MOVING THE June 2020 CHAINS Strategies for Retaking Global Leadership 9 in Industry and Innovation

A FOREWORD ON THE RESHORING IMPERATIVE by David P. Goldman

RESEARCH & DEVELOPMENT AGENCY STRUCTURE Willy Shih, Harvard University Ganesh Sitaraman, Vanderbilt University

TAX INCENTIVES TERMS OF TRADE Rob Atkinson, ITIF Thomas Duesterberg, Hudson Institute

DOMESTIC SOURCING INFRASTRUCTURE FINANCING Michael Lind, University of Texas Terrence Keeley, BlackRock

WORKFORCE INVESTMENT ANTITRUST ENFORCEMENT Samuel Hammond, Niskanen Center Matt Stoller, AELP

REGULATORY REFORM Oren Cass, American Compass AMERICAN COMPASS is a 501(c)(3) non-profit organization, launched in May 2020 with a mission to restore an economic consensus that emphasizes the importance of family, community, and industry to the nation’s liberty and prosperity—

REORIENTING POLITICAL FOCUS from growth for its own sake to widely shared economic development that sustains vital social institutions;

SETTING A COURSE for a country in which families can achieve self-sufficiency, contribute productively to their communities, and prepare the next generation for the same; and

HELPING POLICYMAKERS NAVIGATE the limitations that markets and government each face in promoting the general welfare and the nation’s security.

www.americancompass.org [email protected] Moving the Chains: 9 Strategies for Retaking Global Leadership in Industry and Innovation

TABLE OF CONTENTS

FOREWORD: THE RESHORING IMPERATIVE by David P. Goldman ...... 1 RESEARCH & DEVELOPMENT by Willy Shih ...... 14 TAX INCENTIVES by Rob Atkinson ...... 26 DOMESTIC SOURCING by Michael Lind...... 35 WORKFORCE INVESTMENT by Samuel Hammond ...... 44 REGULATORY REFORM by Oren Cass ...... 54 AGENCY STRUCTURE by Ganesh Sitaraman ...... 62 TERMS OF TRADE by Thomas Duesterberg ...... 73 INFRASTRUCTURE FINANCING by Terrence Keeley ...... 80 ANTITRUST ENFORCEMENT by Matt Stoller...... 89

Edited by Wells King Executive Summary

fter decades of looking away as America’s supply chains migrated overseas, Apolicymakers are finally facing the reality that dependence on foreign produc- ers has weakened the nation’s resilience, its security, and its economy. When factories leave, not only the jobs but also the suppliers, the customers, the expertise, and the innovation go too. When a crisis strikes, vital supplies are unavailable. When produc- tivity growth and innovation are needed, they are nowhere to be found. This symposium gathers experts in many fields; working in think tanks, universities, and industry; starting from points across the political spectrum; to delineate and de- scribe the levers available to policymakers in pursuit of reshoring supply chains and to offer concrete policy proposals for using each lever. Some proposals emphasize investments that the United States can make to improve its competitiveness—in peo- ple, in infrastructure, and in research. Others consider how better laws could attract or even force firms toward domestic production. Still others advocate reform for in- stitutions themselves, from the federal government to the WTO.

RESEARCH & DEVELOPMENT Willy Shih, Harvard Business School

The United States should use pre-competitive research consortia to bridge the gap between basic research and commercial competition. This model proved critical to establishing American leadership in the past, in fields from airplane engines to semiconductors. Policymakers should focus especially on the demand side, priming initiatives like biomanufacturing and grid modernization that will generate stable domestic demand for key domestic manufacturing capabilities.

TAX INCENTIVES Rob Atkinson, Information Technology & Innovation Foundation

The United States should reduce the effective tax rate for companies when they invest in research and development, capital equipment, and workforce training. An American Innovation and Competitiveness Tax Credit would reduce a firm’s tax bill by 30% of spending in those areas (above 50% of base-period levels), reward- ing investment and closing the nation’s gap with the majority of OECD countries that offer an R&D credit more generous than America’s and the many that offer an investment credit too. Executive Summary page 2 of 3 DOMESTIC SOURCING Michael Lind, University of Texas

Rather than encourage reshoring, policymakers should in some cases simply man- date it, by establishing Local Content Requirements that require some or all of a final good’s inputs to be manufactured domestically. While this approach appears blunter than reforms to cajole or incent or create an environment friendly to reshoring, it more directly and reliably achieves its stated purpose and allows policymakers to se- lect and target particular supply chains of economic or strategic importance.

WORKFORCE INVESTMENT Samuel Hammond, Niskanen Center

The United States has lost not only its supply chains, but also the skilled workforce and embedded industry expertise to support them. Its lack of active labor market pol- icies compounds the problem, as workers cast out of disrupted jobs get little support in connecting to new ones. Policymakers should reform Trade Adjustment Assistance, a woefully outdated and underinclusive program, to instead provide training to people unemployed for any reason and help them navigate the path back to productive work.

REGULATORY REFORM Oren Cass, American Compass

Environmental laws enacted 50 years ago have ratcheted continually tighter and spe- cifically target efforts at expanding domestic industrial capacity. Policymakers should remove the excessive hurdles to construction and expansion imposed by the Clean Air Act and the National Environmental Policy Act, by allowing construction of new facil- ities on the same terms as existing ones, and creating streamlined permitting processes comparable to those employed in countries like Germany and Canada.

AGENCY STRUCTURE Ganesh Sitaraman, Vanderbilt Law School

Policymakers are hampered in the development of supply-chain strategy and policy by the dispersion of responsibility and authority across a byzantine tangle of agencies. The United States should consolidate the Department of Commerce, U.S. Trade Rep- resentative, Small Business Administration, export promotion agencies, and econom- ic sanctions authority into a Department of Economic Resilience with divisions for trade, export promotion, economic security, industrial policy, and statistics. Executive Summary page 3 of 3 TERMS OF TRADE Thomas Duesterberg, Hudson Institute

Three principles too long absent from American trade policy must return to the fore: Reciprocity, Security, and Democracy. The World Trade Organization’s rules and procedures no longer uphold those principles, but its requirement of unanimous agreement has precluded reform. The United States should insist upon institutional reform of the WTO that creates a pathway to revising its rules, or else move beyond the WTO’s structure to reassert its own interests.

INFRASTRUCTURE FINANCING Terrence Keeley, BlackRock

Manufacturing and supply-chain professionals rank “investment in U.S. infrastruc- ture” as their top priority, but underinvestment persists. The United States should cre- ate a national development bank to attract private capital into infrastructure projects, closing the funding gap and improving project outcomes. Such banks, already standard features in most national and regional economies, can operate with little to no taxpayer capital while leveraging public guarantees into enormous private-sector commitments.

ANTITRUST ENFORCEMENT Matt Stoller, American Economic Liberties Project

Consolidation among hospital Group Purchasing Organizations (GPOs) provides a case study for how excessive concentration and market power discourages domestic production, suppresses price signals, and helps state-backed Chinese firms dominate supply chains. Sector-specific analysis of industrial organization can point toward op- portunities for prohibiting anticompetitive practices and recreating both horizontal and vertical fragmentation to allow domestic producers back into the game. FOREWORD: THE RESHORING IMPERATIVE

David P. Goldman Asia Times

You may not be interested in supply chains, but supply chains are interested in you.

ntil quite recently, the issue of supply ic trade deficit in manufactured goods, an Uchains has been absent from Ameri- accumulating foreign debt, a chronically ca’s policy agenda. Our supply chains have low savings rate, an excessively consump- been guided nonetheless by government tion-based economy, and stagnant labor action for the past twenty years—not ours, productivity. To paraphrase Leon Trotsky, but Asia’s and especially China’s. America you may not be interested in supply chains, has an industrial policy, namely off-shor- but supply chains are interested in you. ing. State support for capital-intensive manufacturing, the hallmark of the Asian The so-called neoliberal consensus in model since Japan’s 1868 Meiji Resto- the economics profession rationalized ration, shifted industrial output from the the hollowing-out of America’s industrial United States to Asia. Together with this base. A liberal economist believes in free shift, American manufacturing employ- trade; a neoliberal talks about free trade ment fell to about 11.4 million from almost while seeking rents from subsidies provid- 20 million in 1980.1 We also have a chron- ed by foreign governments.

David P. Goldman is a principal of Asia Times LLC, and the president of Macrostrategy LLC. Formerly he was global head of fixed income research at Bank of America. Foreword: The Reshoring Imperative David P. Goldman, Asia Times

For several reasons, America must America planted the seeds of the digital reshore key industries. These include: revolution but failed to harvest the fruits. We invented the semiconductor, but today 1. National Security. The COVID-19 ep- we produce only 10% of the world’s com- idemic showed America’s dependence on puter chips, down from 25% in 2015.3 We imports of protective gear, medicine, and invented all of the core digital technolo- equipment, as well the prospective devel- gies: flash memory, liquid crystal displays opment of vaccines. (LCDs), light-emitting diodes (LEDs), plasma displays, semiconductor lasers, and 2. American “Soft Power.” For example, the solid-state sensors that power smart- America’s lack of manufacturing capaci- phone cameras. Virtually all of these ty for 5G telecommunications equipment products are now produced in Asia. The leaves us open to significant loss of influ- LCD market is divided among South Ko- ence to the benefit of China. The same rea, Taiwan and China; LEDs are produced problem will occur in other key industries by China and Taiwan; Taiwan and Japan without corrective action. produce most sensors; and the U.S. share of flash memory production is down to 3. Productivity. Loss of high-tech manufactur- 10%.4 American firms still lead the world ing capability has a direct negative impact in in chip-making equipment, but about 90% productivity and important indirect effects, of equipment sales are to foreign chip fab- such as the loss of skills in support sectors. ricators.5 In 1999, the American share of global high-technology exports was nearly 4. Innovation. America’s tradition of inno- 20%, and China’s share was less than 5%.6 vation from Thomas Edison through Bell By 2015 our share had fallen to 7% while Labs came from the cooperation of scien- China’s rose to 26%, according to the tists, engineers, and production workers, World Bank.7 As a share of U.S. exports, rather than academic research in isolation. high-technology goods, including elec- tronics and pharmaceuticals, fell to 19% in 5. Resilience. The off-shoring of Ameri- 2018—from 31% in 2007.8 can industry skews the American economy towards household consumption (70% of Asia’s ascent in manufacturing pro- GDP vs. an OECD average of 60%), at duced some benefits for the United States, the expense of investment.2 This leaves the or at least benefits for some Americans: United States more vulnerable to shocks American companies exited from hard- to consumer confidence, as in 2008-2009 ware businesses and focused on “capi- and during the COVID-19 pandemic. Eco- tal-light” software businesses, which are nomic resilience requires a stronger invest- infinitely scalable and benefit from inex- ment component in economic growth. pensive Asian hardware imports. This pro-

AMERICAN COMPASS 2 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

duced enormous growth in the stock-mar- revealed American dependence on China ket capitalization of a handful of software and other Asian countries for urgently re- companies that captured network effects quired protective gear as well as basic phar- (e.g., Microsoft, Amazon, Google, Face- maceuticals. America’s effort to suppress book). American consumers benefited Chinese dominance in the next generation from cheap products that would cost con- of mobile broadband revealed the lack of siderably more to make at home, although American hardware manufacturing—or that is something of a devil’s bargain; with even design—as a strategic weakness. declining manufacturing investment and employment we also had stagnant produc- For strategic reasons, long-term struc- tivity growth and almost no growth in real tural reasons, and short-term economic household income. Real median house- reasons, the issue of supply chains has hold income declined from 1999 to 2012 forced its way to the top of the policy and didn’t regain its 1999 level until 2016.9 agenda, where it will remain for a long time to come. President Trump recently asked For several reasons, this symbiotic mod- during a press conference why the Unit- el—what Niall Ferguson dubbed “Chime- ed States should have global supply chains, rica”10—is no longer tenable. The disrup- rather than make everything at home. But tion of economic and community life in decoupling on a large scale is impossible in former manufacturing hubs due to this the foreseeable future, for a simple reason: shift helped to elect Donald Trump on a America’s imports from China in 2018 program of restoring American industri- were equal to a quarter of our $2 trillion al employment. The COVID-19 pandemic GDP in manufacturing, too large a por- tion to replace in the near future. The largest category of imports, about $70 billion of smartphones, cannot eas- For several reasons, ily be relocated to the Unit- ed States, as Apple CEO Tim this symbiotic model Cook argues, because special- ized engineering skills now —what Niall Ferguson abundant in China are scarce in the United States.11 More dubbed ‘Chimerica’— broadly, genuine autarky is surely unnecessary and un- is no longer tenable. wise. But targeted decoupling of strategically critical indus- tries is long overdue.

AMERICAN COMPASS 3 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

We have the opportunity to reshore key Among all postwar presidents, Ronald industries with a quantum leap in produc- Reagan had the strongest commitment to tivity driven by information technology. If free markets. But as his Treasury Secretary we fail to grasp the opportunity, however, James Baker III noted, Reagan “granted we confront the risk that our strategic rivals more import relief to U.S. industry than will increase their lead in advanced manu- any of his predecessors in more than facturing techniques. China has committed half a century.”13 This included restraints vast sums to 5G broadband, artificial in- on Japanese auto exports to the United telligence (AI), and STEM education with States, “voluntary” restraints on 18 coun- the goal of becoming the world’s domi- tries’ steel exports to the United States, an- nant power in high technology. America’s ti-dumping tariffs on Japanese computer competitive position in the world, long- chips, and numerous other measures.14 term growth prospects, and national secu- rity all depend on maintaining our superior Major corporations that maintained capacity for innovation. large-scale labs, including the Bell System, General Electric, RCA, IBM, and DuPont, Restoring American industry through absorbed most of DARPA’s grants. Scien- innovation will require a visionary port- tists and engineers worked with produc- folio of policy initiatives, including tax tion personnel to determine the practicali- incentives for R&D, direct subsidies for ty of innovations. Although “Big Science” target projects, revisions to international dominated the grants, the venues gave rise trade policy, regulatory reform, and do- to an unprecedented wave of entrepre- mestic content rules, among other mea- neurship, as entrepreneurs formed new sures. In this symposium a distinguished firms to commercialize the discoveries. group of policy experts offers a range of Employment growth during the 1980s was recommendations to bring about the rapid among the highest of the postwar decades, reshoring of manufacturing. with employment at new companies more than offsetting declining employment at When America Led the World large companies.15 A clear division of la- bor separated government subsidies for During the 1970s and 1980s, federal basic research from private risk-taking in spending on basic research and develop- commercialization. ment reached 1.4% of GDP, or the equiva- lent of $300 billion in current dollars.12 Most Two facts about this great surge in in- of this was channeled through NASA or the novation are noteworthy. The first is that, Defense Advanced Research Projects Agen- without exception, every important tech- cy (DARPA). This sustained effort won the nology of the digital age began with a Cold War and created the digital age. DARPA or NASA subsidy: the semicon-

AMERICAN COMPASS 4 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

Entrepreneurs will risk the unknown, but they will not risk money for unknown unknowns—possible discoveries whose commercial application cannot be imagined because the underlying science has not yet been discovered. Indeed, by definition the outcome of basic innovation cannot be predicted in advance.

ductor, CMOS manufacturing of semi- Thus, basic R&D requires state support. conductors, the graphical user interface, Before the “accidental” invention of the semiconductor lasers, optical networks, semiconductor laser, it was impossible to LED and plasma displays, and the Inter- imagine a commercially viable optical net- net itself. The second fact is, that without work; no one could—let alone would—in- exception, the original grants in every case vest to develop and build one. As a prac- did not envision the enormous commer- tical matter, national security has been cial potential of these technologies. The the driver of basic R&D for two reasons: discoveries were the “accidental” result of First, because taxpayers are willing to ac- basic research with a different initial goal. cept expenditures with no specific benefit For example, DARPA funded a study of as a matter of national defense, and sec- night-time battlefield illumination and got ond, because the constant drive for prog- the semiconductor laser and, with it, optical ress in weapons systems and cryptography networks and the cable television industry. provides a concrete target for innovation that pushes at the frontier of science. These two observations illustrate the inadequacy of classical free-market theo- For the pipeline from basic R&D ry. Entrepreneurs will risk the unknown, through commercialization to flow, policy- but they will not risk money for unknown makers must also ensure the private sec- unknowns—possible discoveries whose tor stands ready and able to participate. commercial application cannot be imag- Efforts to protect established industries ined because the underlying science has do not directly produce innovation, of not yet been discovered. Indeed, by defini- course. But it is critical to note that the tion the outcome of basic innovation can- main venue for innovation at the dawn of not be predicted in advance. the digital age was the corporate labora-

AMERICAN COMPASS 5 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

tory. Research isolated from production and diverse industrial base is a precondi- facilities—at universities, for example—is tion for innovation and growth in labor not as effective. The interaction of scien- productivity and incomes. Innovation tists with production engineers and skilled does not occur in a vacuum. The collabora- workers is an indispensable part of inno- tion of scientists, engineers and production vation. Scientists generate countless prom- workers is required to identify innovations ising ideas every day; it takes experienced that have commercial value. High-tech engineers and skilled personnel to sift out manufacturing depends on a complex set the few practical innovations from those of of supply chains, and industrial innovations mere academic interest. If the United States require a critical mass of domestic inputs. loses the most advanced production capa- bilities and disperses its skilled workforce, For instance, at the urging of the Trump our ability to innovate will be crippled. Administration, Taiwan Semiconductor Manufacturing Corporation agreed in May Regaining the Lead 2020 to build a chip fabrication plant in Arizona at a cost of $12 billion.16 Although It is important to be clear about the dif- the plant’s expected output will be small ferent goals that bear on the onshoring of compared to total American demand, it supply chains and to devise policies that will help to secure a supply of computer address these objectives in the most direct chips for American military applications, way. Where the rationale is national secu- an important precaution because unde- rity, onshore production may be consider- tectable backdoors can be secretly insert- ably more costly than imports, but worth ed into complex chips at the production paying for strategic reasons. Where the level. Intel plans to build an onshore chip rationale is economic, greater precision foundry in Oregon.17 A similar rationale about both goal and mechanism is neces- could support is onshore production of sary. Protection of existing industrial jobs medical equipment and medicines even at or subsidies for new jobs may be desirable substantial cost. in some contexts, but we should be aware that we simply may transfer income from “Jobs,” while frequently cited as a moti- one group of Americans (consumers who vation for industrial policy, play little direct pay higher prices for the same goods and role in a case like Taiwan Semiconductor’s taxpayers who pay the subsidy) to anoth- new plant. It will employ 1,600 workers, er (investors and workers in protected with combined annual pay of less than 1% industries). of the total investment.18 In general, inno- vation in manufacturing does not support A separate and often better economic employment growth. Indeed, while the rationale is that, as we have seen, a strong United States could subsidize manufactur-

AMERICAN COMPASS 6 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

ing employment, for example, through a labor costs. That surely was the case for tax credit for new jobs or direct subsidies or some industries, but labor costs cannot subsidies for specific industries, that might explain the shift in capital-intensive in- reduce rather than accelerate productivity dustries, and key manufacturing processes growth, and conflict with the strategic goal are only becoming more capital-intensive of increasing America’s competitiveness with time. The application of AI to robot- against an aggressive ics sharply reduces the and potentially hostile importance of relative Asian challenger. A reshoring policy that labor costs. Dr. Hen- keeps key industries in ry Kressel, the former But a reshoring director of RCA Labs, business in the face of policy that keeps key explains, “this change heavily subsidized foreign industries in business makes manufacturing in the face of heavi- competition is more than closer to home practi- ly subsidized foreign an overpriced welfare policy cal for some industries competition is more for industrial workers. It and creates a compet- than an overpriced is a necessary condition itive advantage by al- welfare policy for in- for future innovation. lowing a much more dustrial workers. It is nimble business com- a necessary condition pared with relying on for future innovation. The indirect impact offshore production.” Changes in tooling of new technologies on employment is can be programmed quickly and cheaply, likely to be far greater than the direct im- reducing dependence on offshore produc- pact. The production of 5G devices and tion lines and traditional labor skills. their embedded semiconductors is highly automated, but the installation of millions The bad news is that America has failed of ground stations will require enormous to prepare for capital-intensive competi- amounts of labor, including a good deal of tion. Our competitors subsidize capital-in- skilled labor, just as the buildout of fiber tensive industry. We subsidize sports sta- optic networks for cable television created diums. Correspondingly, the United States hundreds of thousands of jobs in the past. invests a far lower portion of its GDP than China or South Korea. The good news is that a revolution is underway in manufacturing that will The capital intensity (the ratio of total change the economics of off-shoring. The assets to earnings before interest and tax- migration of manufacturing jobs from the es) of the components of the S&P 500 United States to China and other countries Index has fluctuated around the same lev- is often explained as the result of relative el during the past twenty years, while the

AMERICAN COMPASS 7 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

capital intensity of the components of sidizing basic R&D. The most effective China’s Shanghai Composite Index has government intervention into industry nearly tripled during the same time peri- has fostered transformative innovations od.19 Corporate accounting for assets, to through public-private collaboration in ba- be sure, is unreliable, but the trend none- sic research. theless is striking. Financing for large Chi- nese companies comes mainly from state- Several remedies are available. The sim- owned banks at fixed interest rates—that plest is to reduce taxes on capital income. is, through an industrial policy. This is not The most important form of subsidy that a Chinese, but rather an Asian phenome- the federal government can offer, though, non; South Korea subsidizes capital-inten- is generous support for basic R&D. In- sive industries, and the capital intensity of dustries that receive such subsidies are a its KOSPI Index is close to that of China.20 self-selecting group of prospective inno- vators. As in the past, the Department of The place to begin is at the source of the Defense remains the most effective agency problem, namely the tilted playing field. for the distribution of such subsidies. By No American company can compete with its nature, warfare pushes the boundar- a Huawei or Samsung in hardware because ies of science in the development of new the Chinese and Korean governments pro- weapons systems. Military objectives such vide a capital subsidy. The industrial poli- as laser defenses for American ships, an- cies that cause the least distortion of the ti-missile systems able to stop hyperveloc- economic as well as the political process ity missiles, drone swarms guided by AI, tilt the playing field in favor of capital-in- submarine detection, cryptography and tensive industry by lowering the cost of so forth pose scientific challenges and are capital, and support innovation by sub- likely to elicit fundamental breakthroughs.

AMERICAN COMPASS 8 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

An important indirect subsidy to high- co for steel is not a major national security tech industry is education and worker train- concern. On the other hand, dependence ing. With shrinking capital commitment to on China or even South Korea for semi- manufacturing, colleges do not attract the conductors is. Despite these concerns, di- brightest American students to engineer- rect subsidies are sometimes required to ing. America’s technology industry is in- prevent the loss of key industries and the creasingly dependent on foreign workers. dispersion of skilled labor. Only 5% of American college students major in engineering, compared with 33% Alongside these targeted efforts at in China; as of 2016, China graduated 4.7 lowering capital costs, accelerating R&D, million STEM students versus 568,000 in improving skills, and boosting targeted the United States21 as well as six times as industries, policymakers can also take ac- many students with engineering and com- tion to alter the environment in which in- puter science bachelor’s degrees.22 Mean- vestment decisions occur in order to make while, foreign students earned 73% of the building of industrial capacity a more the doctorates in electrical engineering at attractive bet. And they can reform the in- American universities in 2017.23 Essential stitutions within which they act to improve to any program of industrial recovery is their own coordination, their international an educational reform comparable to our negotiation, and their efforts at regulation. 1957 National Defense Education Act as well as increased technical training for com- The essays offered in this symposium putationally intensive, skilled industrial jobs. cover a broad range of topics, includ- ing pre-competitive R&D as a driver Then there are cases in which direct sub- of long-term productivity gains (Willy sidies to specific industries—“picking the Shih), tax incentives for private-sector winners”—are required for national secu- investment (Rob Atkinson), local con- rity or other reasons. Direct subsidies are a tent requirements (Michael Lind), ac- problematic policy tool. They inevitably in- tive labor market policy (Samuel Ham- vite rent-seeking behavior by corporations, mond), regulatory reform (Oren Cass), subsidies to particular groups of workers, administrative structures to coordinate and a politicized division of spoils. There policy planning (Ganesh Sitaraman), are some forms of employment that are international trade reforms (Thomas senseless to subsidize. Robotics will re- Duesterberg), infrastructure financing place the dirty, dangerous business of (Terrence Keeley), and antitrust en- sending men into coal mines before long forcement (Matt Stoller). Hopefully, as white-coated technicians with virtual these papers will provide a resource for reality visors manipulate underground ma- policymakers now grappling with the chines. Dependence on Canada and Mexi- decisive economic issue of our time.

