By Steven Cohen, Ph.D., Director of the M.S. in Sustainability Management program, School of Professional Studies
The economic history of the United States has been a history of economic transitions. We started as a trading economy, sending raw materials and agricultural products to Europe in exchange for manufactured goods and capital. Then, we became a manufacturing economy, peaking in the 1950s and 60s. Today, we are a service and brain-based economy at the start of a transition to a service economy infused with artificial intelligence. These transitions are driven by markets (consumer demand) and technological developments and are typically facilitated by government policies and programs. There has never been a pure market economy because there are certain resources that are required to grow an economy that cannot be provided by the private sector. Many of those resources are collective goods that we call infrastructure. Private companies build the motor vehicles, but government builds the roads and bridges. Private companies export and import goods and raw materials, but government builds the air and seaports (with revenue from and contracts with private companies). In the United States, train lines were built and run by the private sector, often with government-subsidized or -provided land. Eventually, the lucrative market for freight, along with air and road travel, destroyed passenger train travel in the United States. To maintain passenger train travel, our government invented Amtrak, a superb example of a poorly designed government intervention in the market. Other nations have found that passenger rail requires government-owned lines. We decided to build our national train system on tracks dominated by private freight trains and provided inadequate subsidies to compete with auto and air travel. Freight shipping in the United States is privately run but subsidized by public infrastructure and regulated by government rules that seek to ensure safety, such as traffic enforcement and air traffic controls. America seems uncomfortable with government intervention in the economy, and in most cases, that discomfort is justifiable.
Currently, the United States economy and, indeed, the world economy are being threatened by the most poorly designed government intervention in our 250-year history. The Trump tariffs are an absurd intervention in the global market that has made America the wealthiest nation in the world. The goal is to bring back a manufacturing economy when the high-value-added part of the economy is in services, innovation, ideas, and design. Manufacturing is no longer the heart of wealth creation, and though we will see more in the United States than before, its revival will not be due to tariffs but will be driven by automation, AI, and global supply chains that enable the final assembly of products closer to consumers. By disrupting global supply chains and trying to force manufacturing back to the United States, President Trump and his “economic” advisors are massively and destructively intervening in the market, which does not need government intervention. MAGA ideology resists globalization, while our market economy is built on global supply chains as well as infusions of global capital and labor. The Trump economic team may well snatch defeat out of the jaws of victory.
New York City provides an excellent example of the pain and profit of economic transition. In 1950, over 90% of the clothing worn in America was made in New York City by nearly 500,000 garment workers. Today, that number is close to zero. New York City’s transition from manufacturing to service was painful. The city lost a million people and nearly went broke. The human cost was also substantial as businesses failed and workers lost their jobs. But today, New York City has more people and businesses than ever. While we no longer make clothing, most of the clothing worn in America was designed and marketed by over 130,000 people in New York engaged in what we now call the fashion business. More wealth is created by today’s fashion industry than by yesterday’s garment industry. Branding, design, and marketing dominate. Manufacturing is often avoided. For example, IBM stopped making personal computers because the profit margin was too low to make it worthwhile. Donald Trump and his team want us to make cars and steel in the United States when we would be far wealthier if we focused our capital elsewhere. Easing the pain of economic transition is a function of government that should include job training, transition payments, and small business loans.
One critical role for government in facilitating economic transitions is to invest in research that results in new technologies. Trump’s destruction of America’s research capacity by starving universities of funding and international talent is endangering one of the critical tools we have in developing the breakthroughs—like cell phones, computers, and advanced medical technologies—that have made the U.S. economy the wealthiest in the world.
It is true that China has subsidized our competitors and now dominates renewable energy and electric vehicle manufacturing. Those subsidies were being countered by similar (although smaller) subsidies in the Inflation Reduction Act. That resulted in the start of renewable energy and battery factories largely in red states. But with global supply chains disrupted by tariffs and the Biden-era subsidies probably eliminated by the Republican “Big Beautiful Bill,” the current strategy for “promoting” renewable energy manufacturing is to tax foreign components, raw materials, and finished goods with tariffs. The hope is that, somehow, American companies and investors will risk their capital on U.S.-based energy projects. That strategy is already failing. Fossil fuel companies are reluctant to invest in increased production due to the tariff-driven higher costs of materials and components for drilling equipment, along with lower oil prices due to global competition from growing renewable energy production. American renewable energy companies are holding back while they wait to see what government policies might come next. Given the uncertainty of the global economy, investment decisions are being deferred out of fear of Trump’s next unpredictable maneuver.
