The Post-Industrial Economy Failed
When proposing a nation-building strategy in 1791, Alexander Hamilton argued that “prosperity of manufactures” would reverse the foreign economic dependence jeopardizing the republic’s newfound freedom. His industrial innovation agenda, later championed as the “American System,” produced a manufacturing foundation that fed American domestic and foreign policy strength in the 19th and much of the 20th century.
But after 40-plus years of outsourcing, the nation’s industrial engine has rusted away. Trade deficits, especially in advanced technology products since 2001, when China entered the World Trade Organization, signal the return of foreign dependence jeopardizing our defense, innovation, and living standards.
While the U.S. financial sector prospered, China became an industrial superpower, the 21st-century Arsenal of Autocracy. Beijing boasts the world’s largest ship-building industry and a fleet build-up we cannot match, according to the secretary of the Navy. Nor can we match its massive missile stockpiles. In a war of choice over Taiwan, the United States would—within seven days—run out of long-range anti-ship missiles, which require nearly two years to produce.
Beijing dashed ahead in an industrial-technology race while we shrugged off its Sputnik moments. Years before a China spy balloon triggered a national freak-out in February, in 2016 Beijing launched the world’s first quantum communications satellite. Three years later, a Chinese spacecraft landed on the moon’s far side, a feat we never achieved.
And now the Asian giant boasts stunning leads in thirty-seven out of forty-four critical and emerging science and technology fields assessed in a new report funded by the U.S. State Department and Special Competitive Studies Project. Its innovation excels in synthetic biology, photonic sensors, advanced batteries, telecommunications, and nanoscale materials and manufacturing. The United States leads only in the remaining seven fields.
These ominous developments demand a reassessment of the “post-industrial economy”—the myth that has rationalized U.S. deindustrialization.
In the late 1970s, influential economists and corporate executives entertained a new relationship between manufacturing, the global economy, and innovation. With little debate, the best and brightest declared America was moving into a post-industrial age, the way we supposedly transitioned from agriculture to manufacturing, with service sectors trading information and knowledge constituting the acme of achievement.
We could therefore ship to the far side of the world messy, blue collar manufacturing jobs, and retain clean, white collar “knowledge workers” who would own the future. As the most valuable company in the world boasts on its products, “Designed by Apple in California. Assembled in China.” This smug high-tech illusion pushed a naive leap into the future. If skilled labor doesn’t count as “knowledge work,” a post-industrial economy can thrive without millions of jobs in domestic manufacturing.
Nailing this conceit’s net effect, Dan Wang warns in Foreign Affairs: “Skill loss among not just line workers but also machinists, managers, and product designers…has left the United States in a poor position to dominate emerging technologies.” In other words, shipping the factory floor across an ocean erodes a company’s—and eventually a nation’s—innovation capacity. Inventions cannot be commercialized without an industrial foundation that iterates on product design and process engineering. If manufacturing lands overseas, eventually so does skilled technical talent.
Vaclav Smil pressed the same point ten years ago, noting that innovation most likely occurs when research is connected to manufacturing processes. In his latest bestseller, How the World Really Works, the Canadian polymath further details the risks of the globalist model of clustering so much production in Asia.
That is the basic problem. We have outsourced entire production systems, weakening links between product-design and process-engineering communities that delivered America one success after another in the 20th century. In Producing Prosperity, Harvard Business School professors Gary Pisano and Willy Shih call these links “the industrial commons,” our infrastructure of technical know-how.
Moreover, as our tech geniuses obsessed over post-industrial gimmicks—perfecting attention-grabbing algorithms for social media or inventing the next food-delivery app for the so-called “gig economy”—countries hungry for advancement such as China and India obsessed over production processes delivering technical know-how, the secret sauce of innovation and national strength.
The swath of American-born technologies that migrated elsewhere for advancement boggles the mind. Pisano and Shih point to solar photovoltaic cells, which underpin advanced energy storage, an industry created here but now dominated by Asia. The same pattern applies to ultra-heavy forgings, machine tools, permanent magnets, and rare-earth element refining, as well as rechargeable batteries, LED manufacturing, semiconductors, liquid-crystal displays, precision glass, and fiber-optic components.
