[Senate Hearing 117-620]
[From the U.S. Government Publishing Office]
S. Hrg. 117-620
BUILDING A RESILIENT ECONOMY: SHORING UP SUPPLY
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING HOW WE CAN BEST SUPPORT AMERICAN WORKERS, AMERICAN
INNOVATORS, AND INVESTMENTS IN DOMESTIC MANUFACTURING
__________
MARCH 22, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-714 PDF WASHINGTON : 2024
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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TUESDAY, MARCH 22, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 33
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 34
WITNESSES
William E. Spriggs, Professor of Economics and Chief Economist,
Howard University and AFL-CIO.................................. 6
Prepared statement........................................... 35
Responses to written questions of:
Senator Cortez Masto..................................... 67
Betsey Stevenson, Professor of Public Policy and Economics,
University of Michigan......................................... 7
Prepared statement........................................... 41
Responses to written questions of:
Senator Warnock.......................................... 67
Erica R.H. Fuchs, Professor of Engineering and Public Policy,
Carnegie
Mellon University.............................................. 9
Prepared statement........................................... 43
Responses to written questions of:
Senator Cortez Masto..................................... 67
Senator Warnock.......................................... 69
Veronique de Rugy, George Gibbs Chair in Political Economy at The
Mercatus Center, George Mason University....................... 11
Prepared statement........................................... 55
Phil Levy, Chief Economist, Flexport............................. 12
Prepared statement........................................... 59
Additional Material Supplied for the Record
Statement submitted by Northeast Ohio Build Back Better Regional
Coalition...................................................... 80
(iii)
BUILDING A RESILIENT ECONOMY: SHORING UP SUPPLY
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TUESDAY, MARCH 22, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:15 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order. Today's hearing is in a
hybrid format. Our witnesses are in person. Thank you, each of
you, for getting here and being here in person. Members have
the option to appear in person or virtually.
For generations, manufacturing was the lifeblood of
communities across Ohio and Pennsylvania and South Dakota and
throughout the country. It was heavily unionized and the jobs
paid well, and it is not a coincidence that those things go
together. Those jobs allowed generations of Americans to build
a middle-class life. Workers innovated on the shop floor,
propelling our economy to new heights and allowing us to lead
the world in developing new industries.
Ohioans know all too well what happened. Beginning in the
1970s and 1980s, we stopped making things here. Look at places
like my hometown of Mansfield, Ohio, an industrial city of
50,000 halfway between Cleveland and Columbus. Companies like
Westinghouse, Tappan Stove, Ohio Brass, and General Motors
closed down, one after another after another. Go to any town in
Ohio and people can name a similar list. They now too often
measure their local history in lost opportunities, lost plants,
and lost jobs.
All over America, companies were moving production
elsewhere, in the name of ``efficiency.'' ``Efficiency'' was
essentially business school speak for ``lower wages.''
Corporate America wanted cheaper labor, wherever they could
find it. First, they went to anti-union, anti-worker, low-wage
States, often in the South. Then, when even those wages were
not low enough for corporate America, they shut those plants
and moved overseas.
When these companies moved out, they were not replaced by
new investment. The creative destruction that the market
fundamentalists like to talk about, it was not followed by any
construction, creative or otherwise.
Corporate greed, aided by decades of underinvestment, bad
trade policy--which these corporations lobbied Congress for--
and worse tax policy--which these special interests also
lobbied Congress for--drove production overseas. It left us
reliant on other countries, too often, our economic
competitors. It exposed us to supply shocks. It gutted our
middle class. Ohioans and workers in historic industrial towns
in all our States felt it first.
Now the whole country feels it in the form of higher
prices, empty shelves, and months-long waits for products
people need.
We need to make things here in America.
That is not going to happen on its own, not when the
economy of the last five decades was built on corporations
hopping the globe in search of workers to exploit, and not when
countries like China steal our ideas, then they monetize them
and use them to compete--and often cheat--against American
businesses and American workers.
We need a concerted, coordinated effort to invest in
American industries. We need to reverse decades of bad policy,
and instead invest in our greatest assets: American workers and
American innovation.
Look at what is happening now in Bucyrus, Ohio, a town
about 30 miles west of where I grew up.
There are few innovations more quintessentially American
than the light bulb. Every elementary schooler knows that
Thomas Edison, from Milan, Ohio, invented the light bulb at his
lab in Menlo Park, New Jersey. Ohio became the center of light
bulb manufacturing.
We've seen plants close across my State in places like
Ravenna and Warren. We were told that these plants were old and
dated--they made old-fashioned incandescent light bulbs.
Instead, Americans would make new, next-generation technology
like LED bulbs.
Well, we--not exactly what has happened.
We just learned that two Ohio factories that were part of
the LED lightbulb supply chain in Ohio, in Bucyrus and Logan,
southeast of Columbus, each are closing their operations.
Promises made. Today, 99 percent of LED lightbulb production is
in China--99-point-something percent. Think about that--99
percent of the production is in China. Promises made.
And when you move the entire production overseas, you move
the shop floor innovation right along with it. Again, corporate
America underestimated the ingenuity of American workers, they
usually do, or they just did not care.
Or let's look at semiconductors.
Americans developed the semiconductor. American research
and development created these chips, and American companies did
most of the manufacturing. Yet over time, production, often
fueled by incentives from foreign countries, and betrayed by
American tax and trade policy, this production moved overseas.
And look what happened. During the pandemic, companies in
Ohio and Pennsylvania and all over shut down production lines
and laid off workers because they could not get enough
semiconductors. Whether you are Ford Motor Company in Lima,
Ohio, Whirlpool in Clyde, Ohio, or Navistar in Springfield,
Ohio, you need these chips.
In the semiconductor industry, we see the problem, and we
see the solution.
