If the goal is genuine economic strength, we should stop trying to micromanage the economy through protectionism or top-down industrial policy.

In the Wall Street Journal, Jared Bernstein and Dean Baker have a piece about how the Trump administration’s sweeping agenda of protective tariffs, meant to restrict imports to create a manufacturing renaissance, will fail. These authors propose instead a sprawling array of subsidies, tax credits, and federal grants aimed at coaxing domestic production in “strategic” industries. These are the two dominant industrial-policy frameworks today — and they are both deeply flawed.

Let’s review Bernstein’s and Baker’s mostly correct criticism of the Trump — that is, the tariff — approach to industrial policy.

Baker and Bernstein explain that Trump’s tariffs won’t achieve most of their intended outcomes. While they might reduce imports, they’ll not reduce trade deficits. Tariffs tend to strengthen the dollar, making our goods less competitive abroad, decreasing our exports. In addition, our tariffs will prompt our trading partners to retaliate with tariff hikes of their own, further reducing U.S. exports. This is exactly what happened during the first Trump term: Despite aggressive protectionism, the trade deficit as a share of GDP stayed flat. (Until the final quarter of 2019, it was actually a larger share of GDP.)

And even if tariffs could somehow balance trade, they still wouldn’t reverse the long-term decline in manufacturing employment. Berstein and Baker note that Germany runs persistent trade surpluses, yet it, too, has seen its share of manufacturing jobs fall. Between 2000 and 2024, Germany’s factory employment, as a share of total employment, declined from 20 percent to 16 percent — a trajectory not unlike our own. Technological progress, not trade, is why fewer people work in factories today.

More importantly, tariffs often harm the very sectors they’re meant to protect. Roughly half of U.S. imports are intermediate goods used in domestic production. Half of our imports and a third of our exports are between multinational firms. Taxing these inputs makes American producers less competitive — whether they substitute American products or pay the higher tariff price, their cost goes up. That’s why even U.S. automakers and aluminum producers have lobbied for their imported inputs to be exempted from tariffs.

Further, the fantasy of full-scale reindustrialization of the workforce is just that. Let’s even imagine that higher import taxes on manufacturers and producers — making the inputs they use more expensive — will convince most of them that investing in the U.S. is a good deal, leading to more manufacturing on our shores. Even in this unlikely scenario, there will be no boom in manufacturing jobs. That’s because the drive to be efficient — the competitive pressure to produce more and better at lower costs — will require more automation.

The alternative is one that the proponents of industrial policy for the sake of job creation in manufacturing haven’t considered. If manufacturing were to re-employ a large number of workers, it would mean that they must diminish their automation and, in doing so, lower their productivity. And lower productivity means lower real wages.

Yet those who clamor for reindustrialization (whatever that means, considering that industrial output and capacity today are at all-time highs and manufacturing output is 177 percent higher than the last time the U.S. ran a trade surplus in 1975) naively suppose that government-engineered increases in manufacturing employment will, by some miracle, not reduce manufacturing wages. America specializes in high-value production. That’s what happens when you are a rich country: Your workers are highly productive and have good employment options, so their wages rise. The closer we’ll get to restoring the American economy of the 1950s the closer we’ll get to reducing Americans’ real wages — and to worsening Americans’ work conditions — to what these were 70 years ago.

But it will never get to this because tariffs imposed by Trump will simply make America the most expensive place to build in the world.

The American people seem to understand this better than the administration, which explains why very few people support tariffs, including farmers.

But if tariffs are bad policy, what about the alternative? Bernstein and Baker argue that the best way to create the reindustrialization that the Trump people want is to double down on the Biden administration’s industrial policy of subsidies and direct industrial support. Through legislation like the Inflation Reduction Act, the CHIPS Act, and the Bipartisan Infrastructure Law, Washington has poured hundreds of billions of dollars into clean energy, semiconductors, and infrastructure. Factory construction has indeed risen since 2019, and officials are quick to credit these laws.

Yet this approach, too, is built on shaky assumptions. The idea at the heart of this theory is that government incentives can crowd in investments that wouldn’t happen otherwise. And in some cases, it does happen — think about Solyndra (a company that couldn’t find funds until it got a loan guarantee from the Obama administration). The risks are high when the government manages to crowd in investment because usually, there is a reason why the subsidized companies couldn’t get access to capital — as a reminder, Solyndra went under and taxpayers footed the bill.

However, the crowd-in companies are the minority of those receiving benefits. In fact, the reality of government subsidies is that most of the beneficiaries would do the work without the subsidies or would have access to credit without the government loan. The IRA subsidies are a good example, as most of the companies benefiting from these subsidies were already planning to invest before the bill was passed. The CHIPS Act, meanwhile, showered “the hugely profitable semiconductor sector with about $39 billion in federal subsidies to build and upgrade U.S. chip factories,” as Jack Shaffer rightly reminds us.

In these cases, the subsidies are not causing new activity, they’re often simply paying companies to do what they were already going to do. In that sense, they are a waste of taxpayer dollars. But it gets worse. Subsidies also encourage companies to undertake activities that — when they were spending only their own money — they calculated were unprofitable, meaning wasteful of scarce resources. Subsidies, in short, make it privately profitable for corporations to publicly waste resources.

And once these subsidies start flowing, they are politically very hard to unwind. Industries that are artificially propped up develop strong lobbying arms to ensure their support never disappears. Just look at the number of Republicans who are getting weak at the knees at the idea of ending Biden’s green energy subsidies because special interests in their districts like the perk. The result is an economy that drifts further from market discipline and deeper into cronyism and rent-seeking.

Ultimately, tariffs and subsidies are two sides of the same costly coin. Both cases rely on the idea that politicians and bureaucrats are better at allocating resources than the market. Both underestimate the dynamism and adaptability of private enterprise. And both overpromise: tariffs will not bring back 1950s-style manufacturing employment, and subsidies will not create a resilient, self-sustaining industrial base or the “industries of the future.”

If the goal is genuine economic strength, we should stop trying to micromanage the economy through protectionism or top-down industrial policy. Instead, we should focus on creating the conditions for broad-based growth: a stable fiscal environment, low barriers to entrepreneurship, and a regulatory framework that encourages investment rather than punishing it. Oh, and also a commitment to a policy of free trade.

Industrial policy, whether dressed up as tariffs or as handouts, distracts from these fundamentals. And in doing so, it underminines the very prosperity it claims to build.