[ Is Biden ready to insist that national economic planning is not
just ideologically permissible but urgently necessary?]
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BRINGING THE SUPPLY CHAIN BACK HOME  
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Robert Kuttner
October 21, 2021
New York Review of Books
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_ Is Biden ready to insist that national economic planning is not
just ideologically permissible but urgently necessary? _

Employees in the GlobalFoundries semiconductor manufacturing
facility, Malta, New York, March 2021, Adam Glanzman/Bloomberg // New
York Review of Books

 

World War II was an emergency that demanded a complete economic
mobilization. In response to the war, the US government put forward a
system of comprehensive economic planning unlike anything seen before
or since. The government requisitioned critical materials, imposed
wage and price controls, and underwrote the creation of war production
factories and the purchase of a vast quantity of weapons. There were
no civilian automobiles produced between February 1942 and October
1945 because auto plants were converted to the production of tanks,
jeeps, aircraft, and artillery. The government soon built or financed
two thirds of the war production factories in America, though most
were operated by corporate contractors. By 1944, this war machine was
turning out 96,000 planes a year. Henry Kaiser’s shipyards cut the
production time of a Liberty Ship from 365 to 39 days by 1943, and by
war’s end, to 14. The Office of Research and Development invested in
new technologies, many of which proved to have extensive commercial
applications.

Building Resilient Supply Chains, Revitalizing American Manufacturing,
and Fostering Broad-Based Growth: 100-Day Reviews Under Executive
Order 14017
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a report by the White House
250 pp., June 2021
available at whitehouse.gov
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The war was a prodigious if unintended Keynesian stimulus to the
economy. Despite the association of the New Deal with deficit
spending, FDR’s peacetime deficits never exceeded 5.4 percent of
gross domestic product (GDP) and usually ran at about 3 or 4 percent.
During the war years, though, annual deficits peaked at more than 25
percent. In 1939 the unemployment rate was still in the double digits.
After the government placed war production orders worth $100 billion
during the first six months of 1942—more than the output of the
entire economy a decade earlier—unemployment quickly melted to just
3 percent. Over the duration of the war, the economy’s productivity
doubled; 17 million civilian jobs were created; real GNP grew by 48
percent.

Some of this astonishing rebound took up the slack of an economy that
was still suffering the effects of the Great Depression as late as
1940. But the wartime growth went well beyond a belated recovery. The
industrial effort spilled over into improved civilian living
standards, technological advances, and business leadership for many
decades afterward. The war experience demonstrated how a planned
economy could use untapped economic potential that a market
economy—with limited government policy tools like subsidies, tax
incentives, and modest deficits—is unable to reach. Yet this
government intervention stopped well short of socialism: the
contractors were mostly private corporations, for which the war was a
bonanza.

Roosevelt himself, with the prodding of New Dealers in Congress and
trade union leaders such as Walter Reuther of the UAW, hoped that the
wartime planning could transition into a postwar project of
“reconversion” to preserve full employment. Economists worried,
with good reason, that the return of 12 million GIs to the civilian
workforce, coupled with the end of the extraordinary wartime stimulus,
would drive the economy back into depression. The proposed Full
Employment Act of 1945, sponsored by a great western progressive,
Senator James Murray of Montana, called for a comprehensive program of
national economic planning, underwritten by a federal government
employment guarantee if private job creation proved inadequate.
Another classic document of the era, “Science, the Endless
Frontier,” written by Roosevelt’s science adviser Vannevar Bush,
proposed a national research foundation to continue government
investment in science. This idea inspired the National Science
Foundation, created in 1950.

FDR’s death, in April 1945, cut short these grand designs. His
successor, Harry Truman, was far less enamored of central planning
than Roosevelt. Truman, a moderate, had come to prominence as chair of
the Senate’s committee on corruption in war production contracts,
and he was eager for a return to a normal peacetime economy. In his
appointments of senior economic officials, Truman mostly replaced New
Dealers with centrists. The Employment Act that eventually passed
Congress in 1946 was a stripped-down, largely aspirational document,
with no concrete mechanisms to attain full employment. National
economic planning was not to be.

