that like it's a detail. No, it's not a detail. As Thomas Hobbes said, covenants without the sword are but words. So how do you have a rules-based system when you don't have a world government? Well, the plan was that it would work something like

a game of stickball being played by a bunch of kids on a vacant lot somewhere. There's no umpire, but you have a reasonable degree of adherence to the rules because if you don't, then you can't have a game and everybody wants to play ball, right? So you got to have some degree of observance. If too many people cheat too much of the time, everybody else will just take their marbles and go home.

So the idea behind the WTO was that all the countries in the world would want the benefits of free trade and free markets so much that temptations to cheat, because it's not ever in your move to violate free markets, remember, and everybody's eventually going to figure that out. The temptations are going to cheat and they're going to be relatively small as a result, as I like to say,

The WTO figured it would be enough to have an umpire, but not a judge. The difference between an umpire and a judge is a judge can throw you in jail and an umpire can't, particularly when the umpire is picked from among the players to the game. This whole construct rests on the assumption that all free markets all the time is always good for everybody.

That's not the way the world actually works. The way the world actually works is a natural state of rivalry where, as I think people now increasingly realize, nations are often attempting to take advantage of one another. And depending on what country it is, what economic strategy they have,

They can be doing this only a very tiny amount of the time and generally be unthreatening to the United States, like our trade with the UK, for example. It's no accident they got the first trade agreement with the Trump administration. Or they can be systematically, cynically, and aggressively trying to take advantage of us all the time, like China. And on top of that, of course, China is a dangerous geopolitical

rival and also the global exponent of an authoritarian anti-democratic ideology that's a challenge to free societies everywhere. So the reason I asked you if your critique is of how we understand free markets in theory versus how they operate in practice is partly because of the observation you just made.

which is founded on an understanding of national interest and that in practice, nations cheat to get a competitive advantage and the state is instrumental in advancing those objectives.

But it seems to me that there is a deeper critique we can make. Because even if the global economy were organized under a single global government with a global bond market and a common monetary policy, and there were no national security concerns, and even if you waved away the distributional challenges and wealth disparities that arise from competitive free market economics, that there are winners and losers in other words, and that

the losers need to be afforded some kind of protections in order to maintain political stability in society, to say nothing about the moral arguments for doing so, that even then,

It seems there is a role for the state at the very least in enabling and amplifying the innovation cycle. Now, another guest that we've had on the podcast in the past is Bill Janeway, who wrote a book titled Doing Capitalism in the Innovation Economy. Oh, I know Bill. And so, well then, you know Bill has this concept of the three player game, which he used to characterize the complex, reciprocal interactions between the state, financial capitalism, and the market economy.

And the state has a critical role to play in this framework at the early stages of the innovation cycle, not only because of the capital that governments have at their disposal, but also because the risks at the scientific and technological frontier are often undefinable. And the state has a risk tolerance and an almost infinite time horizon over which it's willing to monetize those investments.

But also, and this is critical, the government stakeholders are the nation itself, which means that it has a vested interest in fostering open innovation so that everyone across the economy can benefit from especially general purpose technologies that have been at the heart of the productivity gains that have transformed society over the last two centuries. So it sounds to me like you would probably agree with that. And even if we took free market theory at its word,

and the world worked the way that the followers of Milton Friedman argue it would, if we only let the market do its thing, that this still would not be the optimal or ideal economic setup. Oh, you're absolutely correct. Bill Janeway is great. Among other things, he's one of very few economic theorists who actually has a very successful private sector career behind him. And the point that he's making is that

Innovation requires a long food chain or pipeline or whatever you want to call it, where you start with a basic scientific innovation and you end up with a product you can actually sell to a customer at a profit somewhere.

And the problem from the point of view of conventional laissez-faire thinking is that on a purely free market basis, you're only going to be able to successfully carry out those stages of the innovation pipeline that somebody can monetize, that you can do at a profit. And the problem is that many of the early stages...

There's no way to monetize the product. You have a scientific discovery and you can't make money by doing pure science. Everybody knows that. And then you have some scientific discovery that clearly has some possibly promising applications in some direction.

But you may not even know what the product is. You just want to say, okay, we've discovered some physical phenomenon. Now, can we manipulate it? The first step of making a product you can sell is just to find out if you can manipulate this phenomenon to get a thing that you couldn't make before.

