The US Desperately Needs A Political Brain Transplant

Authored by Mike Shedlock via MishTalk.com,

Euointelligence has an interesting take on why Biden Inflation Reduction Act will fail in its goal to re-industrialize the US.

Don’t Re-Industrialize. Forge Alliances.

Please consider Don’t Re-Industrialize. Forge Alliances, emphasis mine.

There is an old saying in the world of manufacturing: once an industry leaves, it won’t come back. It’s the Humpty Dumpty of economics. This is why the Germans, who know a thing or two about industry, have been fighting deindustrialization so hard. The US and the UK gave up on industry decades ago, but the Biden administration wants it to return. The instrument of choice is last year’s Inflation Reduction Act, with its $370bn program of green subsidies. I fear the US underestimates the scale of the task.

The intellectual force behind that strategy is Jake Sullivan, Joe Biden’s national security adviser. It is a sign of the times that foreign policy dictates the most important strategic economic policy shift in decades. Sullivan has cited the hollowing out of the US’s industrial base as one of the reasons behind the strategy. The other, of course, is China.

The White House says the goal of the Inflation Reduction Act is to make “the nation more resilient to growing threats… and driving critical economic investments to historically underserved communities”. This describes the mélange of foreign and domestic policy goals quite well. It is rare in politics that one policy instrument achieves two policy goals. More often than not, it achieves neither.

The scale of the problem is illustrated by the diminished role of industry. In the UK and the US, industry accounts for 17-18 per cent of the value added in the economy, according to the World Bank. In Germany and Japan, it is 27-29 per cent. In China it is almost 40 per cent.

It takes years for an industrial company to build a production line and supply chains. This is why China is so good at it. Industry time-horizons correspond more closely to five-year plans than quarterly profit targets. Herein lies the first obstacle. The term of a US president, and their national security adviser, is short. Would an industrial firm be so reckless as to place a strategic bet on Donald Trump not getting back into office? Or that, if he did, he would continue Biden’s industrial policies? Or that even a future Democratic administration would?

Sullivan is, of course, right in his diagnosis: the US industrial base has been hollowed out. Re-industrialization may be a laudable goal, but Sullivan’s strategy would require a political brain transplant. It would be a very long-term program. The way to start would be to build a bipartisan consensus. A subsidy program is not enough. And it should not be the start.

I also fail to see how the US will achieve the second stated goal of the Inflation Reduction Act – to become more resilient and independent from China. China’s near monopoly in some rare earths and other raw materials remains. All the new US investment will do is reshuffle the higher nodes or points in the supply chains.

A smarter policy response for the US would be to build strategic supply-chain and industrial partnerships in Africa and Latin America. This is what China has done, for example by taking a strategic stake in a Chilean lithium mine. Chile is the world’s second largest producer of lithium – a critical raw material in the production of electric batteries. China is also now Chile’s largest trading partner. As the US lost interest in Latin America, Chile has become increasingly dependent on China. 

China is also diplomatically more active in Africa than the Europeans and the Americans. In building new strategic relationships for the benefit of Western economies, this is where I would start.

What Sullivan’s comments tell me is that the US has lost more than just industry. It has lost its instinct for understanding what industry is all about.

Trade Wars Fail

Trump failed with Tariffs. Biden will fail with subsidies. Both are trade war tactics. 

Biden may have better near-term results, but what will the next administration do? And the EU is hopping mad over Biden’s subsidies that are illegal under WTO.

There is little long-term strategic thinking in the US with corporations looking only at beating the street on the next quarter, and politicians looking no further than the next election. 

And whereas Biden weaponized the dollar, the rest of the world, including the EU, is not only resentful, but looking for ways of avoiding the long arm of US sanctions and mandates. 

Dollar Weaponization In the Spotlight Again

President Biden and the Fed crossed a line with dollar weaponization.

For discussion, please see Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US

Also see Central Banks Are Buying Gold at Record Pace, What Does That Mean for Inflation?

Let’s return to a point that Eurointelligence made. “It is rare in politics that one policy instrument achieves two policy goals. More often than not, it achieves neither.”

The Inflation Reduction Act is unlikely to make “the nation more resilient to growing threats” or “drive critical economic investments to historically underserved communities”.

The IRA certainly failed to reduce inflation. If anything, it will increase inflation.

Expect three policy failures because what we really need is a “political brain transplant.”

Although the above is true, despite China’ ability to think long term. it still has not solved its dependence on massive property bubbles.

There is a common denominator to all of these global woes: The fundamental problem everywhere is an unsound currency system that promotes bubbles as a means of growth. 

For discussion, please see What’s the Fundamental Problem in China, the US, and the EU?

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