AMERICAN COMPASS 9 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

16 Bob Davis et al., “Taiwan Firm to Build Chip Factory in U.S.,” The Wall Street Journal (May 14, 2020).

Endnotes 17 Mike Rogoway, “Intel confirms plans for huge Oregon factory,” The Oregonian (February 5, 2019). 1 U.S. Bureau of Labor Statistics, “All Employ- ees, Manufacturing,” St. Louis Federal Reserve Eco- 18 Martin Baccardax, “TSMC Plans $12 Bil- nomic Research (FRED). lion Arizona Plant, Will Create 1,600 Jobs in Latest U.S.-China Tech Skirmish,” The Street (May 15, 2020); 2 World Bank, “Households and NPISHs final author’s calculation. consumption expenditure (% of GDP),” World Bank Data Indicators. 19 Ratio of total corporate assets to aggregate Earnings Before Interest and Taxes as reported by 3 International Business Services estimate. Bloomberg

4 International Business Services estimate. 20 Ratio of total corporate assets to aggregate 5 Bloomberg geographic data for LAM Re- Earnings Before Interest and Taxes as reported by search (7.8% US sales); Applied Materials (12.8% US Bloomberg. sales); and KLA-Tencor (13% US sales). 21 World Economic Forum/Statista. World 6 World Bank, “High-technology exports (% Economic Forum, “The Countries with the Most of manufactured exports),” World Bank Data Indica- STEM Graduates (2016),” Statista. tors. 22 In 2016, the U.S. graduated 200,721 students 7 Ibid. with bachelor’s degrees in engineering and computer science, whereas China graduated 1,180,000. National 8 Ibid. Science Foundation, “Table S2-15. S&E first univer- sity degrees, by selected region, country, or economy 9 U.S. Census Bureau, “Real Median House- and field: 2010-16,” National Center for Science and hold Income in the United States,” St. Louis Federal Engineering Indicators (NCSES). Reserve Economic Data (FRED). 23 National Science Foundation, “Table S2-10. 10 Niall Ferguson, “Niall Ferguson Says Doctoral degrees awarded, by citizenship, field, race, U.S.-China Cooperation Is Critical to Global Eco- and ethnicity: 2000–17,” National Center for Science nomic Health,” The Washington Post (November and Engineering Indicators (NCSES). 17, 2008).

11 “Tim Cook: China a leader in many fields,” China Daily (Dec. 7, 2017).

12 Matt Hourihan and David Parkes, “Federal R&D Budget Trends: A Short Summary,” American Association for the Advancement of Science (Janu- ary 2019).

13 Sheldon L. Richman, “Ronald Reagan: Pro- tectionist,” The Free Market 6, no. 5 (May 1988).

14 Ibid.

15 Larry Schweikart and Lynne Doti, American Entrepreneur: A History of Business in the United States (American Management Association 2009), 386.

AMERICAN COMPASS 10 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

and the Energy Research and Develop- COMMENT ment Administration) and the National Labs, all of which have contributed sub- Willy Shih stantially to America’s global leadership.

s David P. Goldman points out in I also want to reinforce Goldman’s com- Ahis foreword, government funding ments on subsidies for capital-intensive for basic scientific research is an import- industries. This is one of the most perni- ant public good that the U.S. has bene- cious issues in world trade. While Chinese fited from enormously during the post- companies have benefited considerably, war era. Support for funding was built there are several challenges with address- on the consensus that science had won ing this issue: the war – not just the atomic bomb, but technologies like radar, the production of In China there is a general lack of trans- antibiotics like penicillin, and the digital parency on the size and terms associated computer. Other countries have seen the with most subsidies. Many are provided by benefits and have followed suit with- sig provincial or local governments and can nificant investments of their own in basic take the forms of land grants or the con- research. While NASA and DARPA have struction and equipping of factories. It is been important forces on the forefront of very difficult to assess their magnitude, but many pioneering innovations, we should I have seen cases that include a substantial not overlook the extensive research sup- majority of the capital costs. port from the National Science Founda- tion, the National Institutes of Health, The grant of subsidies to competing and the Department of Energy (as a suc- manufacturers in China, and the tolerance cessor to the Atomic Energy Commission for losses among the firms that ultimately do not survive the competition, leads to a robust Darwinian pressure that produc- The grant of subsidies to es strong global competitors. This kind competing manufacturers of portfolio approach parallels the way in China, and the tolerance venture capitalists invest, but in the Unit- for losses among the firms ed States there is little to no tolerance for that ultimately do not the inevitable failures (e.g., Solyndra) that survive the competition, a public investment approach would bring. leads to a robust Darwinian That means we can’t pursue high-risk, but pressure that produces potentially high-reward, breakthrough in- strong global competitors. novations. There is little real comprehen- sion in the U.S. of how the Chinese mod-

AMERICAN COMPASS 11 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

Willy Shih comment, continued ogies. This was one of the pillars of the el works, which should be a prerequisite President’s Council of Advisors on Sci- to understanding how to compete with ence and Technology January 2017 report it. In that regard, “Made in China 2025” on ensuring long-term U.S. leadership in investments in semiconductors would be semiconductors: to catalyze transforma- perceived as very wasteful, but substantive tive semiconductor innovation over the strategic capabilities will (and already have) next decade. If we look forward and in- come out of it. vest in future platform technologies, we can maintain a position where the world It’s hard to be critical of subsidies when turns to us for leadership. we use them ourselves. Most countries, in- cluding the U.S., participate in subsidy or tax benefit schemes. Maybe it’s a question of scale. When the State of Wisconsin pro- COMMENT vided $4 billion in subsidies to Foxconn to build a Gen 10.5 LCD factory in the Ganesh Sitaraman southeastern part of the state, my reaction was the state had not ponied up enough he “Moving the Chains” symposium to be a serious player in that game. If it Toffers a variety of ideas on how to really wanted a Gen 10.5 factory located in think about global competitiveness and the state, Wisconsin should have put up at supply chains. While I do not agree with least $6 billion and included critical suppli- all of the ideas offered, the conversation ers like Corning in the largesse. is essential – and common themes are emerging, such as opposition to the idea Goldman’s recommendations to pro- that the aim of trade policy should be effi- vide generous support for R&D and to in- ciency, with little regard for other factors. vest in education and worker training rep- resent a leadership strategy that plays to Rather than respond to a particular es- American strengths. It has some chance of say, I wanted to outline two other areas restoring our position in fields where we that are important but were not covered in can invest in new manufacturing process the symposium. technologies that might obsolete exist- ing competition. Equally importantly, we The first is the direct public provision should be forward-looking and strengthen of goods and services. For example, the our leadership in areas where we are still federal government has the power under strong—biologics, aerospace, advanced existing laws to license a patented prod- materials, and others—with a special fo- uct, like a pharmaceutical drug. Public cus on general purpose platform technol- production – whether of medicines or

AMERICAN COMPASS 12 Foreword: The Reshoring Imperative David P. Goldman, Asia Times

Ganesh Sitaraman comment, continued produced goods that shipped on the rail- other essential goods – has a variety of ways. Why? Because without a separation benefits. Domestic production creates between the railroad and commercial ac- resilience from global shocks; public ca- tivity that travels across the rails, railroad pacity enables scaling up production in companies would be able to give special a crisis; public production gives govern- privileges to their own vertically integrated ment an understanding of cost structures goods. Other producers would face higher that can serve as a “yardstick” for costs costs to move their goods around. Favorit- and prices in contracting decisions; and ism of this type tends to build a monopoly the public option can compete against and deprives the country of competition, private actors and push monopolists to innovation, and resilience. This tradition lower their prices. of American regulatory practice has impli- cations for tech platforms. A second area is infrastructure regula- tion, sometimes called public utilities reg- These two pathways – public pro- ulation or regulated industries law. The duction and infrastructure regulation – basic idea is that there are some business- come at the problem of weakened sup- es that serve as infrastructure, and they ply chains in a different way than many should be regulated to ensure public ac- of the proposals offered in the sympo- cess on non-discriminatory terms. For ex- sium. But both can help to make Ameri- ample, the 1906 Hepburn Act prohibited ca more competitive and more econom- railroads from owning companies that ically resilient.

The public option can compete against private actors and push monopolists to lower their prices.

AMERICAN COMPASS 13 RESEARCH & DEVELOPMENT

Willy Shih Harvard Business School

Pre-competitive research consortia are vital to sparking innovation.

ore than a decade ago, I pointed out in critical areas. While we can’t expect to Mthe critical need to restore Amer- manufacture everything ourselves, lead- ican manufacturing capabilities that had ership in critical areas can ensure greater withered away.1 The COVID-19 pandem- resilience during the next crisis and great- ic has exposed how lost capabilities have er competitiveness for the geo-economic impaired our nation’s ability to manufac- challenges ahead. In that spirit, I propose ture critical healthcare supplies, phar- two key ideas for American policymakers: maceuticals, and medical equipment, as focus on the demand side of the equation, well as our dependence on interruptible and foster and fund more pre-competitive foreign sources for everything from tele- partnerships. communications equipment to auto parts. Focus on the Demand Side We should harness the lessons learned from the crisis to take stock of our man- Most prescriptions for rebuilding Amer- ufacturing capabilities and rebuild them ican manufacturing focus on the supply side,

Willy Shih is the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School. 1. Research & Development Willy Shih, Harvard Business School

payloads to orbit—including Crew Dragon in May—and providing cash flow for the A more sustainable approach company to develop innova- tions like reusable vehicles would be to focus on the demand that have changed the game in space launch. side, growing domestic demand Demand provides eco- in early markets for new nomic motivation to man- technologies as a way of incenting ufacturers, and proximity to production is valuable the growth of local supply. for early-stage products for which dominant designs ha- ven’t emerged. Close inter- actions between product de- velopers, manufacturers, and incenting manufacturers to move pro- consumers facilitate rapid it- duction to the U.S. and then potentially erations and product refinements. Having erecting trade barriers to protect resulting a large home market in which to “practice” higher-cost positions. A more sustainable is also a significant advantage. As long as approach would be to focus on the demand consumers will buy interim products as side, growing domestic demand in early the manufacturer improves its production markets for new technologies as a way of processes, demand can generate the cash a incenting the growth of local supply. firm needs to grow, learn, and improve. A large domestic market served the United If we look historically at industries in States well during the twentieth century, which the U.S. has led—automobiles in and it is now a substantial advantage for the 1920s, computers, telecommunica- Chinese manufacturers. tions, integrated circuits (ICs), the Inter- net, products using the global positioning Foster and Fund system (GPS)—large early markets drove Pre-Competitive R&D consumption and gave American firms incentives to innovate. Often, as was the Much has been written about the eco- case for ICs and GPS, it was the U.S. mili- nomic benefits of public funding of basic tary or the space program. A recent exam- research.2 American strength in sectors like ple is NASA and the Air Force securing life sciences and biotech, materials, com- long-term contracts with SpaceX to deliver puting, communications, and aerospace

AMERICAN COMPASS 15 1. Research & Development Willy Shih, Harvard Business School

came from public investments in basic and scope of information, resources, and research. But in many fields today—espe- capabilities across firm boundaries. They cially those at the frontiers of science and share lab space, instruments, tools, mate- technology—investment needs to bring rials, and all the infrastructure for collab- pioneering discoveries to market that are oration. They also share people, and this beyond the reach of even the best-funded has the benefit of broadening the pool of firms. The U.S. should encourage the for- ideas. For firms where the incentive to do mation of more pre-competitive research research may not necessarily be high, be- consortia as a way of helping to commer- ing able to tap into a broader knowledge cialize innovations in critical areas to ce- base widens exploratory activities and the ment global leadership. development of new ideas.4

In pre-competitive R&D, partners Two circumstances, in particular, favor work together on a common technolo- such collaborations: when the scale and gy platform with which they intend to complexity of R&D needed to remain independently develop differentiated competitive outpace individual firms’ in- downstream products. This pre-compet- house capabilities, and when the target itive model maintains proprietary access area for partnering is some distance from to the intellectual property and learning downstream product markets, focusing on that might result. The obvious benefit is enabling technologies rather than specific increased research efficiency, increasing market segments or niches. scale and scope while reducing duplication through the pooling of resources and ca- An example of such a collaboration was pabilities.3 Participants share knowledge SEMATECH, established in 1987 as a way and mitigate risk, leveraging a larger scale for U.S.-based semiconductor manufactur-

AMERICAN COMPASS 16 1. Research & Development Willy Shih, Harvard Business School

ers to respond to Japanese competitors. vanced Micro Devices—whose technol- The 14 participants felt that no firm acting ogy operation was spun off and became on its own could compete effectively, so the base for Global Foundries—Freescale pooling resources and sharing technology Semiconductor, Infineon, Samsung, ST had the potential to increase the effective Microelectronics, and Chartered Semicon- scale of American industry and to recover ductor. The Alliance helped Samsung and market share.5 Initial goals included indus- Global Foundries develop their respective try infrastructure—especially the capabili- competitive positions in the industry—es- ties of specialized equipment and materials pecially in the move to high-k metal gate suppliers—manufacturing processes, and designs around 32 nm. Though the Alli- factory management. The founders agreed ance has wound down and been supersed- to contribute in proportion to their reve- ed by collaborative efforts at SUNY Albany, nues for an initial period of five years, and it served the partners well for a number of the federal government matched the sum, years, giving them a far better level of pro- leading to an overall budget of close to $1 cess capability than they could have devel- billion. Work initially focused on reducing oped alone and at a significantly lower cost. the feature size of transistors on chips, technology that all of the partners would This type of pre-competitive collabora- benefit from and that each could employ to tion is common in Europe. For example, compete in downstream product markets. the Interuniversity Microelectronics Cen- While SEMATECH has evolved consider- tre (IMEC) in Belgium is a world-leading ably since its founding, the pre-competitive innovation hub in nanoelectronics that R&D phase cemented U.S. leadership at a crucial time.

A purely commercial example with no gov- An example of such a ernment support was the Common Platform collaboration was SEMATECH, Alliance, in which IBM, Siemens, and Toshiba fo- established in 1987 as a way cused on process technol- ogy for making advanced for U.S.-based semiconductor semiconductors. Others manufacturers to respond who were having trouble developing competitive to Japanese competitors. CMOS process technolo- gy joined, including Ad-

AMERICAN COMPASS 17 1. Research & Development Willy Shih, Harvard Business School Exhibit 1: GE Aviation Engine Roadmap: Key Technologies

counts organizations like DARPA, Intel, nautical and Space Sciences Committee in and TSMC as partners. The BioPro con- the wake of the 1973 Arab Oil Embargo, sortium in Denmark focuses on advanced which painted a dire picture of “immedi- fermentation-based manufacturing pro- ate crisis condition,” “long-range trouble,” cesses of biological compounds, adding and “serious danger.” The program’s ob- to the strength of the fermentation clus- jective was to establish enabling technolo- ter around Copenhagen. The partners’ gy that aircraft manufacturers could com- end-product markets include pharmaceuti- mercialize at their own expense. NASA cals, food ingredients, industrial enzymes, contracted with Pratt & Whitney and GE energy production, and hydrocolloids—all to do early-stage research on advanced pro- distinctly different with minimal overlap. pulsion systems for subsonic aircraft, with Many such European programs serve nar- involvement from Boeing, Lockheed, and row market niches and help participants McDonnell-Douglas. This learning plat- sustain global competitiveness. form proved to be immensely valuable to the companies and U.S. global leadership NASA’s Aircraft Energy Efficiency pro- more broadly. The Experimental Clean gram of the late 1970s offers an outstand- Combustor program sponsored early de- ing example of the impact of government velopment of the Dual Annular Combus- support for such collaborations.6 It came tor at GE, which went into the CFM-56 out of a hearing before the Senate Aero- engine, the most commercially successful

AMERICAN COMPASS 18 1. Research & Development Willy Shih, Harvard Business School

turbofan engine in history. The Advanced described above, could foster or accelerate Subsonic Technology (AST) and Ultra Ef- the development of important manufac- ficient Engine Technology (UEET) Pro- turing capabilities in industries that will be grams helped to advance the basic science important in the future. and secure long-term global leadership for the U.S. in the large turbofan category. Policy Recommendations Exhibit 1 shows government support for key parts of GE’s product roadmap. The As the COVID-19 pandemic recedes program was pre-competitive research at and the country considers infrastructure its best. spending to provide an economic stimu- lus, federal policymakers should aggres- The National Science Foundation re- sively target some of this spending to ports that R&D expenditures have grown generate stable domestic demand for key more rapidly in several Asian economies, platform technologies and increase fund- particularly China, than in the U.S.7 While ing of pre-competitive R&D programs the U.S. continues to spend the most on aligned with those areas. This will boost R&D of any single country, the share the growth of domestic manufacturing ca- funded by the federal government has de- pabilities, contributing to longer-term eco- clined since 2000. Because businesses are nomic sustainability. the largest funder of R&D, federal fund- ing for pre-competitive collaborations in Biomanufacturing. The U.S. lead in bio- important new areas, as in the examples technology is the product of extensive pre-competitive research spon- sorship. Funding for the Human Genome program made possible As policymakers consider something that was beyond the means of individual labs and com- other sectors for investment, panies, and the interdisciplinary effort mounted at NIH and plac- they should be forward- es like MIT and Harvard, among others, secured this country’s po- looking and identify “platform” sition in the field. Federal funding technologies that will underpin for places like MIT’s Department of Chemical Engineering devel- innovations in a broad range oped processes to manufacture biopharmaceuticals. Today, we do of products and services. this better than any other nation on earth.

AMERICAN COMPASS 19 1. Research & Development Willy Shih, Harvard Business School

The U.S. should extend its position and ability. This is already part of a Depart- invest in more precompetitive R&D in ment of Energy initiative, and funding biomanufacturing. We could incent the use to speed implementation would support of a new generation of process-intensified the transition to a distributed generation bioreactors to make biopharmaceuticals, architecture better suited to renewables and traditional as well as recombinant vac- technologies. It would drive domestic con- cines. We could develop the demand side sumption of power semiconductors and by building national strategic stockpiles the development of microgrids, sensing for key medicines or purchasing vaccines technologies, and high-voltage DC trans- as part of assistance packages to underde- mission systems, as well as new services.9 veloped countries. We should look at fer- Similarly, funding for interconnecting the mentation-based technologies, engineered three major U.S. grids10 could drive the re- microbial cell factories, flexible approach- placement of equipment that is more than es to purification, and plant-based pro- 40 years old and encourage substantial en- duction concepts. Continuous flow man- ergy- and operating-reserve sharing.11 Do- ufacturing, another innovation in chemical mestic content rules for equipment or tax processing, might enable us to deploy new abatements would also drive domestic ca- lower-cost process technology, not only pability development. rendering existing competitors’ installed capacity obsolete but also making the U.S. As policymakers consider other sec- small molecule generic drug supply chain tors for investment, they should be for- far more resilient. DARPA has taken this ward-looking and identify “platform” approach with its Battlefield Medicine technologies that will underpin innova- program by funding the development of tions in a broad range of products and flexible miniaturized manufacturing plat- services. Examples might include secure forms and methods for producing multi- communications (especially millimeter ple small-molecule APIs from shelf-stable wave, 6G technology), high-performance precursors in order to meet specific med- materials (e.g., high-temperature superal- ical needs as they arise.8 Driving the do- loys and composite materials), next-gen- mestic commercialization and adoption of eration semiconductor technology (e.g., such technologies with favorable tax treat- chiplets, heterogeneous integration, ad- ments or incentives would be a great way vanced photonics, and new materials like to lessen future dependencies while build- Group III-V), energy storage technology, ing up strategic capabilities in the sector. next-generation architectures to support artificial intelligence and new computa- Grid Modernization. Another good tar- tional applications, and genomics-based get for federal spending is electrical grid medicine. Policymakers should also con- modernization, a known strategic vulner- vene leaders in the scientific community to

AMERICAN COMPASS 20 1. Research & Development Willy Shih, Harvard Business School

advise government efforts and take a port- ites Manufacturing Innovation (IACMI) is folio approach to public investments, rec- focused on energy-efficient manufacturing ognizing that some failures are inevitable of polymer composites. Such initiatives and that it will not be possible to predict could be looked at as a form of buying co- everything. operative and thus could have been treated as a group boycott and subject to per se Pre-Competitive Program invalidity under the Sherman Antitrust Act Design Considerations (e.g., United States v. Gen. Motors Corp., 384 U.S. 127, 145 (1966)). But U.S. courts have Pre-competitive R&D consortia need looked more broadly at effects on markets to include leading companies, universi- and whether a particular initiative seemed ties, and government research labs that designed to increase economic efficiency are working at the frontiers of technolo- and render markets more, not less com- gy. This is not to exclude some firms; the petitive. IACMI, if successful, would fos- intent of such collaborations should be ter substitution of advanced composites to advance the frontier on commercializa- for traditional materials and easily meet tion, not act as a training ground for devel- that test. oping base capabilities. That should be the work of other types of partnerships. Our Future Depends on Investments We Make Today While some companies form alliances and joint ventures, many shy away from Restoring manufacturing capabilities in activities that are too close to commer- the United States will require many steps cialization due to risks associated with taken by the private- and public-sector in antitrust or competition laws.12 The core concert. Doing so will be critical not only question is the antitrust treatment of re- for ensuring the nation’s economic resil- search joint ventures. The Senate Judicia- ience, but also for securing its technologi- ry Committee noted in a 1984 investiga- cal supremacy going forward. Policymakers tion that antitrust challenges have “been and industry practitioners have been right frequently cited by industry to explain the to focus on supply-side solutions, but they reluctance to undertake such activity.”13 should not ignore the demand-side fac- The National Cooperative Research Act tors necessary to motivate manufacturers of 1984 was designed to reduce this risk and foster long-term sustainable compet- for research joint ventures and standards itive positions. A strategic effort to invest organizations. What about pre-competi- in pre-competitive R&D should be a top tive collaborations that target the shared priority for the United States. Our future development of a supply base? For exam- competitiveness may depend on it. ple, the Institute for Advanced Compos-

AMERICAN COMPASS 21 1. Research & Development Willy Shih, Harvard Business School

8 K. Duggan, “Battlefield Medicine,” Defense Advanced Research Projects Agency.

Endnotes 9 2018 Grid Modernization Initiative Peer Re- view, U.S. Department of Energy (2020). 1 Gary Pisano and Willy Shih, “Restoring American Competitiveness,” Harvard Business Re- 10 The U.S. has three major grids, the Eastern view 87, nos. 7/8 (2009). Interconnect, Western Interconnect, and Texas with its own grid. Equipment at the connection points is 2 See: K.J. Arrow, “Economic Welfare and nearing the end of its useful life. Because demand the Allocation of Resources for Invention,” in Read- peaks occur later in the West, a national grid would of- ings in Industrial Economics (London: Palgrave, 1972), fer better demand sharing and peak load management, 219-236; N. Rosenberg, “Why Do Firms Do Basic and could make more effective use of wind and solar Research (With Their Own Money)?” in Studies On Sci- generation in the west. ence And The Innovation Process: Selected Works of Nathan Rosenberg (2010), 225-234; National Innovation Systems: 11 D. Wagman, D, “It’s Time to Tie the U.S. A Comparative Analysis, ed. R.R. Nelson, (New York: Electric Grid Together, Says NREL Study,” IEEE Oxford University Press, 1993); R. R. Nelson, “Why Spectrum (2018). Should Managers Be Thinking about Technology Policy?” Strategic Management Journal 16, no. 8 (1995); 12 R. Gulati, “Alliances and Networks,” Strategic OECD Science, Technology and Industry Outlook Management Journal 19, no. 4 (1998); T. Khanna et al., 2008, Organisation for Economic Co-operation and “The Dynamics of Learning Alliances: Competition, Development (OECD); K. Pavitt, “What Makes Basic Cooperation, and Relative Scope,” Strategic Management Research Economically Useful?” Research Policy 20, no. Journal 19, no. 3 (1998); D.C. Mowery, “Strategic Al- 2 (1991); K. Pavitt, “The Social Shaping of the Na- liances and Interfirm Knowledge Transfer,” Strategic tional Science Base,” Research Policy 27, no. 8 (1998); Management Journal 17 (S2) (1996). A.J. Salter and B.R. Martin, “The Economic Benefits 13 G.M. Grossman and C. Shapiro, “Research of Publicly Funded Basic Research: A Critical Re- Joint Ventures: An Antitrust Analysis,” Journal of Law view,” Research Policy 30, no. 3 (2001). Economics, and Organization 2, no. 2 (1986). 3 J.S. Altshuler et al., “Opening Up to Precom- petitive Collaboration,” Science Translational Medicine 2, no. 52 (2010).

