Neo-Libertarian Industrial Policy
How to interpret Scott Bessent´s recent interest in industrial policy
Scott Bessent is the announced nominee for Treasury Secretary by Trump. I have created this substack to follow him, the Trump Treasury Department and their economic policy.
In my previous post The Abe-fication of Trickle-down Economics, I discussed Scott Bessent´s declared fiscal policy views. In this post, I’ll cover how he has integrated the ideas of the New Right which has suggested the government has a role to intervene in the economy to put “America First”.
While libertarian inspired trickle-down has a more established policy record to discuss, neo-libertarianism with a role for political intervention in the economy is still developing. I’ll reserve evaluations of specific proposals until specific proposals are identifiable.
However, it isn’t too early to work out how to interpret neo-libertarian thinking when you hear it, and give you my take of why it shares the same flaws as libertarian economics.
Birth and death of early industrial policy with Ronald Reagan
¨a dangerous solution to an imaginary problem¨
1983, some prescient economist
In the Carter Administration, rest in peace, Democrat economic thinkers began to take seriously the concept of ¨industrial policy¨. There was a concern at the time that America’s manufacturing industry was facing new global competition and that it could benefit from political support to remain competitive in the global marketplace. It’s a good thing that worry was unfounded.
Ronald Reagan was a sharp critic of industrial policy. Industrial policy, after Ronald Reagan’s presidency began, was set aside and President Reagan went about transforming America’s economy. The net effect of Ronald Reagan’s economic policy was a much more favorable environment for operating business profitably. American investment returned home to invest in American business and foreign capital was attracted to America to take part in the American economy.
When there is a large demand for dollars and dollar denominated financial assets, then it produces a powerful incentive to sell goods to Americans in exchange for their dollars. Ronald Reagan’s presidency was a time period where the trade deficit first became imbalanced in favor of imports, and it came at the moment when foreign competition had begun to be felt.
As far as Ronald Reagan and libertarian economists are concerned, all President Reagan did was undo the distortions of the economy holding back American business as an engine of prosperity.
Fairness of the world, fairness of the game
When two sport teams face off against each other, there are numerous sources of variance that determine which team will win a match. We open a game with ¨may the best team win¨ to recognize this shortcoming.
There's a huge temptation to fixate on the role of the things we control. Is the field uniform? Are the rules able to be enforced impartially? Are all competitors given the same amenities and conditions to perform? It is understandable that our energies be directed at the things we can control, but it can warp our perspective that these are the only sources of variance in performance.
There is a kind of mania where you come to view these points of intervention as the only sources of variability in the game and that the only barrier to a better, less volatile game is to find ways to remove the variability we can control from the game.
But frankly, this is stupid. Most sports are greatly improved by rules that can only be enforced judgmentally. Take the rules around fouling. If fouling rules were pulled back, then suddenly it may be optimal to immediately brawl on the court, producing high rates of injury that would make winning more random, despite the fact you are introducing less external variability in enforcement.
What the mania against referees and libertarian economists have in common is a hyper-fixation on the regulatory sources of variability versus all other sources of variability that are natural.
Is industrial policy a tool or a goal?
So did Ronald Reagan have a broad industrial policy? Well under a libertarian economic frame, no. By removing government and organized labor intervention from the economy and freeing capital to be as profitable as possible, they are merely an easing of intervention.
In this way, the consequences of Reagan’s economic policy, the hollowing out of America’s manufacturing economy, is not an industrial policy but simply a natural consequence of a free market. If a country’s industrial policy was a goal, then a shift to a far more libertarian economic policy could be interpreted as a radical industrial policy.
In Scott Bessent’s telling, only Reagan’s military expenditures were an industrial policy, since it employed the tools of industrial policy to intervene in the market in contradiction of the libertarian ideal.
Scott Bessent has publicly laid out 3 rationales for intervention in the economy:
As an insurance policy that failure of sufficient private sector investment could leave America vulnerable to international threats
Conservation of national treasures, which may be destroyed too casually by short-term investment decisions of markets
As political patronage for the coalition of the wealthy and well-off lower education MAGA voters
He justifies these goals as economically costly, from the perspective of libertarian economics, but justified applications of industrial policy tools. This is a implied criticism of Ronald Reagan’s more rigid libertarian economics from a neo-libertarian perspective.
It would be easy to justify industrial policy that Reagan repudiated under Scott Bessent’s second rationale. The manufacturing sector of the United States was undoubtedly a national treasure, and very possibly could have adapted with major investment to remain competitive in the global market.
However, although neo-libertarianism gives allowances for using industrial policy as a tool, it retains the perspective that interventions in the economy on capital owners are inevitably an imposed cost on all of society.
What is the alternative to libertarian economics?
One reason economics has such widely applicable techniques across various economic conditions is that it functions by taking the current economic reality as a given, clamped in place, and only looks at how markets, an aggregation of the free choices available, will respond.
The reason that interventions in the market appear to bring costs is that it produces a restriction in freedom. If someone creates a regulation that you cannot fire an employee without giving six months notice to meet objective minimum standards to keep their job, then this restricts the freedom of an employer to make economic decisions that may be beneficial. In the best case, it will cause no harm because you had no intention of firing an employee, but in the worst case an employee salary could be a burden on society, it could prevent an employer from hiring a more productive worker, and the employee could actually be a downright hindrance to their workplace for the six months of review.
Similarly, for nearly every intervention in the market, it models out as a restriction of freedom that either is not harmful because the intervention was not needed, or is standing in the way of a market’s freedom and producing costs in an economy.
This portrait takes the current economic reality as a given, clamped in place. A market will reconfigure around the priorities of a society, the available assets and skills of its people, and the constraints of nature. In our current society, we have profound economic freedom in the hands of very few people. For the vast majority, there are very few viable economic paths before them. Their actual economic freedom, adding both the government restrictions on their freedom and from their economic circumstances, is nearly non-existent.
We do bear the responsibility for our economic goals
Much like private sector investment, economic interventions are not without risk. We may seek to create a society with prosperity and tremendous, broad-based economic freedom yet arrive in hell through terrible judgement. However, the solution is not to mindlessly chip away at any intervention that we can control, which also in some manner restricts economic freedom.
We have to aspire to take responsibility for charting a path towards supporting the economic aspirations we have for ourselves and our children.
Whether we recognize that responsibility or not, we have it. President Reagan changed American life fundamentally, enacting policies that would predictably diminish the economic freedom of millions of Americans and expand the freedom of others. He bears responsibility for this industrial policy goal, regardless of his libertarian economic philosophy.
Similarly, Scott Bessent is dead wrong that industrial policy is a tool and not a goal. He and the Trump administration will bear responsibility for all of the economic consequences of their policies, and not just for the explicit interventions they make in the economy.