At the end of January, I flew to Columbus to join Intel to
announce the largest-ever domestic investment in semiconductor
manufacturing. It will create 10,000 good-paying jobs, and
5,000 of those will be union tradespeople working for 10 years
to build this facility. And it is all possible because we are
on the verge of passing an historic investment in American
innovation and manufacturing.
We need to pass this bipartisan legislation that supports
efforts like Intel's to build new production here. Our bill
invests in research, development, and manufacturing throughout
the country to enable us to compete for the jobs of the future.
That builds on the work we did with the Bipartisan
Infrastructure Law, which will create new jobs and allow us to
move more goods, more quickly, shortening supply chains.
That us how we build a more resilient economy that can
withstand global events, whether it is a public health crisis,
a geopolitical crisis, or a climate crisis. We need to invest
in our workers and ensure that they reap the benefits of the
economic growth they create, through good-paying jobs and
investment in training programs and affordable childcare. Taken
together, these investments ensure that economic growth reaches
the whole country.
We need to support local and regional efforts to drive
innovation.
I am submitting a statement for the record from a coalition
of businesses, industry associations, and nonprofits in
Northeast Ohio on how supply chain resilience affects Ohio's
economy. I ask unanimous consent that the coalition's letter be
submitted for the record. Without objection.
I am working closely with them to support their application
for a Federal challenge grant that would help turn the region
into a national hub for advanced manufacturing innovation. It
is the kind of effort we need in communities all over the
country. We can lower prices and speed up supply chains. We can
better compete with China. We can create jobs and economic
growth in places that corporate America helped to kill and then
left for dead decades ago.
I am excited to hear from our witnesses today about how we
can make smart investments that will spur innovation and job
creation. We will hear from experts on the unique nature of
supply shocks triggered by the pandemic, like semiconductors,
and how we can prevent them in the future. We will talk about
how we can best support American workers, American innovators,
and we will talk about investments in domestic manufacturing.
It is time to make things in America again. Ohio has buried
the term ``Rust Belt''. It is time for our whole country to
bury it.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman.
Just to get an important fact out there on the table, if
you look back to find that year in which total manufacturing in
America reached an all-time high, if you look way back to find
that year--wait for it--it was 2018, basically flat in 2019.
Then we had a decline from COVID, and this year we are on track
to set a new all-time record for manufactured goods in the
United States of America. We have never made as much stuff in
this country as we will make this year, and then we will break
that record probably next year, if the economy is strong. I
think it is important to have that perspective.
This hearing is about supply chain resiliency. Of course,
the Banking Committee is talking about supply chains for one
reason, that is that inflation has hit a 40-year high. Under
President Biden, consumer prices have risen by 8.4 percent.
That is more inflation than under the entirety of the prior
Administration.
Even though wages are rising, prices are rising faster, and
that is causing workers, especially lower-income workers, to
fall further and further behind.
Milton Friedman said, and I quote, ``Inflation is taxation
without representation,'' end quote. Now Democratic policies
are hiking that tax. Rather than course correct, our Democratic
colleagues have been trying to shift the blame for their
inflation tax to someone, anyone else. One of their favorite
scapegoats has been the supply chains. that is, in addition to
blaming ``greedy corporations,'' Republicans, generally, and
Vladimir Putin.
Actually, inflation is pretty easy to understand. It
results from more money chasing fewer goods.
The Biden administration's policies have limited the
economy's ability to produce some consumer goods, and
Democrats' reckless spending has resulted in more money chasing
those fewer goods.
As an example, consider the President's war on American
energy independence. In 2020, then-candidate Joe Biden promised
that in his Administration there would be, and I quote, ``no
more ability for the oil industry to continue to drill.
Period.'' End quote.
On day one of his Administration, he started to make good
on that threat. He stopped all new oil and gas leases on
Federal land, and ended the Keystone XL pipeline project. Even
before Russia's invasion of Ukraine, gas prices were up 40
percent. And now the Administration is going on bended knee to
plead with Venezuela's illegitimate dictator to produce more
oil that America is quite capable of producing and exporting.
On the spending side, former Obama administration officials
Larry Summers and Jason Furman warned that Democrats' reckless
spending spree would cause inflation. Yet, with inflation at 8
percent, most of my Democratic colleagues still support another
deficit-financed, blowout spending bill.
So today we are going to set the record straight. First,
inflation did not suddenly accelerate simply because global
free trade somehow made our supply chains ``fragile.'' Global
trade has provided tremendous benefits to Americans and, if
anything, has made our economy less fragile.
Rather, supply chains are struggling because fiscal policy
has over-stimulated demand. For example, because of high
demand, port volumes have hit record levels.
Second, Democrats' far-left agenda would continue to make
inflation worse, not better. Where to begin?
Democrats are pushing for price controls, and for using
antitrust law to reduce economic efficiency. And my Democratic
colleagues continue to push for the reckless tax-and-spend
Build Back Better plan that will further fuel inflation and
harm our economy.
Amazingly, the White House now claims that even more
deficit spending will lower inflation. Now that just defies
belief. And you do not have to take my word for it. Last month,
former Obama administration Treasury official Steven Rattner
wrote a New York Times op-ed entitled, quote, ``Biden Keeps
Blaming the Supply Chain for Inflation. That's Dishonest'', end
quote.
Steve Rattner said the President's claims about supply
chain disruptions are ``both misleading and simplistic.'' He
asserted ``the bulk of our supply problems are a product of an
over-stimulated economy.''
Now while supply chains are not to blame for inflation, our
recent experience highlights the need to enact some sensible
reforms that will improve supply chains. These reforms could
include making U.S. ports more efficient by increasing their
use of automation, which obstructionist unions have long
blocked, and eliminating harmful tariffs that increase
transportation costs and bottlenecks by reducing the supply of
needed equipment, like truck chassis.
In addition, to help fight inflation, it is time for the
President to abandon this domestic agenda he has been on. He
should end the war on American energy that has led to higher
prices for American families. The President should restart the
Keystone XL pipeline, should be expediting natural gas pipeline
and LNG facility approvals, and should repeal the broad and
punitive regulations and restrictions on American oil and gas
production.
