U.S. Industrial Policy & The Unfortunate Sacrifice that Must be Made

December 12th, 2025

U.S. Industrial Policy is becoming one of the most important issues of our time, and it affects far more than factories or jobs. For the past few decades, the United States has relied on cheap imports and low interest rates to fuel a consumer-based economy. That system allowed Americans to enjoy inexpensive goods and rising financial markets, but it also weakened the country’s industrial strength.

Now, with the rise of artificial intelligence and intense global competition, the country is discovering that it must rebuild its industrial base, whether it is ready or not. And as soon as the rebuilding begins, the limits of the old economic model will become abundantly clear.

A modern U.S. Industrial Policy requires massive investment in real things like energy grids, semiconductor plants, data centers, and critical minerals. But the money needed for these projects has to come from somewhere, and it must inevitably come at the expense of the financial system that Americans have depended on for fifty years.

When more money flows toward new industrial projects, less money flows into government bonds, which pushes their prices down and their yields up. Higher yields are good for attracting new investors, but they make it far more expensive for the government to borrow, and that puts enormous pressure on pensions, retirement accounts, and middle-class savings. It will also come with a declining dollar and higher inflation, meaning a rising cost of living.

In other words, rebuilding the industrial economy means weakening the financial safety nets that millions of Americans rely on.

How America Became a Consumer Economy

The shift toward America becoming a consumer-driven economy began in the early 1970s, when the United States moved away from the post-World War II industrial model that had dominated global manufacturing.

In 1971, the U.S. ended the direct convertibility of the dollar into gold, which allowed the currency to float freely on global markets. At the same time, rising labor costs at home and the emergence of lower-cost production hubs in Asia encouraged companies to move manufacturing overseas. This was the opposite of what a strong U.S. Industrial Policy would have encouraged, but at the time it seemed like a path to cheaper goods and higher corporate profits.

Throughout the 1980s and 1990s, trade agreements and financial deregulation accelerated this trend.

By opening global markets and lowering barriers to imports, the United States made it easier and cheaper for companies to outsource production. American consumers enjoyed low prices on everything from electronics to clothing, and corporations enjoyed higher margins. However, millions of jobs were lost in the manufacturing heartlands of the United States, and the gap between rich and poor began to widen.

Meanwhile, countries selling goods to the U.S. were collecting dollars on a massive scale, and they often used those dollars to buy U.S. Treasury bonds. This inflow of foreign capital kept interest rates low, making it even more appealing to maintain the consumer-based economic model.

As manufacturing left the country, the financial sector grew more powerful. Instead of earning money by producing goods, the United States increasingly earned money through finance, services, and intellectual property. Stock prices, home values, and credit growth became the main drivers of economic expansion. That model depended on low interest rates, a strong dollar, and global demand for U.S. debt.

This all worked well for several decades, but it came at the cost of hollowing out the country's industrial base. Policies that might have rebuilt domestic manufacturing were neglected because the system that replaced them delivered short-term comfort and political stability. In effect, a lack of coherent U.S. Industrial Policy allowed the nation to drift further from production and deeper into long-term dependence on global supply chains.

The New Demands of the AI Era

As the United States entered the 2000s and 2010s, the consequences of decades of offshoring became harder to ignore. Most essential goods were imported, and many critical industries (such as semiconductors, machine tools, pharmaceuticals, and rare-earth processing) had moved offshore. The country had built an economic system that made sense when the world was focused mainly on consumer goods and financial markets, but it was not designed for the technological revolution that emerged in the 2020s.

Artificial intelligence, advanced robotics, and high-performance computing all depend on enormous amounts of physical infrastructure. Training AI models requires vast quantities of electricity, specialized chips, data centers, and the raw materials used to build them.

These needs expose the weaknesses in an economy that allowed its industrial capabilities to slip away. The AI race cannot be won with imports alone, and for the first time in decades, the lack of a coherent U.S. Industrial Policy became a central vulnerability.

This new reality forces the United States to confront a simple but uncomfortable truth: modern technologies are built on extremely complex supply chains, and many of the foundational steps in those chains now occur in other countries. America can design world-class software and leading-edge chips, but manufacturing the materials, energy systems, and components that make these technologies possible often happens elsewhere.

That means everything from electrical transformers to silicon wafers to critical minerals must be shipped across oceans before they reach American companies. When global supply chains are disrupted (as they were during the pandemic) economic activity slows, prices rise, and entire industries face delays. AI amplifies this problem because its infrastructure requirements grow exponentially each year.

