Is American Capitalism in Retreat?

0:04In the United States, the economic system is usually described with one word, capitalism.

0:13Historically, the United States was about as close to pure capitalism as you could get. Greg Ip is The Wall Street Journal's chief economics commentator. He says that for the past decade or so, the country has been second-guessing its commitment to free markets. The United States, I believe, in the last 10 or 15 years has migrated away from the pure free market model. There's bipartisan disillusionment with the free market capitalism model that we had sought to pursue for so many years. There's a view, for example, that the unquestioned embrace of free trade led to the offshoring of very good manufacturing jobs, that it left the U.S.

0:49behind in sort of like critical areas, like semiconductors and so forth, where it didn't invest in the future. And recently, Greg says, that view has been gaining traction. The government, especially under Trump, has been taking a greater and greater role in directing the economy, from weighing in on a tech CEO's job, to taking a stake in a steel company and a rare earth mineral company to striking deals with computer chip manufacturers.

1:17And Greg says there's a name for all this. State capitalism. I would say state capitalism is a model of capitalism where most of the means of production remain in private hands and private shareholders, but the state takes a very strong role in deciding what those private companies can do. And that role goes beyond just, say, setting tax rates or even broad regulations, but actually getting involved in the decisions by private companies about where to invest and what to emphasize. For many years, the country most associated with state capitalism has been China. 25 years ago, as China liberalized, the conventional wisdom was that eventually its economy would look like the U.S.

1:55economy. But what we've seen in the last year is moves under both the Biden administration and especially under the Trump administration that are starting to make the U.S. economy look more like China's. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, August 19th.

2:20Coming up on the show, has the U.S. abandoned free market capitalism?

2:39One way to think about economic systems is that they exist on a spectrum. There's socialism on one end and free market capitalism on the other. It's a continuum. There really is literally no true free market, let's say fair, country in the world. We have, you know, government-owned airports, right, and utilities and so forth. So there's no country that is truly free market. And honestly, there aren't really any countries that are truly socialist any longer, with the possible exception of North Korea. And the U.S. has flirted with government intervention and private business in the past, starting in the mid-20th century under Franklin D.

3:14Roosevelt. Well, historically for the United States, the federal government was almost a non-presence. Apart from the post office, it did very little regulation, right? And that begins to change under FDR, where you have a large expansion of the state, along with the New Deal and a lot of new guarantees, things like deposit insurance, things like housing assistance. We have, through various federal agencies, saved debtors and creditors alike in many other fields of enterprise, such as loans on farm mortgages and home mortgages. And then in the Second World War, because of the urgency of building up munitions and weapons to fight the Second World War, the federal government creates the War Productions Board, which essentially dictates to companies like Ford and North American Aviation, you must build the following things for us to fight the war.

4:01America speeds production through increased output in old plants, through new and expanded plants from coast to coast. America builds for defense. So that was, in some sense, pure state capitalism. The government did something similar in the 1950s during the Korean War. It passed a law called the Defense Production Act, which allowed the president to declare an emergency and order companies to manufacture needed products. More recently, during the 2008 financial crisis, the U.S. government intervened again, bailing out banks and car companies. Bailing out Wall Street is the only way to save Main Street, so says the president.

4:42And then, of course, there was the COVID-19 pandemic, when the government provided billions to struggling businesses. Last month, I asked Congress to pass the Paycheck Protection Program, giving small businesses emergency economic relief. But this, of course, was because if they hadn't stepped in, something terrible would have happened to the economy. What's happening today is different from those things. Greg says that the recent moves from the government go beyond responding to a temporary emergency. Instead, they're proactively intervening in private companies. The current push toward state capitalism started during Joe Biden's presidency.

5:18He wanted to give some sectors a boost, like the semiconductor industry. In 2022, Congress passed the CHIPS Act and gave billions of dollars for companies to manufacture in the U.S. He was also interested in boosting the clean energy industry. He thought that the climate, global warming, was something the U.S. had to proactively address, and he wanted to create jobs out of that effort. And so he passed the Inflation Reduction Act, which created a variety of incentives to invest in clean energy, clean power, nuclear, geothermal, all those sorts of things. There was a$400 billion fund set up using existing authorities to lend money to renewable energy companies.

5:57So I think even under President Biden, you saw this movement away from that classic free market model to being more open to the idea that intervention was appropriate in some areas. What we've seen under Trump is an acceleration of all of that. Since Trump's been in office, what are some of the most obvious or biggest examples of him really taking this idea of state capitalism to the next level? There's the Nippon Steel takeover of U.S. Steel. Nippon Steel is a Japanese steel company that had put in the bid to acquire U.S. Steel, an American company based in Pittsburgh. Their bid was contentious because there were national security concerns about foreign ownership in such a critical industry.