After the war, the idea became ideologically suspect, and has remained
so ever since. Government, according to orthodox economics, is not
competent to “pick winners.” Markets do that. During the postwar
era, as the cold war set in, US leaders preached free trade; the last
thing they wanted was to be caught practicing state-led economics. It
was a paradox that the fruits of wartime planning gave the US such
technological and industrial dominance that Washington could afford to
revert to free markets afterward. But no sooner did Truman demobilize
the armed forces than he had to reactivate the defense machinery in
the late 1940s to prosecute the cold war. Since then, Pentagon
planning and procurement have functioned as a kind of closet
industrial policy, leading to great successes in defense projects and
their commercial offshoots, like aircraft, biotech, and the Internet.
World War II and the cold war showed what can be achieved when a
capitalist democracy commits the heresy of national planning.

Joe Biden has directly invoked FDR’s New Deal in proposing $3.5
trillion for public investment in physical and human
infrastructure—an amount since reduced under congressional
pressure—but World War II offers the better model. The combination
of the Covid-19 pandemic, an economy not yet fully recovered from the
resulting disruptions, and the climate catastrophe surely justifies an
economic mobilization comparable to that undertaken in wartime.

Republicans and conservative Democrats have balked at the scale of
Biden’s plan. But if the US is serious about shifting to a
post-carbon economy and adapting to the ravages of climate change,
nothing less is required. Is Biden ready to insist that full-on
planning and explicit targeting of vital industries are not just
ideologically permissible but urgently necessary for the entire
economy?

One significant new document suggests that he is. In February Biden
issued Executive Order 14017, directing the National Security Council
and the National Economic Council to produce, within a hundred days, a
report on the vulnerability of America’s supply chains. The two
White House agencies, led by National Security Adviser Jake Sullivan
and Brian Deese, the director of the National Economic Council, took
this as an invitation to produce a far more expansive blueprint. I
know of no federal planning template so thorough and ambitious since
World War II, nor can I recall a government document that is as
engrossing to read.

The 250-page report reviews four crucial industries and their supply
networks: semiconductors, advanced large-capacity batteries such as
those used in electric cars, pharmaceuticals and their ingredients,
and other critical materials and minerals, including rare-earth metals
used in a wide range of products, for example cell phones, electronic
cameras, and LEDs. A sequel, promised for February 2022, will cover
sectors such as energy and communications technology. The document was
prepared by a task force of people from more than a dozen agencies.

The report is frankly nationalist. It points out that, contrary to
free trade doctrine, offshore suppliers can be unreliable, especially
when they’re located in places like China, a geopolitical adversary.
The report highlights defense needs, but goes well beyond military
concerns to others, such as public health (“the disappearance of
domestic production of essential antibiotics”) and the wider
economy, where China recurs as a threat in multiple areas. It
“refines 60 percent of the world’s lithium and 80 percent of the
world’s cobalt, two core inputs to high-capacity batteries—which
presents a critical vulnerability to the future of the US domestic
auto industry.” The authors extend their analysis to other critical
items such as computer chips, noting the way government investment by
South Korea and Taiwan in the semiconductor business has enabled those
countries to “outpace US-based firms.” As the report puts it,
“when manufacturing heads offshore, innovation follows.”

The only sufficient remedy, the authors say, is to restore American
leadership in technology and productive capacity generally. But how?
In short, by using government aid to promote essential industries,
which, as in World War II, would rely on a combination of the federal
government’s procurement power and its ability to subsidize
technological development. To achieve this, the report proposes
sector-by-sector investment, including $50 billion to upgrade domestic
manufacture of semiconductors; $20 billion for a national charging
infrastructure for electric vehicles and a new federal vehicle fleet,
along with tax breaks for consumers and $20 billion more to electrify
buses; and pandemic-style spending to boost the US pharmaceutical
industry, using the Defense Production Act as necessary. Many of these
outlays are in the reconciliation package now before Congress; some go
well beyond it.

The supply chain report is far from the first publication to call for
a revival of domestic industry. Back in 1987, the Berkeley political
scientists Stephen S. Cohen and John Zysman wrote _Manufacturing
Matters: The Myth of the Post-Industrial Economy_, warning of the loss
of US production capacity and its broader economic consequences. A
series of MIT reports, starting in 1989 with _Made in America:
Regaining the Productive Edge_, suggested strategies for retaining and
rebuilding US production. At the time, these ideas—which fell
outside a consensus that spanned both political parties and most
economists—were widely dismissed as special pleading for
uncompetitive rustbelt industries and their coddled unions; they’ve
since been mostly vindicated. What’s novel about the recent report
is that it makes a plan to reclaim US manufacturing not just
mainstream but the official policy of the US government.

It’s noteworthy that Biden’s original order began with “supply
chains”—until lately an arcane, unfamiliar term to most Americans.
But in the past several weeks, supply chain bottlenecks have been
front-page news. They are raising prices and putting the recovery at
risk. In this respect, the White House report, with its focus on
supply, was well timed.

