Mobilizing for Techno-Economic War, Part 8: Establishing Policy and Programmatic Capabilities

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The federal government lacks adequate capabilities to conduct needed techno-economic- industrial analysis, as well as formulate and manage in an enterprise-wide way effective industrial and competitiveness strategies, policies, and programs. Policymakers must address this gap to avoid losing to China.

KEY TAKEAWAYS

Key Takeaways

Contents

Key Takeaways 1

Introduction. 2

Overview. 3

U.S. Governmental Organization: 1900-Present 7

Limitations of the Current System. 9

Inadequate Data and Statistics 9

Inadequate Assessment of China's National Techno-Economic Power Efforts 10

Inadequate Analytical and Policy Generation Capabilities 10

Inadequate Industry and Other Expert Involvement 14

Federal Data, Analysis, and Organization for a National Economic Power Industry Policy 14

Better Data. 18

Industry Analysis 19

Congress and the White House. 21

Conclusion. 23

Endnotes 25

Introduction

The United States has been the world's dominant techno-economic power for over 125 years. That has induced complacency. As the Information Technology and Innovation Foundation (ITIF) has written, China is hungry and determined not only to displace American techno-economic leadership, but to also make America dependent on China.[1]

On its current trajectory, it is likely that China will in the next decade or two amass significantly greater capabilities than the United States and even Allies will in what we term "national economic power": advanced traded-sector industries that are critical to national security or sovereignty. With those greater capabilities will come geostrategic hegemony over the West, unless the United States forestalls that outcome by adopting a new, transformative national power industry strategy that goes beyond a mere competitiveness or national innovation strategy. This is not a war that the United States and allies can win in the sense of significantly weakening or retarding the growth of China's own national power industries. The only way Chinese attacks will end is if China becomes a free, democratic country, which is unlikely to happen anytime soon. But the United States and allies can avoid defeat-keeping their national power industries relatively strong-by working together and adopting national power industry strategies. Both free-market doctrine and anticorporate, anti-tech progressivism are inadequate, if not outright harmful.

However, the inherent weaknesses of the U.S. innovation and production system (e.g., cuts in government research and development [R&D], limited STEM [science, technology, engineering, and math] skills, an overly strong dollar, a tax system poorly designed to spur investment, institutional resistance to change, and corporate short-termism, etc.), coupled with a Chinese Communist Party (CCP) hyper-focused on victory, suggests that, absent major structural change in U.S. policy, relative decline and loss of techno-economic competitive position and power is inevitable.

The first report in this series addressing the China national techno-economic power industry challenge laid out the context for this, including what is at risk and the need for radically new approaches in a host of key policy areas.[2] Not small steps, but big ones. Not tinkering, but transformation. "Bold" is the operative term. The crisis is at such a point that incrementalism will fail. Other reports have focused on transforming from financial capitalism to national techno-economic capitalism, restructuring U.S. education and workforce and science and technology systems respectively, moving from free trade agreements to strategic techno-economic-trade partnerships, and reshaping the U.S. business regulatory system.

This report lays out a reform and restructuring agenda for how the U.S. government should be organized so it can effectively analyze and operationalize a national economic power industry strategy. The most important aspect of this is to recognize that the American system of government that prioritizes process needs to be modified to a more teleological one that puts goal achievement first: in this case, not losing the techno-economic war to China.

Overview

The United States lacks a "developmental state" with the analytical, organizational, or implementation capabilities to craft and carry out a coherent and effective national economic power industry strategy to address the China assaults. It has various departments and agencies, each tasked with a particular mission, none of which is about not losing to China. And there is no central coordination hub. Indeed, ask any reasonably knowledgeable person in Washington whom to go to in government to discuss the China techno-economic challenge and the answer would be no one. Because that person/office does not exist. We know whom to go to discuss monetary policy. Defense policy. Energy policy. Health policy. But not techno-economic industrial policy.

There are several reasons for this. A major one is that the awareness of the China threat is still not widely and deeply appreciated in Washington, despite efforts to raise awareness of it. Washington is simply not capable of looking over the horizon and acting on a threat that is not yet visible, and even with all the harm the People's Republic of China (PRC) economy has done to U.S. industry, much more of that harm is yet to come and not easily visible now, unless one engages in industry-by-industry analysis.

A second reason is that if you believe that there is no optimal outcome in the economy, except that which free markets naturally produce, then not only is there no need for a strategy and the analytical functions to support it, but such a strategy would be welfare reducing. To this day, most in Washington, at least most non-progressives, believe that Milton Friedman was right when he said, "So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property."[3] Any deviation from market-produced outcomes and structures is less efficient and effective.

Even more broadly than this belief in the sanctity of free market is the fact that the United States, and other Anglo-inspired states, are fundamentally processed based. The American state and system derives its legitimacy from procedural integrity: rule of law, democratic consent, constitutional constraints, market mechanisms. An outcome is legitimate regardless of what it is, if the process was followed. There is no fixed destination; fidelity to method is the point. By definition, that limits the role of the state because the state can only intervene in the way that supports congressionally created, and court-backed, processes. For example, the U.S. regulatory system is based on individual rights wherein everyone and everything is treated the same. Violating that means empowering certain groups against other groups with the risk of intervening state power. The problem, of course, is when you need to follow and arrive at a destination, such as rebuilding advanced manufacturing. The U.S. process-based state can only do this by happenstance.

