Jim Mone/AP Photo
Steel rods produced at the Gerdau Ameristeel mill in St. Paul, Minnesota, await shipment, May 2019.
In recent months, the baby formula crisis and other dangerous shortages have alerted Americans to supply chain disruptions that have stuck around even as the global pandemic has tapered. In response, Congress is finally on the verge of passing $52 billion in spending on semiconductors, though the investment would come years after the chip shortage was first identified. That spending is at the center of a major industrial-policy bill (called COMPETES/USICA), versions of which have passed both the House and Senate, which is now in a conference committee where lawmakers are trying to iron out differences.
Why have computer chips been in such short supply? One culprit is underinvestment in domestic production, according to a new report by researchers at Employ America, a group that advocates for tight labor markets. Now, lawmakers are negotiating over a new Office of Manufacturing Security and Resilience that would monitor and plug supply chain gaps as part of the spending package to help the U.S. compete with rivals that take a more direct hand in steering investment.
Proponents of the office have focused on assuaging concerns that it would give the government too great a role in decisions better left to markets. In an interview with the Prospect, co-sponsor Rep. Tom Malinowski (D-NJ), who sits on the committee merging the House and Senate bills, sought to reassure would-be critics that “the private sector will still be in charge of making things.”
“Most of our competitors around the world, including our friendly competitors, have ministries of manufacturing or industry,” Malinowski told the Prospect. “We’re still going to be a capitalist country, when all is said and done. We’re just going to have a government that uses public funds to help companies make some large up-front investments.”
That frankness about pursuing industrial policy is a dramatic shift from the recent past. The competition mega-bill came together quickly, as consensus has changed over the past two years on the government’s role in public investment. As a result, staffers who worked on the legislation admit there are design flaws: There is little disagreement that the office is missing a key financing authority.
To soothe critics who are skittish about giving the state too much muscle over the private sector, the office proposes to rely on intermediaries such as private equity funds to dole out the cash. It’s a mark of how quickly the zeitgeist has shifted on openly pursuing state-directed investment—but also how much unease remains. Labor groups and proponents of boosting production say they are happy to swallow those shortcomings if it means standing up a nerve center to monitor and finance American manufacturing.
AS FIRST PROPOSED BY THE SENATE, the new supply chains office would only have been tasked with gathering information on opaque supply chains. The thought was to put a coordinating body in the executive branch—the office would be housed in the Department of Commerce—to identify sourcing challenges. A version of the competition bill that passed the House in February goes further, seeding the office with $46 billion to invest in producing goods critical to national and economic security.
That funding is now a sticking point in negotiations, with some on the Senate side arguing that it is actually too little to make an impact, and so Congress may as well not bother. $46 billion is no trifling sum, but the same package of legislation is likely to send $52 billion toward semiconductor manufacturers alone, leaving less than that amount to cover supply chain gaps for the rest of the economy.
“The volume of funding that they’re talking about, they could send out the door in a matter of weeks,” said a staffer in the office of Sen. Chris Coons (D-DE), who added that the office would have a better chance at success if it targeted a few industries and tried to “pick off one or two specific supply chain problems.”
Supporters of the supply chains office say $46 billion would go a long way, especially since it will be blended with private capital. In the House proposal, a maximum of $10 billion could be put toward grants, with the rest going to loans and loan guarantees, meaning taxpayers could recoup the office’s investments. A wide range of potential recipients would be eligible, from domestic manufacturers to state and local governments, colleges, and nonprofits.
This isn’t the only proposal of its kind. In recent years, plans for national investment authorities have proliferated in all flavors, from infrastructure and green banks to a new proposal for regional technology and innovation hubs that was included in both the House- and Senate-passed competition package. Coons and other moderates have proposed an Industrial Finance Corporation that would target sectors needing patient capital or with high up-front costs.
What all the proposals for public investment have in common is a newfound zeal from lawmakers for expanding U.S.-based production and underwriting companies’ efforts to take early-stage risks. Consider Solyndra. For much of the 2010s, Democrats operated in the shadow of that failed solar panel maker, which took loan guarantees from President Obama’s Department of Energy and became a sound bite for wasteful public investment.