When auto production was mostly domestic, manufacturers either owned
parts suppliers outright or had long-standing relationships with local
vendors, so nobody much worried about supply networks. The concept of
supply chains first appeared in business literature in the late 1970s
and 1980s, with the advent of “just-in-time” production, global
outsourcing, and ever more containerized shipping. Since the new
business plan was to hold low inventory and rely on far-flung sources,
issues of logistics came to the fore.

Economists and stock analysts hailed the new approach as a big gain in
efficiency. The risks of disruption and loss of domestic competence
did not enter into their analyses. In 2005, the journalist Barry Lynn
wrote _End of the Line_, identifying supply vulnerabilities as a
hidden cost of globalization. The book was viewed in some quarters as
eccentric, alarmist, and anti-trade. A review in _Foreign Affairs_,
by the economist Richard Cooper, faulted Lynn for lacking
“persuasive evidence or argumentation.” But Lynn’s warning now
looks prophetic.

Thanks in particular to the pandemic, Biden’s order came amid much
wider awareness that the US is alarmingly dependent on foreign
sources, often China, for such basic items as protective medical
equipment and ingredients for prescription drugs. With serious
shortages of products like semiconductors, worries about supply chains
have naturally led to renewed attention to the larger question of
whether the United States is able to make the stuff it needs.

The report Biden ordered represents a wholesale repudiation of the
economic assumptions of the past several decades. According to this
prevailing orthodoxy—derived from the classical economists Adam
Smith and David Ricardo, and embellished by twentieth-century heirs
like Paul Samuelson—reducing barriers to trade is all benefit and no
cost. If other nations can produce products more cheaply, it would be
irrational not to buy from them. But this is a fallacy that relies on
a snapshot of relative prices at a single moment. Contrary to
Ricardo’s notion of competitive advantage, many countries in fact
use subsidies and trade barriers successfully to create technological
capacity, generating greater wealth over time. As many economic
historians have pointed out, countries like France and Germany, as
well as others in East Asia, built their industries with extensive
government aid and tariffs on foreign goods.

Even in the US, Alexander Hamilton’s _Report on
Manufactures_ (1791) recognized that the young republic needed to
invest in manufacturing if it ever was to escape economic dependence
on Britain. Henry Clay’s “American System” of the early
nineteenth century made extensive state-led public improvements and
imposed higher tariffs. The industrialization of the late nineteenth
century included substantial government investment in railroads
through grants of land. In World War I, the federal government
organized entire industries, including radio and aviation.

These governments, overseas and in America’s own history,
demonstrated that there was more to an efficient economy than supply
and demand as envisioned by Adam Smith. FDR governed in the spirit of
John Maynard Keynes, who counseled that it was far better to
countermand private market forces when the entire economy was
depressed. Another great dissenter, the Austrian-American economist
Joseph Schumpeter, pointed to technical advances as the most important
source of progress over time. Vannevar Bush’s “Science, the
Endless Frontier” aptly called for government-led scientific
advances as the main engine of growth, in the spirit of Schumpeter.

America’s postwar tilt toward free trade ideology had a diplomatic
rationale that was bound up with the cold war. The US was now leader
of an alliance, most of whose members were either recovering from
World War II (Western Europe and Japan) or struggling to escape
poverty and build modern economies (South Korea and Taiwan). To cement
that alliance, Washington offered these nations largely barrier-free
access to the world’s largest domestic market, the US. Although this
version of free trade was nominally reciprocal, Washington politely
ignored the state-led economic protectionism practiced by many of its
most steadfast allies. Until the 1990s, the US had such a head start
that it could afford to indulge this double standard.

And free trade did bring additional commercial benefits. Large
multinational corporations could not only expand their potential
markets to the entire world, but could also use outsourcing to lower
their costs, reduce wages, weaken unions, and evade domestic
regulation. Even if some US exports of goods such as autos and solar
cells were blocked by other nations pursuing their own industrial
advantage, US corporations could move manufacturing offshore with
foreign partners, while investment bankers profited handsomely from
the new, globalized financial markets.

Gradually, though, several forces shattered the assumptions
underpinning this global system and its supposed benefits to the US.
By 2006, the annual US trade deficit with the rest of the world stood
at $771 billion, including $202 billion with China alone—and a
modest trade surplus in services partially concealed how extreme the
trade gap in goods was. The US was steadily losing its industrial base
and the skilled workforce that went with it. China, adopting an even
more aggressive version of the mercantilism that had built Japan,
South Korea, and Taiwan, demonstrated that state-led capitalism could
far outpace the laissez-faire variety.

