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Biden is reviving a lost Democratic industrial policy playbook

Biden is deploying ideas developed to compete with Japan in the 1980s to stay ahead of China in 2022

Surrounded by House Democrats, House Speaker Nancy Pelosi (D-Calif.) poses for a photo after signing the CHIPS For America Act, outside the U.S. Capitol on July 29. (Drew Angerer/Getty Images)
7 min

President Biden recently signed into law two major pieces of legislation that represent a revival of industrial policy: the Inflation Reduction Act (IRA) and the Chips and Science Act. Alongside the goal of revitalizing the domestic economy, this new industrial policy is the economic centerpiece of American efforts to “counter” China as part of a “new Cold War.”

The revival of industrial policy harks back not so much to the Cold War itself, however, but rather to a particular episode of the Cold War era: American fears of Japanese economic competition between the mid-1970s to the early 1990s. In a recent, highly perceptive Financial Times column, Leo Lewis commented that the new mantra of industrial strategy suggests U.S. trade and economic policy might be undergoing “Japanification.” Recalling the “Japan panic” that began in the 1970s, Lewis contended that American policymakers are flirting with industrial policy in a manner unthinkable in the earlier era.

This is not entirely correct. Revisiting the “Japan panic” of decades ago reveals that today’s new American industrial policy actually represents the realization of an agenda for strategic, national economic planning that was created in the 1980s by the original “neoliberals” in the Democratic Party. These “neoliberals” (also known, later, as “New Democrats”) sought to craft an agenda that would meet the profound challenges of industrial decline and foreign economic competition, respond to the electoral success of the “Reagan Revolution,” and rhetorically distance themselves from “old” Democrats associated with the New Deal.

By the mid- to late 1970s, after stagflation — high inflation despite a stagnant economy — and military defeat in Vietnam, American politicians began to harbor deep fears of being overtaken economically, and even subverted politically, by Japan. Xenophobia combined with national uncertainty and economic anxiety to produce what historian M.J. Heale has called “Yellow Peril politics.”

While its prominence fluctuated, this politics of xenophobia remained firmly entrenched in the United States well into the early 1990s. Americans’ fears coalesced around Japan’s success in developing, manufacturing and exporting both traditional industrial products, such as cars, and high-tech goods from consumer electronics to semiconductor chips. “Pearl Harbor didn’t work out,” joked business executive Joseph Takagi in the iconic Christmas movie “Die Hard” (1988), “so we got you with tape decks!”

Scholars, journalists and politicians took Japan’s economic growth seriously, though. Political scientist Chalmers Johnson’s enormously influential “MITI and the Japanese Miracle” (1982) explained that the foundation of Japan’s miraculous economic growth was its Ministry of International Trade and Industry (MITI), a government department with wide-ranging planning capabilities. He saw Japan’s postwar growth as the product of long-term industrial policy. Although Johnson himself was not a xenophobic alarmist, his analysis was adopted by Japan-watchers who feared that “shadowy Japanese bureaucrats” threatened the United States.

And yet, a particular group of Democrats drew different conclusions from those of hostile Japan-watchers. In 1981, a number of fresh-thinking House Democrats formed the Committee on Party Effectiveness (CPE). These were some of the “Atari Democrats”: young, highly credentialed politicos enamored with the high-tech economy of the future. Joined by Atari Democratic senators such as Gary Hart and Paul Tsongas, academics such as Lester C. Thurow and Robert Reich and journalists at magazines like Washington Monthly, they were dubbed “the neoliberal club.” This was a reference to the manifesto of Washington Monthly editor Charles Peters, who had used the term “neoliberal” to describe how these Democrats wanted to find new ways to pursue old liberal goals of “community, democracy, and prosperity.”

In advance of the 1982 midterm elections, the CPE published a manifesto, “Rebuilding the Road to Opportunity.” This was the first fully formed articulation of neoliberal Democrats’ proposals in response to Reaganite, free-market revivalist ascendancy.

