Bringing the Supply Chain Back Home

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.

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.

—October 21, 2021