There is only one component of American society that deviates from that process orientation and that is the national security state. National security is not about process: Did we not use market means to develop the best weapons systems? It is about goals, and doing what it takes to accomplish those goals. As the Soviet threat became clear to many Washington policymakers after Churchill's famous "Iron Curtain" speech in Fulton, Missouri, a bipartisan consensus emerged to create a teleological national security state.[4] In 1947, Congress passed the National Security Act, creating the Central Intelligence Agency (CIA), consolidating military branches into the Department of Defense (DOD), and creating the National Security Council (NSC). The creation of National Security Council Paper NSC-68 formally identified the Soviet Union as an existential risk.[5] Over time, this system expanded, including the establishment of the Defense Advanced Research Projects Agency (DARPA) in 1958, production of national security strategies, and post-9/11 changes, including creation of the Director of National Intelligence (DNI).

Some isolationists opposed these changes, rightly understanding that they represented a fundamental change to the Founders' intention of creating a constrained, process-based state. For many of them, this was a threat to American freedom, creating a Leviathan state that would tax citizens, reduce their freedoms, and enlarge government. Others agreed, but with ambiguity and reluctance, from Eisenhower's warning about the military-industry complex to JFK's wanting to rein in the CIA to the Senate hearings on the CIA in the 1970s. But the reality of the Soviet threat to freedom in the West supported this evolution, and meant that the national security state was maintained and expanded, even as the fundamentally free market Trump administration rails against the so-called deep state.[6]

Back then, opponents wanted to turn back the clock and retreat behind the oceans to a more isolationist America. Sputnik and the risk of being destroyed by Soviet intercontinental ballistic missiles put an end to that thinking. Today, many on the Right want to go back to that thinking, believing that the China threat can be dealt with by erecting the equivalent of oceans in a pre-missile age: in this case, massive tariff walls. But, in part because of the nature of advanced industries, economic isolationism will not work and will lead to even further U.S. industrial decline.

Rather, as much as neither nationalist conservatives nor globalist liberals want to hear it, we need to move more in the direction of a teleological, national development state. This means a state that builds on the national security state and that defines national security as more than military power (and soft power), encompassing core techno-economic capabilities. And yes, this means more of the "deep state," one focused not on partisan politics, but on securing the freedom of the West.

A system that does not prioritize national power with the establishment of techno-economic power policy and programs cannot win in a world where there is a state power-the Marxist, Leninist CCP-intent on defeating us on the techno-industrial battlefield. A process-based system with a shrunken state is ultimately a utopian vision that might work if the United States were cut off from the rest of the world or if every state were a modern, rights-based democratic state. But in the real world, we need a developmental state to ensure that America is not defeated. And that means, as this report details, a government that is capable of constituting and carrying out a national economic power industry strategy.

A last point. Most of the narrative on industrial policy comes from those who argue that nations need industrial policy to grow their economies and provide good wages. To be sure, having high-value industries helps in that task, but given that advanced industries account for less than 15 percent of world gross domestic product (GDP), these industries cannot be the key engine of growth. If growth is the goal, the best way to get it is through diffusion of technology and innovations in all sectors of the economy, including nontraded sectors such as retail trade, hospitality, financial services, and logistics. ITIF focuses on industrial policy because without it, America will lose to China and become dependent on the CCP.

U.S. Governmental Organization: 1900-Present

Figure 2: Commerce Department illustration from 1931[8]

Before the third industrial revolution of the late 1880s, federal government data, analysis, and policy capabilities related to the industrial economy were limited. But as Andrew Reamer has written, government officials recognized the need for better data, especially on manufacturing industries and to set industry-specific tariffs.[9] The 1890 Census and 1900 Census included detailed statistics on manufacturing industries. After its establishment in 1903, the Commerce Department conducted detailed studies of various key industries, that in many ways were significantly more advanced than what Commerce does today. In 1921, the Bureau of Economic Analysis (BEA) began publishing the Survey of Current Business, the flagship monthly publication the has provided regional, industry, macro, and international economists with data, analysis, and methodological research concerning the national economic accounts.[10] As Reamer wrote, the Survey's July 1931 issue provided the graphic illustration of the periodical's role as the nation's "Clearing House of Business Statistics," one that offered "2,000 business movements" from data from 49 federal agencies and 160 industry associations and private firms. (See figure 2.) Much of this data was in service of ensuring that U.S. manufacturing grew and with it, U.S. international trade competitiveness.

