Industrial Policy was the Gateway Drug to Cronyism

Is the United States moving toward “state capitalism with American characteristics”? Greg Ip thinks so. His column comparing the Trump administration’s actions with the Chinese Communist Party’s approach to business sparked a bout of soul-searching about the economics of the President’s readiness to wade into corporate decisions.

In the last two months, Trump has extracted a golden share in U.S. Steel to approve its Nippon merger, strong-armed Apple into $600 billion of investment in U.S. production, called publicly for the Intel CEO’s ouster, and shaken down Nvidia and AMD for 15 percent of revenue from certain chips sales to China (in effect, an export tax). Now the administration is pondering a 10 percent stake in Intel, something that reports suggest could expand to all major semiconductor firms receiving federal funds.

There’s a word for the government owning the means of production, of course: socialism. Commerce Secretary Howard Lutnick can deny that this is a step in that direction, but whether he sees this as a way of circumventing Congress to, in effect, create a sovereign wealth fund or as a means of “getting taxpayers a return” on their subsidies, the effect is the President allocating capital through partial nationalization.

The Costs of the Deal

This President, of course, sees himself as in control of the business community. In May, he said he would call up businesses whose decisions he disagreed with. “And on behalf of the American people,” he said, “I own the store, and I set prices, and I’ll say, if you want to shop here, this is what you have to pay.”

Trump’s outlook thus lends itself to making bespoke deals with individual firms—the roughest form of crony capitalism. Those who understand the virtues of a market economy know that this is bad news.

Why? This sort of company-by-company politicization is inherently corrupting to businesses’ purpose. In a market economy, businesses become profitable by creating value for their customers in the pursuit of profit. As soon as a President shows a willingness to use his bully pulpit or policy to reward or punish companies, a new constraint is added to their decision making.

When thinking about long-term profitability, individual businesses must also second-guess how the President will react to their business actions or pricing. This warps decision-making away from them making the most efficient investment, location, or hiring decisions. And this is corrosive over long periods of time. The damage is cumulative, not catastrophic: a long, quiet drag on innovation and productivity (think the slow grind of the Jones Act).

It makes complete sense for individual firms to engage with a President who operates in this way. Take Nvidia and AMD. They doubtless prefer paying a 15 percent tithe to the feds over getting locked out of the Chinese market entirely. Meanwhile, the President can trumpet some short-term benefits to Americans of any action, such as additional revenue from this skimming. The problem is that the costs are borne out longer-term and are less visible, as the reduction in scale opportunities and associated complementarities harm productivity and push Chinese purchases to foreign rivals.

Knowing that the President is so transactional with your business interests turbocharges lobbying too. Mike Pence’s Advancing American Freedom group suggests that tariff lobbyist revenue has gone through the roof in 2025. Every business wants their own sweetheart deal or exemption. The money spent on such political patronage makes sense from the perspective of an individual company, but it is wasteful for society.

Economic modelling confirms that since political outcomes are biased toward those with comparative advantage in lobbying—those who are relatively less efficient in production—inefficiency must arise from a successful lobbying campaign. Making lobbying even more profitable can only exacerbate the effect.

And this distorts the competitive landscape. Who are the companies that can lobby at scale and command in-person meetings with the President? Well, the biggest. Start-ups and unicorns and unborn firms don’t have the political connections and there are only so many meetings the President can have in a day. Inevitably, then, firm-level deal-making is exclusionary in a way that muffles the creative destruction of the market.

What’s more, when a “deal” is reached, or a stake taken in a firm, the President then has a political incentive for the specific company to succeed. When U.S. income is tied to shares in national champions, there is an incentive for lawmakers to double-down on subsidies, procurement nudges, and regulatory favors to protect those bets. As Justin Wolfers asked on TV: would an Intel stake result in government pressure on, say, Apple to buy Intel’s chips? The risk is that market discipline further gives way to political portfolio management.

Tariffs and Industrial Policy Are the Gateway Drug to Firm-Specific Cronyism

It’s tempting to write this all off as something unique to President Trump’s style and worldview. But the enabling condition has been the revival of tariffs and industrial policy under both Trump and Biden.

Industrial policy and protectionism is itself a form of cronyism, but, at least in theory, it can be one grounded in clear rules and conditions, known in advance by all firms and limited in political discretion.