4 P. Dasgupta and P.A. David, “Toward a New Economics of Science,” Research Policy 23, no. 5 (1994); R.R.Nelson, “The Simple Economics of Basic Scientific Research,” The Journal of Political Economy 67, no. 3 (1959).

5 L.D. Browning, “Building Cooperation in a Competitive Industry: SEMATECH and the Semicon- ductor Industry,” Academy of Management Journal 38, no. 1 (1995).

6 M. Bowles, “The Apollo of Aeronautics: NASA’s Aircraft Energy Efficiency Program, 1973- 1987,” NASA (2010).

7 B. Kahn et al., “The State of U.S. Science and Engineering 2020,” National Science Founda- tion (2020).

AMERICAN COMPASS 22 1. Research & Development Willy Shih, Harvard Business School

5G is a leading (although surely not the COMMENT only) example of a technology that should be viewed as public infrastructure and David P. Goldman subsidized accordingly. We can only en- vision a few of the transformational new s an afterthought to Willy Shih’s and technologies that 5G will make possible. ATerrence Keeley’s excellent essays on In that respect, it falls under both Shih’s R&D and infrastructure, it may be helpful to and Keeley’s topics. Dr. Henry Kressel consider the overlap of these two subjects. has proposed the creation of a national telecommunications authority to promote One critical area of infrastructure R&D and provide infrastructure subsidies where the U.S. lags dramatically is 5G in mobile broadband. A central authority mobile broadband. Adjusted for land of some sort is required to sort out nu- mass and population, China is outspend- merous problems, such as the assignment ing us three to one. Part of the reason of radio spectrum, the creation of stan- for our neglect of this game-changing dards (including the delicate problem of technology lies in the fact that we view negotiating such standards with China, mobile broadband as mainly a consumer the market leader), and the promotion of technology, whereas China views it as in- funding for R&D and construction. dustrial infrastructure. 5G is superfluous for streaming video and other consumer There are many ancillary issues in which applications, but it makes possible a range government support will be required to of other technologies, including auton- employ such infrastructure optimally. The omous robotic networks, autonomous application of artificial intelligence to vehicles, telemedicine (including remote health care, now one of China’s top prior- surgery), and robotic mining. In that re- spect, 5G is comparable to 19th-century railroads which, in the main, were unprof- itable as standalone businesses, but trans- 5G is a leading formed every facet of economic life. Un- example of a til the advent of the railroad, large-scale mechanized farming was not viable be- technology that should cause animal-based transport limited the range of distribution to about 50 miles. be viewed as public Once the railroads arrived, farm ma- infrastructure and chines invented a generation before went into mass production and transformed subsidized accordingly. American agriculture.

AMERICAN COMPASS 23 1. Research & Development Willy Shih, Harvard Business School

David P. Goldman comment, continued After all, a major reason for America’s ities, has been delayed in the United States innovation lead was that, in the early 1960s, due to privacy protections for medical re- the U.S. government invested more in R&D cords. Google, IBM, Microsoft, and other than the rest of the world’s governments and American companies are eager to develop businesses did combined. That gave Ameri- this field but face regulatory obstacles. can companies a giant head start as much of this funding went to companies developing I agree strongly with Shih’s view that technologies for the Pentagon and NASA the Department of Defense has a cen- or to institutions that became world-class tral role to play in funding basic R&D. research universities pumping out ground- I would add that the fact that weapons breaking discoveries and top talent. innovation often challenges the frontier of physics is particularly conducive to But that is just a wonderful mirage in fruitful basic research. Still, it is import- the rearview mirror. The U.S. now ranks a ant that a national strategy for infrastruc- pitiful 28th among OECD nations in gov- ture should include high-tech infrastruc- ernment funding of R&D at research uni- ture (of which 5G is the most important versities as a share of GDP. example) and that the funding of high- tech infrastructure should support R&D Federal funding for R&D is no better. in the new technologies made possible by Indeed, in 22 of the 28 years between 1990 that infrastructure. and 2018, federal R&D spending has made up a smaller share of GDP than the year before. The federal government invested just 0.61% of GDP in 2018, the lowest COMMENT level since before Sputnik. Rob Atkinson And when it comes to tax incentives for R&D, the U.S. is hardly on the board. In illy Shih’s essay “On Research and 2000, the United States ranked 10th among WDevelopment” provides critical OECD members. By 2008, its ranking had lessons and advice for U.S. policymakers fallen to 18th, and by 2016 it was 25th. seeking to ensure that the U.S. economy The 2018 rankings show the United States does not fall behind China’s technologi- tied for 26th among OECD members and cally. He is right that, absent a more ac- 32nd among all countries included in the tive role for the federal government in report. R&D, it is likely that the United States will lose its lead in innovation – along Despite America’s spirit, our entrepre- with its military and economic advantages. neurs cannot hope to compete effective-

AMERICAN COMPASS 24 1. Research & Development Willy Shih, Harvard Business School

Rob Atkinson comment, continued kinds of partnerships, the U.S. would ly with Chinese companies that are gen- match China’s funding. erously supported by Beijing. A recent study estimated that the Chinese govern- Shih’s prescription of big federal pro- ment paid for 22.2% of business R&D in curement projects that would spur innova- 2015, with 95% of Chinese firms in six tion, such as electric grid modernization, industries receiving government cash— is also right on the mark. These initiatives, petrochemicals, electronics, metals and if done well and with prohibitions on bids materials, machinery and equipment, from Chinese companies, would not only pharmaceuticals and biotechnology, and address key national needs, but spur do- information technology. In fact, nearly mestic innovation and production. 25% of all R&D expenditures in China come in the form of government subsi- If Congress can spend $3 trillion this dies to firms. The U.S. should not copy year to address the COVID-19 pandemic, the distortive Chinese model, but as Shih it can and should spend at least $100 billion rightly proposes, it should invest more per year through a more generous R&D tax in pre-competitive, industry-led research credit, more direct funding of industrially partnerships. If Congress appropriat- relevant R&D, and demand-led investments ed $85 billion per year to support these in projects like a modernized electric grid.

If Congress appropriated $85 billion per year to support pre-competitive, industry-led research partnerships, the U.S. would match China’s funding.

AMERICAN COMPASS 25 TAX INCENTIVES

Rob Atkinson Information Technology & Innovation Foundation

A tax credit for domestic investment is the best way to reduce production costs.

aul Krugman may insist that “the no- sequences of defeat—but also to win back Ption that nations compete is incor- offshored supply chains and boost exports, rect,” but reality proves him wrong. Coun- it must turn the tax code into a tool for tech- tries not only compete, but increasingly do nological competitiveness and reshoring. so for high value-added, innovation-based industries, such as advanced machinery, Checking the Score aerospace, biopharmaceuticals, semicon- ductors and computing, software, and au- Nations use a number of strategies to tomobiles. For example, the Made in China gain global market share in advanced in- 2025 plan identifies eight key industries in dustries, including intellectual property which Beijing intends to win—and these theft and forced tech transfer. But a com- do not include plastic toys and soybeans. mon approach is to lower advanced indus- If the United States is not only to avoid try firms’ costs through a panoply of tools. losing this competition—and suffering the China is the master, deploying the equiva- myriad economic, military, and social con- lent of hundreds of billions of dollars in

Rob Atkinson is the founder and president of the Information Technology and Innovation Foundation. 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

subsidies to its national champion firms. overseas markets. Second, China is not In 2019, for instance, the Chinese govern- destined to remain a distant follower in in- ment established a second fund of $29 bil- novation. U.S. policymakers have already lion to subsidize domestic semiconductor made the mistake of taking America’s lead companies.1 Chinese subsidies go beyond in innovation for granted. From the 1970s cash injections. They include tax breaks, to 1990s, they assumed that nations like Ja- low-interest and forgivable loans, equity pan, South Korea, and Taiwan could not be injections, cheap land and energy, and oth- global innovation leaders. But as they soon er incentives. In some industries the result learned, fast followers can become lead- is massive: government alone accounts for ers. China is already catching up. As the more than 30% of the revenues of China’s Information Technology and Innovation largest two semiconductor firms.2 Foundation has shown in an analysis of 36 indicators of national innovation, China is Any CEO will tell you that competing catching up to the United States, and in with a subsidized foreign competitor is some areas like 5G, mobile payments, and difficult. The subsidized competitor can drones, it is already ahead.3 Third, while lower its prices and use this advantage to the U.S. is ahead of China in management gain market share at the expense of rivals. quality, the gap has closed over the last de- Unless the disadvantaged firm decides to cade from 21% to 18%. That gap should move its operation to the country provid- continue to close as younger Chinese man- ing the subsidies in hope that it qualifies, agers, many trained in world-class business there are only three ways to retain its com- schools, ascend China’s corporate ranks petitive position: scale, innovation, and over the next two decades.4 management. The view among most economists and pundits is that U.S. firms have advantages in all three and that these outweigh any disadvantages from foreign subsidies. In other words, it is not—and was never—safe to assume that This is wishful thinking at best. First, China’s captive market is U.S. advanced industries will huge, providing the same—if not greater—economies of scale than maintain global market share, U.S. firms enjoy. The Chinese do- mestic market is already vast and absent some change in policy. growing, and the Belt and Road Initiative has only expanded its

AMERICAN COMPASS 27 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

In other words, it is not—and was nev- over, it would do little to spur productivity er—safe to assume that U.S. advanced in- growth and innovation. dustries will maintain global market share, absent some change in policy. If our tradi- A second approach is direct subsidi- tional advantages of scale, innovation, and zation. Subsidies, such as funding more management no longer suffice, then Con- pre-competitive R&D, would help, espe- gress must find a way to lower the costs cially given that the federal government for leading American firms if they are to invests less in R&D as a share of GDP remain competitive in advanced industries. than it did prior to Sputnik. But these only Otherwise, other nations, especially China, help firms indirectly. Direct subsidies, will force even the best U.S. firms into a such as Japanese Prime Minister Shinzo dilemma: offshore even more production Abe’s proposal to pay firms to reshore or else lose significant market share, po- production, are effective, and Congress tentially going out of business. Either way, should establish such a program target- the U.S. economy is hurt. ed to helping to bring back critical, ad- vanced technology industries, such as Reviewing the Cost-Reduction semiconductors.6 But there is insufficient Playbook political will to do this at the necessary scale.7 And, like currency value reduction, So how to reduce costs? There are three reshoring subsidies do little to spur pro- potential approaches—each with its own ductivity growth and innovation. unique drawbacks and advantages. The third tool is the tax code. Tax in- The first approach is lowering the val- centives, in particular, can directly help ue of the dollar. Given the United States’ manufacturers and other export indus- $617 billion trade deficit, the dollar is tries, primary targets of a reshoring strat- clearly overvalued, making U.S. exports egy. Despite the difficulties of WTO more expensive and imports cheaper. compliance if targeting manufacturing, There are multiple ways to bring down tax incentives have clear advantages. They the value of the dollar. One is to place a not only reduce costs, expanding both market access charge on foreign purchases reshoring and exporting, but also spur of U.S. stocks, bonds, and other assets, as investment in key factors driving produc- Senators Baldwin (D-WI) and Hawley (R- tivity growth and innovation. They are MO) have proposed.5 While a weaker dol- relatively easy to administer and avoid lar would help to bring back supply chains the chimera of picking particular firms as and boost exports, it would not be enough, winners. If set at the right levels, they can particularly as China would likely ramp up also be a powerful incentive to change subsidies and other unfair practices. More- business behavior.

AMERICAN COMPASS 28 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

U.S. policymakers should pursue all three Meanwhile, most moderates embrace of these approaches: devalue the dollar, the “lower the rate, broaden the base” issue direct subsidies, and reform the tax mantra which holds that the best tax code code. But reforming the tax code—and is one with low rates and few deductions. designing tax incentives, in particular— In their view, the pre-tax marketplace is presents the fewest drawbacks and greater efficient and any incentives distort the advantages. “invisible hand.” As the Simpson-Bowles Commission asserted, “The [tax] code Tackling Tax Incentives presents individuals and businesses with perverse economic incentives instead of a What kind of tax incentive should be level playing field.”9 Congress followed this used? America’s ideological camps are di- advice when it scaled back the R&D tax vided over the question. Conservative sup- credit in 2017 with the Tax Cut and Jobs ply-siders favor lowering taxes on capital Act. But the claim that tax incentives are gains, dividends, and high-income earners, a form of wasteful, special interest-driven which they imagine will boost savings and spending, or “corporate welfare,” is ideo- investment.8 But America’s problem is not logical, not evidence-based. a lack of capital—the Chinese will loan us as much as we want—it’s a lack of demand The complaint that tax incentives distort by firms for investment capital. Because firm behavior and reduce economic wel- liberal populists view the world through a fare misses the point: government should fairness lens, they see the answer to social want the firms located in their jurisdiction injustice as raising taxes on big companies to do certain things that maximize the na- (after all, for them, small neighborhood tional interest. And because firms cannot firms are what really matter). That may or capture all of the value from investments may not serve social justice, but it will not in R&D, workforce training, as well as make American firms more competitive. machinery, equipment, and software, they

AMERICAN COMPASS 29 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

underinvest in these activities relative to a laggard. Many nations have adopted in- what would otherwise maximize economic vestment tax credits. But the United States welfare. For example, companies investing eliminated its credit in 1986, after neo- in research, on average, capture less than classical economists like Larry Summers half of the returns from that research, argued they were distortionary—though even with robust intellectual property pro- Summers did admit that an investment tax tection,10 and the same is true for invest- credit boosted overall growth.13 And while ments in skills and equipment.11 As Ca- the United States has long had an R&D tax nadian government economist Aleb ab credit, it is anemic, with 25 OECD nations Iorwerth writes, “there is no presump- providing a more generous incentive.14 tion that distortions are necessarily wel- fare-reducing. Distortions that favor the The United States can no longer afford contributors to long-run growth will be to fall behind. It must create a new, more welfare-enhancing.”12 generous tax incentive.

The tax code should be focused on The American Innovation and company demand for capital. It should Competitiveness Tax Credit reduce the effective tax rate for compa- nies, including large corporations, when To limit further deterioration of U.S. they invest in research and development, advanced industry competitiveness, Con- capital equipment, and workforce train- gress should enact an American Innova- ing. In other words, the tax code should tion and Competitiveness Tax Credit for incent American companies to support the expenditures made in the United States on three main building blocks of productivity R&D, machinery and equipment (includ- growth, innovation and competitiveness. ing software), and workforce training. Any such incentive should be modeled on the While the lower corporate tax rate Con- current Alternative Simplified Credit for gress established in 2017 helped, it is not R&D which provides a credit of 14% of enough. An across-the-board rate reduc- expenditures on R&D in excess of 50% of tion is not a particularly strong incentive base period expenditures. to make the kinds of critical investments needed in the United States to ensure It is not clear what the optimal credit lev- competitiveness and boost reshoring and el should be. One consideration might be exports. Direct tax incentives tied to actual that the effective U.S. tax subsidy for R&D investment are better. is just 42% of the median of nations with an R&D tax subsidy.15 On the other hand, When it comes to using the tax code to any incentive would have to address fiscal spur competitiveness, the United States is realities of lost tax revenues—at least in

AMERICAN COMPASS 30 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

ment would break even after 4 years and 10 months, longer than most companies’ invest- Many nations have adopted ment time horizons. But with the tax credit, the breakeven investment tax credits. But the point would be 3 years and 5 months. In other words, a tax United States eliminated its credit would make significant- credit in 1986, after neoclassical ly more investments attractive to American businesses. economists like Larry Summers In the long run, the tax argued they were distortionary. credit would lower the cost of returning production state- side and attract foreign di- rect investment, while also spurring innovation and pro- the short run. As such, it seems reasonable ductivity growth. It would have the add- to set the rate of this new credit at 30% ed benefit of encouraging more firms to (of expenditures in excess of 50% in the become high-performance work organiza- base period). Thus, if a firm invested an tions, where investments in new process average of $10 million in R&D, workforce technologies and worker skills go hand in training, and new machinery over the last hand. 3 years (the base period) and in year 4 in- vested $12 million, it would receive a cred- The American Investment and Inno- it of $2.1 million (30% of 7 million). vation Tax Credit is not a silver bullet for reversing America’s competitiveness slide. This rate would bring firm discount Other steps, including better workforce rates more into line with the actual cost of training, trade policies, government fund- capital, rather than the higher rates most ing of R&D, and regulatory reform, are firms in the U.S. appear to use.16 As a re- all needed. But without such a tax credit sult, the tax incentive would encourage to help level the playing field, these other investments that would otherwise fail to measures will not be enough. meet corporate financial hurdle rates. For example, assume a company has an op- portunity to invest $1 million in a machine that reduces annual labor and other costs by approximately $200,000. The invest-

AMERICAN COMPASS 31 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

11 Luke A. Stewart and Robert D. Atkinson, “The Greater Stagnation: The Decline in Capital In- Endnotes vestment is the Real Threat to Economic Growth,” Information Technology & Innovation Foundation 1 Yoko Kubota, “China Sets Up New $29 Bil- (ITIF) (October 2013). lion Semiconductor Fund,” The Wall Street Journal (Oc- 12 Aleb ab Iorwerth, “Canada’s Low Business R&D tober 25, 2019). Intensity: the Role of Industry Composition,” Depart- 2 “Measuring distortions in international mar- ment of Finance Canada Working Paper 2005-03 (2003). kets: The semiconductor value chain,” OECD Trade 13 Rob Atkinson, “Could a Fed Under Larry Policy Papers No. 234. Summers Worsen America’s Investment Drought?” 3 Robert D. Atkinson and Caleb Foote, “Is (September 9, 2013). China Catching Up to the United States in Innova- 14 Joe Kennedy, “U.S. Continues to Lag Its Com- tion,” Information Technology & Innovation Foun- petitors on Tax Credits for Research and Development,” dation (ITIF) (April 2019). Information Technology & Innovation Foundation 4 Authors calculations from: Nicholas Bloom (ITIF) (September 13, 2019); Rob Atkinson, “Hearing and John Van Reenen, “Why Do Management Practic- on Tax Reform Options: Incentives for Capital Invest- es Differ across Firms and Countries?” Journal of Eco- ment and Manufacturing,” Information Technology & nomic Perspectives 24, no. 1 (2010); and Nicholas Bloom et Innovation Foundation (ITIF) (March 6, 2012). al., “Management as a Technology?” Harvard Business 15 John Lester and Jacek Warda, “Assessing the School Working Paper 16-133 (October 8, 2017). U.S. R&D Credit in the International Context,” Infor- 5 “U.S. Senators Tammy Baldwin and Josh mation Technology & Innovation Foundation (ITIF), Hawley Lead Bipartisan Effort to Restore Competi- forthcoming. tiveness to U.S. Exports, Boost American Manufactur- 16 Rachelle C. Sampson and Yuan Shi, “Are US ers and Farmers,” Baldwin.senate.gov. Firms Becoming More Short-Term Oriented? Evi- 6 Asa Fitch et al., “Trump and Chip Makers dence of Shifting Firm Time Horizons from Implied Including Intel Seek Semiconductor Self-Sufficiency,” Discount Rates, 1980-2013,” SSRN (October 2, 2019). The Wall Street Journal (May 11, 2020).

7 Robert D. Atkinson, “The Case for a Na- tional Industrial Strategy to Counter China’s Techno- logical Rise,” Information Technology & Innovation Foundation (ITIF) (April 2020).

8 Robert D. Atkinson, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer (New York: Rowman & Littlefield, 2006).

9 Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, The National Commission on Fiscal Responsibility and Reform (2010).

10 Charles Jones and John Williams, “Measuring the Social Return to R&D,” Quarterly Journal of Eco- nomics 113, no. 4 (1998).

AMERICAN COMPASS 32 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

sources, but because they were forced to COMMENT do so by antitrust enforcement. Matt Stoller As scholars have recently observed, the large research labs of the 20th cen- eshoring supply chains is a critical tury were a function of aggressive an- Rtask, and there is an endless num- ti-merger rules. Historically, many large ber of policy levers at our disposal to do labs were set up partly because antitrust so. But the key philosophical change that pressures constrained large firms’ ability policymakers must make is to rethink our to grow through mergers and acquisitions. relationship between the state and the In the 1930s, if a leading firm wanted to corporation. For too long, the American grow, it needed to develop new markets. state has been the junior partner, seek- With growth through mergers and acqui- ing to find non-coercive ways to encour- sitions constrained by antitrust pressures, age corporate actors to act on behalf of and with little on offer from universities the national interest. The result is decay, and independent inventors, it often had ineptitude, and historically low produc- no choice but to invest in internal R&D. tivity growth. Meanwhile, the Chinese The more relaxed antitrust environment state, run by strategists with no such naive of the 1980s, however, changed this sta- views about corporations, governs aggres- tus quo. Growth through acquisitions be- sively on behalf of its national interests. came a more viable alternative to internal research, and hence the need to invest in With that in mind, I’d like to comment internal R&D was reduced. on Rob Atkinson’s essay on the need for tax incentives for innovation. In it, he sug- gests that the American government match the Chinese government in its large-scale American firms subsidization of research activity. We can innovated not because debate the right way to design a tax code to help innovation, and there is critical work the government to be done on tax incentives to end off- provided them with shoring. We would also be wise to remem- ber that the American technology industry resources, but because grew because the U.S. government was a they were forced to large and important customer in the 1950s do so by antitrust and 1960s. That said, the historic reason American firms innovated is not because enforcement. the government provided them with re-

AMERICAN COMPASS 33 2. Tax Incentives Rob Atkinson, Information Technology & Innovation Foundation

Matt Stoller comment, continued is not to say that mergers are never useful; Today, corporations do not have to inno- there is some utility from scaling produc- vate because the public policy framework tion. But we have gone way too far. It is we’ve developed lets them avoid doing so. increasingly evident at this point that Amer- Scholars also note that more aggressive in- ican brilliance focuses on financial engi- tellectual property protection laws also led neering rather than actual engineering. to a decline in R&D; why invent if you can invest in lawyers to block your competi- Fundamentally, Atkinson and I agree tors from doing so? that the way to change corporate behav- ior is to change the way that corporations Nearly every time that a pharmaceutical make money. But puncturing new loop- corporation buys a competitor, it lays off holes in the tax code is not going to lead to the scientists and focuses on generating anything except more tax lawyers, unless cash from existing patents. Such non-pro- we change our market structure to force ductive financial engineering was originally innovation in the first place. Changes to pioneered by Jack Welch, who slashed Gen- tax laws may help, depending on the de- eral Electric’s research capacity because he tails, but what we really need are market understood that the post-1981 antitrust rules, such as assertive antitrust and laxer framework meant that market power, not intellectual property laws, that force corpo- quality products, was what mattered. This rations to compete by inventing things.

American brilliance focuses on financial engineering rather than actual engineering.

