Manufacturing not only provides good jobs, but large domestic factories anchor entire communities.
This article is part of our series on “The Post-Corona World.”
America needs a reconstruction strategy that goes well beyond emergency relief measures. This is a moment for a broad public initiative that links modernization of infrastructure, reclamation of domestic industry, and investment in climate transition, at a scale well into the trillions of dollars. The economy, coming out of the corona depression, will need these public investments both to augment a feeble private-sector recovery and to bring the U.S. economy into a new, post-neoliberal, greener era.
Without this national strategy, the U.S. will slip behind China, surviving as a second-class power facing a first-class climate catastrophe. We will become even more a society divided into globalist billionaires and nation-bound low-wage workers. As the crisis revealed, we are not the richest country in the world. The world’s richest country would figure out how to make a cloth mask. The cure for America’s ills must go far beyond recovering from the corona depression—but only if we seize the moment.
The subservience to ultra-free-market ideology combined with a willful blind spot about the rise of mercantilist China, under presidents of both parties (who were all-too-hawkish when it came to Soviet Russia) is explained only by the huge profits made by U.S. corporations from the current arrangement. Trump has broken with this consensus at the level of nativist rhetoric and scattershot tariffs. But he has no strategic trade, diplomatic, or industrial policies that would alter the status quo. We need a managed form of globalization as well as a managed economy at home.
The resonance of the New Deal is not accidental, since progressive economic nationalism was precisely the strategy of the Roosevelt administration—national economic goals, explicit planning, government support of science and technology, public capital, and a rejection of deflationary financial globalism. This continued well into the post-FDR Cold War era because of national-security concerns about the USSR as a geopolitical rival. Today, our geo-economic rival is China, and national economic security should be no less of a driver of policy.
The contrast between the response to the corona pandemic and the World War II mobilization is staggering. In 1941 and 1942, factories making cars, trucks, and other domestic products converted to production of planes, ships, tanks, and artillery, in a matter of months. Private citizens planted victory gardens and participated in scrap drives, as people today are sewing makeshift masks. But nobody pretended during WWII that these volunteer efforts were anything but a modest complement to a massive government-led mobilization. Unlike 1941, there is no leadership from the White House. We’ve lost so much domestic production capacity and know-how—muscle memory of how to manufacture—that only a World War II–scale mobilization can begin to recover that loss.
Beyond Better Supply Chains
The pandemic has focused public consciousness on a term few Americans had heard of—supply chains. Urgently needed medical supplies, from N95 respirator masks to ventilators, are made mostly offshore, primarily in China. Our vulnerability to far-flung offshore supply chains was flagrantly revealed when government tried to ramp up adequate domestic production, and failed.
In our supply-chain education, we are reminded that a chain is only as strong as its weakest link. “The structure is often less like a tree than a diamond,” says Yossi Sheffi, director of MIT’s Center for Transportation and Logistics. The supply-chain fragility is compounded by hyper-concentration. Half of the U.S. supply of swabs needed in coronavirus testing, Sheffi points out, are produced by a single company, Copan, based in Northern Italy, which was shut down for several weeks.
In the context of the pandemic, people have proposed various remedies, from palliative to fundamental: Use the Defense Production Act to compel domestic production of vital medical supplies. Rebuild the Strategic National Stockpile. Diversify sources of supply. Require disclosure of several tiers of subcontractors, to prevent bottlenecks before they occur. Enforce antitrust laws to reverse consolidation of the big pharmaceutical companies. Have government, or a government-sponsored nonprofit, manufacture unprofitable generic drugs. Use mandatory licensing to take back production from China.
But even if these measures were taken, preventable shortages of vital medical and pharmaceutical supplies are, to use a fancy word, a synecdoche—a small part that reveals something about a larger whole. The entire U.S. economy has become overreliant on a trading system that benefits, well, traders, at the expense of the broader society. If all we did was to make our medical supply chains more resilient and reliable, this would be a crisis wasted.
America has also become dangerously vulnerable, for example, on the military front. The rise of “dual use” technologies with both military and commercial applications has led armies of lobbyists to successfully petition for loopholes in export controls, and allowed hedge funds and private equity companies to circumvent national-security concerns.
Meanwhile, China’s own targeted industrial policies coerce U.S. companies to share dual-use technologies, or simply steal them. When China makes a deal for production facilities with a U.S. company, say, Boeing or GE, the U.S. company must agree to produce mainly for re-export to the West, so as not to compete with domestic producers that the Chinese government is incubating to capture global market share. Plus, the U.S. company must share sensitive, proprietary technology with Chinese “partners,” whose goal is soon to surpass and supplant the U.S. rival.