The President should also drop his reckless tax-and-
spending plan that would dramatically increase the size and
scope of Government by expanding the welfare State and fueling
still more inflation.
The best approach to achieve economic growth is to unleash
market competition, the engine of economic growth. Congress can
focus on three areas: cutting through the jungle of red tape
preventing new entrepreneurship, innovation, and competition;
eliminating Government-created barriers and distortions to
Americans working and saving; and increasing opportunities for
global trade and getting rid of protections for special
interests.
To help us understand these issues, today we will hear from
two experts on global trade and fiscal policy: Phil Levy, the
chief economist at Flexport, a leading supply chain logistics
company, and Vero de Rugy, an economist from the Mercatus
Center at George Mason University.
I look forward to hearing from them about the importance of
free trade and free markets for creating strong and resilient
growth, and commonsense solutions for increasing growth and
lowering inflation.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
I will introduce today's witnesses. Dr. William Spriggs,
Professor of Economics at Howard University, Chief Economist of
the AFL-CIO. He previously served as Assistant Secretary for
the Office of Policy at the Department of Labor, and as a
senior advisor at the Small Business Administration. Welcome,
Dr. Spriggs.
Dr. Betsey Stevenson is Professor of Public Policy and
Economics at the University of Michigan. She previously served
on the Council of Economic Advisors and as Chief Economist at
the Department of Labor. Welcome, Dr. Stevenson.
Dr. Erica Fuchs, Professor of Engineering and Public Policy
at Carnegie Mellon, where she leads the College of
Engineering's Moonshot Initiative on national technology
strategy and critical technologies, supply chains, and
infrastructure. Welcome, Dr. Fuchs.
Veronique de Rugy is George Gibbs Chair in Political
Economy at the Mercado Center at George Mason. She previously
was a resident fellow at AEI, policy analyst at Cato, and a
research fellow at the Economic Research Foundation. Welcome,
Dr. de Rugy.
Phil Levy is Chief Economist at Flexport. He previously was
senior fellow on the global economy at the Chicago Council on
Global Affairs and senior economist for trade at the CEA during
the George W. Bush administration as a member of the policy
planning staff for the State Department. Dr. Levy, welcome.
Dr. Spriggs, please begin.
STATEMENT OF WILLIAM E. SPRIGGS, PROFESSOR OF ECONOMICS AND
CHIEF ECONOMIST, HOWARD UNIVERSITY AND AFL-CIO
Mr. Spriggs. Thank you, Chair Brown, for this opportunity
to offer this testimony on behalf of the AFL-CIO, America's
house of labor, and based on my experience as an economist at
Howard University.
We are in an unusual moment. We have not seen price
volatility of this sort in about 50 years. The analogy to the
previous time we saw price volatility of this type, in the
early 1970s and the late 1970s, when we had oil shocks, when we
had wars, and we had two major hurricanes that disrupted
production, has led many people to think that those supply
shocks should be viewed as benign and the real issue was
demand, and people want to think the current situation of price
volatility is similar. It is not.
So I just want to walk through this issue of price
volatility, and by that I mean that month-to-month price
changes, the variation of month-to-month price changes have
peaked at an unusual level. They are receding on their own
right now.
To walk through how the supply chain can affect things,
remember that if you stop the ability to buy one good you are
going to have people look for substitutes. The lack of chips
for the auto industry has led to the greatest decline in
production we have seen over the last 40 years. So as an
example, in 2019, when General Motors forced a strike on the
UAW, we had a strike that lasted from mid-September to the end
of October, total U.S. auto production only fell by about 20
percent.
Last year, at the worst of not being able to find chips,
production dropped 60 percent. This is a collapse in auto
production. We have not seen that before. We have only gotten
back to around 58 percent of the production that we had in the
pre-COVID January of 2020. That is a huge drop in supply over a
prolonged period. We simply have not had that.
The result is that the price for new cars has gone up, not
because demand over the 2-year period was excessive but simply
you cannot function it if you are going to make less than half
the cars you used to make. That sent the price of cars up by
about 10 percent. The price percentage points to the total
inflation was about 0.4 or 0.5.
If I cannot buy a new car then I am going to buy a used
car, so we shift the demand curve out for used cars. The demand
curve for used cars resulted in a prolonged spike in used car
prices that generated 1.7 of the points. Of the 7.9 points in
inflation, 1.7 is just from the seeking of a substitute for the
new cars, which are not producing, which we are only being able
to make at the lowest level ever.
And, of course, if I cannot buy a new car, and a used car
is too expensive, then I repair my old car. And so we have
another little bump-up in inflation from the shift for more
auto repairs. In total, that comes to over 2.3 points of the
7.9 points. About 30 percent of inflation is just because we
cannot get chips.
To say that this is not dealing with a supply, a lack of
supply, General Motors right now would be making every car they
could because people want to buy them. They cannot.
But these supply shifts and the ripple effect have repeated
themselves throughout 2020, whether it is Vietnam having to
shut down a plant because of COVID, or India having to shut
down because they have to divert oxygen to their hospital, or
China shutting down ports. We need a more resilient economy. We
need Congress to pass the CHIPS Act to address what we now know
was an over-concentration of chip manufacturing in the hand of
just a few companies too far from the United States, and we
need more competition in that space. We need Congress to look
at the supply of labor and the passage of the Build Back Better
to ease frictions that are keeping women from returning to the
labor force.
These are steps that Congress can make to recognize that we
live in a world with higher risk, global geopolitical, and we
hope never another pandemic. Congress can make this different
for us going forward. Thank you.
Chairman Brown. Thank you, Dr. Spriggs.
Dr. Stevenson, welcome.
STATEMENT OF BETSEY STEVENSON, PROFESSOR OF PUBLIC POLICY AND
ECONOMICS, UNIVERSITY OF MICHIGAN
Ms. Stevenson. Thank you very much, Chairman Brown, Ranking
Member Toomey, and distinguished Members of the Committee for
this opportunity to speak to you today.