AMERICAN COMPASS 34 DOMESTIC SOURCING

Michael Lind University of Texas

Local content requirements offer a simple intervention with benefits that its prohibitionist detractors ignore.

here is growing recognition across provide a direct, market-friendly, and ef- Tthe American political spectrum that fective method to achieve the goal of na- neoliberal globalization has been a disaster tional independence in strategic industries. for the economy and people of the United States. During the COVID-19 pandemic, LCRs are among the numerous tools Americans discovered the extent to which in the toolkit of industrial policy that the U.S. is dependent on the industry of can be used in the service of strategies China, a hostile great power, for basic of economic development. LCRs require medicines and medical equipment, among designated final goods to use a specified many other manufactured goods.1 For rea- percentage of domestic value-added or sons of public health and national securi- domestically sourced intermediate prod- ty, the reshoring of essential supply chains ucts. LCRs can apply to all firms or be to American soil is imperative. Combined limited to government suppliers. The term with other tools of national industrial pol- “localization measures” has been used as a icy, local content requirements (LCRs) broader category that includes, in addition

Michael Lind is a professor of practice at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin and the author of more than a dozen books, most recently The New Class War. 3. Domestic Sourcing Michael Lind, University of Texas

to classic LCRs, other measures such as re- phlets denouncing the evils of alcohol. quiring that data be stored and analyzed For instance, a 2016 paper from the Peter- locally, conditioning bailouts, government son Institute for International Economics contracts, export financing, as well as (PIIE) speaks of “the United States’ no- tax, tariff, and price concessions on local torious Buy American statutes.”6 A 2009 sourcing, and mandating that products be PIIE analysis is entitled “Buy America: tested locally.2 Bad for Jobs, Worse for Reputation.”7 No- torious… reputation… The sinners must be LCRs have been widely used by devel- shamed into sobriety. oping and developed countries alike, in- cluding Brazil (the oil and gas industry), Typical of this mentality was an an- Russia (automobiles), South Africa (wind nouncement from the Obama administra- energy), India (solar power) and Taiwan tion’s office of the U.S. Trade Represen- (refrigerators and televisions). They have tative in 2013: “Last week’s CTI meeting been deployed both by nation-states and marked the first time the economies of multinational trade blocs. In addition to APEC collectively addressed LCRs to gain state and local laws, the U.S. has a num- a better understanding of how they distort ber of federal laws mandating local con- trade and investment flows [emphasis added].” tent for defense procurement and other The claim that LCRs distort “natural” purposes, often with waivers at the discre- markets is also found in a 2015 OECD tion of officials.3 The U.S.-Mexico-Can- study of LCRs, which claims: “Overall, ada Agreement (USMCA) negotiated by LCRs distort input markets and potentially the Trump administration to replace the inhibit innovation by removing access to North American Free Trade Agreement technologically advanced inputs, under- (NAFTA) raises the North American local mining efficiency gains from lower value content of automobiles eligible for special chains [emphasis added].”8 The underlying treatment under the treaty from 62.5% un- assumption is that the normal and sound der NAFTA to 75%.4 condition of the world economy is a sin- gle market, with no “distortions” in the The Prohibitionist Campaign flows of goods, services, workers, or mon- against LCRs ey across borders. But of course, such an economy never has existed and never will. As one student of the subject has noted, “Despite their importance, economic eval- This dogmatic assumption vitiates most uations of these policy measures are sur- studies of the alleged harmful effects of prisingly limited.”5 Many of the studies of LCRs. If LCRs raise any costs to consum- LCRs are polemical in nature, employing ers or producers previously reliant on im- the tone of temperance movement pam- ports as inputs, this is taken to prove the

AMERICAN COMPASS 36 3. Domestic Sourcing Michael Lind, University of Texas

market, then broad policies If targeted policies to promote to encourage localization of industry in general must be the localization of specific “distortions” as well.

industries within a country are It is true that protection- ist policies can be promoted ‘distortions’ of the global market, by self-interested firms and then broad policies to encourage industries. But it is also true that policies that encourage localization of industry in general offshoring of industry or in- difference to foreign mercan- must be ‘distortions’ as well. tilism are promoted by selfish interests that benefit from them. Special interests and existence of a harmful “distortion.” But national interests are aligned in the case the very purpose of LCRs, along with of policies that improve and diversify the other import substitution measures, is to domestic industrial base, but they are di- “distort” trade and production by replac- vergent in the case of policies that allow ing an existing pattern with a new pattern. multinationals to profit by dismantling Whether the price of localizing a particular the nation’s manufacturing ecosystem or industry in the interest of national securi- allow foreign mercantilist regimes to rob ty, economic diversification, or economic national producers of domestic and glob- growth is worth paying is a values-based al market share. In the words of Alexan- policy judgment which economists qua der Hamilton: “To preserve the balance economists are not qualified to make. of trade in favor of a nation ought to be a leading aim of its policy. The ava- Some critics of LCRs will argue that, rice of individuals may frequently find its even if it were legitimate for govern- account in pursuing channels of traffic ments to promote particular industries, prejudicial to that balance, to which the they should do so by means of “hori- government may be able to oppose effec- zontal” measures, such as creating a busi- tual impediments.”10 ness-friendly environment, encouraging corporate social responsibility, expanding Debating Alternatives training, and investing in infrastructure.9 But if targeted policies to promote the Because neoliberals and libertarians are localization of specific industries within opposed on principle to national industrial a country are “distortions” of the global policy, they have as little to say about the

AMERICAN COMPASS 37 3. Domestic Sourcing Michael Lind, University of Texas

appropriate mix of LCRs, tariffs, or sub- If, however, the goal is to nurture vital sidies as crusading prohibitionists have infant industries, to preserve mature indus- to say about the relative merits of beer, tries that might otherwise be lost to import wine, and vodka. But there is already an competition, or to repatriate supply chains interesting debate underway among ad- lost to private firms’ offshoring strategies, herents of the school of political econ- then LCRs are arguably superior to tariffs omy that Robert D. Atkinson and I have and quotas. In this case, the goal of tariffs, dubbed “national developmentalism.”11 quotas, and LCRs are the same—the per- Members of this school would agree that manent localization of certain industries countries, as well as firms and individu- or supply chains. But the tariffs and quotas als, are actors with their own particular are indirect measures that merely incentiv- interests in the global economy, and that ize localization without guaranteeing it. It national industrial policies are therefore is simpler to mandate localization directly legitimate. This debate—a pragmatic by means of LCRs. one, over the strengths and weakness- es of LCRS in particular cases and cir- If LCRs are justified by a long-term na- cumstances compared to the merits and tional or regional bloc development strat- disadvantages of other industrial policy egy—not short-term tit-for-tat trade di- measures—is the debate in which poli- plomacy—they should apply equally to all cymakers ought to be engaged: not over trading partners, including military allies, whether to have a policy at all, but what neutrals, and rivals alike. In the absence the policy ought to be. of national security concerns, the nation- al identity of the owners and managers of Tariffs and quotas are one possible al- multinational firms compelled by LCRs to ternative to LCRs. They come in two produce in national or bloc markets would kinds: temporary measures, used as bar- be a matter of indifference, and foreign gaining chips to pressure trading partners firms would be free to repatriate their into opening up their own markets, and profits from in-market production. permanent measures, intended to localize certain kinds of industrial production in Compared to tariffs and quotas, then, as the national interest, regardless of the be- a policy to create or preserve permanent havior of trading partners. If the goal is domestic supply chains, LCRs are more di- to retaliate against particular instances of rect, simpler to administer, and potentially foreign mercantilism or to pressure trad- less diplomatically contentious. ing partners into reciprocal trade liberal- ization, then temporary tariffs or quotas Subsidies are another alternative ap- may be more effective than LCRs, which proach worth considering. But they tend to be permanent. should be used with caution. Government

AMERICAN COMPASS 38 3. Domestic Sourcing Michael Lind, University of Texas

subsidies to favored industries—like tax jor countries or blocs were to use LCRs, breaks for domestic production of certain no country could hope to use a dumping goods—might achieve the same goal as strategy to drive foreign firms out of their LCRs, but at the price of greater misallo- home markets, and in-market production, cation of investment and labor. (For the undistorted by subsidies, would not exceed purposes of this discussion, I will define in-market demand. government procurement policies as a kind of LCR, rather than a subsidy). Another problem with subsidies is that conventional approaches—tax breaks for If countries are allowed to subsidize targeted industries, for example—reduce their national champion firms to compete tax revenue, which may need to be made in global markets, but forbidden to en- up by other taxes, a price that may be worth courage or require paying in the in- in-market produc- terest of national tion for goods sold security, job cre- in their domestic Compared to tariffs ation, or produc- markets, the result tivity growth. Of may be escalating and quotas, LCRs are greater concern subsidy wars that more direct, simpler to should be subsi- end in global gluts dies in the form of in the subsidized administer, and potentially preferential credit sectors. Farm sub- policies by public sidies have pro- less diplomatically or private banks duced “mountains nudged by nation- of butter” and contentious. al governments. “lakes of milk” in If used in excess, the U.S. and EU, as in Japan and which are then sometimes dumped on China, these can result in nonperform- world markets. Because of subsidization, ing loans in zombie financial institutions. domestic production of targeted goods Here, too, compared to subsidies to fa- would be ensured, but at the cost of over- vored industries, LCRs may be a superior supply, overinvestment, and wasteful mis- tool of industrial policy. allocation of resources and labor. It is not enough for policies to be ef- In contrast, widespread reliance by fective; they must also be politically sus- countries and blocs on LCRs, rather than tainable. It is much easier for opponents subsidies, to promote strategic industries to denounce tariffs as taxes than to cam- would not encourage gluts. If most ma- paign against “Buy American” policies—

AMERICAN COMPASS 39 3. Domestic Sourcing Michael Lind, University of Texas

although consumers and firms reliant on in India, Vietnam, or other Asian countries imported inputs may suffer similar adverse might reinforce an anti-Chinese diplomat- effects. Unlike subsidies, LCRs require no ic coalition led by the U.S., but it would legislative appropriations of funds, alter- do nothing to increase America’s own eco- ations of the tax code, or special credit nomic independence and resilience. It is policies. Once they are enacted, LCRs are also a mistake to allow U.S. industry to be- relatively invisible to consumers and tax- come too dependent on factories in nearby payers, but they are likely to be defended Mexico, an unstable, crime-ridden country against repeal by the industries they bene- with a corrupt and unreliable government. fit. This is a feature, not a bug, if the goal is to permanently localize part or all of Of the potential tools that American those industries within national borders. policymakers can use to reshore strategic supply chains, LCRs have fewer drawbacks Consistency requires that any policies than other policies—including tariffs, quo- that incentivize firms to invest in one tas, and subsidies. Their virtue lies in their country rather than another—including simplicity. They do not require exercises the provision of law and order, public of vast discretionary authority by the exec- education, and infrastructure—should be utive branch. They do not require targeted defined as “distortionary” and prohibited allocations of public money. Nor do they by international trade treaties. As mem- require technocrats to craft detailed poli- bers of the national developmental school cies to offset specific alleged “distortions” will point out, “distortionary” policy is un- or “externalities.” The federal government avoidable in policymaking. Rather than ne- simply formulates a list of which goods glect some policies for being “distortion- must be manufactured in the U.S. and al- ary,” we should assess them on the merits lows private firms and private investors, of their “distortion.” both American and foreign, to figure out how to meet the requirements. Selective, strategic reshoring, not com- plete national autarky, should be the goal The LCR is a policy tool that should not of LCRs. As noted above, local content be neglected. Beginning with pharmaceu- requirements can be imposed by trading ticals, personal protective equipment, and blocs like NAFTA/USMCA as well as by critical inputs used in defense manufactur- nation-states like the U.S. The most critical ing, Congress should authorize the execu- supply chains, however, should be locat- tive branch to designate and enforce U.S. ed within national borders, where they are local content requirements and to withdraw safe from interdiction or disruption. Re- from any existing international treaties that placing American dependence on Chinese prevent the U.S. from exercising this essen- producers with dependence on producers tial right of economic self-defense.

AMERICAN COMPASS 40 3. Domestic Sourcing Michael Lind, University of Texas

Problem (Washington, D.C.: Peterson Institute for In- ternational Economics (PIIE), 2012).

Endnotes 10 Alexander Hamilton, The Continentalist No. V, in Henry Cabot Lodge, ed., The Works of Alexander 1 For U.S. medical imports from China, see Hamilton, Federal Edition No. 1 (New York: G.P. Put- Karen M. Sutter, Andres B. Schwarzenberg and Mi- nam & Sons, 1904), 267-9. chael D. Sutherland, “COVID-19: Chinese Medical Supply Chains and Broader Trade Issues,” CRS Re- 11 Robert D. Atkinson and Michael Lind, “Na- port, Congressional Research Service, April 6, 2020. tional Developmentalism: From Forgotten Tradition to New Consensus,” American Affairs (Summer 2019). 2 Karan Bhatia et al., “Why General Electric is localizing production,” Vox CEPR Policy Portal (June 21, 2016).

3 Kate M. Manuel et al., “Domestic Content Restrictions: The Buy American Act and Comple- mentary Provisions of Federal Law,” Congressional Research Service (September 12, 2016).

4 David Lawder and David Shepardson, “Automakers to pay $3 billion in new U.S. tariffs under USMCA: budget estimate,” Reuters (De- cember 18, 2019).

5 Francisco M. Veloso, “Understanding local content decisions: economic analysis and an applica- tion to the automotive industry,” Journal of Regional Science 46, no. 4 (2006), 747. The most influential early study was G.M. Grossman, “The Theory of Domes- tic Content Protection and Content Preference,” The Quarterly Journal of Economics 96, no. 4 (1981).

6 Cathleen Cimino-Isaacs and John Zilinsky, “Local Content Requirements: Backdoor Protection- ism Spreading Under the Radar,” Peterson Institute for International Economics (PIIE) (July 22, 2016).

7 Gary Clyde Hufbauer and Jeffrey J. Schott, “Buy America: Bad for Jobs, Worse for Reputation,” Peterson Institute for International Economics (PIIE) Policy Brief Number PB09-2 (2009).

8 Susan Stone et al., “Emerging Policy Issues: Localisation Barriers to Trade,” Organisation for Economic Co-operation and Development (OECD) Trade Policy Paper 180 (January 5, 2015).

9 Gary Hufbauer et al., “Local Content Re- quirements: Report on a Global Problem,” Peterson Institute for International Economics (PIIE) (Octo- ber 7, 2013). See also Gary Clyde Hufbauer and Jef- frey J. Schott, Local Content Requirements: A Global

AMERICAN COMPASS 41 3. Domestic Sourcing Michael Lind, University of Texas

ducers is a good example supporting his COMMENT arguments. Therefore, a narrower stra- tegic approach focusing on sectors with Willy Shih clear national security implications might be more sustainable. s Michael Lind points out, local con- Atent requirements (LCRs) have often been used to achieve employment, indus- trial development, and technology policy COMMENT goals. LCRs primarily target input demand, and China has arguably been quite success- Thomas Duesterberg ful using them. One might question how much of this success was temporal because ichael Lind’s essay on local content it came at a time of rapid growth of China’s Mrequirements (LCRs) has an Oc- domestic market and thus powerful incen- cam’s Razor-like elegance and plausibility, tives for foreign manufacturers to invest and proposing LCRs as the most effective tool build local supply infrastructure. Chinese to achieve a broad return of supply chains LCRs also translated into gains in produc- to the United States. His critique of using tion efficiency because they had the effect subsidies to this end is also compelling. He of shortening the supply chains of inputs rightly argues that the use of tariff measures for product assemblers while reducing input cannot “guarantee” a revival of domestic costs and improving manufacturing flexi- production, but only incentivize this result. bility. Foreign input suppliers in turn could However, his assertions that LCRs are “less also reduce their costs and increase their diplomatically sensitive” than subsidies or sales by localizing in China. Those aspects tariffs, that a country invoking them should will probably not work for the U.S. because apply the rule to both allies and adversaries, many of the intermediate inputs will cost and that the U.S. should withdraw from any substantially more as part of a switch to do- international agreements that limit their use, mestic suppliers, or if foreign suppliers are could engender counterproductive results. forced to localize. More broadly the risk is As with other measures supporting the goal that LCRs generate indirect costs and make of reinvigorating domestic production, pru- American firms less globally competitive. dence must be used with LCRs, especially with regard to those that impact allies in an Some argue that tariffs or subsidies are era of weakened, long-standing alliances. a lesser evil, and I think Lind points to the direct relationship between subsidies There is scope for narrowly tailored and gluts. The oversupply of world mar- LCRs in national defense, medical security, kets by Chinese steel and aluminum pro- and some crucial enabling technologies of

AMERICAN COMPASS 42 3. Domestic Sourcing Michael Lind, University of Texas

Thomas Duesterberg comment, continued data localization), Europe is at a major the future such as quantum computing and disadvantage to its longer-term develop- telecommunications. But even these sectors ment of artificial intelligence and the In- ought to be open to some participation by ternet of Things. Broad deployment of trusted allies. Some products, like steel or LCRs in the U.S. will spur Europe to ex- medical protective, gear might fall under se- pand further its own industrial policies. curity imperatives, but a shared priority of close allies, such as those in the “Five Eyes” If the U.S. were to expand the scope of group, to meet these requirements surely LCRs beyond those allowed in negotiat- would not endanger the overall goal. The ed agreements (e.g., WTO, regional agree- “Five Eyes” have long fostered close col- ments, and bilateral free-trade agreements) laboration in defense-related technologies or by compelling security considerations it and established a track record of reliability. would also limit the ability of U.S. firms to It is possible, too, that close allies like Japan access many markets as countries match the could be added to a circle of trusted allies. U.S. efforts. It would also undermine most U.S. attempts to build coalitions to take on The European Union is a slightly differ- the Chinese economic juggernaut. The ev- ent matter. As an economic superpower, idence to date on the Trump administra- it is not easily convinced by the seemingly tion’s confrontation with China is that this obvious choice to work with the U.S. on mercantilist power will not yield to bilater- common problems like addressing the ex- al pressure to modify the structure of its istential economic threat from China or economy in a permanent way. I believe that even crafting a common approach to the only a broader coalition of non-mercantilist COVID-19 outbreak. These issues, along powers is likely to achieve this goal. Access with the frequent disdain of the Trump to what is soon to become the world’s larg- administration for cooperation, has in- est single economy is already eroding, and stead led the European Commission, China has been able to gain market share spurred by France and Germany, to pro- in places like Europe, in part due to unease pose subsidizing its own national cham- about unilateral U.S. actions. pions in both traditional manufacturing and high technology sectors of the future Lind is right to argue that “selective and using LCRs to promote local produc- strategic reshoring, not complete autarchy, ers. The European Union also seems in- should be the goal of LCRs.” But without tent on the localization of data storage to limiting their use and working toward more protect privacy. If U.S. businesses are not cooperation with like-minded allies, howev- allowed to easily access the huge caches er difficult that cooperation is to achieve, of data gathered in their European op- I fear the world will tilt in the direction of erations (and China is already employing economic autarchy.

AMERICAN COMPASS 43 WORKFORCE INVESTMENT

Samuel Hammond Niskanen Center

Reshoring strategies can only go so far without investment in America’s skilled workforce.

he crisis sparked by the COVID-19 property, plants, and equipment in China Tpandemic has brought the hidden than in any other foreign country besides costs of offshoring into sharp relief. Our Canada.1 This has led China-U.S. trade to reliance on China for all manner of med- be a global outlier relative to the expec- ical supplies, from antibiotics to personal tations of the standard “gravity model,” protective equipment, makes the literal which reliably predicts larger export flows health of American families dependent between geographical neighbors. China’s on the whims of an authoritarian regime. exports to the U.S., in contrast, “are peren- nially twice as large as predicted.”2 What’s Drugs and medical devices are just the going on? tip of the iceberg. China is the single larg- est offshoring destination for U.S.-based Companies that move operations to multinationals. In manufacturing, U.S. China save money through reduced labor companies employ more workers in Chi- costs, but lower wages can only explain na than in Mexico, and own more valuable so much. The hard truth is that Chinese

Samuel Hammond is the Director of Poverty and Welfare Policy at the Niskanen Center. 4. Workforce Investment Samuel Hammond, Niskanen Center

workers have skills that American work- nascent ecosystems enough of a push, the ers on the whole lack. This includes an learning-by-doing process can take off in enormous pool of engineering talent with a virtuous cycle that culminates into mas- ground-level knowledge of industrial pro- tery.5 Reshoring strategies based on tax cesses, making China a growing hub for incentives, local content requirements, or research and development, as well. As Ap- R&D investments will only go so far if, at ple CEO Tim Cook once put it, “In the the end of the day, our shiny new factories U.S. you could have a meeting of tooling have “help wanted” signs on the door. engineers, and I’m not sure we could fill the room. In China you could fill multiple Labor Market Policy Is 3 football fields.” Industrial Policy China’s skilled workforce represents a The relationship between labor market durable competitive advantage that can’t policy and industrial policy has wide-rang- be easily offset through financial incen- ing implications.6 Whom and how a nation tives to reshore. Some kinds of knowledge educates will shape its comparative ad- can be written down and easily shared, vantage. Whether labor markets are tight like a recipe book. Process knowledge, or loose affects investment in labor-sav- or “know-how,” is much harder to trans- ing technology. Whether a company or fer between individuals, let alone whole industry is unionized influences manage- nations, given its embeddedness in what ment and production decisions. The ease Brad Delong has called “communities of with which workers can move between engineering practice and excellence.” For jobs affects the diffusion of knowledge example, Brazil’s attempt to create a do- between firms. And whether dislocated mestic computer industry in the 1970s was workers are quickly re-employed after a disaster because import-substitution pol- an economic shock determines whether icies prevented Brazilian engineers from their talents are preserved, enhanced, or learning from engineers in America, while allowed to atrophy. blocking the importation of IBM’s far su- perior hardware.4 When it comes to an industry’s risk of offshoring, the strength of labor relations Building — or rebuilding — communi- matters enormously. As the economist ties of engineering excellence takes time. Dani Rodrik has long argued, offshoring Acquiring process knowledge requires be- (and globalization more generally) increas- ing a part of the community, whether by es the own-wage elasticity of labor demand, par- recruiting world-class talent from abroad ticularly within the manufacturing sector.7 or through trade missions to learn from Stripped of jargon, this simply means that successful industrial ecosystems. By giving globalization makes employment and wag-

AMERICAN COMPASS 45 4. Workforce Investment Samuel Hammond, Niskanen Center

es more responsive to economic shocks, tation.9 Contrary to popular belief, the job contributing to job insecurity. losses from Chinese import competition were concentrated not in the so-called Rust Conversely, empirical research suggests Belt, but in the South Atlantic states. The that stronger employment protections deindustrialization of the Northeast and make it more difficult to offshore an in- Midwest began years prior, when manufac- dustry and therefore decrease the elasticity turers relocated to the South in droves to of labor demand.8 This can have posi- take advantage of lower taxes and “Right- tive knock-on effects at the industry lev- to-Work” laws. Weaker labor protections el. Trade organizations and professional encouraged moving down the value-chain societies can form more easily, helping to into more labor-intensive forms of pro- preserve process knowledge in a way that duction, creating a perfect storm of work- transcends any particular firm. Inelastic er and supply-chain vulnerability. labor demand can even expand the scope for risk-sharing arrangements, whether Why “Active Labor Market through insurance pools or in the form of Policy”? wages that are stable across time despite fluctuating external conditions. Fortunately, capturing the stability ben- efits of worker protections does not re- Indeed, labor relations are key to under- quire making it impossible to hire and fire standing “why the ‘China Shock’ was so workers. That comes with its own costs. shocking” in the first place, as MIT econ- Instead, labor standards can be raised omist David Autor put it in a 2019 presen- through demand-side policies that keep labor markets tight. While a par- ticular firm may no longer demand a particular worker, a tight labor Weaker labor protections market ensures the demand for encouraged moving down lesser-skilled labor is kept consis- tently high. the value-chain into more By definition, a tight labor mar- labor-intensive forms of ket is one in which job vacancies outnumber jobseekers. Under production, creating a such conditions, businesses in perfect storm of worker and need of workers must either raise wages, invest in the labor produc- supply-chain vulnerability. tivity of the workers they already have, or recruit disadvantaged

AMERICAN COMPASS 46 4. Workforce Investment Samuel Hammond, Niskanen Center

workers from off the sidelines. In the Work-sharing programs are just one ex- twelve months before COVID-19 wrecked ample of an “active labor market policy” the economy, all three of these effects (ALMP). Wage subsidies, job search assis- could be observed in the U.S. thanks to the tance, or retraining programs are all “ac- historically low unemployment rate: Wage tive” in the dual sense of activating workers growth for the bottom quarter of workers and actively shaping market outcomes, such was the fastest in decades, employers were as the quality of a match between an em- launching training programs for entry-lev- ployer and employee. Work-sharing does el jobs, and disability rolls were shrinking. this by helping to maintain the employ- er-employee relationship during a tempo- The tight labor market we enjoyed as re- rary downturn. Unemployment Insurance cently as February was ultimately driven by (UI), in contrast, is considered a “passive” the business cycle. Eleven years into a re- labor market policy because it ostensibly covery, we finally approached full employ- exists to insure individuals against job ment. But with quarantines spurring tens loss and little more. These distinctions are of millions of layoffs in the span of a few blurry in practice, as most governments months, the strong economy turned out to combine active and passive labor market be incredibly fragile. policies in ways that are hard to disentangle.