It is time to admit that our experiment with deindustrialization and offshoring failed America. Because an industrial base represents a dual-use national asset, supporting both defense and civilian production, we feel the foreign consequences of offshoring as war looms, but the domestic effects have been here all along.
Dependent on foreign companies and sole-source suppliers at home, withered U.S. manufacturing created single points of failure throughout the defense-industrial supply chain, impeding production for wartime. The aerospace firm Williams International, for example, remains the sole U.S. supplier of an engine needed for precision-guided missile systems like the Tomahawk and Harpoon, currently used in Ukraine and potentially for a war in the Taiwan Strait. Raytheon reports that scarcity of rocket motors impedes its ability to fulfill orders from the Defense Department.
Nor does the Defense Department have an apparent plan to direct industry to scale up production through the Defense Production Act. Even if it did, defense needs would crash intersection points with civilian products, forcing single suppliers into direct competition for microelectronics with automotive and smart-phone industries, causing ripple effects of shortages and rising prices.
Loss of production mastery also wreaked havoc on Middle America, a forgotten ingredient of national strength. The U.S. family wage—spearheaded by Henry Ford in 1914, hailed by the New Dealers as “the American Standard,” and embraced by labor and management in the Treaty of Detroit in 1950—enabled a single earner without a college degree, often a married father, to support a family.
Because we chased a post-industrial fantasy, this American Dream is all but dead for the middle class, reflected in tanking marriage and birth rates, impoverishing the nation’s social and human capital. Gen. X and Millennial parents must run harder and faster to keep pace with their Boomer parents at their corresponding life stage. According to an index compiled by American Compass, supporting a middle-class family in 1985 cost an average father 40 weeks of his annual full-time wages, leaving the balance for other spending or saving. To achieve that same living standard in 2022, a comparable breadwinner must exhaust his entire annual earnings, plus another ten weeks of income, typically from his wife’s full- or part-time work.
Stagnating wages reflect that almost all net employment growth between 1990 and 2022 has been relegated to low value-added service sectors. Jobs in retail, leisure and hospitality, administration and support, along with warehousing and transportation—collectively employing 44.6 million Americans—all pay less than manufacturing’s average of $31.62 per hour in 2023. Often, for the six in ten American adults without a degree, service jobs are the only alternative when manufacturing dries up.
The pied pipers of the post-industrial tale overlooked that a service economy never built or sustained a super-power. Neither a substitute nor successor to manufacturing, services are either derivative of the former or an adjunct to it. Mastery and control of production remains an indispensable economic driver.
Leaders of both public and private sectors must therefore think anew about reconstituting a diverse manufacturing base at home and connecting that revived sector to America’s research and development institutions. Only by forging industrial policies as instruments of statecraft can we compete with China and restart our engines of domestic prosperity.
As ceding the manufacturing field to others has rendered our industrial base less competitive—in innovations such as advanced batteries, where the Chinese-developed sodium-ion battery for electric vehicles will succeed lithium-ion technology, in which America already has fallen behind—interventions will need to jump-start or ramp-up American production in multiple sectors.
Such interventions should not spook defenders of the free market, because industrial policy is not about aping China’s statism but reviving the “American Way” of political economy, which powered the United States through the end of the Cold War. Because of our bipartisan embrace of capitalism, we avoided common pitfalls of “command” economies, constructing the “industrial commons” as a public good that benefited everyone, like building the interstate highway system, and commercialized government-sponsored research and innovation to power new industries.
Moreover, we have always justified market interventions for defense purposes, although this needle should be threaded carefully. The military should augment—not spearhead—reindustrialization. National security can be extended to almost anything, but laundering industrial policy through the Defense Department leads to a militarized skew of political economy, the Soviets’ downfall. Even the Defense Department, among other agencies, admits that national security supply-chain problems require an economy-wide solution, given the dual-use nature of the industrial sector.