Both GDP and the labor market have recovered at a much more
rapid rate than many predicted. Unemployment has fallen to 3.8
percent. People have the confidence needed to look for better
opportunities and leave their current jobs, and they are
finding better opportunities. A recent Pew survey found that
more than half workers who quite a job in 2020 were now earning
more money, they had more opportunities for advancement, and
improved ability to balance work and family responsibilities.
Indeed, the V-shaped recovery that Members of Congress
hoped for when they passed those many spending bills to help
Americans recover from the pandemic has materialized due to
those efforts.
Now that same survey, though, found that among parents who
had quit a job, nearly half said they had quit because of
childcare issue, and that highlights a challenge I want to
speak to you about today. But let's start with the dark side of
the economy, inflation.
While inflation captures a generalized rise in prices, it
does not mean that all prices are rising similarly, and
Professor Spriggs articulated quite clearly that there is a
concentration in inflation, in the goods-producing sector.
I share some of Senator Toomey's enthusiasm for trade, and
I would say to you that our urgency there to support trade is
to vaccinate the globe. Similarly, within the U.S., containing
COVID is essential to keeping the economy smoothly operating.
The last COVID surge in January did not lead many people to
lose jobs, so it is not showing up in the data that way, but it
did lead to millions of people missing work due to illness.
Availability of tests, vaccines, well-ventilated buildings
helps boost productivity and ensures that workers are healthy
enough to meet the demand of customers.
A healthy and robust labor supply is particularly important
for the service sector. To put in perspective the size of the
manufacturing sector in today's economy, we produce a lot more
stuff in today's economy, but it has really shifted toward the
service sector. When we entered the pandemic, we had a million
fewer people working in the goods-producing sector than we had
at the beginning of the 2008 recession. Today, 84 percent of
private sector workers are in the service sector, and for much
of the past year the service sector has not experienced the
upward price pressures of the goods sector.
Inflation in services excluding energy is running at 4.4
percent, and most services are well within normal inflation
rates. Medical services, just 2.4 percent. Education and
community services, just 1.7 percent. But do not take this as
good news. Take it as a warning. These low rates of inflation,
combined with low labor supply, is why services are where our
most significant risk to ongoing high inflation lies. A rise in
inflation in services could have a devastating impact on
overall inflation, even if the price increases for goods begin
to evade.
The economy remains short 1.4 million workers, particularly
prime-aged women, whose labor force participation rate is down
relative to prepandemic levels and down relative to prime-age
men's labor force participation today.
Women exited the labor force and lost jobs at higher rates
during the pandemic than men did, and yet in every other
recession the United States has ever experienced, it is women's
growth in labor force participation that helped pull us out of
the recession. Between 2015 and 2019, women took way more jobs
than men, and those jobs were largely in the service sector.
One in 4 women work in education and health services, that area
where we have yet to see high inflation.
But this and the rest of the service sector is poised for a
rapid recovery and demand over the coming year, as consumer
demand for services is likely to rise as the pandemic wanes.
But will there be workers to meet that demand?
There are two critical steps you can take to ensure that
workers, particularly women, return to the labor market. The
first is to ensure access to care services, such as childcare
and home nursing care. Research, that I outline in my written
testimony, has shown that caregiving responsibilities keep
women and men out of the labor force. Remember that stat:
parents just told us that their quits were driven by care
concerns in 2021.
The second step is to increase funding and improve access
to training programs, particularly for vocational and community
college programs. Enrollment in community colleges declined
nearly 15 percent during the pandemic. Enrollment in health-
related programs declined nearly 10 percent, education programs
12 percent. Enrollment has fallen most for first-generation
students and underrepresented and minorities.
These declines are bad for the potential students but they
are the Achilles heel in our supply chain resiliency. The
slowdown in training in some fields is a harbinger of potential
labor shortages that will translate into an increase in prices.
As employers compete for a dwindling supply of workers with the
needed training, wages will be bid up to the point that the
additional costs will need to be passed on to customers. The
time to act is now. Thank you.
Chairman Brown. Thank you, Dr. Stevenson.
Dr. Fuchs, welcome.
STATEMENT OF ERICA R.H. FUCHS, PROFESSOR OF ENGINEERING AND
PUBLIC POLICY, CARNEGIE MELLON UNIVERSITY
Ms. Fuchs. Thank you, Chairman Brown, Ranking Member
Toomey, and Members of the Committee.
Early during the pandemic, I spoke with a medium-sized U.S.
medical supplier capable of manufacturing nine million masks
per month. Surprisingly, their most challenging bottleneck was
elastic ear loops. When discussing critical technologies, we
would not ordinarily think elastic, yet during those early
months of intense supply shortages that lack of elastic cost
our country millions of masks a week.
A similar story could be told in how the current shortage
in semiconductors is stopping cars from being produced and
leading to job losses in Michigan.
The solution to these problems are not as simple as just
stockpiling masks or reshoring manufacturing. In the case of
elastic, what was missing was the capability to pivot--adapt
the equipment, change the elastic, change the mask to not
require elastic, change the regulations. In semiconductors,
what is needed is to redesign the chips.
I will highlight three steps toward building a resilient
economy, and the cross-mission, critical technology analytics
our country needs to implement these steps.
First, the U.S. must build timely situational awareness.
Otherwise, we are flying blind. At the time of the COVID
outbreak, the last data collected by the economic census on all
domestic manufacturers was 2017. While the Government convened
large leading companies, they estimated that they had the
capability to meet only half of domestic demand. What they
needed, however, was not more firms but better tools.
Leveraging automated text analysis of public data, my
colleagues and I created timely situational awareness of U.S.
domestic manufacturers entering, pivoting into, and scaling up
in response to the COVID crisis, particularly small- and
medium-sized firms unknown to Government. Within 2 weeks, we
revealed significantly greater domestic mask and respirator
manufacturing capability than known before.
