Biden’s $4 Trillion Industrial Policy Faces Bigger Hurdles Than Politics

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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 $4 Trillion Industrial Policy Faces Bigger Hurdles Than Politics

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.

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.

Biden’s $4 Trillion Industrial Policy Faces Bigger Hurdles Than Politics

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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