Biden’s $4 Trillion Industrial Policy
Faces Bigger Hurdles Than Politics
The price tag for the
infrastructure and manufacturing push could be too high for Republicans, but
it’s economic forces that are the real obstacle.
By
March 11, 2021, 9:00 AM GMT
President Biden and his economic team are about to test
whether Americans can accept a more interventionist role for government in the
economy. Now that his $1.9 trillion Covid rescue plan has cleared Congress,
Biden is gearing up to roll out a “Build Back Better” plan that envisions
spending at least $4 trillion over 10
years on infrastructure and strategic industries such as semiconductors,
renewable energy, and electric vehicles. He promises that government action
will not just generate millions of jobs and help the U.S. compete with China
but also reduce inequality and help battle climate change.
The timing for a new, muscular U.S. industrial policy might
never be better. The pandemic and anxieties over the perceived growing threat
from China have focused minds in Washington, fostering a rare bipartisan
consensus on the need for measures to secure supply chains for
semiconductors and other strategic goods such as surgical masks.
Biden and his allies in Congress want to rewrite an economic
narrative that has seen U.S. manufacturing employment slide since 1979 even as
industrial output has continued to grow. “I don’t accept the defeatist view
that the forces of automation and globalization can keep union jobs from
growing here in America,” the president told reporters a few days after taking
office in January. “We can create more of them.”
Biden’s plan is designed to be more holistic and
longer-lasting than Donald Trump’s often
improvised efforts to bolster U.S. industry, which hinged on cuts in tax rates and regulations and a protective wall
of tariffs. The Build Back Better blueprint Biden campaigned on calls
for $300 billion in new federal
investment in research programs and $400 billion in federal government procurement of American-made goods. It
also includes tax incentives and credit
facilities to spur manufacturers to invest in domestic plants and repatriate supply chains.
The long-term stakes are enormous for the U.S., says
Jonathan Gruber, an MIT economist who with colleague Simon Johnson laid out a
prescription last year for a government-led push to reinvigorate the economy in
their book Jump-Starting America. In
too many vital industries “we’re just not at the top of the game anymore,”
Gruber says, pointing to once proud areas of U.S. achievement such as
robotics and synthetic biology. “At the end of the day if you are worried
about competing with China, it is
not tariffs that’s the answer, it’s
out-inventing them.”
Concerns about America’s fading dominance in strategic
sectors have been pushed to the fore by a chip shortage that has forced several
U.S. automakers to idle plants. On Feb. 24, Biden signed an executive order
launching a review of supply chains for semiconductors, batteries, and
strategic minerals. The White House also has asked Taiwan, the world’s leading
chip producer, for help. Administration officials, though, admit there likely
isn’t a short-term fix to the problem.
Biden supports funding a bill to create incentives for semiconductor research and production in the U.S.
But building new fabs is extraordinarily expensive and takes years. At the same
time, members of his administration have been vague about what actions will
result from the supply chain reviews, some of which will take as long as a year
to complete.
“If you are worried about competing with China, it is not
tariffs that’s the answer, it’s out-inventing them”
Then again, getting away from the rash policymaking of the
Trump years is part of the point. The previous
administration’s efforts to force a repatriation of supply chains via
tariffs yielded a host of unintended
consequences. U.S. farmers were targeted for retaliation by China
and other countries and drew billions of dollars in government assistance. The
uncertainty created by the import duties also put a damper on hiring
and investment—not what you want in an economy trying to recover from the
worst economic contraction since 1946.
The U.S. federal government is the world’s largest purchaser
of consumer goods, so Biden’s Jan. 25 executive order to close loopholes in Buy
American procurement rules may go some way toward furthering his goal of
shoring up domestic manufacturing. But governments have only limited powers to
influence decisions by private businesses on where to produce their products,
even within industries Biden might consider strategic.
A year ago, things were looking up for employees at the GE
Lighting plant on the southern edge of Bucyrus, Ohio, that’s been operating for
more than 60 years. A new line installed in 2020 to manufacture
energy-efficient A-19 LED lightbulbs seemed to guarantee a future beyond the
tenuous one offered by the factory’s existing production of fluorescent tubes
and other legacy products. But GE’s sale of its lighting unit to smart-home
company Savant for an undisclosed sum a few months later changed that. The new
owners, who previously had no manufacturing facilities in the U.S., shut down
the LED line on March 5, laying off almost 50 workers. The plan now is to
import the bulbs from China. “Honestly, I feel like Savant has no interest in
manufacturing in the U.S.,” says Will Evans, president of Chapter 84704 of the
IUE-CWA union, which represents workers at the Bucyrus factory.