In reality, what happens when you get a policy regime change that dishes out new privileges is a rush for favors or exemptions, breeding the bespoke, firm-level dealing that this President is only too willing to provide. As Tyler Cowen reminds us, Ludwig von Mises warned about this “interventionist ratchet.” A “middle-of-the-road” mixed economy isn’t a stable equilibrium, Mises thought, because one intervention begets the next and so we drift toward de facto state control or ownership.

Demand for deals: Tariffs hasten this drift towards company-level cronyism. On the demand side, major changes to tariff schedules fundamentally distort supply chains and trade flows, raising input costs for some firms and deflecting demand to domestic substitutes. Firms sprint to Washington for exemptions (if their inputs are tariffed) or entrenched protection (if they think there’s an opening).

We saw firms ramp up their lobbying shortly after “Liberation Day,” and when the White House released the exemptions list, it showed which sectors succeeded. Reason identified the lobbying-heavy auto, pharmaceutical, energy, and semiconductor sectors as the big winners. More recently, steel and aluminum tariffs have been expanded to a whole range of “derivative” products including “baby strollers, tableware, motorcycles, and spray deodorant.” Domestic producers lobbied Washington for their own products’ inclusion.

In terms of preventing tariffs, Apple momentarily faced threats, but after announcing U.S. investments totaling $600 billion—and gifting the President a 24-karat-gold-mounted plaque commemorating the “Apple American manufacturing program”—it too won exemptions from some of the most onerous tariffs. Tariffs, in other words, encourage lobbying, enabling this deal-making President to negotiate and wield his power over large companies for agreements. Small businesses, frozen out, can only turn to the courts.

This isn’t a Trump-specific effect either. Throughout American history, every time Congress revisited the tariff schedules it kicked off a rent-seeking scramble among American businesses. This happened again with tariffs’ reprise in 2018, when the Trump administration levied tariffs on $550 billion of Chinese goods. Researchers have found that past campaign contributions to the Republican party increased exemption approval likelihood while donations against the executive’s party decreased the likelihood.

Industrial policy as subsidies or tax breaks has similar effects, of course. When the government reveals itself to be a strategizing agent instead of a disinterested referee, business leaders know they too can curry favor with it. When the arguments in favor of protectionism or subsidy include protecting U.S. jobs or supporting national security, it’s hard to imagine an industry that couldn’t make a claim that they contribute positively, even if tangentially.

Supply of deals: Crucially, these broad interventions enhance the supply of firm-specific deal-making too. Once the U.S. announces it wants to protect the steel sector, for instance, it stands to reason it will want a say in the merging or acquisition decisions of major steel companies or their strategies to shift production abroad. The golden share becomes an attractive tool for the government to make sure its policies pan out. The same impulse is currently appearing with semiconductors. If the U.S. has already showered Intel with subsidies and grants, why not take an equity stake in the company and earn a return on investment?

Certain left-wing progressives love the idea of government playing venture capitalist too. This is the “entrepreneurial state” vision promoted by Mariana Mazzucato, where the government acts to achieve “missions,” throwing subsidies around and taking stakes in firms that benefit from the largesse. Yet from an efficiency perspective, politicians’ concerns will always be reputational and electoral, not economic. Their bets are insulated from market discipline, so mistakes endure, and inefficiency multiplies. When an investment doesn’t pan out, lawmakers again face incentives to double down.

Conclusion

Since January, the U.S. government has engaged in ad-hoc industrial policy on a scale arguably not seen since the New Deal. The president has negotiated firm-specific deals, demanded CEO resignations, and instructed companies on how they can communicate prices to consumers. He’s tied export licenses to payments made out to the treasury, wrested a golden share from a company to approve a merger, and conditioned tariff policy on domestic business decisions.

Some of this is unique to Trump’s brazenness (few presidents have been so willing to make corporate decision-making a matter of personal negotiation), but the groundwork was laid with the huge expansions of government-granted privileges since 2017. Tariff walls and enormous subsidies furthered by both Trump and Biden cracked the door for cronyism and now we’re barging through. If we want to avoid state capitalism with American characteristics, we must recognize that the gateway drug was industrial policy itself.