The Government needs these modern data analytic
capabilities. Figuring out which products and supply chains
have sufficient national value to be tracked pre-emptively will
require cross-mission valuation that aggregates across defense,
health, labor, equity, and commercial interests.
Second, the U.S. must create the supply chains of tomorrow,
not fix the supply chains of yesterday. Innovation can
transform supply chains and our competitive position thereon.
Most batteries for electric vehicles require significant
cobalt, the majority of which is mined in the Congo and refined
in China. As the world scales up electric vehicle production,
innovations such as in cobalt-free batteries could reduce and
even eliminate such regional-specific risks.
Semiconductor chips used in transportation and defense
systems are highly heterogeneous and custom-designed to single
manufacturing facilities. Government funding of common design
platforms would reduce the cost of switching between facilities
and increase supply chain resiliency. It would also increase
the aggregate market power of these sectors critical to
security and the economy.
Third, the U.S. need to rebuild its manufacturing ecosystem
through investments in infrastructure. In our research on
domestic manufacturers pivoting during the pandemic, what was
left of the U.S. manufacturing ecosystem was central to the
U.S. response.
In Wisconsin, the founder of a waste management and
construction company, MacGyver'd broken mask manufacturing
machines into working for commercial-scale production. In
Indiana, a company leveraged its expertise in filtration
materials and oil-absorbent products to pivot into making melt
blown polymers for masks, and later also N95s themselves.
These pivoting companies' previous experience in waste
management, construction, and water or oil infrastructure
strengthens my belief that the greatest promise for rebuilding
our manufacturing ecosystem may be equitable, country-wide
investments in infrastructure of the future. Infrastructure for
transit, energy, communications, and data address needs of
society and manufacturing. Done right, investments in smart,
climate-resilient infrastructure of the future can build
national capabilities in the companies and skilled workers who
become the manufacturing workforce of the future.
Going forward, the U.S. needs to build the analytic
capability to identify win-wins across missions. My research
shows that certain innovations in areas critical to national
security, including high-end semiconductors for communications
and cobalt-free batteries, offer better jobs for hard-working
high school graduates.
Similarly, in the case of the current semiconductor
shortage, Government funding of design platforms that embrace
commonalities but leave room for differences across the
technological demands of the defense and commercial sectors can
lead to a solution where the sum is greater than the parts for
U.S. security, economic, labor, and equity interests.
To ensure future U.S. security, competitiveness, and access
to critical supply, the U.S. must establish a forward-looking,
cross-mission, critical technology analytics program able to
build timely situational awareness, quantify the value of
innovations to transform our geopolitical dependencies, and
identify win-win pathways across national missions.
Chairman Brown. Thank you, Dr. Fuchs.
Dr. de Rugy.
STATEMENT OF VERONIQUE DE RUGY, GEORGE GIBBS CHAIR IN POLITICAL
ECONOMY AT THE MERCATUS CENTER, GEORGE MASON UNIVERSITY
Ms. de Rugy. Chairman Brown, Ranking Member Toomey, and
Senators, thank you for having me today and giving me the
opportunity to testify. You have a copy of my original
testimony so I would like to focus on two key points today.
First, fiscal and monetary policy decisions are the key
reasons for the inflation we face.
Second, while supply shocks should not be ignored, they are
not the main cause of inflation.
So first, the United States is currently experiencing an 8
percent inflation over the past year. The key reason for this
burst of inflation is Government-induced demand. The U.S.
Department of Treasury first issued $3 trillion of new debt,
which the Fed quickly bought in exchange for $3 trillion of new
reserves at the Treasury, which then, in turn, the Treasury
sent out as payments to Americans. The Treasury then borrowed
another $2 trillion or so send out another round of payments.
Overall, Federal debt rose by almost 30 percent of GDP over 2
years.
This response was crafted on the mistaken assumption that
the pandemic-induced recession was mostly an aggregate demand
shock, not one of aggregate supply caused by the lockdown and
the pandemic. Under these circumstances, sending money to
people was going to have little impact on the output while
greatly affecting demand for durable goods.
The size of the fiscal stimulus was also a problem. Even by
Keynesian standards, the COVID relief was larger than any
plausible output gap. The deficit spending of $1.9 trillion in
the American Rescue Plan, in particular, was much large than
the projected $700 billion output gap through 2023, the period
when most of the spending would take place and at a time when
unemployment had reduced quite significantly.
Whereas everyone from the Fed chairman to monetary experts
spent most of 2021 explaining inflation without any mention of
fiscal and monetary policies, economists such as Larry Summers
and Jason Furman were sounding the alarm that excessive
spending would boost aggregate demand to the point of
overheating the economy and causing inflation. They also
objected to the inconsistent but widespread narrative that this
inflation was mostly due to supply shock. Several studies
confirmed the demand-side effect of inflation.
So what about supply shock, such as supply chain
chokepoints? What about shift of demand from service to
durables? I mean, these factors cannot be dismissed, but they
are not the main cause of inflation.
First, there would not be such supply chain issues without
the massive increase in demand for durable goods fueled by
Government spending and money creation. According to the WTO,
artificially inflating demand for goods accounted for 65 to 75
percent of supply shortages.
Second, global supply chains are global. If inflation were
truly the product of global supply chain issues we would
witness roughly the same level of inflation throughout
industrial Nations. But we do not. Most industrial countries
have much lower level of inflation than us. These other
countries also implemented significantly lower levels of COVID
relief.
Finally, one needs to differentiate between supply
constraints, which increase the price of some or even many
goods relative to other prices, and inflation, which occurs
when the price of everything, including labor, rise. We are now
seeing the price of everything go up, and wages too also
rising, though for now at a lower rate.
Supply shock and constraints do not cause a broad-based
pattern. In addition, price level hikes caused by supply side
shocks are generally not ongoing month after month price hikes.