However, it wasn't until after WWII that a new economic policy framework was institutionalized. Seeking to avoid another depression following the conversion from a wartime economy and bolstered by the insights of Keynes, Congress passed the Employment Act of 1946, which established the President's Council of Economic Advisors (CEA) and the Congressional Joint Economic Committee. The act stated that it was the "continuing policy and responsibility of the Federal Government to use all practicable means for the purpose of creating and maintaining conditions under which there will be afforded useful employment opportunities for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power."[11] It went on to state:

The President shall transmit to the Congress ... an economic report setting forth; 1) the levels of employment, production, and purchasing power obtaining in the United States and such levels needed to carry out the policy... 2) current and foreseeable trends in the level of employment, production, and purchasing power; 3) a review of the economic program of the federal government and a review of economic conditions affecting employment in the United States or any considerable portion thereof during the preceding year and their effect upon employment, production, and purchasing power.[12]

The goal of the legislation, and indeed the central organizing principle of U.S. economic policy to this day, was not to boost the long-term growth of the economic output, but rather to make sure that recessions don't cause economic performance to slip below some natural, immutable rate of growth. (The goal of keeping inflation low was added in the 1970s.) Nor was the goal to support trade competitiveness, as the consensus view became that the U.S. economic was globally dominant and largely immune to foreign competitive forces. When the act spoke of maximizing production, it meant avoiding recessions, running factories at full capacity, and getting to full employment. It was silent on productivity and international competitiveness. And the CEA by and large continues that tradition today. And much of the U.S. statistical system was oriented around managing the business cycle: regular data updates on price changes and sales and purchases along with other factors used to determine whether the economy was "overheating" or cooling.

To be sure, parts of the Department of Commerce (DOC), especially in the International Trade Administration, were to support exports. And as discussed below, parts of DOD focused on supporting the defense industrial base. But there was no concerted effort to build capabilities focused on industrial competitiveness.

To be sure, there are many departments and agencies that touch on areas of national developmentalism and competitiveness. But none have not losing to China as their core mission. The National Science Foundation (NSF) is designed to give money to scientists to do research on whatever they choose. The Department of Energy (DOE) is designed to support energy innovation and development, but not a national energy industry competitiveness strategy and agenda. The Department of Health and Human Services and National Institutes of Health (NIH) are designed to support drug development but not a national biopharma industry competitiveness strategy and agenda. The Small Business Administration is designed to support any and all small businesses, especially those that serve local markets, such as retailers.

And of course, there is DOC, which at first glance should be seen as the home of the national development state. But it actually does very little in this space. Commerce is an amalgam of different agencies and functions that have no other place to be, so they got put in Commerce. (See figure 2.) President Nixon reportedly did not want the newly established National Oceanic and Atmospheric Administration in the Department of the Interior (DOI) due a personal feud with the then Interior secretary, so it got put in Commerce. Census and BEA collect data, but could easily be, along with other data collection agencies, in a national statistics agency. And most of Commerce is the International Trade Administration, whose mission is principally to expand exports, not to serve as a hub for consideration of industry competitiveness. The National Institute of Standards and Technology (NIST) and Bureau of Industry and Security do have more industry-specific missions, but both are limited in scope.[13]

Finally, there is the Department of War (DOW, also known as DOD). It has a wide variety of programs and offices designed to address innovation and competitiveness, mostly focused on defense industries, with dual-use industry focus. This includes DARPA, DOW Research & Engineering, Office of Strategic Capital, the Defense Innovation Unit, and Office of Undersecretary of War, Assistance Secretary for Industrial Base Policy.

Limitations of the Current System

At least since the Great Depression, the federal government has never felt the need to develop strategic economic intelligence in order to fully understand the competitive position of its traded sectors or to help support overall economic productivity.[14] Rather, most of the focus is on understanding the ups and downs of the business cycle and informing monetary policy.

Inadequate Data and Statistics

Notwithstanding the hundreds of millions of dollars spent every year and the thousands of economists working for the federal government, the exact nature of the challenges to U.S. capabilities with regard to the competitiveness of America's traded sectors is only weakly understood. To some extent, the intelligence community may have done some of this work; but since most is classified, it does not inform commercial policy and programs.

As George Washington University scholar Andrew Reamer has noted, the opaqueness and limitations of our national statistical system for measuring innovation, sources of productivity growth, and competitiveness make achieving the needed insight daunting.[15] Established after WWII, the system is designed to help facilitate fiscal and monetary policy in order to avoid another Great Depression, and as such, measures things such as the number of houses built and cars manufactured. It does not measure the competitiveness of the electronics industry or auto industry or any other number of important matters (the assumption being that those things take care of themselves).[16] Moreover, other nations and regions such as the EU collect much more detailed data, on firm and industry innovation activities, that can be used to understand key sectors.[17] There are two key problems with federal statistics related to national economic power industry analysis. The first is limited budgets for the federal statistical system. The Bipartisan Policy Center reports that since 2010, the real purchasing power of the 13 principal statistical agencies has declined by 12 percent while real GDP has grown 48 percent.[18] The result has been the elimination or cutbacks of some key statistical programs.

The second problem is that the system is not designed to support a national advanced industry strategy. Data on national power industries is limited. For example, one can get data on auto imports and exports, worker wages, and jobs. But data on differences between U.S. firms and foreign transplants is not available. Detailed data on productivity in factories and the overall enterprises, kinds of capital investment (including robotics, AI and smart factory technology), size of factories, share of profits retained for investment, spending on pollution control, nature of firms' supply chains, exact nature of exports and imports, types of R&D spending, and others are likewise not available, at least from public sources.