“Made in China 2025,” a ten-year plan launched in 2015, committed
Beijing to spending whatever is necessary in every major emerging
sector of advanced production. The plan involves extensive government
subsidies, barriers to imports, and government directives aimed at
ensuring that Chinese companies dominate their respective industries.
But America’s commitment to its free trade ideology and its
indulgence of China persisted right through the Obama administration.

It fell to Donald Trump to reverse course, but in a nativist,
bombastic, and strategically incoherent fashion. He imposed tariffs on
exports from China but also on several friendly nations. Despite
Trump’s initial bluster about stopping the movement of American jobs
to Mexico, there was no serious effort applied to reviving domestic
manufacturing. But because of the perceived threat from China,
industrial policy has become a rare oasis of bipartisanship in a
Capitol that is otherwise bitterly divided. Although Senate
Republicans have unanimously refused to support Biden’s package, a
$200 billion industrial subsidy bill called the US Innovation and
Competition Act passed the Senate in June by an impressive vote of
68–32, with several leading Republicans as cosponsors. The bill,
cobbled together by Senate Majority Leader Chuck Schumer, was
originally titled the Endless Frontier Act in a salute to Vannevar
Bush. Like the White House report, the Schumer bill provides at least
$50 billion in subsidies to domestic semiconductor research and
manufacturing.

China is a Leninist one-party state. In World War II the US was a
command economy, though without anything close to Beijing’s total
control over the economy and society. Today, the US government’s
powers are much more limited than they were during the war and after.
Washington can offer subsidies and incentives, and it can require
publicly funded projects to purchase domestic goods, under the Buy
American Act. But even if the recommendations of the supply chain
report go into effect, the US will be a long way from the command
economy of World War II, much less China’s degree of dirigisme. And
the more Biden’s industrial policies impinge on the freedom of
America’s powerful multinational corporations to source supplies
wherever they want, the more political resistance he will encounter.

There are also disagreements within the constituency that supports the
Green New Deal, a vision of major public spending to convert the US to
a post-carbon economy. Advocates of developing domestic production,
for example, make a persuasive case that the US should regain the lead
in producing solar cells it had before China began subsidizing its
solar industry, to the tune of some $47 billion since 2005,
undercutting most American competitors into oblivion. But solar
installation companies in the US vehemently oppose such a move, as
they simply want the lowest possible price for panels.

To many Americans, economic nationalism has an ugly, nativist ring,
epitomized by President Trump. But economic nationalism has another,
distinct meaning, untainted by jingoism, that dates from the postwar
era: in the years before the hyperglobalism of the World Trade
Organization (WTO), it was considered normal and legitimate throughout
the West for the state to play a significant part in the market
economy. Now, with the waning influence of free market ideology, the
challenge is for democracies to reclaim their ability to manage their
economies without suggesting they’re involved in the wrong kind of
nationalism.

A related challenge is the need to revise trade policy itself. A full
embrace of government industrial planning means a reversal of many US
commitments to the WTO, which demands that its signatories renounce
government subsidies and treat the forty-eight nations that have
acceded to its General Procurement Agreement as domestic producers for
the purposes of government purchases. Biden will have to choose
between the policies proposed in the supply chain report and several
current trade deals. (The US has the right to withdraw from these
deals, as do other signatories.) Although the press may deplore such a
scenario as a trade war, the effect would merely be for the global
economy to revert to the order that pertained before the
ultra-free-market dictates of the 1990s. The Harvard economist Dani
Rodrik has called such a reversion a necessary, shallower form of
globalization. If all nations regain the right to pursue industrial
policies, countries will simply impose tariffs to offset subsidies of
other countries’ export products—as the US has already done with
regard to China.

It’s clear that Biden will have to settle for far less public
investment than proposed in his original vision to “build back
better.” But with this remarkable report on supply chains, we have a
dramatic reversal of a half-century’s conventional wisdom in
economics—a working draft of a neo-Rooseveltian strategy for shared
prosperity. Biden’s report suggests that we don’t need a wartime
command economy for government planning to achieve a great deal.

_[Robert Kuttner is a Cofounder and Coeditor of The American Prospect
[[link removed]] and a Professor at Brandeis’s Heller School.
His new book, Going Big: FDR’s Legacy and Biden’s New Deal, will
be published in April.]_

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