It is not clear that China’s intervention in the market, Biden’s, or Trump’s really accomplished much. China has been successful in accelerating the technology and production of renewable energy and electric vehicles. However, the rest of their economy continues to struggle as the government attempts to steer the economy but finds consumer behavior difficult to influence. Electric vehicles are a notable success story in China, but real estate development has been a massive failure.
Here in the United States, efforts to accelerate the adoption of electric vehicles have had a mixed record of success and failure. There are several factors that influence the electric vehicle market. The initial cost of EVs is still higher than vehicles powered by internal combustion, but operation and maintenance costs are lower. This has been demonstrated by the rapid adoption of electric vehicles by commercial ride-sharing taxi services. Operation and maintenance are critical elements of their cost structure, and these longer-term costs have proven to be lower with EVs. Most EV owners charge their vehicles in their suburban driveways. Most trips in motor vehicles are local, so “range anxiety” is less of an issue for these drivers. But the technological developments of faster charging and greater range along with greater reliability in cold weather must still be developed and proven. Prices also need to come down. China has already demonstrated all this is possible. Once that happens in the United States, public charging stations will be as common as gas stations, and toll roads will be expected to include charging stations in their service areas. Government incentives and disincentives will not be needed. No one had to subsidize our move from landlines to cell phones. When electric vehicles demonstrate their technological and cost superiority, they will displace their competition.
Government’s role in accelerating the adoption of renewable energy and electric vehicles has been erratic, which is possibly the worst of all possible worlds. Subsidized production and tax credits for adoption can accelerate the market, but when they are turned on and off by the federal government, they can have the opposite impact, as manufacturers and investors must bake in the possibility that subsidies are temporary. Nevertheless, as technology improves, the market takes over. The global supply chain enabled just-in-time manufacturing and reduced the capital cost of maintaining inventory. When the Ford Motor Company made the Model T, they required huge, on-site warehouses with all the raw materials and parts needed for manufacturing. That required huge outlays of capital and a long gap between expenditures and revenues. Today, those supplies are delivered as needed, and capital can be deployed elsewhere. Warehouses and the on-scene inventory are less important. This reduces costs and increases efficiency. Global supply chains are made possible by low-cost global communication, low-cost computing, bar codes, GPS, and containerized shipping. Tariffs raise the cost of these supplies, but the time and capital needed to replace them make it unlikely they will be replaced by local sourcing. Instead, prices will go up, and the standard of living will go down.
Instead of the ridiculous attempt to bring back the economy of the middle of the 20th century, we should try to prepare for the economy of the mid-21st century. That will be a service economy made more efficient and effective due to artificial intelligence (AI). Our ability to collect and analyze vast amounts of data has increased exponentially over the past several decades. AI gives us the ability to utilize that data to create goods and services specifically tailored for our use. We will need to regulate AI’s use and to do that, we will need to jettison anti-regulatory ideology and replace it with less burdensome and more efficient and effective rules. The abuse of social media due to the absence of regulation is an object lesson in what we must avoid as we utilize the more powerful technology of artificial intelligence.
The fear that AI will make human labor obsolete is the same fear we have seen with technological innovations like mass production, the internet, and search engines. Instead, new technology results in new services and products and new jobs and professions. Think of physical trainers, web designers, event planners, and businesses like the vendors on Etsy. These jobs would never have developed without modern technologies. AI will transform these professions and create new services and jobs we cannot yet imagine. People are living longer and, due to medical technology and advances in physical and occupational therapy, are living fuller lives than their parents did. But these new professions and our evolving economy require careful and thoughtful innovations in governance and regulation. Government has a role to play, but subsidies, rules, and tariffs need to be based on pragmatism, not ideology.
There are serious challenges to overcome as the technology of the world’s economy continues to develop. Government has a role to play, but policy must defer to technological and market forces that are far more powerful and lasting than government policy. Today’s trade war threatens, but ultimately will not displace, global supply chains. The efficiency of the world economy and the profit motive itself will motivate the workarounds that will circumvent the impediments of poorly designed government interventions.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of Columbia School of Professional Studies or Columbia University.
About the Program
The Columbia University M.S. in Sustainability Management program offered by the School of Professional Studies in partnership with the Climate School provides students cutting-edge policy and management tools they can use to help public and private organizations and governments address environmental impacts and risks, pollution control, and remediation to achieve sustainability. The program is customized for working professionals and is offered as both a full- and part-time course of study.
