The Specter of State-Controlled Industrial Policy
When considering industrial policy, one is reminded of the old saying “been there, done that.” It almost always begins with declarations of good intentions — strategic industries, jobs, national champions. If only these firms received sufficient support, the argument goes, they (and the nation) would flourish. Politicians and bureaucrats have repeated this claim for decades. And whenever someone points to the lessons of history, the response is the same: “This time it’s different.”
The history of U.S. industrial policy dates back at least to Alexander Hamilton’s Report on Manufactures, from 1791; it advocated tariffs, subsidies, and state support to foster domestic industry. Since then, in the name of national security, supply-chain resilience, and economic competitiveness, presidents and Congress alike — across party lines — have deployed tariffs, subsidies, and targeted tax incentives. What, then, distinguishes the present moment?
We have now moved beyond subsidies and tax preferences to direct government purchases of equity stakes and equity warrants — which confer the right to buy shares at a predetermined price — in so-called strategic firms: MP Materials, Intel, Lithium Americas, Trilogy Metals, Vulcan Elements, and ReElement Technologies. More are likely to follow. State participation in corporate equity for industrial policy purposes may still be in its infancy in the United States, but its track record abroad is not encouraging.
Europe has already run the experiment many times and in many different forms. There have been successes, but the overall record offers mostly cautionary tales.
For instance, France during Les Trente Glorieuses — the postwar boom from 1945 to 1975 — and Bismarckian Germany are often cited as cases where industrial policy, whether through the coordination of private industry or extensive state ownership, appeared to “work.” Yet these cases are not as clear-cut as often suggested: Both episodes were shaped by specific historical forces — namely post-WWII recovery in France and post-unification catch-up in Germany. Industrialization might well have unfolded even without state support — something we will never know — implying opportunity costs and risking a post hoc ergo propter hoc fallacy.
Similar episodes abound, but Fascist Italy stands out as one of the most prominent examples of state-led industrial strategy in the West during the interwar era — and one of the clearest illustrations of the corrosive effects of extensive state control.
Beginning with the creation of the Institute for Industrial Reconstruction (IRI) in 1933 — a state-owned holding company tasked with restructuring failing banks and firms — and followed by the establishment of the National Hydrocarbons Board (ENI), a state-controlled energy company, and the Agency for Shareholdings and Financing of Manufacturing Industries (EFIM), which oversaw public investment in manufacturing, the Italian state came to control vast sectors of steel, shipbuilding, energy, telecommunications, and transport. The approach long outlived Mussolini.
Politics shaped business decisions, losses were socialized, and restructuring delayed. What began as strategic stewardship hardened into bureaucratic inefficiency. By the 1990s, as IRI was dismantled, EFIM liquidated, and ENI partially privatized, the fiscal costs that had accumulated over decades had become politically unsustainable.
The details vary and the caveats are many. Yet the trajectory tends to follow a pattern.
It begins with subsidies — phase one. These initial measures often come with few conditions, meant to signal restraint: The government is simply providing support while strategic decisions remain with management. The state is not intruding; it is helping.
Disappointment inevitably follows. When results diverge from the plan, phase two begins: Politics enters the firm. Management is deemed incapable of delivering the desired outcomes. A question no one asks — at least not publicly — is why competent management would have required public support in the first place. The strategic plan, after all, is declared sound; only its execution is lacking.
Then comes phase three. Public money now justifies oversight. Officials visit plants, tour facilities, and interview managers and workers. Oversight rarely stops at observation. It soon leads to phase four: equity stakes. If the state is providing the capital, why should it not share in ownership?
If we put to one side the opportunity costs already incurred by such policies, phase five is where things begin to go badly. Boards and managers are no longer chosen for competence alone. They must serve the “state interest.” Political appointments replace managerial talent. The state, it is assumed, knows better.
The strategic plan remains “fantastic.” The problem was the old management, now replaced by bureaucrats. Yet financial markets remain unconvinced — an intolerable verdict for a “strategic” project. This must reflect hostility or bias rather than the financial markets’ clear-eyed assessment of a project’s economic viability. Whether directly or indirectly, the state steps in with help (guarantees, subsidies, loans from public banks, and the like) to see that the plan receives the capital that free markets will not freely provide. This is bad news for competitors that can flourish on their own.
Losses pile up. Yet it is not a solvency problem, we are told, but a liquidity one. Losses are socialized; discipline weakens.
As the situation begins to resemble a disaster, denial becomes policy. We cannot let this go to waste. If the original firm was “strategic,” its suppliers must be strategic, too. Then its lenders. The perimeter keeps expanding. Entire industries are folded into the industrial plan. Banks follow. Worker protections are strengthened — the state cannot be seen firing people. It is only fair to protect workers if owners were protected first.
The result was familiar to anyone who knows Italy well: industries frozen in time, investment driven by politics, and the withdrawal of state support often too politically toxic to be risked.
This progression is often ignored. Many analyses — too many — present an overly simplistic view of industrial policy, neglecting its political economy. The result is a framework that works neatly in theory — at least for optimists or the ideologically convinced — but breaks down in practice. These accounts overlook the central difficulty: Sustained government involvement in business activity weakens corporate governance. Decisions normally disciplined by markets are validated by the rubber stamp of state control. Knowledge is dispersed, yet state control brings centralization — the only way, after all, to ensure that everything proceeds “correctly.”
They also neglect a basic political reality. Politicians do not like to fail publicly, especially when elections loom. A mistake that could have been acknowledged and corrected early becomes the starting point for additional interventions, each meant to fix the previous one.
As errors accumulate, admitting failure grows more costly — political careers are now on the line. What could once have ended with limited losses becomes a self-reinforcing cycle of mistakes and “fixes.” The project turns “too big to fail” or, more precisely, too big to confess.
When all is said and done, public money has been lost and opportunities foregone. Yet those responsible retain a ready justification: Mistakes were made, but in the name of the common good. The moral high ground conveniently erases accountability.
Time passes. Decades go by. The generations that lived through the failures of industrial policy fade from memory. The clock resets. Once again, we are told that this time is different. The nation needs it. The consensus is broad. And so, the cycle resumes.
Today’s American debate should take this backdrop seriously. Support for industrial policy now spans the political spectrum, a bipartisan consensus often mistaken for wisdom. More often, it is a reminder that bad ideas have no party label. It is also a reminder that some of the more astute — if less scrupulous — politicians are, and always will be, aware of the opportunities for power accumulation and the rent-seeking that industrial policy affords. Industrial policy may be bad for the economy, but it can be good for the political class. Yet we are told that this time is different: Industrial policy is invoked not to address economic shortcomings but to serve geopolitical aims and fortify the nation against strategic rivalry.
The road to industrial policy is paved with (sometimes) good intentions — and littered with bad outcomes. In public policy, hubris consists in repeating yesterday’s failures in the confident belief that this time will be different. A modern Dante Alighieri would surely reserve a circle of his Inferno for those responsible for such efforts.