6:37Eventually, President Donald Trump approved the deal, but with some conditions. And when Trump came in, he actually okayed the takeover, but he made a conditional on U.S. Steel handing over a so-called golden share to the U.S. Treasury. Now, exactly what form this share will take is unclear, but the idea is that major decisions that U.S. Steel makes, the U.S. gets to have a say in those, possibly even a veto. What I think is interesting, given the conversation we're having, is that China does exactly the same thing. President Xi Jinping requires private companies to hand over a golden share. They even use exactly the same term, by the way, a golden share to the Chinese Communist Party so that even these nominally private companies must in some sense defer to the priorities of the state in their key decisions.

7:24Last month, the U.S. government took a stake in another company, MP Materials. It's a company based in Nevada that extracts and refines rare earth minerals, which are critical to making everything from batteries to fighter jets. And the most recent examples of Trump's inroads into state capitalism are in the chip industry. Last week, he announced a deal with NVIDIA and Advanced Micro Devices that would give the U.S. government a 15 % cut of certain chip sales to China. Also this month, Trump said the CEO of Intel should resign. Administration officials are now discussing taking a stake in the chip maker, according to people briefed on the talks.

8:02Now, I'm not saying that this is necessarily a bad idea. Intel is a pretty important company, and there might be some value to having that, you know, some government money, make sure that they continue to have a presence and be a healthy presence in the United States. But Greg says what is unusual here is that Intel and these other chip makers aren't companies that are failing. You know, it's not like NVIDIA is going to fail if the United States doesn't, you know. It's the most valuable company in the world. Intel's a little bit shakier ground, but it too isn't exactly a basket case. yet. So what you're seeing is an affirmative type of intervention where the government isn't just acting as the investor of last resort, but a first resort in some cases.

8:46Why now? Why is state capitalism gaining traction in this moment? Well, as I mentioned earlier, I think partly it's because of disillusionment with free market capitalism in the sense that we let China get too far ahead. We let certain things slip away. So the U.S. is focusing its state capitalism efforts on strategic sectors, places where the U.S. simply cannot allow itself to be behind. And so the case for semiconductors is almost self-evident because they're ubiquitous in all high-end applications, whether it's artificial intelligence, satellites, you know, missiles. But I think it's specific to Trump as well.

9:19He has a very aggressive, robust view of executive power. He's asserting powers that presidents have in the past. He's very obsessed with getting paid. The government should get paid to be the mark, you know, like countries that sell to the U.S. should pay for the privilege. They should invest in the United States. And he, as a president, gets to say where that investment goes. That's kind of a mindset that's somewhat unique to Trump. And so I'm not sure that we'd be in this position now but for Trump. A White House spokesperson said, quote, Cool inflation, trillions in new investments, historic trade deals, and hundreds of billions in tariff revenue prove how President Trump's hands-on leadership is paving the way towards a new golden age for America.

9:59Coming up, we'll hear from Greg about the potential pitfalls of state capitalism.

10:19To understand the advantages and disadvantages of state capitalism, Greg and I talked about China, a country where for decades the Chinese Communist Party has directed the way the economy was run. China was about as close to pure socialism as you could get. But certainly since 1979, China has moved steadily away from the pure socialist model, where, yes, some of the key enterprises remain in state hands, but private shareholders own pieces of them, and the most dynamic and fastest-growing companies in China are primarily private. Though China doesn't call its system state capitalism. So the Chinese call it socialism with Chinese characteristics.

10:56How has that worked for China? Well, if you were asked the Chinese, they would say it's worked really well. Their economy has grown extremely fast since 1979 when these reforms began. And even though in the initial part of industrialization, China's model is mostly about catching up and copying the West, there are now areas where it basically is as good as if not ahead of the West. For example, electric vehicles and drones, you know, and certain military applications. So the Chinese would say that that wouldn't have happened if they had not used all the levers of the state, such as subsidized capital, subsidized loans, state ownership, government preferences.

11:30You know, the Chinese would say all that has worked extremely well for them. China has gone from essentially a very poor country to an economic superpower whose only true peer is the United States. Greg says there's an idea that the U.S. government could and maybe should mimic some of this and have a more active role in the decision-making that happens in private companies. And for some, that's a compelling argument. Some people say in the Chinese system is that, like, they're very decisive, right? You know, they say, let's, we want to, like, build a steel factory. We're just going to go out and build that steel factory.