They are usually a one-time price level jump, which eventually
dissipates when the supply shock is over, and indeed usually
reverses, resulting in a period of measured deflation. Again,
here, all prices are rising. The inflation is persistent, and
there is no sign of a reversal.
The bottom line is the inflation we have is, for the most
part, a fiscal and monetary inflation. Controlling it requires
strong Fed actions but also significant fiscal restraint from
Congress. Short of implementing both, inflation could persist
much longer, at the expense of the most economically vulnerable
in our society. However, be aware that our level of debt has
made controlling inflation harder and will make it much more
fiscally painful.
Thank you.
Chairman Brown. Thank you, Dr. de Rugy.
Dr. Levy, welcome.
STATEMENT OF PHIL LEVY, CHIEF ECONOMIST, FLEXPORT
Mr. Levy. Thank you. Thank you, Chairman Brown, Ranking
Member Toomey, and Senators, for this opportunity to testify
today on the performance of supply chains through the COVID-19
pandemic. Even from a purely economic perspective, it has been
a time of extraordinary shocks, unprecedented policy responses,
and shifting economic behavior.
One salient outcome has been disappointment in the
performance of global supply chains. In my testimony, I would
like to address the question of why this happened. Why did we
not continue to enjoy the ready availability of goods at
moderate prices, to which we have become accustomed?
I will focus on two potential dominant causes and then
argue for a choice between them. I will close with a thought or
two about supply chain resiliency.
The first explanation I will offer attributes the shortages
and the prices hikes that the country has experienced to a
failure of global supply chains. Over the course of the
pandemic, we saw periods when factories around the world closed
due to COVID infections or were operating at limited capacity.
We saw infections and restrictions hit truckers, warehouses,
rail, air, and port operations. It is inarguable that the
pandemic posed serious challenges for supply chain operations.
There are some who believe that if we just reduced our
dependence on foreign goods we would be insulated from such
shocks and enjoy greater resiliency in our supply chains.
However, the supply chain challenges that I described above
were by no means limited to foreign suppliers, foreign ports,
foreign warehouses, and foreign truckers. They were not
confined to any one country. We experienced all of those
difficulties in the United States as well.
Even if it were economically feasible to produce all the
goods we want in the United States, at high quality and
reasonable prices--it is not--the result would only be enhanced
resiliency if the United States were immune to the ravages of
such pandemics. It is not.
Before we blame everything on supply chains we need to
consider an alternative explanation. The pandemic-era economy
has been characterized by a dramatic expansion in the demand
for goods. How could it be that goods consumptions rose so
sharply in the wake of such a powerful shock? We can look at
three complementary explanations.
First, there was the clear effect of health measures. When
it became difficult to go to a gym, or a restaurant, or a movie
theater, people instead purchased home exercise equipment,
kitchenware, or entertainment centers.
Second, in the wake of the pandemic due to powerful fiscal
policies, real personal income never dropped back to its level
of March 2020, nor did the level of Government social benefits.
Finally, extraordinarily accommodative monetary policy,
negative real interest rates, provided an incentive for
consumers and businesses to move purchases forward in time,
thus stimulating present consumption.
Note that either an expansion of demand or a contraction of
supply could drive up prices. However, only an expansion of
demand would explain the additional quantity consumed. Had the
supply chain been unable to deliver the goods, quantities
consumed would necessarily have fallen. Instead, they grew
significantly. By spring of 2021, durable goods consumption was
up 35 percent on its February 2020 level.
For imports, if we compare the fourth quarter of successive
years, 2020 was 5.4 percent above 2019, while 2021 was 13.6
percent up from 2 years before. Those were record highs. None
of this is consistent with an international supply system that
has broken down.
So what happened? The supply chain system was able to
deliver significantly more goods in the face of surging demand,
but has had its limits. The system has now been operating at or
above peak capacity for almost 2 years. That has brought
congestion, high prices, strains, and delays.
One might ask, why did we not have an even more resilient
system that could readily accommodate such surges in demand?
The answer is that capacity is costly. For the public sector,
there is a reluctance to allocate funds to build out
infrastructure beyond any realistically anticipated need. For
the private sector, the cost of excess capacity can drive
companies out of business.
On the subject of resiliency, there is no simple, low-cost
policy that allows an economy to gracefully accommodate very
large and sector-specific surges in demand. In general, an
efficient trading system that allows for flexible, competitive
sourcing, is most likely to meet shifting demand. As a policy
measure, this argues for an open, rules-based trading system.
To conclude, the shift in preferences and a strong policy
response induced an extreme and sustained demand for goods. The
global logistics system was able to partially accommodate this
surge in demand, even amidst operational difficulties. But
global supply chains had and have capacity constraints. As
surging demand hit those constraints, costs have risen and
goods have taken a long time moving from factories to
customers.
The resulting scarcity, along with pressures for increased
production and hiring, have contributed to rising inflation.
The measures most likely to ease supply chain pressures are
those which curtail demand. The measures most likely to bring
resilient supply chains are those which facilitate global
sourcing. Thank you.
Chairman Brown. Thank you, Dr. Levy.
Let's start with you, Professor Spriggs. Your explanation
with the chip shortage and its impact on new auto sales and
used auto sales, and even auto repair was clear and concise as
a major contributor to inflation. Thank you for giving us that
insight.
Answer these couple of questions, if you would, Professor
Spriggs. Would making more in America make our supply chains
shorter and stronger, and how do we make sure we are better
prepared for these risks and their impact on the supply chain
and our economy?
Mr. Spriggs. Yes, it would make our economy more resilient
because the supply chain, particularly for chips, turned out to
be too highly concentrated. This is bad, even if it had been in
the United States, because if it had been in Texas, the freeze
that we had a year ago might have destroyed chip capacity.
We do not want, as a global matter, to have this high
concentration in a small set of firms in a small geographic
space. We would be more resilient, the world would be more
resilient, and the United States, as you mentioned, is the
inventor of this technology. We need to renew our commitment to
being ahead on that game.