Yet today, Malinowski says he hopes the supply chains office takes on enough risk that a couple of its investments are duds. The government, by this view, should be taking on moon-shot investments that private investors are unwilling to attempt. “If an effort like this only invests in winners, then it’s playing it too safe,” Malinowski told the Prospect. “They wouldn’t be doing their job if they didn’t produce a couple Solyndras.”
LAWMAKERS’ NEWFOUND RISK APPETITE and willingness to invest in cutting-edge technologies is a welcome development for boosters of domestic production like the analysts at Employ America, whose new report found that capacity constraints are also partly to blame for inflation.
Despite the shifting mood in Congress, however, they say some tools are still missing from this bill. Arnab Datta, a legal expert at Employ America, has argued that the supply chains office should be given the authority to make advance market commitments (AMCs), an approach in which the government issues contracts to buy a product still in development.
For instance, the U.S. government’s multibillion-dollar preorders of vaccines pushed pharmaceutical companies to produce doses years faster than had previously been achieved. Operation Warp Speed had already benefited from years of mRNA vaccine research at DARPA, the research arm of the Defense Department. But while the U.S. has long excelled at that sort of “demand-push” research, it struggles with the subsequent stage: commercialization and large-scale production of new technologies. That’s the stage where “demand-pull” funding, like purchase guarantees for vaccines, has just been proven wildly successful. (In fact, some have argued that Solyndra could have competed with cheap Chinese-backed solar producers if it had been funded this way.)
The Department of Defense already relies on purchase guarantees in a procurement process it refers to as “Other Transaction Authority.” The omission of this relatively uncontroversial and bipartisan financing authority seems to have been an error in a bill that came together hastily. A staffer to sponsor Rep. Lisa Blunt Rochester (D-DE) said AMCs were brought to their attention too late to be incorporated, but that she doubts there would have been substantive opposition.
THE MOST DELICATE ELEMENT of the supply chains office might be its authority for equity investment—that is, the government taking an ownership stake in firms.
There’s strong precedent here. When he took office during the Great Depression, President Franklin Roosevelt empowered a national investment authority, the Reconstruction Finance Corporation, to purchase stock in crisis-stricken banks. The RFC acted aggressively, changing compensation schemes, firing top bankers, and replacing them with its own appointees.
Today, the government taking a direct equity stake in private firms would be a nonstarter for ideological reasons, according to staff who worked on the bipartisan legislation. Instead, the House proposal routes financing through an intermediary: The office would make a loan to a private “manufacturing investment company,” which would then make an equity investment.
Private equity funds are among the types of firms that could qualify as manufacturing investment companies and be authorized to make investments on the government’s behalf. Notorious for charging investors high fees and forcing companies into bankruptcy, corporate raiders might seem like unlikely assistants in the taxpayer-funded effort to reinvest in an atrophied manufacturing sector. But labor unions endorsing the office say they have been persuaded otherwise.
“This idea that private equity in itself is institutionally bad is something that you have to take on a case-by-case basis,” said Roy Houseman, legislative director for United Steelworkers. He pointed to Blue Wolf Capital Partners, a New York–based private equity fund aiming to reopen a shuttered Alcoa smelter in Washington and produce “green” aluminum. Labor groups originally argued for excluding private equity funds, Houseman told the Prospect, but “there was a pretty broad, bipartisan interest in trying to incorporate private equity.”
Houseman is satisfied with the protections labor has negotiated into the House bill, including safeguards against costly management service agreements and outsourcing. The secretary of the office would be permitted to set limits on the fees and ownership stake a manufacturing investment company could take in a firm, and could choose to exclude bigger private equity funds from participating. Labor also inserted some worker protections, like a guarantee that loan recipients remain neutral in any union organizing effort for the term of the grant.
Datta, for his part, isn’t concerned about private equity firms’ participation. Equity investing is tough, he said, and takes private-sector expertise. And the task the office would be charged with is difficult enough: quickly identifying and deploying capital to projects in critical industries from green technology to biopharmaceuticals.
Instead, Datta worries whether an office housed in Commerce, as opposed to a government corporation like the New Deal’s RFC, would be insulated enough from political whims. “If they have to rely on the congressional appropriations cycle, and all the maneuvering involved to get the money to deploy the capital, they might kind of miss the window.”
