State Capitalism

The Credit Strategist - July 2023

In April, National Security Advisor Jake Sullivan told an audience at the Brookings Institution about the Biden Administration’s industrial strategy: 

“America needs a deliberate, hands-on investment strategy to pull forward innovation, drive down costs, and create good jobs.  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.”

Mr. Sullivan went on in to cite the “massive” subsidies that China has made in “key industries of the future, like clean energy, digital infrastructure, and advanced biotechnologies.”  I wasn’t in attendance so I don’t know if he mentioned the enormous efforts China has made to steal Western technologies, but you get the picture.  The NSA chief argued that America needs to follow China’s path of state capitalism (or state whatever-you-want-to-call-it) which is, as The Wall Street Journal’s Daniel Henninger argued in a compelling column on June 16, 2023 (“Biden’s March to State Capitalism”), “a system that deploys the state’s authority and money to force acquiescence to its version of social organization.” 

The Biden administration’s attempts to create incentives for industries like semiconductors and electric vehicles may be well-intentioned but they come with progressive policy chains wrapped around their beneficiaries’ necks.  Offering tax and other subsidies, they require recipients of government largesse to fulfill progressive policy prescriptions that increase costs and water down the value of the incentives.    The increasing intervention of government into American business is moving our version of capitalism further away from a free market model and closer to the state-run models that invariably end up in failure.

            Mr. Henninger also discussed in his column the pending merger of the Professional Golf Association (PGA) with LIV Golf, which raises a variety of business and geopolitical questions.  Naturally the Justice Department couldn’t stop itself from initiating an investigation of the merger after politicians expressed their outrage at Saudi money effectively taking over their beloved game of golf.  This would be the first time that professional athletes become employees of a foreign government as Mr. Henninger points out (he also points out, less convincingly perhaps, that American auto workers are becoming government employees because of the green subsidies driving these businesses today).  But the point is well taken – when government becomes the primary source of capital for a business, employees are no longer operating independently of government control.  That is painfully obvious for professional golfers now facing the prospect of going to work for the Saudi sovereign wealth fund and less obvious for industrial workers employed by companies supported by massive government subsidies (like Tesla, Inc. (TSLA) for example and increasingly its competitors).  Foreign semiconductor companies facing the imposition of progressive labor and other laws in exchange for subsidies to build plans in the United States are facing similar realities and voicing their concerns.  As the governing economic model veers further away from free market capitalism, these tensions will only increase.  It is perfectly sensible for America to try to draw more manufacturing to its shores, especially manufacturing of strategic goods.  But the Biden administration is overplaying its hand by pairing the incentives it offers with progressive wish-lists that render those incentives less attractive.

            The ship of truly free market capitalism in America sailed long ago.  In an economy dominated by an activist Federal Reserve that massively distorts the price of money, it is preposterous to contend that we have a free market economy.  The government picks winners and losers every day based on politics.  Through the work of the Fed, the government is intensely involved in every aspect of the economy even before considering all of the increasingly intrusive work of the administrative and regulatory state.  Government intervention reduces productivity and erodes prosperity and liberty.