This is key to manufacturing. That would be like saying,
``I do not want oil,'' to say you do not want chips. It is that
essential, and we have to guard that.
Chairman Brown. Thank you, Professor Spriggs.
Professor Fuchs, in your testimony you mentioned the back-
and-forth between engineers, between and among engineers and
workers on the assembly line is essential to bringing
innovation to market. The people coming up with ideas, the
people executing those ideas need to be in conversation with
each other. We lose that when corporations move abroad.
Elaborate on why investing in a vibrant manufacturing
sector is critical to retaining domestic innovation.
Ms. Fuchs. So I actually want to address two things in one.
One is Senator Toomey's comment that there is a growing amount
of manufacturing in the United States. That is correct,
according to manufacturing value-added statistics. It is
complicated because our proportion--(a) what does value-added
measure, and (b) what our proportion is of the global pie has
been shrinking.
I think the most important question, which comes to your
question, Senator Brown, is what we do not produce, which is
why I focus on critical technologies and defense types of
implications. So for example, 90 percent of cellphones, and 80
percent of computers are made in China. Is that OK for defense?
Is that OK for our economic security? That is where I would
focus our questions.
I think that when we talk about--and our resiliency--when
we talk about--I will stop there, actually.
Chairman Brown. OK. Thank you.
Dr. Stevenson, as you know and as you pointed out well,
some workers, especially women, were forced to leave their paid
jobs at the beginning of the pandemic because of the lack of
childcare that made it harder for people to afford to go to
work. People went to work but they simply cannot afford to with
a child under 4 years old at home.
The expansion of the child tax credit certainly helps
workers afford childcare. What additional actions should
Congress take to support workers, especially women, in
reentering the paid labor force?
Ms. Stevenson. Well, the childcare provisions in Build Back
Better are necessary to strengthen our childcare system. You
know, childcare workers are some of the lowest-paid workers in
the economy. A typical childcare worker makes $12 an hour. It
is impossible to hire childcare workers at this point at that
wage because, fortunately, the wages at the bottom have been
pushed up.
The problem for families is that if childcare workers start
to see wages that are competitive with, say, Amazon, at $18 an
hour, that is going to think about maybe a 50 percent increase
in childcare for families. That is going to make even more
families find that childcare is unaffordable for them.
That means that there needs to be broad-based subsidies
available for parents to be able to afford to work. If we
really want to think about this, can you afford to work? There
is a long literature that shows that many women have paid to
work in the past. By the time they pay their marginal taxes, by
the time they pay for childcare, by the time they pay their
commuting costs, they come out behind. As childcare costs rise,
even more women are going to find themselves in that situation,
and as an economy we really cannot afford to lose these women
right now.
We need them to come back. They provide essential services,
and produce essential goods in the economy. But they need the
kind of support that families need to be able to afford high-
quality investment in their children.
Chairman Brown. Thank you. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Dr. de Rugy, so
let me see if I have got this right. So over 2 years of 2020
and 2021, money supply grew at about 40 percent. The Federal
Government took on massive amount of new debt, spent a massive
amount of money, more than offset lost income. Government
spending was greater than the output gap.
And if I understand correctly, your view is that all of
this extraordinary money creation, new debt, and spending
actually is the source of most of the inflation. Is that a fair
characterization?
Ms. de Rugy. Yes.
Senator Toomey. And Dr. Levy--I am sorry. Is it LEV-y or
LEE-vy?
Mr. Levy. LEE-vy.
Senator Toomey. Levy. Dr. Levy. Some have still tried to
blame inflation on supply chain disruptions, and President
Biden, not too long ago, described our supply chain as a being,
quote, ``cut off.'' Our supply chain was ``cut off.'' So tell
us about the state of our supply chain. Is it cutoff? Is that
what happened with our supply chain?
Mr. Levy. No, sir. It is not. The supply chain is working
very, very hard at the moment. Now, it is experiencing delays.
There are actually people working heroically, in very difficult
conditions, but an awful lot of goods are moving. It is not
cutoff.
Senator Toomey. So, in fact, are the ports, through which
we bring in a lot of the imported components of our supply
chain, are they operating at record levels?
Mr. Levy. They are, and they are suffering from congestion.
There is difficulty moving containers around, getting rid of
empties. But yes, you are quite correct. They are operating at
record levels.
Senator Toomey. So they are pushing more products through
than they ever have before, really.
Mr. Levy. Correct.
Senator Toomey. That is what is happening with our supply
chains.
Now even if that is not the cause of our inflation, it
would still be great if our ports could be even more
productive, right, if they could put more products through.
That would be great. Tell me this. Do American ports lead the
world in productivity and efficiency?
Mr. Levy. Sadly, they do not. If you look at independent
rankings of port efficiency, American ports do not tend to rank
especially high. There is room for improvement.
Senator Toomey. Dr. de Rugy, do you have any views on what
could be done to increase the productivity and the efficiency
of our ports?
Ms. de Rugy. With the caveat that it is not my area of
expertise, I mean, there is no doubt that there is a lot of
room for improvement. As Dr. Levy has said, like when you look
at most rankings, the U.S. ports never rank in the top 50. In
fact, I went and looked at the World Bank's Container Port
Performance Index, and not a single port--so maybe it is the
top global 50 ports. And the largest U.S. port, Los Angeles and
Long Beach, which account for 40 percent of loaded import
nationally, ranked 328th and 333rd.
I mean, I thought it was quite puzzling, considering we are
a big, big country, doing a lot of trading. And it seems that
there is a fair amount of consensus about the fact that unions,
I mean, could be one of the factors that reduce the efficiency
of ports, not because when they are on the job they do not
actually work a lot, but it is because through their contracts,
and because of labor purposes, they have reduced hours, they
are very opposed to automation. And automation is one way to
significantly create increase in efficiency. And you can see
it. Like a lot of our ports apparently are manually--the cranes
are manually operated, which is not the case in a lot of Asian
ports. They do not function 24/7.