Savant says it invested millions to try to make the only
U.S. production facility for the LED bulbs cost-competitive. “We’ve turned over
every stone in our attempt to lower the cost of assembly,” says Ben Sabol, a
spokesman for GE Lighting, a Savant Company, as the business is now known. But
“it’s no longer economically viable to continue to operate the line.”
Biden’s Made in America plan includes several items on the
National Association for Manufacturers’ wish list, including a surge in
infrastructure investment as well as tax breaks to encourage domestic
production and more spending on R&D. On top of that, the NAM is asking for
more federal dollars to fund worker
training programs. But Aric Newhouse, who runs the trade group’s policy
team, says shoring up U.S. competitiveness also means addressing rising
health-care costs and not reversing Trump’s reduction in the corporate
tax rate—something Democrats say may be needed to pay for new spending on
roads, bridges, and the like. There “is not a silver bullet,” Newhouse says.
“It’s tax policy. It’s health care.”
There is also the question of what, if anything, to do about
the dollar. U.S. exporters have long
complained they pay a price for the greenback’s status as both a reserve and a
safe haven currency. The upward pressure put on the dollar by foreign
investors’ flows into U.S. Treasuries and equities hurts exporters’ ability to
compete internationally by making American-made goods and services more
expensive overseas.
Speculation that the Biden administration may target the
dollar has grown with the appointments of noted proponents of a weaker greenback, such as Jared
Bernstein, who’s on the Council of Economic Advisers, and Brad Setser, a member
of the new trade team. A former Treasury staffer who spent the Trump years at
the Council on Foreign Relations, Setser regularly called for more action
against economies he accuses of keeping their currencies artificially weak.
Even advocates of a tougher currency policy—one that would have
the U.S. Treasury buy bonds denominated in other currencies to weaken the
dollar, say—are not convinced a traditionalist like Treasury Secretary
Janet Yellen will be altering the playbook very much. And a more aggressive
stance may not further the Biden camp’s stated goal of repairing strategic
alliances frayed by four years of Trump’s pugilistic “America First”
economic policy. “I wouldn’t rush into it,” says Joseph Gagnon, who from his
perch at the Peterson Institute for International Economics has for years
argued for U.S. intervention to weaken the dollar and the introduction of a transaction
tax to discourage short-term capital inflows.
The problem Biden will face, says Gagnon, is that the fiscal
rescue plan he just pushed through Congress, and the promise of more spending
to come, will be fuel for an economic
boom of the sort America has not seen since the 1960s. That will bolster the dollar, which could act as
a powerful brake on any industrial policy push.
It’s hard to feel upbeat about Biden’s odds of making good
on his pledge to create millions of blue-collar jobs when you look at recent
history. Since the 1970s, the U.S. has never managed to recoup the manufacturing jobs lost in each
recession; in February it was still down 561,000 from a year earlier.
Government incentives for renewable energy and electric vehicles will plump up
payrolls in those industries, but they’ll also wipe out jobs in rival or even
adjacent ones. Electric cars, for instance, require fewer parts than
gas-powered vehicles, so on a net basis will the U.S. gain or lose? “A lot of
what industrial policy is about is shifting
the composition of jobs and not necessarily adding jobs,” says Todd Tucker
of the left-leaning Roosevelt Institute, who served on Biden’s trade transition
team.
Biden’s Made in America job creation goals may be undermined
by some of the very innovation he is eager to promote. Model No. (pronounced “Number”), a three-year-old Bay Area company,
makes lounge chairs, tables, and other home furnishings on 6-foot-tall 3D printers that use polymers made from vegetable waste
such as corn husks. Its supply chains are 95% domestic. (The vegan “leather”
comes from Europe.)
Model No. operates
on-demand, meaning it fires up its 3D printers only when an order comes in
through its website, though Chief Executive Officer Phillip Raub says he’s in
talks with a few retailers who’ve expressed an interest in stocking the
company’s wares. Raub says he’s certain the company will eventually produce customizable, environmentally friendly furniture
at mass-market prices that can compete with products from lower-cost
factories in Asia. To do so, the company plans to establish a U.S. network of 25 to 30 “microfactories” each employing 25
to 50 people, so it can quickly fill orders when they come in. “You can
start to bring back these things,” Raub says. “There is a better way.” Just not
one that might create the millions of factory jobs Joe Biden is promising.
—With Jenny Leonard
Read next: One Name for Build Back Better Is
‘Infrastructure-Plus-Plus’
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