The results of this scheme can be seen in a 2018 Department of Defense report on military supply-chain vulnerabilities, which found that “China is the single or sole supplier for a number of specialty chemicals used in munitions and missiles … In many cases, there are no substitutes readily available.” Other examples of foreign reliance included items as basic as circuit boards, night vision systems, batteries, and space sensors.
Would China really play that kind of hardball? In 2010, the Japanese, in a dispute over fishing rights and territorial waters, seized a Chinese fishing trawler. China, which dominates the world supply of rare earth materials used in batteries and small electronic devices, told the Japanese government to expect that exports would cease. China was willing to weaponize supply chains, and Japan meekly returned the trawler.
U.S. loss of dual-use technology is also driven by Wall Street. The Defense Advanced Research Projects Agency (DARPA) acts as a public-sector investment bank to underwrite development of technologies needed by the military, often with commercial applications as well. One such area is robotics. DARPA provided the seed capital for the successful company that became iRobot. The Pentagon needed robots for battlefield uses in Iraq like disarming of bombs and battlefield reconnaissance. iRobot also invented the popular home robot vacuum cleaner known as Roomba. In 2015, a hedge fund operator named Willem Mesdag, a former Goldman Sachs partner, invested heavily in iRobot, and successfully pressured the company to give up its military business and focus on home uses. In line with classic hedge fund tactics, Mesdag and his allies moved production to China. So technology financed by the Pentagon—by all of us, the taxpayers—has now relocated to China.
This story is far from a one-off. It is the general pattern. Those rare earth materials that China threatened to withhold from Japan use a technology devised by GM engineers using Defense Department grants. Then the leading U.S. spin-off company that developed rare earth magnet applications in the 1980s and 1990s, Indiana-based Magnequench, was purchased by Chinese interests in 1995, with the aid of a Wall Street investment banker, Archibald Cox Jr. The entire enterprise, including the jobs, technology, and manufacturing know-how, was moved to China.
The General Case for Reviving Domestic Manufacturing
Even if China were not bent on becoming the world’s economic leader through massive state investments such as Made in China 2025 and the Belt and Road Initiative (which will export infrastructure projects to some 80 countries), there would be a strong case for reclaiming U.S. production capacity. But China’s rise provides the exclamation point. China’s reliance on state capital allows its economy to target long-term dominance in one emerging technology after another, while America’s reliance on distorted market signals from Wall Street causes our industry to fall behind. As China becomes infrastructure provider to the global South, all this has geopolitical as well as geo-economic implications.
After the first wave of offshoring, Berkeley economists Stephen Cohen and John Zysman wrote a prophetic book in 1987 titled Manufacturing Matters. They pointed out that manufacturing not only provided good jobs; large manufacturing plants anchored entire regional economies. Today’s manufacturing, moreover, was the admission ticket into the advanced technologies of the future. Engineers innovate by being close to the shop floor. If you lose production of, say, machine tools, or semiconductors, or solar panels, or telecom, and a mercantilist rival such as China becomes not only the dominant manufacturer but the global technological leader, then it is all but impossible to get back into the game absent government intervention.
In the decades since Cohen and Zysman wrote their book, the U.S. trade balance has gone from a slight surplus of $16 billion in 1975 to a deficit of $578 billion in 2019. In advanced technology products, we’ve gone from rough balance to a deficit of $132 billion. We have lost the know-how to make a shocking assortment of products. Lobbyists have petitioned the U.S. Trade Representative that America simply cannot make such goods as nylons, bridal gowns, and even Bibles, the oldest mass-produced product in the Western world.
The post-corona economic mobilization needs to restore domestic manufacturing generally. Just as DARPA plays the role of public investment banker for dual-use technologies, government can underwrite industrial leadership as it did during World War II, this time to prevent Beijing’s Made in China 2025 program from dominating emerging technologies. If Wall Street continues to sell out the national interest, government should take an equity stake, placing public servants on corporate boards, as the Reconstruction Finance Corporation sometimes did during the Great Depression and World War ii. We should complement public members on corporate boards with worker representatives.