And then you have to figure, okay, you could do that. Now, can you produce this in large quantities or is it doomed to remain a delicate, exotic hothouse flower of the lab? Well, you're getting closer to commercialization, but you're still not producing someone that you can sell to somebody and then get more money than it costs you to make the thing.

So there are many, many stages of innovation where you can't monetize what you're doing or to speak about it in a slightly more sophisticated way, where the risk of getting a result that you can monetize is just too high for the private sector to take on. If I were to go to a venture capitalist like Bill Janeway and say,

I've just discovered this fascinating phenomenon in the lab that tells me I might just possibly be able to make something that everybody knows would be great, but you can't have, like, say, a room temperature superconductor. I think I may have just discovered how to do that. And he's like, well, that's great, but are you sure? And I'm like, well, I've got all these lab results. I got this one molecule. It does this. It does that.

And I think maybe if I and some other smart people work on this for, I don't know, 20, 25 years, maybe around the year 2050,

They'll be able to put these in everybody's wallet and we'll all have gadgets that contain this stuff. And it's going to be great. Whoever owns it is going to make billions of dollars. And you know what? Even if that's true, and if you look at the histories of technologies looking backward, you can reconstruct plenty of cases from history where that would have been true.

A venture capitalist is not going to fund you for something that's going to pay off 25 years in the future, which is why historically many of the most important inventions, the early stages were created by government. For example, the internet, the basis of so many entrepreneurial fortunes, but the internet itself was not created in somebody's garage in Palo Alto,

To make millions. It was invented by government scientists to share data. Or give another example. Why does Disney World exist? Well, the reason Disney, I know it's a weird example, but stay with me.

Disney World exists because it's technologically and financially feasible to fly millions of people from all over the United States to this one resort in central Florida to have fun. Now, what has to be the case for this to happen, which wasn't the case as recently as, say, the mid-1950s, right?

Well, you need airplanes, and you need not only airplanes, you need very large passenger airplanes, and they need to be very cheap. Well, how do you get that? Well, to have a wide-bodied jet airliner, you need giant aluminum frame aircraft, of which the first was the B-29 that the US built during World War II to bomb Japan. And the other thing you need is you need high-bypass jet engines.

which are the high-performance, high-mileage jet engines that are powerful enough and have sufficiently good gas mileage that you can power giant aircraft and fly them around the country for cheap and charge fares that ordinary people can afford to go do this. Now, those jet engines were not invented by Walt Disney. They weren't even invented by United Airlines. They were invented for the U.S. Air Force.

to build aircraft sufficient to frighten Soviet communists from attacking us. A huge amount of this is military. Inventions come out of military origins because the military has a ton of money and they have a very high premium on performance, on having things the adversary doesn't have, on making sure that if the adversary does have something, we have something at least as good as that.

And the other thing the military can do is they don't just invent things. They can also stand up a complete

production process, a complete supply chain at scale to not just develop, say, the jet engine in a lab and make half a dozen of them, but to produce tens of thousands of them for fighter planes in Korea and B-52s and so on and so forth. So you have entire industries being created from the ground up on the back of military dollars.

So, actually, there's another book that I, after hearing your examples, there's another book that I want to recommend people read. And I also had its author on the show back in the day. The book was called Loon Shots, and the author was Safi Bakal. And one of the stories there that I think is instructive is the story of Vannevar Bush and the Office of Scientific Research and Development, OSRD.

where a lot of important inventions came out during the course of the war, one of which was microwave radar, which they figured out, "Oh, this will be really useful for helping us bomb submarines in the Atlantic," but whose underlying technology turned out to be useful in all sorts of commercial applications, including most famously for heating your food. I don't know that we actually defined industrial policy, did we?

Well, I would define industrial policy in terms of the three-part explanation I gave you at the beginning is industrial policy is actions of state

premised on these three ideas. Number one, it matters what industries you have. Number two, a laissez-faire policy won't give you the best assortment of industries. And number three, wisely chosen government interventions can improve the outcome that you get. These are the three pillars that you identify in the book. So let's go through each of these. What do they mean in practice? And how does each pillar, in your view, complement the others? Yeah.

Well, what I would say it means in practice is that the U.S., above all, needs to get its act together. Because right now, the United States actually has reasonably good industrial policy for national security purposes. There are problems, but it's reasonably okay. And we have reasonably good industrial policy for public health. That's the other thing that the government throws money at.

in very much a subsidized innovation, industrial policy sort of way. Long time ago, American Home Products, a big pharmaceutical manufacturer in New Jersey, was a business client of mine. And I went out there on the first day when I was working with them. They had this huge campus outside New York City. And a little cluster of people were being given a tour of the facilities. They give you a tour there when you go to work for them.

