Whatever happened to the need for a small government to leave the high and mighty free market alone that supposedly won the last Cold War for the West?

Meanwhile, the alarmingly unbalanced economy of China has been trying – with only limited success – to switch from state-directed intensive capital investment that delivers increasingly diminishing returns to an economy driven by domestic consumption not entirely unlike the American model.

The new US industrial policy

Unless you are “wonkish” about US government policies and those of the International Monetary Fund and the World Bank, it may be very confusing.

Well, there was the old “Washington consensus” that was pretty much killed off by the last global financial crisis, triggered by the collapse of the US real estate market and amplified by subprime mortgage derivatives, among other financial derivative tools.

It turns out the old consensus was pretty destructive after all. So, according to Sullivan, neoliberal economics, the free market, deregulation and financial (deindustrialised) capitalism are out the window.

The Reaganite revolution is dead. Small government is out. Big government is back. But didn’t the last Washington consensus win the Cold War for the US, which then tried to shove it down someone’s throat, especially during the 1997-98 Asian financial crisis? Poor Indonesia and South Korea!

Well, that was the old American “leadership”. The new or rather “renewed American economic leadership” now means doing the complete opposite, and then shove it down everyone’s throat. America, you see, must always lead, no matter the party line of the moment.

Let’s consider Sullivan’s actual words at some length.

He said: “America’s industrial base had been hollowed out. The vision of public investment that had energised the American project in the post-war years – and indeed for much of our history – had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatisation over public action, and trade liberalisation as an end in itself.

“There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently – no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.”

Of course, the rest of the world knew that for a long time. Still, it’s nice to hear it from a top US official.

Sullivan continues: “[In] the name of oversimplified market efficiency, entire supply chains of strategic goods – along with the industries and jobs that made them – moved overseas. And the postulate that deep trade liberalisation would help America export goods, not jobs and capacity, was a promise made but not kept.”

If you know a bit about recent US economic history, the Reaganites and then the Democrats under Bill Clinton killed off the domestic labour movement – just like Margaret Thatcher and Tony Blair did in Britain – to spread the gospel of global trade liberalisation.

It took, Sullivan said, “the shocks of a global financial crisis and a global pandemic [to lay] bare the limits of these prevailing assumptions”.

Well, for diehard American free marketeers, yes. For the rest of the world, many knew it from the start.

“Another embedded assumption was that the type of growth did not matter. All growth was good growth,” Sullivan added. “So, various reforms combined and came together to privilege some sectors of the economy, like finance, while other essential sectors, like semiconductors and infrastructure, atrophied. Our industrial capacity – which is crucial to any country’s ability to continue to innovate – took a real hit.”

American manufacturing communities were hollowed out, he now admits, and that effectively decimated the middle class.

“Key among these drivers [of economic inequality] are decades of trickle-down economic policies – policies like regressive tax cuts, deep cuts to public investment, unchecked corporate concentration, and active measures to undermine the labour movement that initially built the American middle class.”

Now that Sullivan has confessed his “come to Jesus moment”, what should America do about it?

“The first step is laying a new foundation at home – with a modern American industrial strategy,” he declared.

“A modern American industrial strategy identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions.

“It deploys targeted public investments in these areas that unlock the power and ingenuity of private markets, capitalism, and competition to lay a foundation for long-term growth. It helps enable American business to do what American business does best – innovate, scale, and compete.”

It seems like only yesterday that Milton Friedman and his legions of fans in Washington were telling other countries that industrial policy and identifying national champions and strategic industries were a fool’s errand and the very definition of wastage and inefficiency. The free market knew all.

Having danced around the bush during much of his speech, Sullivan finally said the once-cursed term in Washington: “In fact, even as the term ‘industrial policy’ went out of fashion, in some form it remained quietly at work for America – from DARPA [the advanced weapons research unit of the Pentagon] and the internet to Nasa and commercial satellites.”

Well, not so quietly in post-war Japan, South Korea, all the East Asian Tiger economies, Vietnam and of course, China. But those Asian economies adopted industrial policy to make the leap to industrialised or developed status. Here, you have the world’s most advanced economy adopting the same type of policy to start a new cold war against a near peer!

Sadly for the US, the damage and destruction inflicted on the US economy and society by neoliberal-deregulation economics were, on the other side of the coin, gains and advantages for the rising China. Global trade, it turns out, really can be an (almost) zero-sum game within a geopolitical context.

America let the genie out of the bottle. It knows it can’t put it back, but that won’t stop it from trying.

So, Sullivan now declares that it’s imperative for the US to pursue industrial policy, the better to beat China; and to lead the world, again, of course.

“Now building our domestic capacity is the starting point,” he explains.

“But the effort extends beyond our borders. And this brings me to the second step in our strategy: working with our partners to ensure they are building capacity, resilience, and inclusiveness, too.

“Our message to them has been consistent: We will unapologetically pursue our industrial strategy at home – but we are unambiguously committed to not leaving our friends behind. We want them to join us. In fact, we need them to join us.”

What if they don’t want to join, such as cutting the sale of advanced semiconductors to the lucrative Chinese market?

His reply was: “We’ve implemented carefully tailored restrictions on the most advanced semiconductor technology exports to China. Those restrictions are premised on straightforward national security concerns. Key allies and partners have followed suit, consistent with their own security concerns.”

Followed suit? Translation: “You’d better do as we say or else … You have a nice semiconductor business going here. Shame to let anything happen to it.” Sorry, I am paraphrasing The Godfather movie, not Sullivan.

Sullivan, of course, blasted China for its industrial policy: “China continued to subsidise at a massive scale both traditional industrial sectors, like steel, as well as key industries of the future, like clean energy, digital infrastructure, and advanced biotechnologies.

“America didn’t just lose manufacturing – we eroded our competitiveness in critical technologies that would define the future. Economic integration didn’t stop China from expanding its military ambitions in the region, or stop Russia from invading its democratic neighbours.”

America must fight back – by doubling down on industrial policy, forcing its allies to follow suit and showing those Chinese how it’s done. Got it?