Our unofficial ideology of laissez-faire ostensibly rejects the idea that nations should promote “national champions” such as Siemens or Huawei or Airbus. This is for the market to decide. But there is a compelling case that, as long as government moves heaven and earth to ensure the solvency of Boeing, a basket case due to disastrous management blunders like the 737 MAX, it should get a controlling interest in the exchange. Boeing could hardly do worse as a government corporation than it did as a Wall Street-obsessed private-sector company.
The fact that so many corporations have no better uses for trillions of dollars of capital than stock buybacks and dividends suggests that “the market” doesn’t perceive productive investment opportunities in the private sector. But there is no shortage of them in the economy. That’s all the more reason for public capital to step into the vacuum.
From a Managed Economy to a Green Economy
This strategy goes hand in hand with a long-overdue program for modernizing infrastructure and converting to a resilient, renewable economy. The American Society of Civil Engineers puts the shortfall in basic infrastructure at $4.5 trillion.
The sponsors of the 2009 recovery guiltily described the goals for stimulus as “timely, targeted, and temporary.” The new green-investment initiative needs to be planned, public, and permanent.
The collapse of jobs in the crisis presents a perfect moment to establish this green stimulus. It’s not for nothing that the Golden Gate Bridge and Hoover Dam were built during the Depression. So too can we convert idle resources to the infrastructure needs of today.
To the extent that taxpayer dollars and public debt are used to create public improvements, they should also provide domestic jobs. Trade norms that brand this approach as illegitimate favoritism need to be discarded in favor of national renewal. We can still work out arrangements with trading areas such as the EU that share our views of a mixed economy. Nations like China, which flagrantly violate human rights, labor rights, and the intellectual-property rights of their supposed partners, can be subjected to offsetting tariffs and regulations. No U.S.-based company, for example, should be allowed to follow coercive Chinese rules of technology transfer.
In order to pursue a national public-investment and green-transition strategy, we also need to wrest economic policy from failed economic thinking. One word that gets thrown around far too casually is “efficiency.” As public discussion has focused on supply-chain vulnerability, it has become a cliché to concede that “we focused too much on efficiency at the expense of resiliency,” as former World Trade Organization Director General Pascal Lamy told a recent conference sponsored by the OECD and the Open Markets Institute.
Forget “timely targeted, and temporary.” Green investment should be planned, public, and permanent.
But the entire concept of efficiency is debased. As I pointed out in my 1996 book, Everything for Sale, there are three different kinds of efficiency—the efficiency of Adam Smith, based on supply and demand; the efficiency of Keynes, which countermands Smith when the entire economy is depressed; and the efficiency of Joseph Schumpeter, in which innovation is the source of dynamic growth over time. China, in its race to innovate and grow, ignores market price signals, as did the U.S. in WWII.
Further, the standard account of efficiency omits the multitrillion-dollar cost of catastrophes wrought by mistaken or corrupt market pricing, such as the crashes of 1929 and 2008, as well as climate change. It assumes no corruption, no market power, and no feedback loops between concentrated economic and political power to make the rules. So the usual efficiency story is not just in need of trimming for the sake of resilience; it’s preposterous, and contradicted by history. It’s time to overthrow it—as we thought we had done once and for all after the Great Depression, Keynes, and Bretton Woods.
The postwar era facilitated benign economic nationalism for the U.S., Europe, and much of the global South. If Europe’s recovery program included nationalized banks and publicly owned companies, that was fine. If preference was given to domestic suppliers in order to create jobs, that was fine, too. And if U.S. investment in Cold War technologies such as jet aviation, biotech, and computer networks had commercial spillovers, also fine. But somewhere along the way, diplomats addled by Chicago economists and suborned by Wall Street lobbyists abandoned that original Third Way in favor of an absurd quest for perfect markets.
In the meantime, with no sense of contradiction, they made an exception for Chinese mercantilism, as long as bankers and corporations were cut in on the action. We need to reject that crusade, and modernize a 21st-century version of the postwar social contract that allows plenty of space for national policy.
We could be quickly moving to electric power based entirely on renewables. But current market pricing signals too much purchasing of carbon-based fuels. Only by using regulations and subsidies can government quickly wean the economy from carbon in favor of an energy future that is not only cleaner but more cost-effective and more secure. Markets often price things wrong. That’s why we have governments and democratic planning.
We need a national strategy to reclaim U.S. leadership in both the whole range of advanced manufacturing and green transition. Not incidentally, all of this creates technical learning and increases the local supply industry and good domestic jobs. The strategy is all of a piece. And, yes, it does violate orthodox (and discredited) myths about free markets and free trade. That’s also long overdue.