It didn’t have to be this way. While U.S. The United States has incredibly weak unemployment shot up from 3.5% in Feb- labor market policies of either type. Ac- ruary to 14.7% in April, Germany’s only cording to the OECD, the U.S. spends rose from 4.7% to 5.5% over the same about 0.10% of GDP on programs that period.10 Their secret? Germany’s Kurzarbeit sys- tem of “short-time work” allowed employers to re- duce worker hours while the government covered most of their lost wages. In theory, 26 U.S. states have similar work-sharing programs in place, yet up- take is pitiful due to lack of employer outreach, ad- ministrative complexity, and employer taxes that discourage its use.11

AMERICAN COMPASS 47 4. Workforce Investment Samuel Hammond, Niskanen Center

actively encourage labor force participa- Anglophone countries like Canada and tion, the lowest of any OECD country af- Australia expend much less on ALMPs ter Mexico.12 As the Council of Economic than Scandinavian social democracies, but Advisors noted in a 2015 report, our low still double what the U.S. does. In fact, the rate of ALMP spending is the result of a U.S. would need to increase spending on steady erosion that began in the 1980s — ALMPs by nearly $100 billion per year just an erosion that doesn’t appear to have been to match the average OECD expenditure a part of any deliberate policy choice, but of 0.55% of GDP. which correlates well with steady declines in prime-age labor force participation.13 The Case for Comprehensive Employment Supports For comparison, Denmark spends over 1.9% of GDP on ALMPs and has per- Well-designed ALMPs can be both pro- haps the most dynamic labor market in tective of the industries we have and at- the world. One in five Danes switch jobs tractive to the industries we might hope to in any given year, aided by insurance with reshore. Their effectiveness, however, de- generous wage replacement that transi- pends on ensuring that underlying work- tions into vocational education and other force development programs are both job support programs if workers fail to comprehensive and administered in coor- find a new job quickly.14 This combination dination with private industry. of labor market flexibility, income securi- ty, and continuous education is known as America’s largest employment and train- “flexicurity” and is the flipside of Den- ing program, Trade Adjustment Assis- mark’s diversified, export-oriented econo- tance (TAA), is far from comprehensive. my. Roughly 55% of Danish GDP is produced in export industries, of which about a fifth is in manufactur- This combination of labor market ing. International exposure helps to keep the workforce flexibility, income security, highly productive, but also vulnerable to foreign trade and continuous education is shocks. Robust active labor known as “flexicurity” and is the market programs are thus not simply a nice thing to flipside of Denmark’s diversified, have, but an integral part of how Denmark stays globally export-oriented economy. competitive.

AMERICAN COMPASS 48 4. Workforce Investment Samuel Hammond, Niskanen Center

Yet despite its bad reputation, TAA pro- A comprehensive system of ALMPs vides valuable resources for workers lucky would integrate these otherwise effective enough to be admitted, including funding training and wage insurance programs di- for retraining and income support pay- rectly into the federal-state UI system, lib- ments while they are enrolled. According eralizing eligibility to the universe of dis- to a quasi-experimental study of 300,000 located workers. Under this proposal, any displaced workers, TAA-trained workers worker who exhausted their unemploy- cumulatively earn $50,000 more than their ment compensation would be eligible for non-TAA trained counterparts over ten federally funded retraining and subsidized years, representing an up to 9% internal employment programs, regardless of why rate of return.15 One third of this effect is their job disappeared.17 driven by higher wages, with the remain- der from greater labor force participation, State workforce agencies, in turn, would suggesting that workers gain real human be given the flexibility to test different re- capital from retraining. training models, provided the majority of federal funds went toward direct training Unfortunately, TAA eligibility is re- and wage costs. States could choose to stricted to workers who can demonstrate prioritize apprenticeships and on-the-job that they lost their job due to internation- training models over classroom education, al competition or outsourcing. Establish- for example, by partnering with employ- ing that kind of causation is a challenge ers, professional associations, and local for the world’s top econometricians, much workforce development boards. The same less your typical blue-collar worker. Super- systems used to help quickly re-employ visors in the Office of Trade Adjustment dislocated workers could then be aligned Assistance are then tasked with adjudicat- with broader economic development strat- ing the petitions, including through sub- egies, including the sort of sector-specif- poenas of the employer’s internal records. ic training and recruitment necessary for A process this scrupulous doesn’t begin to reshoring. make sense, as the policy rationale for re- training applies equally to job losses from The Great Reset non-trade shocks like technological change or shifting consumer demand. Nonethe- While “creative destruction” may be less, administrative data reveal that every an inevitable feature of capitalism, the dis- trade-displaced worker in TAA is associ- posability of our skilled workforce is not. ated with two lost jobs overall, suggest- Had the U.S. properly invested in ALMPs ing that America’s single largest retraining in the early 2000s, many of the two mil- program is not even covering its own rela- lion manufacturing workers who lost their tively narrow remit.16 jobs to Chinese import competition would

AMERICAN COMPASS 49 4. Workforce Investment Samuel Hammond, Niskanen Center

els that would make the Danish prime minister blush, emergency relief cannot go on forever.19 Rather than take the low Behind all this human trag- road on worker wages and edy lies a once-in-a-generation productivity, we can prioritize opportunity to reset our labor market around a new equilib- access to apprenticeships rium. Rather than take the low road on worker wages and pro- and trades programs, bridge ductivity, we can prioritize access workers into transitional jobs, to apprenticeships and trades programs, bridge workers into and boost labor demand. transitional jobs, and boost labor demand through hiring subsidies conditioned on job quality, train- ing, and retention.20

have stayed attached to the labor force and For many, simply having someone help moved into higher valued-added parts of to write a resume or navigate a job board the manufacturing supply chain. Instead, will make a world of difference. But over as the economist David Autor and his col- the longer run, active labor market poli- leagues found, disability insurance was 30 cies can aim much higher. Through strate- times more responsive to job destruction gic partnerships with the private sector, we than TAA and UI combined. That is, rath- can retrain workers for the jobs we — and er than re-activate our skilled workforce, they — want, not merely for the jobs we we pummeled it into passivity.18 already have. In doing so, we can plant the seeds for new communities of engineer- With Great Depression-levels of job- ing, scientific, and vocational excellence to lessness, the United States needs a com- grow in our own backyard. All roads to an prehensive approach to re-employment American manufacturing renaissance lead and retraining now more than ever. Absent through a skilled workforce. If we train a vaccine, demand for labor in sectors like for them, good jobs will come. retail, hospitality, and food services will likely remain depressed for the foreseeable future, forcing millions of workers to re- train or relocate. And while a boost to our UI system is replacing lost wages at lev-

AMERICAN COMPASS 50 4. Workforce Investment Samuel Hammond, Niskanen Center

13 “Active Labor Market Policies: Theory and Evidence for What Works,” Council of Economic Endnotes Advisers Issue Brief (2016). 14 As discussed in Samuel Hammond, “The 1 Alexander Hammer, “The Size & Compo- Free-Market Welfare State: Preserving dynamism in a sition of U.S. Manufacturing Offshoring in China,” volatile world,” Niskanen Center (May 1, 2018). United States International Trade Commission (USITC) Executive Briefings on Trade (2017). 15 Benjamin Hyman, “Can Displaced Labor Be Retrained? Evidence from Quasi-Random Assign- 2 Willem Thorbecke, “China-U.S. Trade: A ment to Trade Adjustment Assistance,” SSRN (April global outlier,” The Research Institute of Economy, 20, 2018). Trade and Industry (RIETI) Discussion Paper Series 14-E-039 (2015). 16 Illenin O. Kondo, “Trade Displacement Mul- tipliers: Theory and Evidence Using the U.S. Trade 3 As quoted in Samuel Hammond, “The China Adjustment Assistance,” National Bureau of Eco- Shock Doctrine,” National Affairs (Fall 2019). nomic Research (NBER) (2017).

4 “Alphachatterbox: Brad DeLong on Hamil- 17 For a related proposal, see Samuel Ham- tonian Economics,” Financial Times (May 2016). mond, “The ELEVATE Act Explained: A ‘Job Guar- 5 See also Dan Wang, “How Technology Grows antee’ That Can Actually Work,” Niskanen Center (a restatement of definite optimism)” (July 24, 2018). (January 24, 2019).

6 For my personal definition of industrial policy, 18 David Autor et al., “The China Shock: Learn- see “The Struggling Regions Newsletter” (July 9, 2019). ing from Labor Market Adjustment to Large Changes in Trade,” National Bureau of Economic Research 7 Dani Rodrik, Has Globalization Gone Too Far? (NBER) Working Paper No. 21906 (2016). (Washington, D.C.: Institute for International Eco- nomics, 1997). 19 Samuel Hammond, “Will Pandemic Jobless Benefits Make Recovery Harder?” National Review 8 Alexander Hijzen and Paul Swaim, “Off- (April 2, 2020). shoring, Labour Market Institutions and the Elasticity of Labour Demand,” University of Nottingham Re- 20 For a detailed subsidized employment pro- search Paper No. 2008/05 (2008). posal, see Samuel Hammond, “The ELEVATE Act Explained: A ‘Job Guarantee’ That Can Actually 9 David Autor, “Why Was the ‘China Shock’ Work,” Niskanen Center (January 24, 2019). so Shocking? – And What Does that Mean for Poli- cy?,” Peterson Institute for International Economics (PIIE) (October 17, 2019).

10 John Detrixhe, “Why the US unemployment rate is so much higher than Germany’s,” Quartz (May 28, 2020).

11 George Wentworth et al., “Lessons Learned: Maximizing the Potential of Work-Sharing in the United States,” National Employment Law Project (NELP) (2014).

12 “Active Labour Market Policies: Connect- ing People with Jobs,” Organisation for Economic Co-operation and Development (OECD).

AMERICAN COMPASS 51 4. Workforce Investment Samuel Hammond, Niskanen Center

the-job experience and substantive train- COMMENT ing, whether in the workplace or through a firm-sponsored community-college pro- Oren Cass gram. Just as college administrators can expect about $10,000 for each “student” ammond is right to emphasize the im- enrolled, employers should receive a com- Hportance of active labor-market poli- parable amount for each “trainee” on cies, and training in particular, to firms and staff. The prospect of hiring and internal- industries as well as workers themselves. ly training inexperienced workers would But his emphasis on expanding Trade Ad- instantly become an attractive opportuni- justment Assistance is far too kind to a ty rather than a risky burden. Firms doing program—and policy model—that tends this at scale would find themselves with a to fail even those it does cover. Data con- cost advantage. sistently show that government-led train- ing programs fail to impart relevant skills With such a program in place, the or yield long-term gains for workers. prospect of reshoring a factory absent a well-prepared workforce would be less Rather than funnel money through gov- daunting. And rather than the government ernment programs, America should in- attempting to discern what skills might vest in workforce training by establishing be useful and how to teach them, the end an open-ended grant for employer-based “customer”—the employer—would be in training comparable to the generous sup- the driver’s seat. In many cases, employ- port offered to students on college cam- ers would work with community colleges puses. An American designated with the status of “student” and spending time at an institution accredited as a “col- lege” can expect to receive approximate- Rather than the ly $10,000 in annual taxpayer support to government attempting study—well, just about anything. Yet that same American, if trying to learn how to to discern what skills do a new job in a workplace, gets nothing. might be useful and This despite, for a wide range of jobs, the workplace offering a far more effective how to teach them, the learning environment. end ‘customer’—the employer—would be Instead, we should establish a “trainee” status for any worker employed full-time by in the driver’s seat. a firm that provides a balanced mix of on-

AMERICAN COMPASS 52 4. Workforce Investment Samuel Hammond, Niskanen Center

Oren Cass comment, continued market. A campus might in some cases be to develop programs rather than attempt an attractive option, or a necessity. But in to run them in-house. But whereas today’s most, it is the workplace that is both want- community college has as its mission the ed and needed. attraction and enrollment of individual students, most of whom will not gradu- Both the anti-business contingent on ate, under the new system the community the Left and the anti-government contin- college’s focus would have to be delivering gent on the Right will surely object to the what employers actually need. idea that public funds should be given to corporations. But firms will not sufficient- Such a system would also be far more ly invest of their own accord in the train- responsive than the existing higher-educa- ing of their workers for the simple reason tion framework to the needs of workers. that it is the workers who ultimately cap- The “campus” model of education pre- ture the value of their skills in the form of sumes predominantly young people with higher productivity and wages (which we few other attachments or commitments should want!), so public funds are needed. dedicating their time to classroom learn- Government agencies have neither the ca- ing. Certainly, there is a need and a place pacity nor the incentives to train as well as for that in our society. But the far more employers will, so corporations are need- pressing need is to help the person try- ed too. Active labor market policy should ing to connect or reconnect to the labor bring those forces together.

A campus might in some cases be an attractive option, or a necessity. But in most, it is the workplace that is both wanted and needed.

AMERICAN COMPASS 53 REGULATORY REFORM

Oren Cass American Compass

Outdated environmental regulation poses an irrational barrier to reshoring efforts.

ne reason that firms have chosen to posals are subject to years-long reviews Oestablish supply chains abroad is that from multiple agencies, after which the attempting to expand domestically could litigation begins. Final approval is contin- get them sued, stalled, and saddled with gent on adherence to costly requirements extraordinary burdens—all in the name of unparalleled stringency. Alternative- of an approach to “environmental pro- ly, you can go elsewhere, comply with tection” that is decades out of date. Since far laxer rules, and sell back to American 1970, when the Environmental Protection businesses and consumers just the same. Agency (EPA) was created and the Na- tional Environmental Policy Act (NEPA) The domestic obstacles are salient and and Clean Air Act were both enacted, the the costs measurable. A Department of United States has inadvertently erected a Commerce survey of manufacturers in byzantine system of permitting processes 2017 found that EPA regulations occupied for infrastructure and industry that seems the top nine spots on a list of the twenty designed to frustrate investment. Pro- “most frequently cited regulatory and per-

Oren Cass is the executive director at American Compass. 5. Regulatory Reform Oren Cass, American Compass

mitting issues that impact manufacturing.”1 and priorities could ensure that America Already in the 1990s, the stricter standards maintains its environmental achievements imposed on regions with air quality below to date while also unleashing a wave of do- the EPA’s standard were depressing new mestic investment. plant construction by 26–45%, with the greatest impacts on the largest plants and Outdated Environmentalism firms.2 Compliance with air-quality reg- ulations were costing the industry 9% of At the time of their passage, the Clean profits,3 comparable to the median state Air Act and NEPA corrected an imbal- tax burden on a manufacturer.4 anced regime that had granted industry carte blanche and left the nation’s air, wa- Matters have only gotten worse. A 2018 ter, and ecosystems in woeful condition. study in the American Economic Review re- Fifty years later, the pendulum has swung ports that “the implicit pollution tax that to the opposite extreme, as restrictions manufacturers face doubled between 1990 ratchet ever-tighter with little regard for and 2008.”5 The Obama administration the tradeoffs involved. In the 1970s, the pushed the envelope further, tightening average “Environmental Impact State- ozone standards in a way that some nation- ment” (EIS) mandated by NEPA for a fed- al parks could not meet,6 let alone cities like eral highway project was 22 pages long and Atlanta, Baltimore, Cincinnati, Columbus, the process took two years to complete; by and Cleveland.7 Environmentalists were 2011 the typical highway EIS could run outraged that the Obama EPA did not go more than 1,000 pages and the process further8; “the goal for policymakers world- required more than 8 years.10 Over that wide,” reports Science, “should be to push same period, air-quality standards were down levels as far as possible.”9 tightened repeatedly, to the point where Brussels—the capital of the purportedly This is irrational. Of course, environ- enviro-friendly European Union—would mental quality is important, and clean air be the single dirtiest city in America.11 and water have real value that policymak- ers should pursue. But industrial activity The Clean Air Act, sometimes called offers enormous benefits to the nation “the most powerful environmental law in alongside the environmental costs that it the world,”12 provides a particularly com- might impose. The more important that pelling case study and the best opportunity activity becomes, the greater the environ- for immediate reform.13 The Act establish- mental tradeoffs we should be prepared to es the types of pollution-control technol- accept. Otherwise, the claimed commit- ogy that emitters must employ, based on ment to reshoring is mere lip service. Major two factors. First, it directs the EPA to set reforms responsive to present conditions National Ambient Air Quality Standards

AMERICAN COMPASS 55 5. Regulatory Reform Oren Cass, American Compass

(NAAQS) that define the thresholds for setting pollution reductions to compen- acceptable pollution concentrations in the sate for any new emissions. Even if built air. A region whose air quality fails to meet in a region that already met all air quality this standard is declared a nonattainment standards, a new facility must install state- zone (NAZ). Second, it creates a “new of-the-art pollution controls, a require- source review” process for any new facility ment more stringent than what preexist- that will emit pollutants. Existing facilities ing facilities have to meet. As new source must also install pollution controls if their standards tighten, existing facilities are region becomes designated a NAZ, but the “grandfathered”—asked only to meet the most demanding standards are reserved existing-source standards. But, significant- for newly built sources of emissions. ly, major modifications to existing facilities cause them to be treated as “new” sources To build in a nonattainment zone, a new of pollution. The idea is that over time, facility must install the best possible pol- as new facilities get built and old ones are lution controls, while also finding other renovated, all will be constantly required facilities in the region that can make off- to use better controls than before.

AMERICAN COMPASS 56 5. Regulatory Reform Oren Cass, American Compass

The Act’s structure is understandable to advocate regulation that hurts them but given the goals at the time of its passage to hurts potential competitors more. Older, improve environmental quality rapidly and dirtier facilities continue to operate as they regardless of cost, without overburden- have rather than investing in upgrades that ing already-operating facilities. On those might improve their productivity while terms, it has been quite effective. Between reducing their environmental impact. In 1980 and 2018, lead levels in the air fell some cases, shutting out new construction 99%, carbon monoxide fell 83%, sulfur di- has led to pollution levels that are high- oxide fell 91%, nitrogen dioxide fell 61%, er than they would have been if there had and ozone fell 31%.14 These are significant been no regulation at all. “This approach,” achievements, and environmentalists are writes Robert Stavins, director of Harvard justifiably proud of the enormous public University’s Environmental Economics health benefits that have followed. Program, “has been both excessively costly and environmentally counterproductive.”15 But no matter how clean the air gets, the rules demand ever more. Consider a hy- Removing the Dam pothetical manufacturer seeking to return production capacity to the United States. Although the EPA earns well-deserved The firm cannot build a plant comparable criticism for its implementation, it is to one already in operation, because as a merely the messenger of a long-ago Con- “new source” it must do better. If seeking gress’s broader choices. The ever-tighten- to build in an area already meeting air qual- ing ratchet is exactly what the Act—duly ity standards, it must install pollution con- passed by overwhelming bipartisan ma- trols although existing operators need not. jorities in 1970 and further strengthened If it is located in a nonattainment zone, by overwhelming bipartisan majorities in it must install the best possible pollution 1990—calls for. Showing disregard for controls and pay to offset its pollution. If massive costs is exactly how the U.S. Su- it hopes to expand at some point in the fu- preme Court, in a unanimous opinion au- ture, it will have to go through this whole thored in 2001 by none other than conser- process again. An otherwise-attractive in- vative justice Antonin Scalia, has held that vestment might not go forward at all. the Act requires the EPA to proceed.16

The discrimination against new facilities A federal statute is not a pendulum that amplifies other economic costs as well, and, will swing back of its own accord; it re- over time, it has even interfered with envi- quires substantive reform. A new balance, ronmental goals. Large businesses benefit appropriate to America’s current challeng- from barriers to entry that keep newer and es, would secure the widespread gains in smaller firms out, giving them an incentive environmental quality to date while pri-

AMERICAN COMPASS 57 5. Regulatory Reform Oren Cass, American Compass

ceed more slowly. If a hypothetical factory wanted to double its size, Removing heightened it would be able to do so without inviting new burdens. If another new source requirements firm wanted to build a competing factory with similar technology, would allow industrial and it also would be able to do that. energy-producing facilities States would retain the authority they have today to impose tighter to expand and would also regulations if their circumstances or policy preferences warranted allow new facilities to be built such a course.

under the same rules that This reform would be the eco- older plants must follow. nomic equivalent of removing a dam. The current discrimination against new investments holds back a reservoir of capital that would oritizing efforts to establish and restore surge forward were it not for the costs and domestic production capacity over further restrictions now imposed. American in- environmental improvement. It would ac- dustry sits downstream, happy to expand cept the additional pollution that naturally employment but restricted in its ability to follows from the return of domestic pro- do so. Under current law, every time en- duction that both political parties say is vironmentalists succeed in tightening an their explicit policy objective. air-quality standard yet further, the dam wall gets that much higher. The key reform to shift the Act’s ful- crum and strike a new balance would be Eliminate the impositions on new in- to eliminate new source review, ending vestments and, as quickly as analysts could the discriminatory treatment of new fa- revise their models, a host of construction cilities. Removing heightened new source projects previously considered infeasible requirements would allow industrial and would become attractive. Upgrades to ex- energy-producing facilities to expand and isting plants, shelved for fear of triggering would also allow new facilities to be built new requirements for the plant, would go under the same rules that older plants back on the drawing board. New plants, must follow. The EPA would continue rejected because they could not operate to set air-quality targets as it saw fit, but profitably, would suddenly find willing in- progress toward those targets would pro- vestors. Entirely new businesses, deemed

AMERICAN COMPASS 58 5. Regulatory Reform Oren Cass, American Compass

unlikely to succeed while established busi- facilities. Thus, although one would ex- nesses and foreign competitors enjoyed a pect improvements in air quality to slow, sizable cost advantage, would begin hiring. overall quality could degrade only as the The return of supply chains would begin result of a much-needed expansion in out- to seem more sensible, and its encourage- put. Meanwhile, the competitive pressure ment would require fewer costly induce- to cut costs through improved energy effi- ments like tax incentives or subsidies. ciency would continue to usher in techno- logical improvements that tend to reduce pollution. Entirely new businesses, Permitting Progress deemed unlikely to succeed while established A second target for reform should be NEPA, which is infamous for impos- businesses and foreign ing red tape on energy and infrastructure competitors enjoyed a projects but can also trigger environmen- sizable cost advantage, tal review processes for other projects that require federal permitting or use federal would begin hiring. The funds. These reviews can take years and, return of supply chains rather than concluding the matter, a com- would begin to seem pleted one then provides an invitation for more sensible, and its environmental groups to launch lawsuits over the quality of the process, occupying encouragement would years more, even if no legal basis exists for require fewer costly objecting to the project itself. inducements like tax The extent of these obstacles became incentives or subsidies. obvious during implementation of the 2009 American Recovery and Reinvest- ment Act, for which Congress appropri- The effects on air quality would follow ated $800 billion with the goal of rapidly directly from the objectives of the reform. boosting employment and—purported- There would be no change from the exist- ly—upgrading American infrastructure in ing facilities that are the vast majority of the process.17 Notwithstanding the typi- pollution sources. New and modified fa- cal argument from environmentalists that cilities would not operate free of all reg- NEPA “improves governance, increases ulation; they would simply be subject to transparency, and makes infrastructure the standards that now apply to existing projects better,”18 President Obama be-

AMERICAN COMPASS 59 5. Regulatory Reform Oren Cass, American Compass

gan granting waivers from its re- quirements when it was deemed economically vital and politically NEPA itself must be scrapped 19 expedient. in favor of a structure that In fact, NEPA’s lengthy, un- provides the protection the predictable process is entirely unnecessary and should be re- environment needs rather placed. Countries like Canada and Germany, with exemplary than the endless stalling environmental bona fides, have streamlined review processes that tactics that activists crave. guarantee short, fixed timelines for review and preclude further litigation once a decision has been made. that provides the protection the environ- In Germany, legal challenges to quickly ment needs rather than the endless stalling made permitting decisions are tightly cab- tactics that activists crave. ined and subject to a one-month statute of limitations. Canada’s federal govern- The environmental laws that raise costs, ment defers to province-level approvals increase risks, and lengthen timelines for for most projects.20 Done right, such ap- investments in domestic industry no lon- proaches could make major industrial in- ger serve the purposes for which they vestments far more attractive without sac- were created. A genuine commitment to rificing environmental quality. Even if the environmental quality requires setting change entails some environmental risk, reasonable expectations for progress and that is a trade-off worth making. pursuing it with the least possible eco- nomic burden. Today, the system does the The Trump administration has focused reverse, setting standards without refer- intensively on this issue and taken substan- ence to cost and providing opportunities tial action, proposing new rules that would for opponents of investment to create ar- narrow the categories of projects subject bitrary burdens without reference to any to review and set firm deadlines for com- cognizable environmental goal. Whether pletion.21 But administrative action on this policymakers are willing to revisit this ar- front is inherently limited by the reality that rangement and strike a balance appropri- it will itself invite years more of litigation, ate to the imperative for reshoring supply precisely the outcome that reform seeks chains provides a useful litmus test for to short-circuit. Ultimately, NEPA itself whether they are serious about supporting must be scrapped in favor of a structure domestic production at all.