On top of that, multiple agencies, including the Bureau of Labor Statistics (BLS), National Highway Traffic Safety Administration, Commerce, Census, and the Environmental Protection Agency (EPA) collect industry data, but it is not organized into one central repository for analysis. For example, asking data.gov for data on the motor vehicles generates 147 separate databases, from local, to state, to national, but virtually none of it is relevant to understanding industry structure and competitiveness position.[19]

Inadequate Assessment of China's National Techno-Economic Power Efforts

It will be much more difficult to develop effective techno-industrial policies responding to the China threat without deep understanding of what China is doing. Unfortunately, for the most part, that understanding it lacking.

Most of the limited assessment of Chinese national economic power dynamic capabilities is done by the private sector (usually behind a pay wall) or think tanks. While much of think tanks' work is strong, it is by nature limited since these organizations, especially nonprofit ones, have limited budgets. And much of the work is focused on "popular" industries such as AI and quantum, ignoring other key industries such as steel, chemicals, consumer electronics, and others.

Inadequate Analytical and Policy Generation Capabilities

Where would a policymaker seeking to find information about how to restore U.S. competitiveness in a particular industry go? The answer is that maybe they can find an office at DOW if the industry has enough defense implications. But by and large the answer is nowhere. There are simply no capabilities in the federal enterprise to do sector-by-sector industry analysis.

On top of that, there is a dearth of individuals, not only in federal agencies but also in the United States overall, who are truly expert in industrial policy. Despite the interest in industrial policy and the misleading claims that "industrial policy is back" few of the individuals writing about industrial policy really understand it. Many approach it as technology innovation, but this is too narrow a lens. Many are area studies specialists, who may know China but do not understand the Chinese techno-economic production system and its implications for the United States. Others are economists who are lacking in deep understanding of business dynamics, strategy, and production systems.[20] Others are ideologues pushing particular social policy agendas through "industrial policy."[21] Still others want industrial policy, but for goals other than not losing to China, such as having more clean energy firms or boosting social services for the "care economy."[22] Still others are political scientists trying to make sense of why and how policy comes about.[23]

The closest to industrial policy experts are business scholars. While there was considerable excellent work done in the 1980s and 1990s on competitiveness policy, including by business scholars such as John Zysman, Laura Tyson, Robert Hayes, Lester Thurow, Michael Piorre, James Womack, Annalee Saxenian, Ira Magaziner, and others, that work did not have to focus on national power industries because our core competitors-particularly Japan and Germany-were allies. And that cadre of academic researchers has, with a few exceptions, not really been replaced today.[24]

Full expertise to really understand and craft effective industrial policy requires a combination of disciplinary knowledge of business administration, economics, technology, regional planning, and techno-economic history. Many of the individuals in this field have one of these backgrounds, but not all of them. To be sure, understanding firms and business finance is important, but that is only one component of an overarching industrial system. Similarly, expertise in one or more technologies is certainly helpful-someone should not be weighing in on semiconductor policy unless they understand at the least the basics of the technology-but again, it's not enough.

What to do? Unfortunately, in part because the United States has never faced this kind of challenge, there is little intellectual work on which to build. As discussed, the closest is the field of business strategy. We need to look at this field, not for cookie-cutter answers, but rather for inspiration and ideas that can be built upon to construct a national power industry strategy framework. Any effective strategist needs to be able to understand the process of public policy formation, public administration, and policy specialties (e.g., trade, tax, workforce, regulation, and more). And an effective strategist needs to understand key firm, industry, and technology dynamics, including these issues:

▪ Choices of technology leapfrogging

▪ Overcoming latecomer disadvantages

▪ Role of market-share building

▪ Fixed costs and variable costs and impacts on marginal costs

▪ Economies of scope and scale

▪ Importance of execution vs. strategy

▪ Sources of competitive advantage (price, quality, customization, innovation)

▪ Incremental vs. disruptive innovation

▪ Organizational culture and resistance to disruptive innovation

▪ Turnaround strategies vs. sustaining

▪ Experience curve and learning curve

▪ Growth-share matrix

▪ Cost advantage vs. differentiation

▪ Barriers to entry

▪ Product life cycle and commodification

▪ Market growth rates

▪ Sustaining vs. disruptive innovation

▪ Industry positioning

▪ Market scope (local, national, global)

▪ Kinds of innovation (product, process, business model)

▪ Kinds of competition (dynamic vs. static)

▪ Industry externalities

▪ Network effects

▪ Agglomeration (localization and urbanization)

▪ First mover vs. latecomer advantages

▪ Threat of entry and barriers to entry

▪ Expected retaliation from incumbent

▪ Substitutability

▪ Modularity

In short, it is the almost complete absence of the study of what has been termed "meso-economics" that is the problem. Mesoeconomics sits between micro and macro, focusing on the behavior of industries, sectors, networks, and institutional structures-things too aggregated to be micro but too disaggregated to be macro. Microeconomics (and business administration) focuses on individual firms, consumers, prices, and markets, while macroeconomics focuses on aggregate output, inflation, employment, and monetary/fiscal policy.

Mesoeconomics adds a focus and understanding of 1) industry dynamics including oligopoly behavior, sector evolution, firm strategy; 2) supply chains and inter-firm networks and institutional structures including regulatory regimes, industry associations, public private partnerships; 3) sectoral composition of the economy, including manufacturing vs. services vs. finance and differences in firm size; 4) regional/cluster economics, including an understanding of what regional economists term "localization economies"; 5) the process of technology development and diffusion across industries; 6) the role of governments in shaping industry structure and evolution; 7) international industry dynamics; and 8) the historical evolution of industries.