And the guy giving us a tour told me two things that stuck with me. The first one is, what is a medicine? A medicine is a small dose of a poison that just sends a shiver down your spine. But the other thing he said, he actually said this to me in private. He said, truth be told, we don't do any real research anymore. Nobody does. We all just have spies at the NIH.

National Institutes of Health. Now, I think it may have been exaggerating, and this is not to cast dispersions on that particular company, but the fact is the vast majority of genuinely new drugs of recent decades, they're not created by private firms, which figure out how to commercialize the actual branded drugs that they sell. But the underlying science to figure out that this substance will cure this disease or whatever is

It comes out of the National Institutes of Health. That's where the research is done. It's the best funded civilian research industry in the U.S. government. I mean, it has a budget of something like $35 billion a year.

So, public health and national security, we do. Now, newly with Joe Biden, we add a new category to this. And by the way, when I talk about Joe Biden, I am not... Some people think because I support tariffs, I am a Trump guy. I am not a Trump guy. I am a tariff guy. I also support what Joe Biden did in imposing a huge industrial policy for

green energy, that is to say for environmental protection, the Inflation Reduction Act with the huge amounts of money for not only technology research, but to subsidize purchases of electric cars and to help fund corporations setting up

production facilities in green energy technologies from solar cells to windmills to batteries and so forth. So the U.S. now has, I mean, Trump is trying to demolish that right now. We'll see how that goes. But as of this recording, the United States has

pretty good industrial policies in these three things. We have national defense, we have public health, and we have environmental protection. What we don't have

is industrial policy for the sake of prosperity as such. That is to say, we're going to do this simply because we think it's going to make us a richer country. Now, here's one example. The United States has nine out of the 10 leading academic programs in robotics in the world.

We do not have any of the 10 largest robot manufacturers. The one company which people cite as American is actually owned by a Japanese firm. So why is this? Well, if you look at the history, these foreign governments in China, Japan, Korea, Germany, they have been pushing very hard for a long time to develop industrial automation.

and other kinds of robotics. And we haven't. And this is now a big gap in what's obviously one of the leading industries of the future. And the United States is AWOL here. We shouldn't be. We should be putting money into industries like that. So are you saying that despite our success on the research side, that

the lack of an advanced manufacturing ecosystem has stunted the development of many of these breakthroughs because there hasn't been an industry in which to commercialize them and reap the benefits of further innovation? Oh, well, you're actually raising a whole other issue there, which is very important. What you've said is that one of the difficulties in commercializing robotics in the United States

is that you can't just create an industry in isolation. Industries don't exist in isolation. They depend on what has been called by professors Willie Shee and Gary Pisano at Harvard Business School,

the industrial commons. That is to say, they rely on all sorts of technologies and skill sets and products and access to the management of companies in supplier and consumer industries that they need to work closely with. So if you don't have that rich ecosystem of servo activators and vision sensing systems and all the other things you need

To build a robot, it gets harder to develop that in the US. Robotics is actually probably not an industry I would choose to cite as one that is specifically constrained by...

The lack of an ecosystem just because cutting edge robotics is so new. I mean, they're only just starting to have commercially available humanoid robots and the Boston Dynamics dog robot and so forth. Where I would say is a better example of the phenomenon that you talked about is actually flat panel displays.

You're watching me right now on the flat panel display of a laptop, I would guess, or desktop monitor. Those displays are not made for civilian purposes at scale in the U.S.,

And it's a huge industry. It's a high-tech industry. It's an advanced industry. It's not a cheap labor industry. It's a very advanced manufacturing industry. It's the kind of manufacturing industry that the United States should have and doesn't. When people like me talk about the United States not having as much manufacturing as it ought to have,

That doesn't mean that I think we're lacking the kind of garment sweatshops we had in 1900 and that Bangladesh has today. It means that all our flat panel displays are produced in places like Korea and Japan. Now, the question is, why doesn't the US manufacture flat panel displays? Well, a bunch of explanations, but one of the big ones is that when flat panel displays

started to become manufacturable, there was nobody in the US who had the skills to do it. And the reason for that is the flat panel display developed out of the liquid crystal display industry. There are obviously similarities. You're talking about a very intricate, thin film of electronic stuff on a screen. So the companies that dominated flat panel display

Despite the fact that the original technologies were American and some of the crucial underlying chemistry still comes from American companies, the large-scale manufacturing, the big value-added, the big profits, the big employment base, that went to countries where they had already had mass manufacturing of LCDs.