AMERICAN COMPASS 60 5. Regulatory Reform Oren Cass, American Compass

13 This discussion is adapted from Oren Cass, The Once and Future Worker: A Vision for the Re- Endnotes newal of Work in America (Encounter Books, 2018). 14 “Air Quality – National Summary,” U.S. En- 1 “Streamlining Permitting and Reducing Reg- vironmental Protection Agency. ulatory Burdens for Domestic Manufacturing,” U.S. Department of Commerce (October 6, 2017). 15 Robert Stavins, “Moving beyond Vin- tage-Differentiated Regulation,” Huffington Post 2 Randy Becker and Vernon Henderson, “Ef- (May 25, 2011). fects of Air Quality Regulations on Polluting Indus- tries,” Journal of Political Economy 108, no. 2 (2000). 16 Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (2001), Justia. 3 Michael Greenstone et al., “The Effects of Environmental Regulation on the Competitiveness of 17 Joe Biden, “What You Might Not Know U.S. Manufacturing,” MIT Center for Energy and En- about the Recovery,” New York Times (July 26, 2009); vironmental Policy Research (CEPR) (2012). Michael Grabell, “How Not to Revive an Economy,” New York Times (February 12, 2012). 4 Jared Walczak, “Location Matters: Effective Tax Rates on Manufacturers by State,” Tax Founda- 18 Kevin DeGood, “The Importance of NEPA tion (September 1, 2015). Review for Infrastructure Projects,” Center for Amer- ican Progress (August 16, 2018). 5 Joseph S. Shapiro and Reed Walker, “Why Is Pollution from US Manufacturing Declining? The Roles 19 Kristen Lombardi and John Solomon, of Environmental Regulation, Productivity, and Trade,” “Obama Administration Gives Billions in Stimulus American Economic Review 108, no. 12 (2018). Money without Environmental Safeguards,” Wash- ington Post (November 28, 2010). 6 “Ozone Standard Exceedances in National Parks,” National Park Service (November 28, 2017). 20 Philip K. Howard, “Two Years Not Ten Years: Redesigning Infrastructure Approvals,” Com- 7 “8-Hour Ozone (2008) Designated Area/ mon Good (2015). State Information with Design Values,” U.S. Envi- ronmental Protection Agency (as of May 31, 2020). 21 Lisa Friedman, “Trump’s Move Against Landmark Environmental Law Caps a Relentless 8 Coral Davenport, “New Limit for Smog-Caus- Agenda,” New York Times (January 9, 2020). ing Emissions Isn’t as Strict as Many Had Expected,” New York Times (October 1, 2015).

9 Emily Underwood, “The Polluted Brain: Ev- idence Builds That Dirty Air Causes Alzheimer’s, De- mentia,” Science (January 26, 2017).

10 “Getting Infrastructure Going: Expediting the Environmental Review Process,” Regional Plan Association (2012).

11 Oren Cass, “Will EPA Cuts Harm America’s Air Quality?” Manhattan Institute for Policy Re- search (2017).

12 Coral Davenport, “Obama Build Environ- mental Legacy With 1970 Law,” New York Times (No- vember 26, 2014).

AMERICAN COMPASS 61 AGENCY STRUCTURE

Ganesh Sitaraman Vanderbilt Law School

A new task for government demands a new structure for its agencies.

rominent leaders across the political trial policy that fits within a broader strate- Pspectrum have argued in recent years gy for economic resilience. Such a strategy that the United States needs an industrial would consider vulnerability in our supply strategy. These advocates recognize that chains, address economic inequality and some kind of industrial policy is inescap- ensure good paying jobs, guarantee eco- able. When government adopts tax incen- nomic security from foreign technological tives or regulations that differ by econom- theft, and invest in research that will keep ic sector, for example, it is engaged in a the United States on the frontiers of science. kind of ad hoc industrial policymaking. But even if advocates succeed in per- Advocates also recognize that a vari- suading the White House to convene a ety of contemporary challenges – from blue-ribbon commission, organize an in- geo-economic competition with China to ter-agency task force, or deputize some pandemics to climate change – could be trusted advisor to develop a strategy for better addressed if America had an indus- economic resilience and a plan for indus-

Ganesh Sitaraman is a professor of law at Vanderbilt Law School and author of The Great Democracy: How to Fix Our Politics, Unrig the Economy, and Unite America. 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

trial policy that includes rebuilding do- houses the Economic Development Agen- mestic supply chains, we will still need a cy and Minority Business Development government that can execute that strategy Agency, but the Small Business Adminis- – and right now, we don’t have it. tration (SBA) sits alone as a cabinet-lev- el agency. The U.S. Trade Representative Institutional Capacity and (USTR) does too – but Treasury handles Industrial Policy economic sanctions, and Commerce hous- es the International Trade Commission. Many people think reorganizing gov- Labor, meanwhile, administers Trade Ad- ernment is futile and unproductive – and justment Assistance (TAA). Importantly, proposals to do so are unhelpful. But the none of these agencies see themselves as reality is that structure shapes substance. doing industrial policy or quarterbacking If we want government to pursue a spe- the economic resilience strategy of which cific mission with gusto, there must be an it should be a part. institution within government equipped for that mission. Right now, there is no In addition to being split across the single department or agency within the government, the work of industrial policy federal government whose core mission needs to change. Current programs cov- is to develop a comprehensive industrial er a dizzying range of topics – from loan policy and facilitate its execution across programs for small businesses to export government. Offices that are relevant to controls. But one of the core aspects of a coherent strategy are split across multi- industrial policy – supply chain resilience ple departments and agencies. Commerce and domestic production capacity – is not a systematic feature of U.S. economic policy outside of the Pentagon. Understanding supply chains is difficult, resource-in- If we want government to tensive work. It requires inves- pursue a specific mission tigating sectors of the economy to identify the links in the chains with gusto, there must that could be relevant in different crises. A pandemic might lead to be an institution within one set of supply chain needs; a drought which led to the 1930s government equipped Dust Bowl a different set; a mas- for that mission. sive earthquake in the Bay Area a third set; and a hurricane tearing up the Eastern Seaboard yet an-

AMERICAN COMPASS 63 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

other. And that is before evaluating possi- be tasked with developing a quadrennial ble global disruptions. Moreover, serious national economic resilience strategy, akin supply chain analyses are not a one-and- to the national security strategy or national done proposition. As both the economy defense strategy. and its risks evolve, analyses will need to be revisited in order to maintain prepared- A single department would have a va- ness. In other words, this is not work that riety of benefits. First, the Department can be done on an occasional basis by po- would be able to develop a strategy that litically appointed advisors who serve for a integrates international trade, the dislo- couple of years before their next gig. It is cations and shocks to domestic industry the work of civil servants. that accompany trade, and economic se- curity- and supply chain-related issues that If we are going to take industrial policy emerge from global interconnectedness seriously, we will need a government that (including with great power competitors understands where the like China and Russia). It risks and vulnerabilities would both have capaci- lie, can develop a strat- ty to gather information egy to address them, Five Cones: to inform a strategy and and can execute on that have the bureaucratic ca- strategy. That is why we International Trade pacity to execute on the need a new Department strategy. of Economic Resilience. Export Promotion The Department should Second, the Depart- subsume the Depart- ment would gain height- ment of Commerce, take Economic Security ened status within the on USTR, SBA, TAA, federal government, ele- export promotion agen- Industrial Policy vating the importance of cies, economic sanctions, these issues and creating and a smattering of oth- Statistics a series of cascade ef- er agencies and offices, fects. With the Depart- and organize them into ment articulating a strat- five cones: international trade, export pro- egy every four years, think-tank experts motion, economic security, industrial poli- will spend more time working on indus- cy and economic development, and statis- trial policy-related issues; academics will tics. The Department should also have an have much fodder for research, creating office of policy planning, akin to the State a pipeline of scholars who study industri- Department’s Policy Planning Staff, that al policy and a body of literature on what would report directly to the Secretary and works and what doesn’t; and civil servants

AMERICAN COMPASS 64 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

who develop expertise in these currently capture threatens the entire enterprise. sleepy areas will have a path to greater in- A captured government wastes taxpayer fluence and prominence. money and reduces faith in the govern- ment’s integrity on economic issues. It While some might rightly point out that could also backfire and make the United interagency coordination will still be neces- States more vulnerable, not less. For exam- sary, there are significant benefits to reduc- ple, if companies at essential points in the ing interagency frictions and having a single supply chain are able to lobby government Department with a single leader who can to avoid resiliency policies, the U.S. might coordinate agencies to align with the strat- find itself without critical supplies in the egy. Rather than having to elevate issues to next pandemic or during a geo-economic the White House, the Secretary will be able crisis with China. Or imagine if compa- to coordinate a wide range of economic nies influence government to prevent ex- resilience-related issues within the Depart- port controls on certain technologies: they ment. This should alleviate, not exacerbate, might actually help great power competi- interagency coordination challenges. tors innovate faster than they would have otherwise. Industrial Policy without Industry Capture It is difficult, perhaps even impossible, to block every single avenue for influence. Perhaps the strongest objection to in- But lawmakers must try to close as many dustrial policy, and therefore to organizing as possible in order to maintain the integ- government to be better at it, is that indus- rity of industrial policymaking. Campaign trial policy invariably attracts in- terest-group capture. If govern- ment is setting policies to protect some industries from foreign competition, to prevent some in- Preventing capture must dustries from foreign operations, be a primary focus for to invest domestically in some in- dustries, or to regulate any aspect anyone interested in of some industries, those indus- tries will do whatever they can to industrial policy because influence decision-making. capture threatens the Preventing capture must be a entire enterprise. primary focus for anyone inter- ested in industrial policy because

AMERICAN COMPASS 65 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

contributions, congressional lobbying, and created a structural rule in railroad regu- meetings to influence regulators are one lation: railroads were not allowed to own set of problems. The revolving door in companies that had goods that moved and out of government – for both political across the rails. If railroads could verti- appointees and civil servants – poses an- cally integrate between their platform and other set of challenges. And a third issue commerce that trafficked across it, they is the cognitive capture that comes from could preference their own goods over cozy friendships and relationships, even other companies’ competing goods. This down to regulators and the regulated hob- would make it difficult for competitors nobbing at dinner parties and sending kids to get their goods around the country. A to the same schools. technocratic rule would not have prohib- ited all ownership and mandated a clean Industrial policy advocates need to fo- separation; it would have allowed for some cus greater attention on how to combat ownership or investment, tried to figure these problems, even if they cannot stop out what amount would be risky from the all of them. For starters, policymakers perspective of conflicts of interest, and re- should try to set industrial policy using quired regulators to monitor that practice structural rules, rather than technocratic or lawyers to sue the railroad after an al- market incentives or monitoring. Structur- leged violation of the technical rules. The al rules shape the structure of the market structural rule is simpler and clearer, and itself, while technocratic rules require bu- while it might be a little over- or under-in- reaucrats to make case-by-case distinctions clusive, its virtue is that it does not rely or monitor market activity on an ongoing as much on regulators or judges to make basis. For example, the 1906 Hepburn Act fine-grained distinctions.

AMERICAN COMPASS 66 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

In the supply chain and industrial policy category, competition laws are The structural rule is perhaps the best example of a struc- tural approach. Rather than mandate simpler and clearer, and particular production by particular firms, strong antitrust enforcement while it might be a little can ensure competition in entire sec- tors – leading to many competitors over- or under-inclusive, across a wide geography and, there- its virtue is that it does not fore, to more resilient supply chains. In the context of the COVID-19 rely as much on regulators pandemic, for example, medical de- vice mergers contributed to a short- or judges to make fine- age of ventilators. This is not to say grained distinctions. that there cannot be benefits to scale, but simply that even if there are ef- ficiency gains at the extremes of consoli- ing policies. In essence, the separation of dation (though, of course, there may not information gathering and industrial pol- be), resilience requires making a trade-off icymaking is a structural rule within gov- –and we should be willing to make it. ernment, akin to a structural rule within the market. Second, policymakers should adopt a new principle: the separation of informa- Even with structural rules in the mar- tion gathering and industrial policymak- ket and government, the likelihood of ing. Industrial policymaking choices will capture is still extraordinarily high. Polit- require knowing about market structures ical appointees might come from or exit and practices, and civil servants will have to firms that benefit from industrial policy to work closely with companies to get in- choices. Appointees might be influenced formation on suppliers, production lev- by aggressive informational campaigns. els, capacity, and fragility. Such close co- Congress might place undue pressure on operation with corporations could make administrators, driven more by campaign these information gatherers sympathetic contributions or independent expendi- to those with whom they work and skew tures than by the public interest. As a re- their perspective on which policies serve sult, organizing government for industrial the national interest. As a result, infor- policy will require a variety of stringent mation gatherers should be akin to intel- anti-capture provisions targeted at specif- ligence collectors and analysts—offering ic practices. These include adopting strict information, but not setting or implement- ethics rules to eliminate financial conflicts

AMERICAN COMPASS 67 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

of interest, restricting lobbyists’ practices restructured the entire defense establish- like contingency fees and foreign lobbying, ment immediately after World War II. The closing the revolving door through bans Department of Homeland Security came on lobbying and employment in related into being only a year after the September sectors, and boosting transparency in the 11 attacks. There are always challenges to rulemaking process. There have been rig- creating, moving, merging, and eliminating orous, effective proposals in each of these government offices. But that is no excuse areas in recent years – and they are essen- not to act – in fact, a crisis is precisely the tial to making industrial policy work and time to act because everyone understands retaining public confidence in it. what is at stake.

A Time for Big Changes Still other skeptics worry that reorganiz- ing government isn’t possible because Con- We are used to hearing objections to gress will object to anything that chang- proactive, institutionally focused govern- es its committee structures or oversight ment reforms from the Right, but it is powers. This concern can be easily dealt worth noting that similar objections come with. Existing committees can retain over- from the Left as well. People on both sides sight of the parts of the new Department argue that structural change is not worth over which they hold power, but Congress pursuing, and that it is an especially bad should agree to phase out this structure in idea in the midst of – or even in wake of favor of a more sensible one after twelve – a pandemic and economic crisis. Their years. That would give members more arguments often presume that there are than enough time to make choices about too many other urgent priorities and that their committee preferences. a massive government reorganization and the passage of new anti-capture laws are More than anything, however, we must too hefty a lift for Congress. reorganize the government because we cannot afford not to. If our government But these anxieties misjudge the mo- cannot create an economic resilience strat- ment. Big changes in how government is egy and execute on it, our country will not structured almost always happen during be able to weather the challenges of the fu- or immediately after a significant crisis ture successfully. Whether it is great power for a simple reason: the American people economic competition with China, climate recognize the need to act and to act deci- shocks, or the next pandemic, Americans sively. Lincoln thus overhauled the entire will suffer and America will be weaker if banking system in the middle of Civil War. we do not prepare for the next crisis and The SEC was created during the Great have plans in place to endure and bounce Depression. The National Security Act back. That is a fate worth avoiding.

AMERICAN COMPASS 68 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

government that captures, contaminates, COMMENT and distorts an otherwise free market. Or maybe it’s a two-way street, and both can Samuel Hammond capture each other simultaneously. Either way, the universal tendency is to treat the efore being supplanted by the nar- public and private sectors as separable, Brower discipline of economics, “po- with their independence mediated by the litical economists” from Adam Smith to relative throughput of various “revolving Karl Marx understood markets as inher- doors.” ently embedded in laws, customs, and cultures. It simply didn’t make sense to Ganesh Sitaraman’s essay in this series, study “the economy” absent other so- On Agency Structure, is no exception. In cial or political structures, as those so- it, Sitaraman tackles the question of how cial and political structures were under- to implement industrial policy at the level stood as constitutive of “the economy.” of federal organizational structure. As he writes, “Preventing capture must be a pri- Today, it is far more common to draw mary focus for anyone interested in indus- a categorical distinction between politics trial policy because capture threatens the and the economy, and thus to see their entire enterprise. A captured government interaction in terms of contamination wastes taxpayer money and reduces faith or capture. If you’re on the Left, it’s the in the government’s integrity on economic ultra-wealthy and big corporations that issues. It could also backfire and make the capture an otherwise public-spirited gov- United States more vulnerable, not less.” ernment. If you’re on the Right, it’s the For better or worse, industrial policy has a strong association with “picking win- ners and losers,” including by agencies like the Export-Import Bank that libertarian The universal tendency is to groups have gone to lengths to make the treat the public and private poster-child of “crony capitalism.” The onus is therefore on industrial policy pro- sectors as separable, with ponents to make the case that regulatory their independence mediated capture is not a fait accompli, but instead by the relative throughput depends on the specifics of an agency’s structure and institutional capacity. One of various ‘revolving doors.’ job of political economy is to explicate which institutional designs work best, giv- en the filter of democratic politics. All

AMERICAN COMPASS 69 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

Samuel Hammond comment, continued else equal, for example, independent and mission-oriented agencies with dedicat- In a second-best world, our ed funding, competitive salaries, and clear lines of accountability are harder to “cap- choice may not be between ture” than, say, politicized agencies that whether our government are shielded from oversight. is captured but by whom. Sitaraman is also right that American Indeed, today’s America has national economic policy is unusually frag- a robust industrial policy mented, spread across multiple agencies that rarely coordinate on ad hoc issues, for Wall Street, soybean much less around a coherent national de- farmers, Hollywood, drug velopment strategy. This likely increas- es an agency’s vulnerability to regulatory companies, and trial lawyers. capture, as programs designed for narrow interests tend to serve narrow interests. Sitaraman therefore proposes consolidat- ing agencies like USTR, SBA, TAA, and ics can be separated from the political and various Commerce Department functions social system within which it is embedded. under a new “Department of Economic Resilience.” The Department would have Western observers often struggle to a unified policy planning staff, allowing its understand developmental states like Secretary to coordinate a national devel- China or Japan precisely because the lines opment strategy in much the same way the between civil society, private enterprise, President coordinates the National Securi- and the state can be so blurry. Corporatist ty Strategy. As someone who has proposed social democracies are a bit easier to de- a similar “Office of Struggling Regions,” scribe, but still require a thoroughly insti- this idea clearly speaks to me. tutionalist approach. Rather than impose a stark divide between the state and the At the same time, industrial policy pro- market, for instance, regulations, social ponents should resist limiting themselves policies, and strategic coordination often to the vocabulary of regulatory capture. emerge dynamically from the negotia- To understand which governance models tions between trade unions and employ- work best ultimately means reviving the ers’ associations, with the government dormant discipline of political economy. serving as mediator. In such systems, the And by its very nature, that means reject- conventional notion of regulatory cap- ing the neoclassical premise that econom- ture breaks down.

AMERICAN COMPASS 70 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

Samuel Hammond comment, continued Developmental and corporatist states COMMENT tend to be our main, contemporary source for case studies of successful industrial Michael Lind policy. They should also be a source of information, if not inspiration, for which n his thoughtful contribution to the governance models are likely to work. And IAmerican Compass symposium, “On in both types of systems, regulatory cap- Agency Structure,” Ganesh Sitaraman ad- ture is not so much eliminated as some- dresses two problems: fragmentation of thing that is continuously and dynamically authority over industrial policy and regula- managed, whether through tripartite ne- tory capture. The problems are real, but I gotiations, or (as in the export-oriented am not sure that his proposed solutions—a growth model) through the ruthless dis- single, centralized department of industrial cipline of international competition and a policy and more powerful career civil ser- hyper-meritocratic civil service. vants—are politically realistic or necessary.

Charlie Wilson may not have actually His proposed new Department of Eco- said “What’s good for General Motors is nomic Resilience “should subsume the good for the country.” Nonetheless, in a Department of Commerce, take on USTR, second-best world, our choice may not SBA, TAA, export promotion agencies, be between whether our government is economic sanctions, and a smattering of captured but by whom. Indeed, today’s other agencies and offices…” In essence, America has a robust industrial policy for this is the model that Congress followed Wall Street, soybean farmers, Hollywood, when it created the Department of Home- drug companies, and trial lawyers. Is it land Security, cobbled together by putting any coincidence that the systems gov- the Coast Guard, the Secret Service, the erning these sectors are also some of the Federal Emergency Management Agency most captured? (FEMA), the Immigration and Naturaliza- tion Service, and the Environmental Mea- Reorienting American industrial policy surements Laboratory, among others, into toward productivity growth, upward mo- a single cabinet-level department. It is not bility, and breakthrough innovation will clear that any synergies resulted. require strengthening our coordinating in- stitutions to resist certain forms of cap- What is more, the danger of politiciza- ture. But in many cases, it will also require tion can only increase when a single po- identifying superior captors, for whom the litical appointee sets the agenda for many “special interest” and “general interest” formerly independent entities. Jeane Kirk- roughly align. patrick taught me a rule she learned from

AMERICAN COMPASS 71 6. Agency Structure Ganesh SItaraman, Vanderbilt Law School

Michael Lind comment, continued ernment for industrial policy” will require one of her professors, the political sci- “adopting strict ethics rules to eliminate entist Harold Lasswell: when designing a financial conflicts of interest, restricting constitution, imagine that your worst ene- lobbyists’ practices like contingency fees mies are in power. and foreign lobbying, closing the revolving door through bans on lobbying and em- We tend to think of the U.S. as a big- ployment in related sectors, and boosting ger version of Japan or Germany, when transparency in the rulemaking process.” it is really a more coherent version of the European Union—a group of states These are all sensible reforms. But you and regions bigger than most countries. go to war with the army you have, not the In designing an in- army you want. If in- dustrial policy for dustrial policy in the a continental soci- U.S. can only be car- ety with a third of ried out by the equiv- a billion people, we alent of Japanese would do well to We tend to think of the Ministry of Finance follow the exam- technocrats or power- ples of 20th-centu- U.S. as a bigger version ful French enarques, ry reformers who instead of our exist- created regional in- of Japan or Germany, ing cadres of revolv- stitutions for eco- when it is really a more ing-door in-and-out- nomic regulation ers and career civil and development— coherent version of servants, then we are the Progressive-Era in for a long wait. Federal Reserve Sys- the European Union. tem, with its twelve I am more optimis- regional banks, and tic. In the 20th centu- the Farm Cred- ry, Congress repeated- it System, with its ly rejected proposals half-dozen territories, created during the to create a powerful American high civil New Deal. Even if most regional institu- service. Nevertheless, the U.S. managed to tions are corrupt or incompetent, a few mobilize industry to win two world wars country-sized American regions might get and a cold war and to launch the nucle- it right. ar, space and computer revolutions. Even with our flawed political and personnel Then there is the question of person- systems, we might be able to get much of nel. Sitaraman writes that “organizing gov- the industrial policy we want.