But there are few if any graduate programs in the United States focused on education future practitioners in mesoeconomics as it applies to industrial strategy. For example, at Harvard, ranked the number 1 economics department in the country, there is no course offered in industrial policy, or anything remotely connected to it.[25] They do offer courses such as "Using Markets to Solve Social Problems," "Finance for Inclusive Growth," and "Market Power in the New Economy." In the Ph.D. program, students can specialize in fields such as contracts and organizations, econometrics, financial economics, and macroeconomics, but not mesoeconomics or industrial strategy.[26]

This touches on a key challenge: the paucity of techno-economic analysts in government. In many federal agencies, there are two kinds of people: political appointees charged with setting the overall direction and dealing with the outside and program managers charged with implementing specific programs, such as grants. But there are often few analysts who understand the broader theory and practice to inform program design and management. MIT Professor Don Schoen calls these individuals "reflective practitioners" who understand both the academic and theoretical underpinnings of the agency's activities and also how iterative learning from practice can inform theory and rubrics.[27] All too often, programs just hand out money ensuring that all the federal rules are met to a "t," but they don't ensure that programs achieve their overall goals because they do not understand all the factors that contribute to success. Too many grant managers, not enough strategists.

This gets to a key point. The lack of a dedicated cadre of staff in government with these analytical capabilities. Industrial policy experts Ian Fletcher and Marc Fasteau wrote that "a dedicated corps of civil servants should exist for day-to-day administration, to maintain institutional memory, and to track ongoing changes in technologies, the strategies of other governments, and the competitive positions of US and foreign companies."[28]

Inadequate Industry and Other Expert Involvement

Industry councils to advise government on sector-specific industrial policies largely do not exist. In part, this is because the U.S. government does not see its role as doing such analysis-and also because the general view in Washington is that industry is self-seeking and it would be inappropriate to give it a special seat at the table. It can, like other interested stakeholders, advise by responding to various notice of requests for information. But without this kind of close dialogue with industry and other experts (e.g., think tanks, consultants, financial analysts) the government will be limited in the sophistication of its analysis.

Federal Data, Analysis, and Organization for a National Economic Power Industry Policy

We need a whole-of-government approach to economic war-fighting. If we had that as an organizing principle, U.S. foreign aid would be explicitly linked to whether receiving nations are siding with China. Treasury would push to lower the value of the dollar, especially against the renminbi. Tax policy would focus on reducing taxes on traded sectors, especially those in advanced industries, by such steps as significantly increasing the R&D credit and instituting an investment tax credit. Antitrust regulators would abandon the neo-Brandeisian quest to break up big companies. An array of regulatory policy areas, including privacy, artificial intelligence, and biotechnology would be approached through the lens of how regulations support or advance the economic war. Policy would embrace, rather than reject, automation. The State Department would take the lead in organizing a NATO for Trade to coordinate actions against Chinese economic aggression.[29] Financial regulators would work to shrink nonproductive components of the financial sector (e.g., short-term trading and hedge funds). The intelligence and domestic law enforcement communities would be mandated to prioritize commercial intelligence and counterintelligence. Each agency would have to see its budget approved by the Office of Management and Budget in part based on how well they are contributing to U.S. success. And actions such as the Energy Department's transfer of $15 million of R&D-funded battery technology to China would stop.[30]

The question is, should an agency lead this, and if so, what agency? In an in-depth analysis of the success of Asian Tiger industrial policy, International Monetary Fund economists contended that success was dependent on "a network of institutions with a leading agency at its center."[31] This institution needs to focus on "'learning-by-doing' through experimentation, feedback, and action to build specialized knowledge and identify policies is key to the effective functioning of institutions. The Asian Miracles achieved it by devising an institutional 'system' or architecture that, we argue, can be replicated."[32] They went on to argue:

Even in a world with strong coordination across agencies and low coordination costs, there is a need for a leading agency since it is not practical or efficient to build a stock of specialized or sector-specific knowledge across many agencies required to implement industrial policy. This stock of knowledge, another key feature of the model, has to be built or accumulated in some institution or agency. This agency will need to deal with design strategies and action plans, acquiring sector-specific and cross-sectoral information and data, conducting industry and market analyses, and monitoring and assessing progress. Eventually, it also needs to decide whether to pull the plug or conditionally support various industries, firms, and projects while tackling political economic constraints. These policy actions are costly, knowledge-intensive, and prone to failures, including government failures (e.g., special interests, capture, corruption), and require information and learning.[33]

This is correct. While institutional coordination and distributed learning is important, having a lead agency is critical. The key question is what kind of lead agencies the United States should adopt. There are three possible solutions.

The first is to put these responsibilities in the Commerce Department. At first glance, this would be logical because the issues deal with many different industries. But Commerce historically has been weak in interagency battles, and its inherent capabilities also have weakened over the years. Moreover, as a government department, it suffers from the typical bureaucratic limitations, including limits on hiring and firing and other matters. (To a lesser extent, this also applies to the agencies within Commerce, such as NIST and the Patent and Trademark Office.)