And that's where the industrial commons and industry ecosystems really helps or hurts you. And that's one of the problems with purely market-based thinking, because the purely market thinking is if something is a good industry to be in, it'll be profitable, and then American entrepreneurs or existing corporations will see this, and they'll enter that industry. Well,

There are barriers to that when you're talking about entrenched technological ecosystems and skill sets. And it turns out that there are some very lucrative industries you can't get into as an American because the prerequisites aren't there anymore.

So that's where you say there's an industrial policy interest in protecting the vitality of a comprehensive manufacturing ecosystem so that when technologies come along in the future that you can see are going to be very lucrative, that you have that option. Otherwise, you're just going to be watching other people do it.

So, I think that actually falls under the category of your first pillar, right? Which is retaining high value industries or advantageous industries. The third pillar was currency management. I'd like to understand your thinking here because when most people talk about foreign exchange rate management, what they really mean is devaluation, undervaluing your currency so that the export sector is more competitive. What do you mean when you talk about foreign exchange rate management and how would that apply to the United States?

Currency, superficially, a strong dollar sounds like a good thing. You know, a strong dollar for a strong America. Well, that's just a metaphor. In point of fact, the right way to think about the price of your currency is it's kind of like a person's blood pressure. You can get sick if you have blood pressure that's too high.

You can also get sick if your blood pressure is too low. People usually, you know, middle-aged adults usually worrying about high blood pressure, but you can also get sick from low blood pressure. So it's important to start by thinking about it as a parameter that needs to be optimized between not being too high or too low, not as something that, "Ooh, boy, the dollar is so strong. Isn't that wonderful?" Now, here's why that's important. If you have a dollar that's too strong,

Imports are going to be cheaper, so you get cheaper imports. Okay, that seems good. But there's a couple of problems with that. First thing is you lose export competitiveness. So every export-oriented business in the United States is going to be losing out when the dollar is too strong.

Other problems with an excessively strong dollar. Well, by driving up your imports, you're going to be losing jobs in the US in the short run, and you're going to be losing the profits from whoever would have been manufacturing things in the US. And in the longer run,

You're going to be losing industrial capacity, which is not just individual plants closing down, but it's the unraveling of supporting supply chains. It's the retirement and non-replacement of people with critical skill sets. And the third thing that happens when you have an excessively strong currency over a long period of time and you run a trade deficit is you're

A trade deficit means we import more than we export. So we're taking more from the world than we give back to it. And unless we're trading with Santa Claus, you can't get something for nothing. So the question is, what are we really giving? It's kind of hidden. But what we're really giving foreigners is American financial assets. That is to say,

We're selling off T-bills, shares in Google, parts of a shopping center in San Diego, or some American is undertaking bank debt to some foreigner. And that, by definition, makes this a poorer country because we own less and we owe more. Now, these are all consequences of having an excessively strong currency, which is why

You want an optimal currency. You want it strong enough to get cheap imports, but you don't want it so strong that you kill your exporters, you kill your domestic production, you run down your industrial base and deteriorate your net worth as a country. So some of those cheap imports are also inputs into the manufacturing process. And furthermore,

labor share of a firm's cost structure is less today than it was 50 years ago. And so, how do we assess the marginal dollar value of a weaker currency in the face of both labor's diminishing role and the subsidized cost of inputs that you get with a stronger currency? Okay. And I ask this because to me it isn't so obvious.

Because it might've been more obvious in 1940 when we were preparing to fight a war against the Germans or maybe in the 1970s. But it's certainly the dynamics aren't identical today. And so my question is, do those same dynamics and our same understanding of how a lower value currency makes you competitive, is that still true today in the way that it was or meaningfully so?