AMERICAN COMPASS 72 TERMS OF TRADE

Thomas Duesterberg Hudson Institute

The international trading system must recover the core principles of reciprocity, security, and democracy.

fter the fall of the Soviet Empire and ented economic model decisively under- Athe entry of China into the global mined Western industrial sectors starting trading system, a new idea was added to with metals and electronics and later pro- the canon of neoliberalism: that former- ceeding into higher-technology industries ly communist economic systems could be such as telecommunications, high-speed transformed into liberal democracies by the railroads, and automobiles. Meanwhile, attraction of rising living standards. Soon the World Trade Organization (WTO), thereafter, however, the growing industrial the centerpiece of this liberal, rules-based dominance of mercantilist China disrupt- trading regime, proved ineffective in com- ed the political and economic calculus that batting the blatant disregard of its rules a liberal, rule-based trading regime would by its founders in transatlantic economies, produce balanced growth among faithful and even less so by mercantilist regimes. practitioners and that the U.S. would pros- per by dominating cutting edge technologies International trade growth fostered an in the modern economy. China’s export-ori- unprecedented rise in global prosperity in

Thomas Duesterberg is a senior fellow at the Hudson Institute and served as an assistant secretary of commerce for international economic policy in the George H.W. Bush administration. 7. Terms of Trade Thomas Duesterberg, Hudson Institute

the post-1945 period. But in recent years which the General Agreement on Tariffs it has encouraged the prolonged atrophy and Trade (GATT, 1948) and the WTO of American industrial capacity and an (1995) were conceived. They are: reciprocity, erosion of domestic supply chains. The national security, and democratic oversight. United States has only just begun to wake up to the consequences of this historic The principle of reciprocity is simple trend. Over 8 million American manufac- in theory but complex in practice. Adam turing jobs were lost after 1979 as supply Smith has too easily been pigeonholed as chains moved overseas and U.S. manu- a proponent of the unrestricted flow of facturers replaced workers with capital to goods, knowledge, and people across bor- meet low-cost foreign competition. The ders to maximize efficiency. But he also social impact of deindustrialization in the admitted to its limits: “…it may be a mat- U.S. was perhaps the final blow as pathol- ter of deliberation how far it is proper to ogies linked to the loss of blue-collar jobs continue the free importation of certain engendered a political backlash against foreign goods…when some foreign nation the postwar trading system. In 2020, the restricts by high duties or prohibitions the COVID-19 pandemic and attendant inter- importation of some of our manufactures ruptions of key supply chains have under- into their country.”1 It is not only China scored the problems of interdependence that violates this principle systematical- and the political reality of nationalist re- ly, but many proponents of open trade sponses to them. as well. Agricultural goods are largely ex- empted from trade liberalization. India re- Trade policy alone will not solve the stricts imports of most high-technology problems caused by vulnerable supply goods and services, and maintains bound chains and the loss of industrial jobs, but tariffs averaging 49%. All nations protect it will be essential to any effective agenda their telecommunications and airline sectors. addressing them. A different set of fun- damental principles will help reverse these The way to think about reciprocity is trends and bolster incentives to produce straightforward: a real balance of rights goods—especially high-technology goods and protections between trading partners and related services—in the United States. that is mutually beneficial. A simple met- ric of trade flows does not convey the Three Principles of Trade real impact of reciprocity. At a minimum, reciprocity implies equal access to market The principles proposed here are not opportunities. When China systematically new, but they require a new emphasis if subsidizes exporters and appropriates in- trade policy is to be effective in a world tellectual property while restricting access economy much different than those in to its markets, or Europe applies higher

AMERICAN COMPASS 74 7. Terms of Trade Thomas Duesterberg, Hudson Institute

tariffs on autos and blocks imports of ge- the WTO can adjudicate differences of netically modified products while offering interpretation of what constitutes a legit- no offsetting measures, or India refuses to imate security sector (famously steel, for honor pharmaceutical patents, reciproci- instance). U.S. Trade Representative Rob- ty is undermined. But redress is difficult ert Lighthizer, however, is right to insist to achieve under existing WTO rules and that each nation has an absolute right to procedures. determine its own security imperatives and meet them with domestic resources.4 The second principle is that national se- curity imperatives are crucial to any trade Related to the second principle is the and related investment policy. This idea third: democratic oversight of trade policy has long been recognized, including by by sovereign states must be restored. There Adam Smith,2 but it is especially import- are two strands to this concept: The ab- ant in an age in which commercial tech- stract rules of economic efficiency should nologies are increasingly hard to separate not be the only consideration for setting from those important to national defense economic policy, and the role of technical products and systems. The security of experts must be balanced by democratic telecommunications and electric power in- oversight.5 In practical terms, what this im- frastructure are part and parcel of nation- plies is that democratic (or republican) in- al security. Many also argue that medical stitutions such as the Congress can surely products and services should be consid- decide whether considerations, such as the ered vital to national security, a concern resilience of medical or certain high-tech- obviously brought into sharp relief by the nology supply chains, should override the present pandemic.3 Purist supporters of a imperatives of lower-cost production. In rules-based trade order would argue that an era of unprecedented prosperity, a na- tion could choose to pay more for domestically produced med- icines or supercomputers than The tension between those imported from an adver- technocratic management and sary or an unreliable supplier. democratic oversight that is Yet the tension between st technocratic management and ubiquitous in the 21 century democratic oversight that is has roots that extend back to ubiquitous in the 21st century has roots that extend back to the Bretton Woods trade order. the Bretton Woods trade order and a deep mistrust of populist

AMERICAN COMPASS 75 7. Terms of Trade Thomas Duesterberg, Hudson Institute

rule and ill-informed politicians emerging ing Chinese access to the technologies it from the chaos of the 1919-1945 period.6 needs to compete with firms in advanced The GATT and especially its successor, economies. the WTO, were always conceived as supra- national in character, with rules that take Such actions damage the Chinese eco- precedence over domestic law. Its quasi-ju- nomic model as well as the balance of dicial procedures often bypass member incentives to produce and move supply negotiations to make new law or to over- chains to the Middle Kingdom. They also turn the laws of sovereign nations. But weaken the economies of scale and ease over time, the WTO has proved incapable of access to advanced technologies for of enforcing existing rules and addressing China. In 2016 more than 75% of Chinese problems such as forced technology transfer exports of advanced-technology goods and state subsidization of industry.7 to the U.S. were made by wholly for- eign-owned or joint-venture companies. Reforming the WTO to Rebalance During the same year, the domestic con- Production Incentives tent of all advanced-technology exports from China was less than 50%.8 Many ana- There are multiple paths by which the lysts have shown that China’s ability to in- principles outlined above could induce novate still depends on access to American firms to return supply chains to the U.S., firms and research institutions.9 largely by weakening the opportunities for mercantilist foreign competitors and Unfortunately, the WTO has shown it- strengthening the calculus in favor of do- self ill-equipped to maintain an effective mestic production. For instance, the U.S. system of international trade, with much has already leveled tariffs against China of the action now confined to unaccount- for violation of existing WTO rules as able WTO judges arbitrating disputes and well as national security concerns associ- interpreting existing rules.10 Reform of the ated with the dual use of certain products WTO itself now requires unanimity of its or their acquisition by the People’s Liber- more than 160 members, which effective- ation Army (PLA). Because the U.S. does ly blocks any attempt to create new rules not enjoy reciprocal access to the Chinese for the modern economy, vigorously en- market and faces systematic dumping of force its existing rules, effectively sanction subsidized products by Chinese firms, the mercantilist actors, reverse long-standing Trump administration has imposed broad asymmetries in its rules, or overrule its restrictions on Chinese exports. It has also techno-bureaucratic decisions. These are increased scrutiny of Chinese purchases underlying structural challenges of an or- of firms in the U.S., a strategy also used by ganization that was designed for a global allies in Europe and Japan, thus diminish- economy that no longer exists.

AMERICAN COMPASS 76 7. Terms of Trade Thomas Duesterberg, Hudson Institute

The United States should address these unanimity rule governs, the institutional problems by working with allies to reform paralysis that has reigned since 1995 will the WTO, not abandon it. The recent pro- continue empowering technical experts to posal by Senator Josh Hawley (R-MO) to make the relevant policy choices in the in- abolish the WTO is not a good idea for terstices of existing rules. Reform of the re- several simple reasons.11 The U.S. alone form process itself must be the top priority. cannot abolish the institution. Withdraw- ing would only further alienate allies such In a WTO prepared to make substantive as Japan, the United Kingdom, and other changes, the reform agenda should focus European nations, who could be helpful in first on establishing better rules to limit achieving better rules to combat the China the role of state subsidies and the power challenge. The U.S. has had some success of state-owned enterprises. Subsidies un- in convincing allies to join its WTO com- derpin the Chinese march to technical par- plaint against Chinese intellectual property ity and trade advantage encapsulated in the theft and also won a landmark case in the Made in China 2025 program.13 WTO to curb state subsidies to Airbus In- dustries. If the United States is to reverse Updating WTO rules is also important the damage to domestic supply chains built in seeking reciprocal access to more open up over the last 70 years, it should pair re- economies that enjoy advantages relative form of the institution with vigorous use to the United States. Long-embedded of U.S. trade law and regional trade pacts. rules often favor European nations at the United States’ expense. For instance, the Modernizing the WTO to meet the WTO tolerates higher auto tariffs for U.S. challenges of China and others to a mar- exports as well as rebates of high Europe- ket-based and reciprocally balanced trade an value-added taxes for its exports while system can only be achieved if the orga- refusing to accept U.S. efforts to adopt re- nization’s unanimity rule gives way to ma- ciprocal border adjustable taxes.14 Curbing joritarian decision-making reflective of the overreach of the WTO’s Dispute Set- member-party priorities.12 So long as a tlement Body and allowing more scope in

AMERICAN COMPASS 77 7. Terms of Trade Thomas Duesterberg, Hudson Institute

the WTO for “plurilateral” agreements ne- champion of multiple advantages and give gotiated by coalitions representing a super- domestic and allied firms more time to majority of trade in a given sector would find economically viable alternatives.17 help to overcome longstanding problems dating to the early years of the GATT as Placing trade restrictions, including ex- well as new problems associated with the port restrictions, on China and other na- rise of modern mercantilist states. tions certainly has costs. The American semiconductor industry, for instance, re- Finding a solution in the WTO would lies on China for 23% of its exports and be ideal, but absent this, the United States controls almost half of all global produc- should pursue other policies to combat Chi- tion of this key enabling technology. The na’s strategy—either with a coalition of the profitability of world-leading American willing or, if necessary, by leading on its own. firms allows them to devote 20% or more Coordination with longstanding allies in the of their sales to research and to keep ahead “Five Eyes” group would be a good place of their subsidized Chinese competitors. to start.15 Given the increased tensions with, Jeopardizing this model by risking access and intransigence of, China, the United States to the world’s largest semiconductor mar- should also reconsider its decision to pull out ket, if China were to retaliate against U.S. of the Trans-Pacific Partnership Agreement. sanctions, could endanger a vital area of Stronger rules of origin, however, must be American technological leadership.18 On incorporated into that agreement. the other hand, U.S. restrictions have in- centivized Taiwan Semiconductor Manu- The example of Huawei is instructive to facturing Company (TSMC), the world’s crafting an overall approach to reform of largest fabricator of semiconductor chips, U.S. and WTO policies. In Huawei, China to locate a $12 billion plant in the United has employed state support of as much as States, where the leading creators of new $70 billion and technology theft to build a designs are already domiciled. The exten- low-priced and competent national cham- sive supply chains for large fabrication pion that undermines the ability of other plants could follow in TSMC’s steps.19 firms to achieve profitability in global mar- kets.16 The United States no longer has an One can be more confident that the ap- integrated equipment maker, and the two propriate tradeoffs for trade actions will European competitors, Nokia and Erics- be balanced when they are made by some son, struggle to remain financially sound democratic process rather than the imper- enough to compete and invest in fresh sonal logic of economic efficiency narrowly technology. A U.S. policy toward Hua- defined as that which produces the lowest wei, based on the three principles outlined cost to consumers, or by technical experts above, would deprive the Chinese national interpreting rules adopted fifty years ago.

AMERICAN COMPASS 78 7. Terms of Trade Thomas Duesterberg, Hudson Institute

11 Josh Hawley, “The W.T.O. should be Abol- ished,” New York Times (May 5, 2020).

Endnotes 12 Thomas J. Duesterberg, “The Importance of WTO Reform from a Transatlantic Perspective,” 1 Quoted in Jeffrey Peters, “Father of Capi- Hudson Institute (2020). talism Embraced the Use of Tariffs,” The News and Times (March 2, 2018). 13 John Lee, “Ambition and Overreach: Coun- tering One Belt and One Road and Beijing’s plans 2 Adam Smith, An Inquiry into the Nature and to dominate Global Innovation,” Hudson Institute Causes of the Wealth of Nations, Vl II (London: W. (2020). Strahan and Company, 1778). 14 Ike Brannon and Thomas J. Duesterberg, 3 Scott Atlas and H. R. McMaster, “Relying on “Tax Reform and the Republican Manufacturing and Foreign Drugs Is Dangerous,” Wall Street Journal Growth Agendas,” Tax Notes (July 10, 2017); Gary (April 28, 2020). Hufbauer and Lucy Lu, “Border Tax Adjustments: As- 4 See “Hearing on ‘Approaching 25: The Road sessing Risks and Rewards,” Peterson Institute for In- Ahead for the WTO; Questions for the Record for ternational Economics (PIIE) Policy Brief 17 (2017). Ambassador Robert Lighthizer, USTR,” U.S. Senate 15 J. Rogers, A. Foxall, M. Henderson, and Committee on Finance (March 12, 2019). S. ArQuinn Slobodian, Globalists: The End of Em- 5 Oren Cass, “Putting Dynamism in Its Place,” pire and the Birth of Neoliberalism (Boston, Har- National Affairs (Spring 2020). vard University Press, 2018); James Rogers et al., “Breaking the China Supply Chain: How the ‘Five 6 Even the stalwarts of the London School Eyes’ Can Decouple from the China Supply Chain,” of Economics preferred rules-based order enforced Henry Jackson Society (May 14, 2020). by technocrats. As one historian argues:” Hayek, for instance, feared … ‘unlimited’ (or what Von Mises 16 See Robert Spalding, “Data Security in a 5G called ’omnipotent’) democracy as always leading to World,” National Bureau of Economic Research totalitarianism out of a logic of capture.” See Quinn (NBER) (March 16, 2020). Slobodian: Globalists: The End of Empire and the 17 Thomas J. Duesterberg, “There is a Better Birth of Neoliberalism (Boston, Harvard University Alternative than Huawei,” Wall Street Journal (Feb- Press, 2018). ruary 5, 2020).

7 Thomas J. Duesterberg, “Now is a Good 18 Antonio Vara and Raj Varadarajon, “How Time to Reform the WTO,” Wall Street Journal (De- Restrictions to Trade with China Could End US Lead- cember 1, 2019). ership in Semiconductors,” Boston Consulting Group 8 Mary E. Lovely and Yang Liang, “Trump (March 9, 2020). Tariffs Primarily Hit Multinational Supply Chains, 19 Bob Davis et al., “Taiwan Firm to Build Chip Harm US Technology Competitiveness,” in US–Chi- Factory in U.S.,” Wall Street Journal (May 15, 2020). na Economic Relations: From Conflict to Solutions, eds. Ha Jiming and Adam Posen, Peterson Institute for International Economics (PIIE) (2018).

9 John Lee, “Decoupling the US Economy from China after Covid-19,” Hudson Institute (2020)

10 Thomas J. Duesterberg, “The Importance of WTO Reform from a Transatlantic Perspective,” Hudson Institute (2020).

AMERICAN COMPASS 79 INFRASTRUCTURE FINANCING

Terrence Keeley BlackRock

A national development bank could attract the private capital that America’s infrastructure needs.

s America launches an era of in- ness for the nation. Left unattended, in- Adustrial and economic resurgence, frastructure underinvestment may delay or it must simultaneously address our ailing, even disqualify many industry relocations. and in many cases failing, physical infra- structure. Improving the security of our Building the infrastructure America supply chains and strengthening our econ- needs to power and transport a new cen- omy through reshoring of manufacturing tury of growth has proven problematic in and technological capacity is an urgent, na- the best of times. The COVID-19 pan- tional priority. Success will depend upon demic has made an already challenged en- our comparative tax and regulatory frame- vironment for state, local, and federal pub- works, worker retraining efforts, and trade lic infrastructure finance worse. The U.S. and antitrust regimes. But the quality of sorely needed a new approach to planning, our energy, transport, broadband and other permitting, and financing infrastructure public works are equal concerns for busi- across all 50 states before the latest health ness leaders – and, at present, a major weak- and economic crisis. Now, reluctance to

Terrence Keeley is the Global Head of the Official Institutions Group at BlackRock and has served on the advisory board for the Asian Development Bank. 8. Infrastructure Financing Terrence Keeley, BlackRock

adopt a new approach—one that is com- U.S. spends some 2–3% of GDP annu- prehensive, resilient, flexible, and sustain- ally on infrastructure—half of what the able—invites economic peril. EU spends, and only a quarter as much as Australia and China. Years of neglect have Any meaningful solution requires that caught up with us. private capital step up. Experiences with public-private partnerships (PPPs) outside A widely cited 2017 report by the Amer- of the U.S. reveal promising and plausible ican Society of Civil Engineers (ASCE) paths that could mobilize 20% or more of graded our systems a D+ before assigning our total infrastructure funding needs, or a hefty “$4.5 trillion by 2025” price tag for trillions of dollars. Political stars also seem their prioritized remediation.1 This report to be aligning for such a solution. Pending has gone largely unheeded, however; since legislation, supported by Democrats and its release, America has lagged an addi- Republicans alike, envisages a much larger tional $1.5 trillion behind. role for private capital. The most compel- ling elements of four bills now pending Our infrastructure vulnerabilities are in Congress could be aggregated and aug- not academic. In rail transport alone, 15% mented to create a best-in-class, uniquely of maintenance facilities, 17% of systems American development bank. (e.g., power, signal, communications, and fare collecting), 35% of tracks, and 37% The right PPP model would serve mul- of stations are not in a state of “good re- tiple goals. It would make America a more pair.”2 By another estimate, proper expan- attractive supply-chain site and bring in- sion of and upgrades to our energy grid dustry home, eliminating foreign supply requires at least $600 billion in investment risks and boosting the domestic economy. through 2050.3 In fact, without $180 bil- It would create enormous latent demand lion for transmission and distribution en- for industrial output and millions of new, hancements in the next four years, Amer- high-quality jobs. Finally, it would effi- icans across the South and Midwest will ciently upgrade our public works at min- likely experience longer and more frequent imal taxpayer expense. power interruptions.4

Broke … and Broken These shortcomings are a top issue for manufacturers and a comparative vulnera- The state of our roads, bridges, broad- bility for the nation. They are also a direct band, airports, sea-ports, energy transmis- obstacle to reshoring industrial produc- sion, levees, and mass transit systems bear tion. Infrastructure quality is one of the directly upon our economic competitive- vital factors that firms evaluate when de- ness—and currently retard growth. The ciding where to site their facilities: one of

AMERICAN COMPASS 81 8. Infrastructure Financing Terrence Keeley, BlackRock

the top six “key location drivers” for Deloitte in 2015;5 one of five 47% of 1,500 manufacturing crucial dimensions for McKinsey in 2017;6 and one of six for PwC and supply-chain professionals in 2019.7 The World Economic Forum (WEF) rated the United preferred investment in U.S. States second overall in its 2019 infrastructure as their top Global Competitiveness Index— but this was despite our infra- policy priority for the Trump structure shortcomings. Against top-five rankings for our labor administration, versus just market, financial system, busi- 26% who chose tax reform. ness dynamism, and innovation capability, the WEF ranked the U.S. thirteenth for infrastructure—well be- al assistance to shore up their healthcare hind Germany, France, Korea, the Neth- and first-responder services; their urgent erlands, Japan, the UK, and Spain, among physical infrastructure needs will again others.8 Our industrial leaders have re- fall down the priority list. In times of lo- peatedly decried these disadvantages. A cal funding distress, Washington has of- 2017 survey by IndustryWeek, conduct- ten stepped up counter-cyclically, either ed before passage of the Tax Cuts and increasing direct spending, or supporting Jobs Act, found that 47% of 1,500 man- new local debt instruments with guaran- ufacturing and supply-chain professionals tees. Following the Global Financial Crisis, preferred “investment in U.S. infrastruc- Build America Bonds mobilized an incre- ture” as their top policy priority for the mental $180 billion in capital that would Trump administration, versus just 26% not otherwise have been available.11 But who chose “tax reform.”9 the federal government today has more limited latitude to assist. Many congressio- Even the recent decade-long economic nal leaders are already fatigued with tril- expansion failed to close our infrastruc- lion-dollar, deficit-funded spending plans. ture funding gap. States and localities his- It appears much of the country shares that torically provide two-thirds of the nation’s fatigue as well. total infrastructure spending, the rest coming from the federal government.10 Private Capital to the Rescue? The COVID-19 crisis has now crippled the finances of many states and locali- But now comes some good news. Tril- ties, gutting revenues while spending has lions of dollars of private capital are soared. Many hard-hit states need feder- both ready and willing to be deployed for

AMERICAN COMPASS 82 8. Infrastructure Financing Terrence Keeley, BlackRock

high-quality infrastructure projects that to all-time lows. They could well fall into generate revenue streams. The premise is negative territory. Our public and private simple: private capital is used in a project’s pension plans as well as our insurance green- or brownfield build-out phase in companies urgently need to replace all this exchange for some component of revenue lost income. Today, on average, the top sharing following the project’s completion. 100 pension plans in the U.S. are only 82% The provision of credit and/or comple- funded. Absent new sources of attractive, tion risk guarantees from the government sustainable, long-term, real returns—such makes the investment viable while lower- as that infrastructure could provide—tax- ing the project’s total cost of capital. payers may need to bail out dozens of public and private pension plans and the Properly constructed guarantees crowd millions of retirees they were created to private financing in, rather than fencing serve. it out. For example, the recent experience of the European Investment Bank (EIB) The untapped opportunity for PPP is and the so-called “Juncker Plan” achieved enormous. A recent Congressional Bud- a 15:1 ratio of private to public capital de- get Office (CBO) report estimates that ployed.12 The EIB’s remarkable PPP suc- less than 3% of U.S. funding sources for cesses are simultaneously credited with public water and transport assets since creating more than 1.7 million jobs and 1990 have private origins14—infinitesimal raising EU GDP by 1.8%.13 Today, Europe relative to other countries. Roughly half has proven more adept than America at mobi- of Australia’s annual infrastructure spend lizing private capital for public infrastructure. has historically come from private sources,

In Hamiltonian fash- ion, developing pub- lic infrastructure in the U.S. as a new asset class may even solve one problem with an- other: better infrastruc- ture for the country could well beget better and much-needed re- turns for those proj- ects’ owners. U.S. gov- ernment and corporate bond yields have fallen

AMERICAN COMPASS 83 8. Infrastructure Financing Terrence Keeley, BlackRock

equivalent to more than 4% of Australian Garrett further notes the “profound GDP. U.S. emulation of Australia’s PPP irony that America—arguably the world’s experience would amount to $900 billion most developed and perhaps most mar- of private infrastructure investment per ket-friendly economy—has persevered year—enough to meet the ASCE’s goals. with a government-led, if not govern- That same CBO report further highlights ment-only, financial mindset to taking on why diversified financial sources aren’t the its infrastructure challenge.” only reason to foster more private involve- ment: public works built in part with private Proposed Congressional capital and know-how are more likely to be com- Solutions pleted on time and under budget. Market disci- pline and the profit motive create powerful The 116th Congress has four pending incentives for projects to get done faster infrastructure bills, each intended to fill and at lower cost. at least part of our yawning infrastruc- ture funding gaps through a new era of In analyzing Australia’s broadly positive public-private partnerships—three in the experiences with PPP, Geoffrey Garrett, House and one in the Senate. The pro- dean of the Wharton School of the Uni- posals differ in scope, function, and the versity of Pennsylvania, cites three crucial amount of federal capital at risk (i.e., “re- lessons that the U.S. could learn: course”). They also differ in reporting accountability, agency consolidation, and 1. Building first-rate infrastructure— prospects for rapid expansion. roads, bridges, ports, high-speed rail, airports, power grids, cellphone net- The House bills—H.R. 658, H.R 4780, works, and fiber optic cables—is essen- and H.R. 6422—are sponsored by Repre- tial to realizing the full potential of all sentatives Rosa DeLauro (D-CT), Salud economies. Carbajal (D-CA) and Adriano Espaillat (D-NY), and Danny Davis (D-IL) and 2. The sheer scale of the global in- Seth Moulton (D-MA), respectively. Each frastructure challenge is so enormous bill would effectively establish a national that the only possible way to meet it bank with the singular remit of infrastruc- is to find a much bigger role for the ture finance. Activities in scope at launch private sector. would be limited to debt- and project com- pletion-guarantees. All governing board 3. Smart governments can ensure that members would be appointed by the Pres- increasing the role of the private sector ident with the Senate’s advice and consent. in infrastructure furthers their mission Of these, the Davis-Moulton bill is by far of serving the broad needs of society.15 the most ambitious, authorizing subscribed

AMERICAN COMPASS 84 8. Infrastructure Financing Terrence Keeley, BlackRock

equity capital of up to $500 billion, with authority specifically capped at $20 billion no more than $100 billion coming from in its first two years. The bill would simul- the federal government. Presuming a cap- taneously establish a “Project Delivery ital adequacy ratio of 12.5%, the implied Task Force” and an “Office of Technical lending capacity of the Davis-Moulton bill and Rural Assistance.” The former could would be $4 trillion—i.e., genuinely pro- tackle a problem that has often proven as portionate to the tasks ASCE insists need vexing as financial resources: the expedi- to be undertaken. H.R. 6422 also includes tion of local and cross-border permits. an advisory function known as “regional The latter would provide much the same economic accelerator planning groups”— advisory assistance as H.R. 6422’s “region- an administrative capability that could en- al economic accelerator” function, with courage reshoring initiatives by creating detailed project analysis and execution ad- ready site and execution plans. visory capacities. Both could underscore and deepen the symbiotic relationship be- Senator Mark Warner (D-VA) is sponsor- tween effective infrastructure financing ing the Senate bill, S.1535, joined by bipar- and the reshoring of supply chains. tisan cosponsors including Senators Roy Blunt (R-MO), Amy Klobuchar (D-MN), An alternate approach that might incor- John Cornyn (R-TX) and Chris Coons (D- porate all of these positive elements, and DE), among others. Also known as the perhaps augment them further, would be Reinventing Economic Partnerships and to establish a new development bank. De- Infrastructure Redevelopment (REPAIR) velopment banks differ from the national Act, S.1535 relies upon an “infrastructure banks outlined in the House bills primarily finance authority” structure that is directly through their larger scope of capabilities, accountable to the Secretary of the Trea- including direct debt issuance, credit and sury, rather than a bank with an indepen- completion guarantees, equity lending, dent board. S.1535’s new syndication authority, authority would begin and levels of technical with paid-in public cap- assistance. The United ital of $10 billion and be States is unique in the restricted from issuing The United States is world for not having debt in its own name. unique in the world for some multi-lateral or na- This means REPAIR’s not having some multi- tional development bank lending and guarantee providing these capabili- capacity would have rela- lateral or national ties. This is a remarkable tively modest beginnings development bank, disadvantage. There are until “proof-of-concept” more than a dozen mul- is achieved, with lending tilateral institutions and

AMERICAN COMPASS 85 8. Infrastructure Financing Terrence Keeley, BlackRock

nearly three dozen national development than the Juncker Plan. Callable capital also banks supplementing trillions of dollars represents the most taxpayers could ever of investments, supporting industry and owe—though if history is any guide, pub- infrastructure all over the globe—yet none lic cost would most likely be zero. in America. Such organizations—like KfW in Germany—have proven adept at attract- Built to Last ing, supporting, and retaining business- es, enabling local industries to flourish.16 America has a golden opportunity to re- Their ambit extends from infrastructure to gain its position as a preeminent manufac- worker training to advisory services for large- turing power, reshoring industrial capacity, scale production facilities and beyond. fortifying supply chains, and repatriating high-quality jobs. To succeed, we must Relative to the infrastructure agency and create the right tax, trade, and regulatory national bank instrumentalities now before incentives, in addition to a properly trained Congress, stand-alone development banks workforce. But we must simultaneously present another potential benefit, espe- bring our antiquated infrastructure up to cially in an era of fiscal constraint: most globally competitive standards—or per- operate with a “callable capital” model, haps even dare to surpass our competitors funding their own activities and balance and establish next-generation infrastruc- sheets through tax-advantaged debt and, ture as a genuine strength. most often, implicit rather than explicit federal guarantees. Their debt often trades Absent ubiquitous, scalable, innovative at, or even through, U.S. Treasury rates, partnerships between public and private depending upon the currencies in which capital, it is hard to see where much-need- they are issued. Such cheap funding pro- ed financial resources and know-how vides considerable leverage opportunities will come from. For this reason, charter- with limited systemic risk: no major na- ing the right institution or institutions to tional or multi-lateral development bank turbocharge a new PPP era should rank has ever sustained stultifying losses. Loss among our top national priorities. With- recourse for, say, the World Bank or Asian out an infrastructure authority or devel- Development Bank is effectively limited opment bank providing proper technical to the equity capital and their other senior assistance, fast-track permitting, and cus- and secured assets. Given this, it is reason- tomized financing solutions, we may well able to assume an American development be unable to bring desired manufacturing bank with $100 billion in callable capital back to our underemployed communities. (i.e., the same as H.R. 6422) may be able And without a new era of American in- to mobilize $1.5 trillion in private funds dustrial leadership, the vibrant promise of within two years, nearly three times more the next American century will be lost.