The American Way was never about “picking winners and losers.” No demand existed for GPS, a military wonder of the space race, until President Reagan commercialized its access for all airlines in 1983. Nor was the American Way about protecting buggy-whip businesses. The National Science Foundation’s Strategic Manufacturing Initiative, for instance, was pivotal in issuing 600 grants from 1986 to 2012 for establishing foundational technologies for additive manufacturing (3-D printing).
Conservative policies like these promoting national economic self-sufficiency could shape and accelerate the current uptick in domestic manufacturing, a shift driven by federal incentives, the coronavirus pandemic, and corporate America rethinking the predicament it long embraced and profited from, the separation of production from invention.
Bloomberg reports that 90 percent of U.S. executives are in the process of relocating operations out of China or have plans to do so, while 80 percent were considering moving some production to the United States. More promising, the Wall Street Journal reports, citing Census Bureau data, that construction of U.S. manufacturing facilities jumped to a record $108 billion last year, “more than was spent to build schools, heathcare centers or office buildings.”
These ripples of reshoring confirm that reindustrialization holds promise for investors, workers, and the national interest. Yet the challenge remains for policymakers to drive these modest currents into a tidal wave ushering in an industrial renaissance throughout the land.
The National Strategy for Advanced Manufacturing, updated quadrennially by the National Science and Technology Council (NSTC), a White House office, represents the closest expression of an official industrial-innovation agenda. Just as the National Security Council coordinates its National Security Strategy across the defense establishment and intelligence community, the NSTC functions as the entity by which presidents coordinate planning for manufacturing across the industrial policy community.
However, the industrial policy community—comprised of at least eleven federal agencies running fifty-eight programs fostering innovation, assisting with trade and financing, and "up-skilling" labor—lacks organizing principles. For example, Manufacturing Extension Partnership centers are funded and run by the National Institute of Standards and Technology, while Manufacturing USA institutes are funded in part by the U.S. Departments of Commerce, Defense, and Energy.
No single department or agency’s core mission executes the national manufacturing strategy. Nor does a single official implement the resource requirements of the National Security Strategy. Despite grave domestic and foreign problems stemming from deindustrialization, and the promise of renewed national strength from a reindustrialized America, our government lacks comprehension and command of the industrial-base resource requirements of our domestic and foreign policies.
But an official with presidential access could provide critical leadership. A new position could be called the Director of National Strategic Resources, with authority to oversee, advocate for, and direct the military and civilian elements of government with industrial policy functions. Such an official would deliver needs assessments for the president’s foreign and domestic goals, including reports on the nation’s industrial base, innovation capabilities, and net assessments of science and technology competition with China, Russia, and our allies.
For example, a Director of National Strategic Resources would surface gaps in our current priorities, exemplified by the CHIPS Act, which focuses on the seven out of forty-four critical technology sectors where we already lead China. Rather than ceding the other thirty-seven to foreign powers, as seems to be the case, the director would focus on this side of strategic competition.
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The role could be modeled after the National Security Resources Board, created in 1947 for this very purpose. Or it could draw from the original vision of the Director of National Intelligence (DNI), which integrates the sixteen agencies and offices that comprise the U.S. intelligence community, an organizational archipelago like the U.S. industrial policy community.
At critical inflection points in history, the United States reorganized its government, fashioning instruments of statecraft fit for the challenge of the times. When President Harry Truman signed the National Security Act of 1947, a bipartisan Congress consolidated the military services under a new Department of Defense to reboot political-military resources for the challenge of the Soviet Union. When President George W. Bush signed the Intelligence Reform and Terrorist Prevention Act of 2004, another bipartisan Congress created the DNI to orchestrate, advocate, and lead an information-intensive effort to preempt foreign terrorist plotting.
Now, in the era of great power competition, particularly against our toughest rival, the U.S. industrial policy community must be orchestrated to become—as our first Treasury secretary would demand—an instrument of economic statecraft to preserve our country, our liberty, and our way of life.