Senior Fellow, International Economic Development Council
“There must be power in the States and the Nation to remould, through experimentation, our economic practices and institutions to meet changing social and economic needs… It is one of the happy incidents of the federal system that a single courageous State, may, if its citizens choose, serve as a laboratory, and try novel social and economic experiences without risk to the rest of the country.”
Supreme Court Justice Louis Brandeis, New State Ice Co. v. Liebmann, 1932
The Covid-19 Crisis of 2020 vividly demonstrates the consequences of four decades of the decline of US manufacturing. A combination of tax policies that favor financial services, trade policies that lead to deficits, corporate policy that drives outsourcing, technology policy that under invests in advanced manufacturing, and talent policy that undervalues STEM education, led to a lack of resilience, surge capacity, and redundancy in our supply base. These trends have undermined our productivity capacity, imperiled our defense industry base, and caused millions of people to lose their jobs. Now our very lives are threatened.
The dramatic impact of the Covid-19 crisis, and the unprecedented national public and private response it evoked, provides an opportunity for a fundamental re-thinking of the strategy to restore our productive capabilities. among these the central role of States. Five principles should shape the initial stages of our industrial recovery strategy.
First, in the US federal system, States play a necessary and critical role in policy development, program implementation, and political sustainability. Governors have clearly demonstrated the leadership role of the States in facing the Covid crisis. This is nothing new: over the decades, States have demonstrated their essential role administering federal funded programs, such as the interstate highway system, Medicaid, unemployment insurance, workforce training, and K-12 education.
Second, existing federal agencies do have the authority and flexibility to respond to unexpected challenges – if they are led by experienced administrators, have adequate resources, and value professional expertise. (By contrast, see “Testing Blunders Cost Vital Month in U.S. Virus Fight” (NYTimes, March 29, 2020).
Third, if the decentralized nature of political authority in the federal system requires a prominent role for the States, the fragmented nature of federal agency mission requires coordinated national leadership. Typically this involves White House executive branch leadership – for example through OMB, NEC, and OSTP – working through the traditional inter- agency process that engages cognizant agencies.
Fourth, It is unlikely that large corporations – by themselves – will be able to quickly pivot to repurpose their facilities, retrain the workforces, or reprogram their robots to respond to the immediate needs for crucial medical supplies. The decline of vertically integrated industrial systems through the Wall Street driven “asset lite” and “shareholder value” strategies, has created a highly efficient, just-in-time, global supply chain, which unfortunately lacks redundancy, resilience, and is blind to single source dependency in its lower tiers.
Recent articles about the manufacture of facemasks and other medical supplies highlight the flexibility of small firms, working cooperatively, to respond to immediate market needs. (See “At the Brooklyn Navy Yard, Bolstering Supply Chain,” NYTimes, April 1, 2020).
These small firms remain the base of our domestic industrial supply chain; of the 290,000 manufacturing “establishments,” over 99% are defined as “small” (<500 employees), containing 50% of 12 million manufacturing employees.
Fifth, and perhaps most challenging to contemporary economic trends and intellectual paradigms, the recurring and increasingly frequent outbreaks of congestion driven illnesses in our globally connected world– AIDS, SARS, MERS, Ebola, Covid-19 – undoubtedly amplified by climate change – strongly indicates the need for the dispersal of economic activity.
During WWII the US placed important defense facilities in the heartland to prevent exposure to attack e.g., Boeing in Kansas, and in rural areas to protect security, e.g., Los Alamos in New Mexico. In a world connected by robust electronic networks and transportation systems, the broad dispersal of economic activity to rural areas will have salutary economic benefits, improve health protection, restore economic convergence amongst regions, and reduce political divergence.
This approach challenges the theory of the positive impacts of agglomeration effects and the practices that support regional clusters – which have resulted in significant economic and social costs to both “left behind” rural regions and hyper- concentrated metro areas.
An immediate starting point to begin restoration of our manufacturing supply chain is to develop state/local manufacturing innovation strategies. Existing authorities and proven models exist. The Commerce Department’s Economic Development Administration (EDA) EDA has the authority to provide economic adjustment/planning grants to States, and has often exercised this authority in the aftermath of natural disasters and its Manufacturing Extension Partnership (MEP) program could easily utilize its State Technology Extension Program (STEP) to similar effect.
A major focus of these strategies would be to support diverse and extended supply chains across the nation, particularly in rural areas, to provide security, resilience and redundancy.
Manufacturing enterprises are often the anchors in rural areas, and rural manufacturers are major components of state manufacturing sectors. 10 states, primarily in the Great Lakes region and Southeast, have more than 1,700 rural manufacturing enterprises; in 20 states, primarily along the Ohio and Mississippi Valley and in the upper Great Plains, rural manufacturers represent more than 28% of all manufacturers, and in 9 of those states more than 42%. Rural areas also contain a high proportion of the 35,000 manufacturers in the critical – and vulnerable – food processing supply chain, which the FDA estimates more than 85% employ fewer than 100 persons.
Development of these strategies at the national and state level could be undertaken immediately – without requiring any new legislative authority, through new funding as part of a special supplemental appropriation.
While national and state level strategies are developed, the federal government should put in place a national funding mechanism. One proven model is the Technology Reinvestment Program (TRP), created by Congress in 1992 in response to defense downsizing, and implemented by the Clinton Administration; an initial $500 million pool of funds, allocated to DARPA, competitively awarded in 7 distinct categories through an inter-agency process, and then managed by the appropriate cognizant agency. In current dollars funding would be approximately $1 billion.
Another relevant example is the mid-1970’s Local Public Works programs (LPW I and II), a counter-cyclical shovel ready infrastructure initiative, administered by EDA, allocating funds to state and local government on a formula based funding levels, through a competitive process. The $6 Billion in two tranches dispersed at that time would be equivalent to $28.85 billion now.
Whenever possible, the default mechanism should either be to have the States manage the programs, because of their greater responsiveness to local conditions, or for federal funding to be consistent with State strategies. And a requirement for receipt of major federal funding should be State and local legislative reform to prohibit the use of all federal dollars for inter-state private firm relocation subsidies – a “net-loss game” – estimated at $70-$100 billion annually in outlays and foregone tax revenue. Requirements for local policy compliance are common in federal grant-in-aid programs, as in the Obama Administration’s educational Race to the Top.
A final consideration will be the degree of technological or industrial targeting in any recovery initiative. Major federal strategies are traditionally oriented around a single technological or industrial goal – Race to the Moon in the 1960’s; TARP in 2010. Under public discussion in the past few years have been a major Infrastructure Program and a Green New Deal. Now is added the Response to the Covid-19 Pandemic. Such an approach will undoubtedly drive the political and programmatic imperative for action. However, underlying any of these pathways is the need to restore our nation’s capacity to produce tangible goods.