However, their proposals were not a simple “turn to the market.” Instead, these neoliberals proposed an ambitious framework for industrial policy and long-range economic planning explicitly modeled after Japan. Or, perhaps one ought to say, after the interpretation of Japan’s model articulated by Chalmers Johnson and adopted by neoliberal writers such as Thurow, Reich and James M. Fallows. Rather than repeating xenophobic jeremiads against Japan, the neoliberals urged the United States to emulate it by crafting a high-tech-oriented industrial policy.

The CPE proposed a “broad-based investment program” to develop “new technologies” and subsidize or incentivize private-sector acquisition of new manufacturing plants and equipment for what the CPE’s adviser Thurow termed “sunrise industries.” The CPE’s economic policy chair, Rep. Tim Wirth (D-Colo.), advocated for the federal government to commit investment equal to 3 percent of annual GDP into research and development of technological innovations for industries such as computing and biotechnology. Wirth echoed a 1982 Harvard Business Review article by Reich that unfavorably compared federal investment in semiconductor chip manufacturing ($55 million per year in defense-related funds) with the comparable government investment in Japan ($650 million per year in direct subsidies and research funding).

The CPE’s core proposal was an entirely new federal agency with interdepartmental reach: the Economic Cooperation Council (ECC). This would be composed of representatives from government, business, labor and research universities, with a fully staffed data analytics bureau. The CPE consistently pointed to Japan as the United States’ great competitor, arguing that it had achieved its success because it had “undertaken a national effort to formulate an economic strategy and marshal public and private resources.”

The founding New Democrats believed that the key to America’s long-term prosperity was a dynamic, innovative private sector. But they were unequivocal that enabling this to emerge and flourish required not just support from government but proactive, even direction-setting, government input.

In short, these New Democrats believed that America had to learn from and emulate Japan. And this stood in contrast to conservative ideas about the inefficacy of economic planning, or what they considered “the myth of the free market.”

Such ideas became more central to the Democratic Party as neoliberals themselves became more embedded in party structures and leadership. A congressional report released to frame the 1986 midterm elections, “Choices for Change,” called for establishing a Council on Industrial Competitiveness with essentially the same blueprint as the ECC. In 1988, the House caucus’s economy task force revived calls for “national strategic planning” around future-growth industries.

Nonetheless, the ambition and innovation of New Democrats’ proposals depreciated in the context of the party’s 1980s electoral misfortunes and a resurgence of xenophobia. Some charter members of the “neoliberal club” disentangled themselves from their embrace of “Japan Inc.,” sounding notes from the “Yellow Peril politics” hymnal. During his unsuccessful 1988 presidential primary bid, Richard A. Gephardt, who was one of the CPE’s co-founders, aired TV ads castigating East Asian auto companies. In his book “More Like Us” (1989), Fallows posited economic individualism and creative destruction as uniquely American characteristics irreconcilable with Japan-style planning. Incidentally, the book’s gnomic subtitle was “Making America Great Again.”

Therefore, by the time Bill Clinton won back the White House for the party in 1992, New Democrats’ proposals for a Japanese-inspired industrial policy were fading into oblivion. Overall U.S. interest in the Japanese economy also declined in the context of the start of Japan’s “Lost Decades.”

Today’s revival of industrial policy, under a president once closely aligned with the CPE’s network, represents the rebirth of foundational neoliberal plans for long-term, strategic economic planning. While the end of the Cold War eroded the political connection between global economic competition and national interest, Democratic leaders are now reviving industrial policy in the context of a new global rivalry.

Even as he continues to promise a renewal of ameliorative social policy in the tradition of the New Deal or the Great Society, President Biden’s economic development agenda represents the fruition of his fellow New Democrats’ original agenda — one that never came to fruition in its moment. The Biden administration has rediscovered a dynamic, faciliatory yet interventionist role for government at an unsettled time when America could be most in need of strategic economic policymaking.