Written by: Sunjna Namjoshi
For much of the late twentieth century, industrial policy occupied a marginal position in U.S. economic thinking. Government efforts to direct investment or subsidize specific industries were widely viewed as inefficient, distortionary, and vulnerable to political capture. Market allocation, paired with free trade, was understood as the most reliable path to long-run growth. That consensus has quietly collapsed. Today, industrial policy has reemerged not as a partisan experiment but as bipartisan orthodoxy reflected in legislation such as the CHIPS and Science Act and the Inflation Reduction Act, alongside renewed use of tariffs, local-content requirements and targeted tax incentives (Rodrik, 2022; Congressional Budget Office, 2023). While debate has largely centered on whether this shift is justified, far less attention has been paid to a more uncomfortable question: who ultimately bears the economic costs of this new industrial policy regime?
The return of industrial policy reflects a series of shocks that exposed vulnerabilities in the efficiency-first model. Supply chain disruptions during the COVID-19 pandemic revealed the risks of geographic concentration in critical industries, particularly semiconductors, pharmaceuticals and energy inputs (Antràs, 2020). At the same time intensifying geopolitical competition, especially between the United States and China, has reframed industrial capacity as a matter of national power rather than market efficiency alone, strengthening the case for domestic production and strategic autonomy (Rodrik, 2022). Climate change has further accelerated this shift. While economists long favored carbon pricing as the most efficient climate tool, political constraints have pushed governments toward subsidies and direct public investment in clean energy technologies instead (Aghion et al., 2021). Together, these forces have made industrial policy not merely acceptable but politically unavoidable.
Yet these interventions are not costless. Subsidies, tax credits, and public guarantees must ultimately be financed through higher taxes, increased public debt or forgone public spending elsewhere. Recent estimates indicate that clean-energy and manufacturing incentives now constitute a substantial and growing share of federal tax expenditures, with long-term fiscal impacts that remain highly uncertain (Congressional Budget Office, 2023). These costs are diffuse and often invisible to the public, while benefits are concentrated among firms and regions best positioned to capture subsidies. This asymmetry weakens democratic accountability and raises distributional concerns, as industrial policy may disproportionately benefit capital owners and higher-income households in the short to medium term (Bistline et al., 2023; Lane, 2020).
Proponents of industrial policy frequently argue that efficiency must now be balanced against resilience. Redundancy, domestic production capacity, and supply-chain security are framed as public goods worth paying for. While this logic is compelling, it obscures important trade-offs. Resilience-oriented policies often imply higher production costs, reduced specialization, and slower productivity growth – costs that appear not as line items in government budgets but as higher consumer prices and weaker real wage growth over time (Antràs, 2020). Political economy concerns further complicate the picture. When governments select sectors or technologies for support, they invite rent-seeking behavior and political capture, particularly if subsidies persist beyond their original economic justification or lack clear performance benchmarks (Lane, 2020).
These risks are magnified at the global level. As the United States, European Union, and China simultaneously expand industrial subsidies, the result increasingly resembles a subsidy race that fragments global trade and encourages retaliatory policies (Evernett et al., 2023). Smaller and developing economies lacking comparable fiscal capacity, are often crowded out or disadvantaged by this competition. Industrial policy is therefore not only a domestic economic strategy, but a force reshaping the international economic order. If it is to be sustainable and legitimate it must be accompanied by transparency about trade-offs, rigorous evaluation of outcomes, and a clear accounting of who pays and who benefits. Without such scrutiny, the danger is not state intervention itself, but intervention without accountability where costs are socialized, benefits are concentrated and economic reasoning gives way to political expedience. Ultimately, the resurgence of industrial policy reflects a broader shift in how governments understand economic risk in an increasingly fragmented world. Prioritizing resilience, domestic capacity, and strategic autonomy may be defensible in the face of geopolitical rivalry and climate pressure, but these goals are not free. Treating industrial policy as an unquestioned solution risks obscuring its fiscal costs, distributional consequences and long-term effects on productivity and global cooperation. If industrial policy is to remain a credible tool rather than a political reflex, its trade-offs must be made explicit and subject to ongoing scrutiny. The challenge is not if governments should intervene, but if they are willing to confront the economic costs of doing so moving forward.
References
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Antràs, P. (2020). De-globalisation? Global value chains in the post-COVID-19 age. National Bureau of Economic Research Working Paper Series, No. 28115. https://doi.org/10.3386/w28115
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Congressional Budget Office. (2023). Budgetary effects of the Inflation Reduction Act. U.S. Government Publishing Office.
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Evenett, S. J., Fritz, J., & Wolff, G. B. (2023). Subsidy races and the fragmentation of global trade. Economic Policy, 38(114), 311–357. https://doi.org/10.1093/epolic/eiad006
Lane, N. (2020). Manufacturing revolutions: Industrial policy and networks in South Korea. American Economic Review, 110(1), 76–111. https://doi.org/10.1257/aer.20170932Rodrik, D. (2022). Industrial policy and the return of economic nationalism. Project Syndicate.