12:03We want to build high-speed rail. We're going to go out and build that high-speed rail. You know, all these government funds shower money on electric vehicle companies. And next thing you know, China leads the world in electric vehicles, right? So there's a lot of folks in our system who say, why can't we do that? And they sort of see America bogged down in all of its like legalistic objections, right? You can't even build a highway without like 10 groups coming out of the woodwork and suing to stop it because, you know, it infringes on their quality of life. And so you can see why some folks like Trump's, you know, forcefulness and his assertion of broad executive power as just what this country needs kind of like to break out of its funk.

12:40Are there any disadvantages to state capitalism? Like, is China also experiencing problems with its version of this? If you actually delve into the numbers, you discover that the areas where it has grown fastest are those areas where the state was least involved. And in fact, China's growth always accelerated when the state tended to retreat from particular parts of the economy. And so in some sense, China owes its growth not to the involvement of the state, but the retreat of the state that allowed the natural entrepreneurial vigor of the Chinese people to come to the fore. So you can make the case that China grew fast in spite of not because of state capitalism.

13:18And today we can also see that notwithstanding some of the amazing success stories, you know, such as electric vehicles, there's also staggering like waste out there. You know, massive overcapacity in industry after industry, such as steel, to the point that many of these companies, many Chinese companies are losing money. So what I would say is that while China sometimes epitomizes a state capitalism model, you want to think twice before thinking that it's all roses. Greg says that another issue with state capitalism is that it's also about political control. He points to an incident in 2020 when a major Chinese tech CEO criticized the Chinese government.

13:56Jack Ma, who is the co-founder of Alibaba, spoke out against financial regulation, and Xi Jinping retaliated. He canceled an IPO, investigated the company, and made it clear who's boss here, right?

14:10In the U.S. context, you do worry that, like, the more the government involves itself in private sector decisions, the more this becomes a way of not just advancing a particular vision of the economy, but advancing the political interests of the people in charge. We've already seen Trump use the power of the federal government to punish media companies, law firms, and even banks that he believes have opposed him politically. And you do worry that, like, a president or an executive unbounded by legal and constitutional constraints on his actions within the economy could push that further in that direction.

14:44That's another thing that Greg is looking out for as state capitalism continues, the legal grounds for what's going on. When Biden announced subsidies for chips and clean energy companies, he did so under authorization from Congress. What Biden was doing was that he first passed the laws that authorized this extension of government resources to the private sector. Trump is acting without a legal basis for much of what he's doing. The investments that he's insisting Europe and Japan and South Korea make in the United States, there's no legal framework that governs that. that the 15 % he's asking for on chip sales from AMD and NVIDIA, not only is there no law authorizing that, but in form, those look like export taxes and the U.S.

15:32Constitution forbids export taxes. So that's an important difference between the way Biden went about it and the way Trump is going about it. What kind of problems do you maybe see that causing down the line? I mean, we're a nation of laws. You know, the U.S. Constitution says the Constitution and the laws are the supreme law of land, right? And the executive in the article two says the duty of the president is to faithfully execute those laws. It's not to essentially decide for himself what the laws are, you know? And I think that that model has worked very well for the United States. It's worked democratically and it's worked economically, right?

16:02The constitution says that the government may not deprive people of liberty or property without due process, right? Due process implies there needs to be some kind of like legislative code that determines how these things are action. It's not just the president sitting down with a CEO and saying, give me 15 % of your company or else. And I think that's the kind of thing all folks involved today have to keep in mind, the private sector, the Congress, the president, and the courts, right? Is that the system we've had has worked very well for over 200 years. And it's worked well by ensuring that no part of that government essentially exceeds the kind of the limits that we sort of like put in place.

16:41The U.S. definitely isn't gone as far as China has gone, right? We still don't have many state-owned enterprises, almost none for that matter. But I think that in its DNA, the United States still is uncomfortable with state ownership and still sees itself as free market. But it's clear that because we have migrated away from that model and that we have a president and we have had presidents who are less enamored of that model, that it's not pure free market capitalism any longer. So that's why I say it's state capitalism, but with American characteristics.

17:19Before we go, we're working on an episode about 401ks and want to hear from you. Do you know what your plan is invested in? Are you excited or worried about the potential to invest in new kinds of things, like private equity? How do you view your 401k these days? A retirement fund or a rainy day fund? Let us know. Send us a voice message to thejournalatwsj.com. That's thejournalatwsj.com. This episode has been updated to include comment from the White House.

17:52That's all for today, Tuesday, August 19th. Additional reporting in this episode by Amrith Ramkumar, Lauren Thomas, and Robbie Whelan. The Journal is a co-production of Spotify and The Wall Street Journal. Thanks for listening. See you tomorrow.