Yeah. I mean, things get a bit more complicated, but a lot of those complexities can be unraveled. For example, when you talk about having a weaker currency raising the price of certain products in the U.S.,

That's the whole point. That's how the thing works. Now, in terms of- No, but I mean inputs in the manufacturing process. So let's say commodities that you need or battery inputs that you need in order to build an electric car. There are all sorts of inputs that cost more when your currency becomes weaker. Sure. Whenever you have a weaker currency, you're

going to raise the price of the final product, you're going to favor domestic production. That's what's supposed to happen. That's understood. That's what happens. I'm not saying that a lower currency comes without cost. I'm just saying that there's a reason why we incur those costs. Now, the interesting thing you have raised is if some company needs to import aluminum into the United States to make something and then export it again,

where, and this is something people have been complaining about with the Trump tariffs, where a tariff or a lower currency affects your export competitiveness. Now, in the case of export competitiveness, that effect is wiped out because as the currency goes down, anything priced in dollars becomes cheaper, so it doesn't affect it. But in the case of tariffs, since we seem to have gotten onto the subject,

The answer here is that you should be rebating the tariffs on inputs to a product when that product is exported. Now, they're not doing that. That's something they should be doing. That's a legitimate criticism of the Trump tariffs. If you did that, then import tariffs would not harm your export competitiveness indirectly.

But again, maybe I'm sort of not thinking about this correctly, but to me it just seems at least theoretically that the more capital intensive your industry, the more value accrues from having an overvalued currency than is otherwise the case. In other words, the real benefit historically, again, please correct me if I'm wrong here,

But the real benefit historically has been not just, let's say, commodity inputs or other inputs that are produced domestically, but also the cost of labor used to be very high in the industrial process. And so having an undervalued currency meant that you had cheaper labor, which was a big input cost.

And so, are there parts of the manufacturing chain, the more advanced parts, that actually may benefit from a slightly overvalued currency? Could that be the case if you have the right policy to accompany it? Because it seems that the US is in a position to take advantage of the overvaluation of the currency in order to right the ship, as opposed to simply... Because some will argue that we need to devalue.

And that seems to me to be problematic as a first course of action, because we have a structural trade imbalance built up over many decades. And if we were to devalue, that would seem to make the problem of re-industrializing even harder. I'm afraid I don't really understand what your argument is here. So let me unpack this a little. Perhaps you can identify exactly what I'm saying that you have an objection to.

I may or may not. I'm actually just trying to understand it, but yeah, go ahead. The idea is that an overvalued currency basically gets you the short-term sugar rush of cheaper consumption of imported goods, but there's no something for nothing in this world. And we pay a price for that in the form of loss of jobs, loss of domestic profits, loss

loss of industrial capacity, and increasing indebtedness to foreign nations. And when you recognize that these costs are not abstractions, but they're real, you realize that you have to consider these costs when asking yourself just how strong do you want the dollar to be? Now, my claim is that the right price for the dollar

is that price, which on a continuing basis gives you more or less balanced trade. US right now is $700 billion a year out of balance. We're a trillion dollars out of a year out of balance in goods, and it's partly compensated by the surplus in services. So you want to zero that out or get close to zeroing that out.

And there are limits to how much you can do this just by applying tariffs, which is what the Trump administration right now is doing. Some of their people, including the president, have made friendly comments about wanting to bring the dollar down to a competitive price. I mean,

Stephen Moran at the Council of Economic Advisers has written about this. Scott Besant is documented as supporting this on some level, as is Howard Lutnick, Secretary of Commerce. So who knows? Maybe they'll get to this at some point. But right now, they've only been doing tariffs. And there are reasons why you can't get to balanced trade using tariffs alone.

The first problem is that tariffs do absolutely nothing for your export competitiveness. They only apply on the import side. The other reason is that when you apply a tariff, and I'm going to simplify the math here a little, but this is sound, and this is actually a point of agreement in large part, though not entirely with my opponents.

If you apply a tariff and you reduce imports, well, what that means is that the US is demanding less foreign currency to buy imports. So you have less dollars being sold into the market. You have less downward pressure on the dollar, which means that the very act of applying tariffs will tend to push your currency up. Now, my opponents will tell you

on the basis of a theory called Lerner equivalence, named after an economist at Columbia University, Abba Lerner, that it's going to be a one-for-one relationship. So they will tell you that tariffs cannot even affect your trade balance. The problem I have with that is the same theories that tell you this are also the theories that tell you that free trade is always right and that trade deficits are

shouldn't happen in the first place. So I don't believe it's a one-for-one offset. I don't believe that is, that tariffs are entirely useless for applying negative pressure to the trade deficit. I do very much believe that you can't solve the entire problem with either tariffs or the other thing that Trump is obviously trying to do

is use the threat of tariffs to get other countries to open their markets to us and supposedly get more exports from the United States. That's not wrong, but I don't believe, for reasons that are too complicated to get into here, I don't believe you can solve the whole problem with tariffs. You're going to have to do something about the currency. I mean, right now, the dollar is being estimated at maybe 15%, 16%.