The second possible solution is to expand the purview of DOW beyond its narrow focus on the defense industrial base to encompass national economic power industries more broadly. There would be multiple advantages to this approach. First, DOW has vastly more funding than other agencies, and while it wouldn't be entirely easy to add $25 billion to $50 billion to its budget for these activities, it would be a lighter lift than increasing the Commerce budget by the same amount. Second, DOW, in part through its Office of Industrial Policy and other offices, has a long and deep involvement with industry. Finally, DOW is the one place in U.S. politics where "industrial policy" is seen as acceptable, if not necessary. Even free-market defenders accept many DOW industrial-base programs. So, defining the defense industrial base more broadly would not be a major intellectual change.

In his memo to Pentagon leaders about the establishment of the new Economic Defense Unit (EDU), Deputy Defense Secretary Steve Feinberg correctly wrote:

Economic Competition is the coordinated and deliberate application of economic tools including capital, procurement, policy, trade, tariffs, regulatory authorities, export controls, and other potential economic activities to expand the United States' economic advantage by deterring, denying, disrupting, and helping to defeat adversaries through economic means.[34]

But the risk is that the EDU will have a relatively narrow business-financing approach that focuses on deals rather than broader industrial strategy.[35] While more patient and generous financing is necessary to avoid losing to China, it is not sufficient. The other risk with the EDU is that its scope will focus on a relatively narrow set of defense and dual-use sectors, and not on a broader set of industries in which China may establish leverage over the United States.

If Congress adopts the approach of broadening the War Department's purview to encompass national economic power industries, it should establish a new position of Undersecretary for Defense, Dual-Use, and Enabling Industries, and move related responsibilities from the Undersecretary of Acquisition and Sustainment (whose core focus should be on weapons systems). This new office would be expanded to focus on a broader range of industries besides just defense-focused ones.

But notwithstanding the significant potential benefits of DOW doing more in this space, there are also some downsides to placing all or most strategy and implementation capabilities in DOW. The first is that nondefense industries still could very well get short shrift, given the intense focus on ensuring war-fighter capacities. Related to this, the community of people involved in national security are generally quite insular, talking largely to themselves, often in DOW jargon and acronyms, and not really having deep knowledge of the broader industrial and economic ecosystem. Taking all of this into account, Congress should establish a new Undersecretary for Defense, Dual-Use, and Enabling Industries. But that office should not be the lead agency for a whole-of-government approach to economic war-fighting. Instead, a new agency is needed for that purpose, and it should exist outside of either DOW or Commerce.

This brings us to the third and best possible solution to the question of how to organize a whole-of-government approach: Congress should establish a quasi-public National Advanced Industry and Technology Agency (NAITA) organized like the Ex-Im Bank, but with greater flexibility.[36] Well over 50 nations have already established such bodies.[37] This new agency would lead a number of core tasks, including analyzing U.S. industry strengths, weaknesses, opportunities, and threats and responding with well-resourced solutions, including support for domestic R&D and production partnerships and investment in advanced research facilities. Such an agency should take the lead in crafting and regularly revising a national advanced industry and technology strategy. It should coordinate, along with the White House, an interagency process to help align federal, state, and international (allied nation) policies and programs with the goal of U.S. advanced industry competitiveness. And it should be the one place in government that funds activities explicitly focused on commercial competitiveness. One of many advantages to this structure is that, as a quasi-public agency, it would have an easier time recruiting highly skilled individuals with industry experience.

As figure 3 illustrates, the organization would have several divisions. The data and analysis division would work to close data gaps (as previously described). In addition, it would conduct competitiveness analysis of key advanced sectors and technologies, including SWOT analysis. This should involve working with key stakeholders, including other government agencies, industry, and organized labor, to develop strategic roadmaps of how the federal government can promote the competitiveness of key sectors and technologies.

Figure 3: Organizational chart for a proposed National Advanced Industry and Technology Agency

The advanced industry division would operate a variety of programs focused on boosting the overall competitive position of the United States and key industries, including programs such as the CHIPS program office, cooperative industry-led R&D programs, and established government industry-focused research and development labs. The emerging technologies division would put out calls for proposals for grants in particular technology areas. The innovation systems division would develop key competitions in various innovation systems, such as healthcare, construction, manufacturing, working with stakeholders to better understand key policy interventions in order to boost innovation in the entire system. In certain cases, this might entail support of precompetitive applied industrially relevant research. The coordination division would work to increase alignment within the federal government and with states that curate their own technology-based economic programs. It would also take the lead on ensuring that U.S. technology and competitiveness programs, wherever possible, are aligned with our allies.

The challenge with this idea is the political difficulty of creating any new agency, given committee conflicts, the view that such reorganization is difficult, and resistance by some to larger government.[38] In addition, in contrast to placing these capabilities in DOW, adequate Congressional appropriations are likely to be problematic.

Whatever the organizational form(s), if the United States is to improve policies and programs related to keeping national economic power industries globally competitive, then better data and industrial analysis are needed.

Better Data

If the U.S. federal government is going to develop more effective policies to spur traded-sector competitiveness, including in manufacturing, it will need to get much smarter. The very existence of government policies (tax, trade, regulation, spending, etc.) means government inevitably influences innovation-sometimes for good, sometimes for ill, but almost always by happenstance. Government would be much better positioned to effectively support competitiveness, including how to ensure that regulations do only limited harm to U.S. competitiveness, if it were more strategic and knowledgeable. It should be able to understand the U.S. competitive position vis-à-vis other nations on key technologies and industries, as well as key strengths and weaknesses and where specific policies are needed.