Rebuilding domestic production capacity is not just a matter of convenience. It has become essential for national competitiveness. If the United States wants to lead in AI, autonomous systems, quantum computing, and advanced manufacturing, it must regain the ability to produce key components at home. That includes modernizing the electric grid, expanding mining and processing of rare and strategic minerals, and constructing new semiconductor fabs and data centers.

All of this requires massive investment, and it pushes U.S. Industrial Policy back to the forefront of economic strategy.

This industrial revival, however necessary, brings financial challenges that governments rarely had to consider during the era of offshoring and low interest rates. Rebuilding factories and infrastructure requires long-term capital, which tends to flow only when interest rates are high enough to offer a meaningful return. Yet higher interest rates make it far more expensive for the government to service its large and growing national debt.

In other words, the United States suddenly finds itself caught between two competing goals: keeping borrowing costs low to support the financial system, or allowing rates to rise to rebuild the physical economy.

This tension sets the stage for the central dilemma confronting U.S. Industrial Policy today.

The Costs, Risks, and Realities of Rebuilding American Industry

Rebuilding America’s industrial base is not just a matter of building factories or inventing new technologies; it requires shifting enormous amounts of capital from the financial economy into the physical economy.

For decades, the U.S. has relied on Treasury bonds as the backbone of financial security. They were considered the safest place for investors, and their stability allowed middle-class Americans to plan for retirement with some confidence. But funding a strong U.S. Industrial Policy competes directly with Treasuries for investment dollars.

As capital moves toward industrial projects, bond prices fall and yields rise. Rising bond yields make it more expensive for the government to borrow, and it weakens the financial foundations of pensions and retirement accounts for millions of Americans.

The middle class is particularly vulnerable.

Pension funds, 401(k)s, and insurance plans rely heavily on Treasuries for predictable returns. When bond values drop, the funding gap in these systems widens, leaving retirees with less security. In practical terms, this can mean:

Underfunded public pensions that force local governments to cut services or raise taxes.
Reduced retirement income for middle-class workers who rely on 401(k) and IRA investments.
Rising insurance premiums or reduced coverage as insurers adjust to higher borrowing costs.
Greater economic stress on communities that depend on stable Treasury income.

Even beyond inequality, there are broader economic risks. A major redirection of capital toward physical infrastructure can trigger higher interest rates across the economy, increase borrowing costs for businesses and households, and create pressure on the federal budget as debt servicing costs rise.

Here is the unavoidable truth: there is no way to implement a strong U.S. Industrial Policy without incurring these costs. As Luke Gromen and other analysts have noted, rebuilding the industrial economy necessarily means:

Diverting massive capital from financial instruments like Treasuries.
Causing bond prices to fall and yields to rise, destabilizing retirement and insurance systems.
Triggering short- and medium-term inflationary pressures, and rising costs of living.
Exposing the middle class to financial risks while benefiting investors and industrial stakeholders.

The tradeoff is not a matter of policy finesse. Strengthening America’s industrial base inevitably comes with real costs. These are the unavoidable consequences of reversing decades of deindustrialization and financialization.

Conclusion: The Dire Tradeoff Facing America

The United States stands at a crossroads. After decades of offshoring, financialization, and policy choices that prioritized short-term profits over domestic capability, the country faces a stark reality: rebuilding its industrial base is essential, but it comes with unavoidable economic pain.

A robust U.S. Industrial Policy can restore domestic manufacturing, secure critical supply chains, and create high-paying jobs; but the cost will be borne unevenly, with the middle class facing financial disruptions even as the nation gains long-term industrial strength.

This is not a matter of “careful design” or clever policymaking. The tradeoffs are baked in. As capital is diverted to physical infrastructure, Treasury yields rise, pensions and retirement funds are strained, and poorer Americans bear a disproportionate burden. At the same time, the wealthy and industrial investors tend to gain from the increased inflation and the shift to tangible assets, widening the wealth gap that decades of deindustrialization helped create.

Americans now face a clear choice: continue down the path of industrial weakness, technological dependency, and relative decline, or accept the painful but necessary adjustments that a strong U.S. Industrial Policy demands. There is no painless way forward.

Source:

Luke Gromen - We Are Facing "The Mother of All Crises"

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Opinion Column

About the Author
Steve Bain is an economics writer and analyst with a BSc in Economics and experience in regional economic development for UK local government agencies. He explains economic theory and policy through clear, accessible writing informed by both academic training and real-world work.
Read Steve’s full bio

U.S. Industrial Policy & The Unfortunate Sacrifice that Must be Made

How America Became a Consumer Economy

The New Demands of the AI Era

The Costs, Risks, and Realities of Rebuilding American Industry

Conclusion: The Dire Tradeoff Facing America

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