Overvalued, I'm going from the currency misalignment monitor on the website of the Coalition for a Prosperous America, which by the way, I'm on the advisory board of. Let's say the dollar is 15% overvalued. Well, what does that mean with a 10% universal tariff?

Well, it means you don't have a net effect of a 10% universal tariff. You have a negative five tariff. So right now, everything that Trump is trying to do with tariffs is being undermined by the administration's failure to do anything about the dollar.

So, because I actually want to get to the international case studies that you have in the book, which are very interesting and informative and useful also for digging into some of the assumptions of the book, as well as some of the historical case studies.

And we're going to talk about those in the second hour. But just one last question, and I'm going to try to rephrase the previous question I had about the dollar. Let's just say in theory, or for argument's sake, that the White House decided that AI is going to be the, or one of the critical technologies that will determine US strategic and economic competitiveness.

over the next few decades, and that the primary vector along which advancements in AI will depend is computing power to train the models. And that the ultimate bottleneck of compute is the ability to supply power to the data centers.

Wouldn't it make sense for your industrial policy to focus on helping accelerate the build out of this capacity first, even if it relied on foreign manufactured goods, rather than worrying about how to reduce the costs of exports that you don't have the capacity to produce yet, given that all sorts of components necessary for expanding and servicing the national grid

like extra large power transformers that take upwards of two years to make and deliver, are produced entirely or almost entirely outside the United States. In other words, the US has spent the last 40 or 50 years, whatever it is, de-industrializing. It's not like we've got the factories to just switch production back on. And that's what I don't quite get about the devaluation argument. It seems...

to put the cart before the horse by presuming the persistence of an antiquated economic dynamic that no longer holds, which is to say that we have a preexisting industry to manufacture these goods and all we need to do is lower our costs in order to expand our market share. And that doesn't seem to make sense to me.

Well, you're talking about the short-term response, which is absolutely true, but this is a long game. And part of what got us into the mess we're in is that we've been jumping at short-term gratification and short-term policy fixes. Yes, you're absolutely correct. Devaluing the

dollar is not overnight going to restore the productive capacities of the United States. And you also don't want to devalue the dollar overnight because that would apply an inflationary shock. I wrote in the book that you probably want to bring it down over a period of five years, which would spread out the- But wouldn't markets run ahead of you? I'm sure they would, but you can manage that. You can manage expectations if you

For example, the preferred solution we actually put in the book, not because this is the only solution, but because we owe people an explanation of, okay, concretely, how would you implement all this? The preferred solution we put in the book is you make balanced trade an additional cost

part of the Fed's current triple mandate, which is for full employment, price stability, and moderate long-term interest rates. You add balanced trade, and you put the Federal Reserve in charge of managing a small and variable tax on flows of incoming capital into the United States, which is what I believe is causing dollar to be so overvalued.

If you do that, then over, say, five years, you announce this ahead to the market that we're going to bring the dollar down over five years. The market listens to pronouncements by the Fed and the Treasury. And after they manage this so-called market access charge, which was

proposed in a bill in the Senate in 2019, it's called Baldwin-Hawley, Tammy Baldwin and Josh Hawley. It's a bipartisan thing. If you announce to the markets that you're going to spend five years working your way into a target of zero trade deficit, the markets will take that seriously if your actions over the first few months and going forward

back it up. And so, yeah, currency markets, they overreact. They're kind of elastic. They go too far. But it really doesn't matter if the markets get a bit ahead of this, because if they get too far ahead of it, speculators will push it back. So

I don't think this is a particularly fraught part of the needed policy package. There are much bigger issues people are going to fight about with this thing. So, as I mentioned, I want to move us to the second hour and discuss some of these case studies. There are actually eight different country case studies in the book. One is unsurprisingly Japan. Another is South Korea.

China, Germany, France, Britain, India, and Argentina. Some of these are examples of what can be done right. Some are the examples of bad outcomes and what can go catastrophically wrong in industrial policy. Others like France are kind of somewhere in the middle.

So, I want to explore some of those. I also want to explore some of the historical case studies in the book. You go through five different years of industrialization. One of them is the period from 1750 to 1865. Another is 1866 to 1939. Another is 1940 to 1973. Another is 1974 to 2007. And the last one is 2008 to the present. And then I want to ask you about policy recommendations and practical next steps, especially in the face of current fiscal realities and the political

disunity that has overtaken the country. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Ian, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers.

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