One key change is to expand the focus to more international statistics. The federal statistical system was largely designed around collecting statistics on firms that were located in the United States. But as the economy has become increasingly global, we need much more fine-grained international statistics. These include a better input price index; better data on imports and exports in the Annual Survey of Manufacturers, restored BLS data on international labor comparisons; better BEA data collection of U.S. companies with facilities overseas to identify the types of products manufactured abroad and the number of employees at those facilities; better data on U.S. multinationals.[39] On top of that, the major statistical agencies should work to transition NAICS (the North American Industrial Classification System) to the International Standard Industrial Classification System so that U.S. industry data is comparable to most other nations.

Moreover, during the Cold War, there was virtually no risk to U.S. supply chains if the Soviets decided to take aggressive action against the United States. Our supply chain vulnerabilities were near zero. That, however, is completely different with China. Should we get into a conflict with China, or should China seek to exert leverage over the United States, it has vast capabilities in terms of cutting off needed exports. As such, it is now critical-like it has never been in the history of the Republic-that the federal government has deep, comprehensive insight into the state of U.S. supply chains, especially vulnerabilities vis-à-vis China.

Finally, federal agencies need much better data on Chinese policy and Chinese firms. A number of private sector firms provide deep analysis on this, including Datenna and WireScreen.[40] Relevant federal agencies should fully avail themselves of these and related sources.

Industry Analysis

It's not enough for the federal government to just collect better data; it needs to analyze it and add value to it. Unfortunately, the federal statistical agencies, with perhaps the exception of the Center for Economic Statistics at the Census Bureau and BLS, do little to interpret their own data. The result is that much of it goes unused. One problem is no federal agency has been tasked with performing competitiveness analysis. This explains the widespread calls for the Biden administration to step up its analytical capabilities when it came to trade and industrial competitiveness, to at least close the gap between the country's economically oriented analytical capabilities and its national security-oriented analytical capabilities.[41] Indeed, the closest America has to that now is in DOW's Office of Industrial Policy, but its focus, as expected, is defense oriented.

The federal government needs an economy-wide equivalent of DOW's "net assessment" structure and process, which is a "framework for strategic analysis" involving quantitative and qualitative information, to assesses current and future military power of the United States and its adversaries.[42] The United States needs the same in-depth practice to assess the commercial power and capabilities of itself and its adversaries. As such, a core task for the new NAITA proposed earlier should be to conduct competitiveness analysis of key advanced sectors and technologies, including SWOT (strengths, weaknesses, and opportunities) analysis.

In addition, this should involve working with key stakeholders, including other government agencies, industry, and organized labor, to develop strategic roadmaps of how the federal government can promote the competitiveness of key sectors and technologies. It should incorporate a number of different industry analysis rubrics, such as Pisano and Shih's "Modularity-Maturity Matrix," classifying industries by modularity and maturity, the Porter competitiveness diamond, as well as others, such as type of production (process vs. product, customized vs. mass, etc.).[43]

As noted in box 2, federal agencies work to advance their own particular missions and are largely unwilling to take into account the impact of their actions on innovation competitiveness or to coordinate with other agencies. Accordingly, NAITA should develop strategic roadmaps to guide interdepartmental efforts to ensure that the regulatory policies and activities of disparate government agencies are, wherever possible, aligned to promote the global competitiveness of strategic sectors of the U.S. economy. NAITA's Data and Analysis Division, shown in figure 3, also should assess the nature of U.S. supply chains, particularly in advanced technology industries. The unit should also be charged with identifying and tracking foreign industrial policies, both to provide learning for the United States and to understand better what our competitors, particularly China, are doing. Finally, because there is a need to coordinate advanced industry and technology strategies and programs with allies, NAITA's Coordination Division, also shown in figure 3, should work with close allies on industry and firm data alignment, coordination, and analysis.

Finally, there is a serious human capital gap. Few U.S. universities, including those with economic and public policy programs, provide a grounding in the kinds of skills needed to conduct in-depth industry analysis. (See box 3.) Moreover, while there are a few bastions of related analysis, such as the Industry Studies Association and the Industrial Policy Group, many more are needed.[44]

Congress and the White House

New organizational structures are needed in Congress and the White House to effectively craft and implement a national economic power industry strategy.

Congress

The House took a major step forward with the establishment of the Select Committee on Strategic Competition between the United States and the CCP. The Senate should do the same. In addition, Congress should establish a Joint Economic Competitiveness Committee (separate from, but akin to, the Joint Economic Committee) to bring coherence to its own disparate efforts, which are dispersed in a wide range of committees and subcommittees with little coordination or thought to how they collectively advance the economic war effort.

The White House

There is no entity in the White House whose responsibility it is to defend the United States from techno-economic attacks from China. CEA is the home for conventional economists, focused largely on macroeconomic policy. NSC, while having had some focus on these issues, sees China through the lens of national security, intelligence, and foreign policy. And the National Economic Policy team focuses largely on broad domestic economic policy issues, often related to social policy, business regulation, infrastructure, college debt, inflation, and small business.

