Handling the CHIPS: Industrial Policy and Administrative Law

August is usually a quiet month in Washington. But August 2022 changed the course of administration. Through the Inflation Reduction Act, Congress enacted hundreds of billions of dollars in appropriations and forgone revenue to support sectors key to the clean energy transition. And just a week earlier, Congress passed the CHIPS and Science Act, appropriating nearly $53 billion for investments into the U.S. semiconductor industry. The bulk of that spending came to the Department of Commerce to offer financial incentives to companies to build and expand domestic fabrication facilities. Congress and regulators imposed a variety of conditions on firms receiving incentives from this pool of funds. Yet the core statutory authority underlying these transactions was striking in its scope: Commerce was to “enter into agreements … and other transactions as may be necessary and on such terms as the Secretary considers appropriate.”

Commentators such as Ezra Klein and Paul Krugman have hailed this turn towards “industrial policy” as the dawn of a new political-economic paradigm. And there is reason to believe that this kind of marketcrafting is likely to remain salient in the years ahead. Across the ideological spectrum, lawmakers have increasingly embraced the case for sectoralism: the idea that that the size and operation of different industries matter to achieving public aims. Sectoralism rejects the notion that the best economic policy necessarily maximizes aggregate national wealth, under the assumption that resources and information will flow freely to their highest use-value across the economy. Under this view, for example, we might decide that we care deeply about the provision of quality childcare or ensuring sufficient domestic capacity to ramp up production of a key medical supply. In many such cases, simply buying or subsidizing a good or service without further intervention cannot produce the qualitative outcomes the public seeks.

Clearly, the normative questions that lawmakers will grapple with in enacting industrial policies are vast in scope. Industrial policy is also a broad category of statecraft and can be executed in many ways. Industrial policies can take the form of trade policies, regulatory standards that establish product quality standards, and educational policies that aim to train workers for particular jobs. For both political and procedural reasons, however, it has proven easier to enact industrial policy through discretionary spending than through other forms of lawmaking. So, while the battles over industrial policy are likely to be broad, the terrain on which they are fought is likely to be quite particular. Administration of grants and procurement contracts, loans and equity investments, forward commitments, and other transactions authority may well become the important sites of contestation.

The resurgence of industrial policy therefore has dramatic consequences not just for lawmakers but also for the administrative lawyers who will be tasked with effectuating such policies. The transition from utility commissions and rate-setting to rulemaking and standard-setting marked an epochal shift in administrative law’s main focus. The resurgence of industrial policy might mark yet another.

Administrative lawyers often conceive of their practice as ensuring that agencies operate with procedural fairness, within the four corners of their authorizing statutes. These goals are evidently relevant in the industrial policy context. Industrial policy frequently empowers the Executive Branch with dramatic authority to design sectoral interventions in the manner that best serves public ends. And yet, despite this, administrative law finds itself singularly ill-equipped to deal with the governance questions the new industrial policy raises.

In a recent article in the Harvard Law & Policy Review, Amy Kapczynski and I describe administrative law’s inadequacy for structuring how regulatory power in the industrial policy domain should be exercised. Dramatic changes in doctrine—with the Court’s recent decisions in Loper Bright and Corner Post cases in point—have unmoored the anchors as to what judicial review of agency decisionmaking ought to look like. But even had these changes not taken place, much of the industrial policy toolkit already sits uncomfortably within both statutory and administrative common law. Agencies’ decisions about how to spend lump-sum appropriations are presumptively unreviewable. Regulations related to grants and contracts are generally exempt from the APA’s notice-and-comment requirements. Even when judicial review is theoretically available, lack of an administrative record, timing issues, and lack of standing all present barriers to granting relief. Of course, this does not mean that courts will not intervene over industrial policy decisionmaking. But, when they do so, they may be acting on limited evidentiary bases and with unclear precedents, heightening uncertainty and hampering effective administration.

These challenges demand a new paradigm. In lieu of new procedural requirements for how to structure industrial policy decisionmaking, we investigate what substantive requirements industrial policy needs to achieve its ends. Industrial policy will often operate in highly unequal fields of power, which finds the state directly negotiating with firms seeking subsidy in exchange for activity they may or may not otherwise undertake. Effective industrial policy therefore requires tools aimed at producing administrative power: developing information and knowledge about the targeted sectors, as well as tools to control sectoral development itself. For similar reasons, industrial policy also requires attention to countervailing power: the ability of systemically disadvantaged groups to exercise organized power over governance and ordering decisions. Without attention to democratic values, industrial policy risks advantaging private firms over both the government and ordinary people and reproducing stratifications of resources and expertise. A procedural toolkit without attention to these fundamental dynamics will fail to achieve the substantive goals underlying industrial policy.

In our article, we also begin to map the tools that can be used to achieve these ends. With respect to administrative power, we highlight ways that the government can secure access to the information needed to develop reasoned and effective policymaking, such as requiring data-sharing from grantees and creating bidding processes or other policies designed to elicit decentralized information. We also outline a taxonomy of different modes of government control over industrial policy spending, highlighting a continuum between public ownership, on the one hand, and open-market purchases of commodities, on the other. We argue that effective administration will need both more experimentation with these various forms and better conceptualization of their risks and benefits.

We also argue that industrial policy administrators can counteract hierarchies of authority over decisionmaking by paying heed to associational capacity: the ability of civil society groups to organize disadvantaged individuals that have a stake in—but might otherwise be unable to participate in—industrial policymaking debates. We show how a variety of familiar tools already in use by agencies can be ported and scaled to do this. Congress can set requirements for federal officers and advisory committees that empower underserved groups in deliberations over appointments. Regulators can contract with civil society organizations to perform key parts of program administration or reach communities the federal government cannot. And through conditionalities on government grants and contracts, agencies can create footholds for workers to secure collective bargaining agreements or for civil society organizations to negotiate community benefits agreements.

Existing administrative law doctrine has failed to sufficiently grapple with the tools of industrial policymaking, making these interventions particularly urgent. Yet in many ways, they are also generalizable to the challenge of administration writ large. As the scholar Blake Emerson describes it, democracy requires expert administration to address complex social problems, and yet “specialized expertise, regularization, and distance from more immediate expression of popular will” undermines democratic values. Realizing democratic administration requires both building institutions capable of achieving public aims and holding open space to allow those aims to be challenged and changed over time. Administrative lawyers set and enforce the ground rules for this contestation. In this moment of great change, their challenge is to ensure that procedural safeguards do not crowd out substantive ends.