AMERICAN COMPASS 86 8. Infrastructure Financing Terrence Keeley, BlackRock

15 Geoffrey Garrett, “What the U.S. Could Learn from Australia about Financing Infrastruc- Endnotes ture,” Knowledge@Wharton (June 8, 2018). 16 “KfW Group at a Glance,” KfW. 1 “Infrastructure Report Card,” American So- ciety of Civil Engineers (ASCE).

2 Ibid.

3 “Increased Electrification and Renewable Energy May Require Massive Transmission Invest- ment,” Institute for Energy Research (IER) (March 20, 2019).

4 “Energy – Infrastructure Report Cards,” American Society of Civil Engineers (ASCE).

5 “Footprint 2020: Expansion and optimization approaches for US manufacturing,” Deloitte (2015).

6 “Making It in America: Revitalizing US Man- ufacturing,” McKinsey Global Institute (2017).

7 “Reconfiguring your manufacturing footprint for growth,” PricewaterhouseCoopers (PWC) (2019).

8 Klaus Schwab, “The Global Competitiveness Report 2019,” World Economic Forum (WEF) (2019).

9 Karen Field, “Manufacturing Professionals to Trump: Focus on Infrastructure,” IndustryWeek (June 29, 2017).

10 Hunter Blair, “What is the ideal mix of fed- eral, state, and local government investment in in- frastructure?” Economic Policy Institute (EPI) (Sep- tember 11, 2017).

11 “Treasury Analysis of Build America Bonds Issuance and Savings,” U.S. Treasury Department (May 16, 2011).

12 “European Fund for Strategic Investments: Action needed to make EFSI a full success,” Euro- pean Court of Auditors (ECA) (2019).

13 “Juncker Plan has made major impact on EU jobs and growth,” European Investment Bank (EIB) (October 22, 2019).

14 “Public-Private Partnerships for Trans- portation and Water Infrastructure,” Congressional Budget Office (CBO) (January 21, 2020).

AMERICAN COMPASS 87 8. Infrastructure Financing Terrence Keeley, BlackRock

sidized accordingly. We can only envision a COMMENT few of the transformational new technolo- gies that 5G will make possible. In that re- David P. Goldman spect, it falls under both Shih’s and Keeley’s topics. Dr. Henry Kressel has proposed the s an afterthought to Willy Shih’s and creation of a national telecommunications ATerrence Keeley’s excellent essays on authority to promote R&D and provide in- R&D and infrastructure, it may be helpful to frastructure subsidies in mobile broadband. consider the overlap of these two subjects. A central authority of some sort is required to sort out numerous problems, such as the One critical area of infrastructure where assignment of radio spectrum, the creation the U.S. lags dramatically is 5G mobile broad- of standards (including the delicate problem band. Adjusted for land mass and popula- of negotiating such standards with China, tion, China is outspending us three to one. the market leader), and the promotion of Part of the reason for our neglect of this funding for R&D and construction. game-changing technology lies in the fact that we view mobile broadband as mainly a There are many ancillary issues in which consumer technology, whereas China views government support will be required to em- it as industrial infrastructure. 5G is superflu- ploy such infrastructure optimally. The ap- ous for streaming video and other consum- plication of artificial intelligence to health er applications, but it makes possible a range care, now one of China’s top priorities, has of other technologies, including autonomous been delayed in the United States due to pri- robotic networks, autonomous vehicles, tele- vacy protections for medical records. Goo- medicine (including remote surgery), and ro- gle, IBM, Microsoft, and other American botic mining. In that respect, 5G is comparable companies are eager to develop this field but to 19th-century railroads which, in the main, face regulatory obstacles. were unprofitable as standalone businesses, but transformed every facet of economic life. I agree strongly with Shih’s view that the Until the advent of the railroad, large-scale Department of Defense has a central role to mechanized farming was not viable because play in funding basic R&D. I would add that animal-based transport limited the range of the fact that weapons innovation often challenges distribution to about 50 miles. Once the rail- the frontier of physics is particularly condu- roads arrived, farm machines invented a gen- cive to fruitful basic research. Still, it is im- eration before went into mass production and portant that a national strategy for infrastruc- transformed American agriculture. ture should include high-tech infrastructure (of which 5G is the most important example) 5G is a leading (although surely not the and that the funding of high-tech infrastruc- only) example of a technology that should ture should support R&D in the new technol- be viewed as public infrastructure and sub- ogies made possible by that infrastructure.

AMERICAN COMPASS 88 ANTITRUST ENFORCEMENT

Matt Stoller American Economic Liberties Project

The American medical industry offers a case study of how market concentration undermines economic resilience.

ccording to virtually every major Rubio emphasizes the threat from Chi- Afigure in Washington, it’s time to na, pointing to a threat in Chinese state- bring back critical supply chains—includ- run news media to cut off pharmaceutical ing those for medical supplies and med- exports to the United States if America did icine—to the United States. Republican not show more gratitude for China’s help Senators Marco Rubio (R-FL) and Josh during the pandemic. “If China banned Hawley (R-MO) have bills, as do Demo- exports,” said the article, “the United cratic Congressmen Marc Pocan (D-WI) States will fall into the hell of a new coro- and John Garamendi (D-CA). President navirus pneumonia epidemic.”2 This is not Trump has called for reshoring medi- an empty threat; the vast majority of our cal production in the wake of the pan- imports of penicillin, tetraycline, surgical demic. “These stupid supply chains that masks, rubber gloves, first aid kits, and liq- are all over the world,” he said in May, uid-filled thermometers come from Chi- “one little piece of the world goes bad, na. Beijing does have the ability to induce and the whole thing is messed up.”1 shortages in America.

Matt Stoller is the research director at the American Economic Liberties Project and the author of Goliath: The Hundred Year War Between Monopoly Power and Democracy. 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

What policymakers ignore is that short- the monopolization of drug and medical ages in American hospitals are not new, supply purchasing, which makes it unprof- and have not, until recently, been related itable to have a diverse and high-quality to China. These shortages started in the pharmaceutical production industry. In late 1990s and accelerated in the mid- other words, China is threatening medical 2000s. We’ve had shortages of hundreds shortages that, ironically, we have already of standard generic medicines for so long inflicted on ourselves. that the Food and Drug Administration (FDA) warned that young doctors increas- This essay presents developments in the ingly do not know how to practice medi- generic pharmaceutical and medical sup- cine with high standards of care; they just ply industries as a case study of a broader aren’t used to having the right medicines problem in the American economy: the re- available.3 lationship between consolidation and lost production capacity. Approaching reshor- Focusing on the foreign threat ignores ing in other strategic industries, from ad- the real problem, of which Chinese depen- vanced materials to semiconductors to dence is merely a symptom. The United telecommunications, will require similar States’ underlying markets for medicine are approaches to reform. The industry-spe- broken. Shortages should produce higher cific analysis below can serve as a - blue prices, which should draw in more produc- print for analyzing other industries as well. tion. Yet as the FDA noted in a report last year, “Drug shortages persist because they The Side Effects of do not appear to resolve according to the Consolidation ‘textbook’ pattern of market response.”4 Shortages don’t really result in higher prices, Long before the Chinese entered our and so they don’t draw in more producers. market, Americans began to see troubling signs of a fragile drug supply chain. In Markets are broken in medicine for the 1993, the FDA noticed that doctors were same reason that they are broken in much running out of off-patent drugs for three of the rest of the economy: the rise of unrelated conditions: angina (nitroglycer- monopolies has distorted price signals that in), HIV (sulfadiazine), and tuberculous used to match supply and demand. This (streptomycin).5 market-rigging has a number of different symptoms, such as high prices for some Americans had complained about the generic pharmaceuticals, poor quality medical industry for decades. But while standards, dependence on foreign imports, politicians like Senator Estes Kefauver (D- and most significantly, shortages. Over the TN) had complained about high pharma- last 25 years, policymakers have allowed ceutical costs in the 1960s, they complained

AMERICAN COMPASS 90 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

about excessive prices to con- sumers, not about the underlying productive machinery.6 Supply chains were well-resourced and By 2001, shortages had deep, with a thicket of different producers and distributors mak- become a routine feature ing and innovating around chem- of our medical system; one icals and medicines. Even into the 1980s, the only stories about drug hospital executive observed, shortages in American newspa- pers were stories observing prob- ‘Something strange is going on.’ lems in the Soviet Union as that system broke down.

But during the Clinton administration, What had shifted was the market struc- shortages soon became a regular occur- ture by which hospitals buy supplies, in- rence. These problems were concentrated cluding pharmaceuticals, medical devic- among generic pharmaceuticals, ones for es, and generic products like cotton balls. which patents had expired, not the more Traditionally, hospitals bought supplies profitable on-patent medicine. Almost through large purchasing co-ops known as inevitably the story was the same. The Group Purchasing Organizations (GPOs), sole factory that produced the medica- a bit like Costco for medicine. GPOs used tion would be taken offline by the FDA to be membership organizations, with for some health infraction, and then not hospitals paying dues. But in 1987, Con- restored to production because it was no gress exempted GPOs from anti-kickback longer profitable. Such was the case in rules, allowing GPOs to take money from 1999, when there was a nationwide short- suppliers.9 age of penicillin after Marsam Pharmaceu- ticals shut down production.7 This change, finalized in regulations in 1991, shifted competition in the mar- By 2001, shortages had become a rou- ketplace for devices and drugs.10 Prior to tine feature of our medical system; one this shift, suppliers and buyers matched hospital executive observed, “Something through open competitive bidding, facil- strange is going on.”8 What was bizarre itated by a GPO. Afterwards, suppliers about the problem was that they seemed competed with each other to pay off the to defy the laws of economics. Unmet GPO and get an exclusive or near-exclu- demand didn’t result in higher prices, but sive contract to supply hospitals. The price shortages. that mattered was what vendors were will-

AMERICAN COMPASS 91 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

ing to pay to the GPO. Moreover, GPOs a pharmaceutical company called Amer- now had an incentive to inflate prices, be- ican Pharmaceuticals, which then had a cause they were paid fees by vendors based successful IPO on Wall Street.15 American on the total amount sold. Pharmaceuticals sourced from China, and its drugs were routinely recalled for poor GPOs maintained control of the hospital quality. Yet Premier sold its drugs to hos- market through a number of mechanisms. pitals because Premier had taken an undis- For one thing, several large GPOs were closed stake in the drug company. owned by hospitals. In addition, GPOs of- fered rebates to hospitals who purchased Such self-dealing has eliminated the price from them, or penalized hospitals who signals that make markets work. Last year, bought elsewhere by removing discounts. the FDA noted that large GPOs do not The industry also began consolidating; in really care about shortages of low-priced 1995, Premier Health Alliance, American generic pharmaceuticals. A high-volume Healthcare Systems, and SunHealth Alli- buyer “bears only a small portion of the ance merged into the nation’s largest GPO, costs of a shortage while other parties Premier.11 By 1998, six GPOs controlled (health care providers, third-party pay- 80% of medical supply buying for acute ers, and patients) bear larger portions.”16 care hospitals. Today, four GPOs manage Since GPOs often contract with just one 90% of hospital purchasing.12 According or two drug makers for any particular ge- to experts, four of these corporations – neric pharmaceutical, and any particular Vizient, Premier, HealthTrust, and Intaler product is a small part of their business, — control purchasing of more than $300 it’s just not particularly important to the billion annually of drugs, devices, and sup- people who control the market if there is a plies for 5,000 health systems.”13 shortage of low-cost, but highly important drugs or devices. GPOs gradually evolved into the busi- ness of selling access to the hospital buy- Merger Mania ing market. Pharmaceutical manufacturers who weren’t closely tied to GPOs could GPOs are the most obvious culprit in no longer make money; fees charged by terms of breaking our medical markets, GPOs could exceed 50% of the cost of but consolidation was happening across the drug.14 It was impossible to stay in the multiple healthcare sectors, from hospi- market for commodity products unless tals to drugs to distribution. As pharmacy you were connected to a GPO. In 2002, specialist Erin Fox put it, “drug shortag- the New York Times did a groundbreaking es exploded in 2001,” pointing to mergers series of stories on GPOs, finding that Pre- as the culprit.17 In a frenzy of mergers in mier had, in the late 1990s, helped set up the late 1990s and early 2000s, Pfizer had

AMERICAN COMPASS 92 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

bought Warner-Lambert in 1999, in the merger law and antitrust enforcement in biggest pharmaceutical merger of all time, the early 1980s. Big was no longer bad, and and in 2000, Glaxo bought Smithkline in corporate consolidation no longer mattered. the second biggest.18 Drug distributors, GPOs, hospitals, Size in production led to a relentless pharmaceutical makers, and pharmacy focus on the most profitable drugs. For benefits managers consolidated through- instance, in 2001, at the same time as out the 1980s and 1990s. “Shortages are GlaxoSmithKline’s medicine Beclovent, now a fact of life,” said an FDA official in an inhaled corticosteroid for asthma pa- 2001.20 “We have to find ways to deal with tients, lost its patent protection, there were them.” Yet few connected consolidation production problems in the rest of the in- to the shortages. Even as the drug supply haled corticosteroid market. The corpora- chain fell into crisis, business school case tion stopped production of Beclovent and studies celebrated the growth of consoli- shifted to making a more expensive treat- dated healthcare distributors and GPOs as ment, Flovent.19 earnings-per-share bonanzas.21

This consolidation happened largely A Dose of Reality because policymakers had changed their philosophy around monopoly power. Pri- The problem is far worse today. Wave or to the 1980s, policymakers followed the after wave of consolidation in purchasing thinking of Louis Brandeis, who saw the and distribution has created massive fragil- control of markets through size as a threat ity in the supply chain. Along with concen- to social stability. Enforcers were generally tration among the pharmaceutical benefit skeptical of attempts to roll up industries managers, drug distributors, hospitals, and and tried to protect small and mid-sized pharmaceutical corporations, there is now businesses as resilient and responsive to a complex thicket of oligopolies, joint public needs. ventures, and resulting coercive contrac- tual arrangements that make it extremely In the early 1980s, the Reagan admin- hard to sell things into healthcare markets istration and Congress adopted a new unless you are an incumbent player. philosophical underpinning for industrial organization. Encouraged by law and eco- Selling to what is known as a “pow- nomics scholars at the University of Chi- er buyer” is much like selling to Walmart cago, as well as the consumer rights move- or Amazon in retail; you have to be able ment on the Left, lawmakers focused on to supply large amounts at extremely low efficiency, not resiliency, as the lodestar of prices, putting relentless pressure on sup- commercial politics. They radically relaxed pliers to cut corners.22 There’s virtually no

AMERICAN COMPASS 93 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

profit margin for a small player because Pharma, and Epic Pharma, bragging in an the ability to compete is solely based on investor presentation about how it had be- bargaining power among middlemen and come a monopoly provider of five sepa- not on patients’ needs. rate products.23

And that’s where China comes in. In the For the same reason that it was not suf- 1990s, foreign suppliers in India began ex- ficiently profitable to make penicillin in porting active pharmaceutical ingredients 1999, it isn’t worth it for today’s domestic into the U.S., but without dominating the players to challenge Chinese dominance still-fragmented market. China followed in supply. After all, even if you are able and used its state power to build up an to level the cost advantage, you’re still up increasingly sophisticated pharmaceutical against power buyers. industry and to become a manufacturing powerhouse in other medical supplies. That’s why putting up tariffs hasn’t re- ally brought production back to the U.S.; Some of China’s pricing advantage was the price signals have broken down. With- due to state subsidies and lighter regula- out open and flexible markets, it’s hard to tion of pollution. But these sources of get into the business of making medicine. supply also plugged directly into an in- By and large, this dynamic is true across creasingly concentrated American produc- much of the medical supply industry, not tion and distribution system. By the 2000s, just pharmaceuticals. Chinese pharmaceutical companies were buying American players; Wuhan-based In fact, the more you take a step back, Humanwell purchased Risedose, PuraCap the more this story of consolidation rep- resents the American econ- omy writ large. Everything Without open and flexible from outdoor grills to con- struction cranes to consumer markets, it’s hard to get electronics is sold through a consolidated retail and distri- into the business of making bution apparatus and made in medicine. By and large, this China. Even our own ability to make weapons is increas- dynamic is true across much ingly controlled by a few gi- ant defense contractors who of the medical supply industry, thwart new entrants, leaving our military dependent on not just pharmaceuticals. production in China.

AMERICAN COMPASS 94 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

Policymakers largely missed this mas- cRX,27 which is heavily tied into the exist- sive consolidation for the same reason ing concentrated GPO system.28 We aren’t they missed the elevated power of Chi- going to create a resilient and flexible phar- na. As monopolization was occurring in maceutical supply chain with an industrial the early 2000s, the philosophy of the law policy focused entirely on financing append- and economics movement posited market ages of existing monopolies. structure as an innate force of nature rath- er than a political choice. In 2001, Mark J. The solution here is conceptually sim- Goldberger, the FDA official responsible ple. Congress should remove the safe har- for monitoring drug shortages, adopted bor to anti-kickback statutes it granted to the learned helplessness of this philoso- GPOs in 1987 and then break up GPOs phy, telling The New York Times why there into smaller companies. These actions was little he could do about shortages: “We would force GPOs to return to their roots, can’t control who is making drugs.” After as co-ops helping hospitals buy supplies all, “that,” he continued, “is determined by through open and competitive bidding and the marketplace.”24 thus restoring the market’s price signals. Tariffs could then work because pricing We must ensure that American produc- would bring in new domestic producers. ers are no longer at a disadvantage ver- There are a host of other policy choices to sus their Chinese competitors. To do this, restore price signals, all of which involve there are various levers, like raising tariffs removing conflicts of interest among mid- and providing financial incentives for do- dlemen and breaking them up so that there mestic producers. But failing to recognize is competition within the market—instead the underlying market dynamics leads to of over the market. the wrong—or at best, to an incomplete— policy response. The Trump administra- There is an emerging consensus that tion’s tariffs haven’t helped.25 It’s had tariffs we must stand up to the Chinese threat. up for years, but they haven’t restructured The question is whether we can muster the market because its price signals no the capacity to stand up to the American longer work. More recently, the Trump domestic corporate monopolies that serve administration has tried direct financing. as China’s unwitting allies. We once had The Biomedical Advanced Research and a vibrant and diverse supply chain in the Development Authority offered nearly a United States. Reshoring the production billion-dollar contract to a new corpora- of generic pharmaceuticals and medical tion, Phlow, to create active pharmaceuti- supplies will require not only changing the cal ingredient chemicals and finished med- relative cost of production, but ensuring icines for federal stockpiles.26 But Phlow that American entrants can actually sell is backed by the hospital consortium Civi- into functional markets.

AMERICAN COMPASS 95 9. Antitrust Enforcement Matt Stoller, American Economic Liberties Project

15 Walt Bogdanich, “When a Buyer for Hospi- tals Has a Stake in Drugs It Buys,” New York Times Endnotes (March 26, 2002). 16 “Drug Shortages: Root Causes and Potential Solu- 1 “Trump Says He’ll Replenish Stockpile for tions,” U.S. Food & Drug Administration (FDA) (2019). Future Pandemics,” U.S. News & World Report (May 14, 2020). 17 Susan Jenks, “Drug Supply Dwindles,” Florida Today (December 6, 2005). 2 “Straightforward, the world should thank China,” Xinhua (March 4, 2020). 18 Matthias Back, “The Top 10 Largest Phar- maceutical Mergers in History,” Process Worldwide 3 “Drug Shortages: Root Causes and Potential Solu- (May 17, 2019). tions,” U.S. Food & Drug Administration (FDA) (2019). 19 Melody Petersen, “Drug Shortages Become a 4 Ibid. Worry At Hospitals Around the Country,” New York 5 Lawrence K. Altman, “Medical Science: Times (January 3, 2001). THE DOCTOR’S WORLD; When Important Drug 20 Melody Petersen, “Drug Shortages Become a Is Scarce,” New York Times (January 12, 1993). Worry At Hospitals Around the Country,” New York 6 Jeremy A. Greene and Scott H. Podolsky Times (January 3, 2001). “Reform, Regulation, and Pharmaceuticals – The Ke- 21 Mary B. Teagarden, “Case Study: Cardinal fauver-Harris Amendments at 50,” The New England Health, Inc. (A),” Harvard Business Review (March Journal of Medicine (October 18, 2012). 11, 2009).

7 Abigail Zuger, “Type of Penicillin Is in Criti- 22 “Drug Shortages: Root Causes and Potential Solu- cal Supply,” New York Times (October 29, 1999). tions,” U.S. Food & Drug Administration (FDA) (2019).

8 Melody Petersen, “Drug Shortages Become a 23 Matt Stoller, “Shut Down Congress!!! (Physi- Worry At Hospitals Around the Country,” New York cally at Least),” BIG by Matt Stoler (March 12, 2020). Times (January 3, 2001). 24 Melody Petersen, “Drug Shortages Become a 9 Social Security Act, 42 U.S.C. § 1128B. Worry At Hospitals Around the Country,” New York 10 “Medicare and State Health Care Programs: Times (January 3, 2001). Fraud and Abuse; OIG Anti-Kickback Provisions,” 25 Melody Petersen, “Drug Shortages Become a U.S. Department of Health and Human Services Worry At Hospitals Around the Country,” New York (July 29, 1991). Times (January 3, 2001).

11 Marianne Taylor, “Hospital Alliances Unite 26 “Phlow Corporation Awarded $354 Million Buying Clout,” Chicago Tribune (November 28, 1995). HHS/ASPR/BARDA Contract to Manufacture Es- 12 Letter from Senator John McCain to Assis- sential Medicines in Shortage,” PR Newswire (May 19, tant Attorney General Andrew Fois, U.S. Senate (Au- 2020). gust 17, 1998). 27 Arlene Weintraub, “How Civica helped un- 13 William Barnett and Phil Zweig, “Letter: der-the-radar Phlow nab a $354M COVID-19 Manu- Congress should repeal ‘safe harbor’ provision,” The facturing Deal,” Fierce Pharma (May 21, 2020). Bulletin (March 12, 2017). 28 David Dayen, “Behind the Coronavirus Threat, 14 William Barnett and Phil Zweig, “Letter: a Middleman Destroying Prescription Drug Markets,” Congress should repeal ‘safe harbor’ provision,” The The American Prospect (February 25, 2020). Bulletin (March 12, 2017).

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