As such, Congress should establish a National Economic Security Council (NESC) whose job would be to manage economic competition with adversaries, especially China.[45] This is similar to the idea for a Technology Competitiveness Council proposed by the National Security Commission on Artificial Intelligence. The NESC's role would be to establish and coordinate the implementation of an all-of-government strategy for how the United States can avoid losing to China. It would oversee analysis of U.S. advanced-industry capabilities, especially vis-à-vis China. It would assess Chinese policies designed to erode U.S. advanced-industry leadership. It would identify key sectors needed for U.S. leadership and organize a whole-of-government approach to advance that on the sectoral level (e.g., semiconductors, biopharmaceuticals, aerospace, autonomous systems, AI, etc.). The NESC should be staffed not by economists who focus principally on price-mediated markets, but rather by "productionists": analysts who have a deep understanding of firm, industry, and technology dynamics.

The NESC should lead the formation of an all-of-government China strategy wherein each major agency develops an approach to deal with China. U.S. Border and Customs should have a robust strategy for interdicting and destroying all illegal Chinese imports. The Department of Justice (DOJ) and Federal Trade Commission (FTC) should develop a joint strategy for responding to China's weaponized antitrust regime. NSF should focus on how to support knowledge generation that limits Chinese access while advancing U.S. industrial innovation. The Ex-Im Bank, the Development Finance Corporation, and other federal export agencies should be required to form joint aligned strategies, along with state governments that operate similar programs.

Agencies and departments will need to be pressured to prioritize winning the techno-economic war with China, just as containing and ultimately winning against the Soviets was a top priority for many federal agencies in the first Cold War. This will mean intervening in deep agency cultures to press them to reconsider long-held views. In antitrust, for example, it will mean agency regulators putting competitiveness first and foremost, not competition per se. For the Small Business Administration, it would mean not just supporting any and all small businesses, but also prioritizing the ones that are most likely to grow and could do the most to help compete with China. For EPA and other regulators, it would mean putting industry competitiveness impacts front and center with their traditional missions to better balance the two when they are in tension. For the State Department, it would mean putting American economic interests first and being more willing to challenge China and other foreign governments whose policies hurt U.S. advanced-industry competitiveness. For the Securities and Exchange Commission, it would be more and stronger efforts to limit Chinese access to U.S. financial markets.

Congress should also statutorily reconstitute CEA as the Council of Economic and Enterprise Advisors. CEA was established in 1946 to provide economic advice to the president and has almost exclusively been staffed by economists focused on studying price-mediated markets and limiting business cycle fluctuations; not on productivity, innovation, and competitiveness. As these three issues have become central to U.S. economic policy, it is no longer appropriate to have U.S. economic policy guided only by economists from the market-efficiency school. We need scholars in government who understand how enterprises grow, evolve, and innovate and less on how markets respond to price signals. This means CEA members who understand enterprises and innovation.[46]

Congress should also establish a new undersecretary position at the State Department to assume responsibility for monitoring U.S.-China relations and PRC actions around the world. In the 1980s, Soviet expert Richard Pipes proposed a similar position, but to monitor the Soviet Union.[47] He wrote that: "only in such a manner will the government feel the pulse of Soviet global activities and the Secretary of State be in a position to advise the President on an intelligent response to them."^[48] He argued for this because the organization of State into regional desks "ensures that the whole picture of Soviet global policy is broken down into disjointed fragments which the regional desks cannot properly interpret because they are not away of the broader context into which they fit."^[49] That is even more true today. He went on to note that, "For this to happen, of course, the Secretary of State must first persuade himself that unlike the United States, the Soviet Union has a Grand Strategy that is not only pragmatic but also ideological, and not only regional but also global in scope."^[50] The same can be said today with respect to China.

Conclusion

Notwithstanding the increased interest in Chinese techno-economic competition, not losing this war is far from agreed upon as a national priority. We haven't even come close to agreeing that China is a serious challenger. If we had consensus on these issues, there would be vastly more action being taken by Congress and the administration. But as things stand, the federal government is not organized in a way to successfully prosecute this war.

When it became clear in the late 1940s that the threat from the Soviet Union was real and existential, a consensus emerged that the United States needed national security and intelligence capabilities to not lose to the Soviets. And Congress and the White House cooperated to institutionalize those capabilities. Without that, the outcome of the conflict could have been very different. To be sure, there was initial uncertainty about what to do, and no consensus even about the need to do it. But both were eventually resolved, and the national security state developed as a result.

Today, there is a very real threat from the CCP, at least a threat for global dominance in advanced technology industries and who will be the global hegemon from an international relations perspective. As this series has argued, developing a bipartisan consensus of the nature of the threat will be much harder than it was in the late 1940s, in part because so many China scholars see China as a normal country, not a core Marxist-Leninist adversary.[51]

However, if a consensus on the nature of the threat and the need for action grows, a key step will be to put in place the institutional capacities in government to effectively assess the threat and responses, and to craft and implement a coherent U.S. national economic power industry strategy that is something more than the sum of the parts of various and sundry policies and programs. In other words, we need a national advanced-industry competitiveness state to complement the national security state. This report lays out a roadmap to establish the necessary capacities.

Endnotes