I mean, it is hard. It is a hard transition from what we
have now to what other ports have, but we just far, far from
what we could do.
Senator Toomey. So that makes it more expensive to process
goods through our ports than it needs to be.
Ms. de Rugy. Absolutely. Yeah. Well, I mean, and again, not
my area of expertise, but it does look that it--I mean, it is
just pretty lucrative to work at a port. And so, yes.
Senator Toomey. My understanding is wages are
extraordinarily high. Some of the highest labor wages in
America, are at our ports. What is maddening is the leadership
of organized labor resisting the automation. You could
grandfather current workers. You could make sure that nobody
gets laid off in the near term. But you could ensure that at
least in the future we would begin to catch up to sort of a
second-world level of productivity at our ports. That would be
nice.
I see my time has expired. Thank you.
Senator Menendez [presiding]. Thank you. Senator Brown had
to step outside for an introduction so he asked me to preside.
I will recognize myself.
One of the major factors holding back the supply chain is a
widespread shortage of labor. And while some of the labor
shortages we hope to be addressed by the reopening of the
economy as the pandemic recedes, I am not convinced that will
fully address the problem.
Dr. Stevenson, can you briefly describe the effects of the
labor shortage and where we are seeing the largest deficits?
Ms. Stevenson. Yeah. So we are still missing a million-and-
a-half, roughly, workers who have not returned to the labor
force.
Let me put this in the broad spectrum, which we have seen
declining labor force participation for prime-age men for many,
many, many decades. What has saved the United States has been
the rising labor force participation of women, which has pulled
us out of every single previous recession, with women's labor
force participation growing faster than male labor force
participation.
That is not happening right now. And so it is crucial that
we bring women back. I think it is also crucial that we solve
the problem of declining male labor force participation. Some
of that is about making sure that there is widespread
availability of jobs but also that workers have access to the
training that will give them the good-quality jobs that they
can stay attached to, that motivate them to be in the labor
force.
I am particularly worried about ongoing labor shortages as
demand for services resumes. This Committee has heard a lot
about our big consumer demand for goods. We really liked our
goods during the pandemic. But I believe we are going to want
to go back to things like preventative health care, elective
health care, enrichment, educational products. So when I say
education workers I am not talking about public school
teachers. I am talking about private sector. All of that
inflation is very, very low. Demand is low. If it comes back
and the workers do not, that is going to be source of inflation
that you are having hearings about next year.
Senator Menendez. Yeah. And that million-and-a-half that
you are talking about who have not returned to the workforce
still falls far short of the nearly 10 million jobs that go
unanswered in the economy today.
A few weeks ago, Chairman Powell of the Federal Reserve
testified before the House Financial Services Committee that
part of the labor shortage is being fueled by an inordinately
high number of retirements. We just do not have the workers to
replace those who are leaving the labor force.
Thankfully, immigrants are ready and willing to fill those
jobs. In your view, what is the potential role of immigrant
workers in mitigating the current labor shortage?
Ms. Stevenson. I think that Congress should take immediate
steps to ensure that undocumented immigrants who are in the
United States, particularly young ones, can stay and can work,
because we need them in the labor force. We are going to have
to open our borders back up and welcome workers from around the
world, and welcome students from around the world back into our
schools. That is a place where we get a lot of our innovation
from, that sort of rich source of immigrant labor. So I think
that is a very important part of expanding our labor force.
Senator Menendez. You are not alone in that view. Leading
business groups in this country agree that robust immigration
reform is urgently needed to address our labor shortage. And I
am talking about not only in the question of dealing with
undocumented workers but even in terms of our visa process.
There is an enormous backlog.
I wanted to ask Dr. Spriggs. The pandemic exposed or
exacerbated disparities throughout all sectors of the economy,
including the supply chain. Recent research from the University
of Chicago's Booth Business School showed that customers
delayed payments to their suppliers when their suppliers had a
female or Black trade credit officer, at 10 to 20 percent
higher rates relative to the payments to White men.
Are you familiar with this or other research regarding
racial or gender bias in the supply chain?
Mr. Spriggs. I am not familiar with that specific study. We
saw many disparities that we did not want to see, with the
Payroll Protection Plan loans, through the slow rate at which
Black workers were able to be rehired, despite the fact that
many employers said they were desperately looking for anyone. A
number of these cleavages unfortunately showed themselves
during this crisis.
Senator Menendez. What broader negative effects could bias
in the supply chain produce for minority communities?
Mr. Spriggs. Well, this makes it harder for those
businesses to survive in this setting, and it was very hard for
them to get access to the liquidity to survive in this setting.
Frictions in the economy hurt everyone. They drive up costs.
And so we all lack because of that.
Senator Menendez. So, Mr. Chairman, just taking one
community that I am infinitely familiar with, the Hispanic
community, largest minority in the country and growing
exponentially, fastest rate of growth of small businesses are
Latina-owned business, but if they are disproportionately
affected by our payment process and the supply chain effort and
access to capital and all of those things, then the biggest
growth faces some of biggest challenges, which means at the end
of the day there are consequences for the country, far beyond
the community itself. That is something I look forward to
working with the Chairman on.
Chairman Brown [presiding]. Thank you, Senator Menendez.
Senator Rounds, of South Dakota, is recognized.
Senator Rounds. Thank you, Mr. Chairman. First of all,
thank you to all of you for coming and visiting with us today.
I want to take a little bit different tact. In South Dakota
right now, January to January, we saw an increase of $1 a
gallon in unleaded fuel. I think right now it is fair to say
that the cost of fuel is up about 38 percent, year to year,
right now. Clearly that impacts the cost of transportation, the
cost of production, and so forth.
We have not talked a lot about energy, and I would like to
bring that into the conversation a little bit. I will begin
with Dr. Levy. What would you say is, of the total inflation,
let's just say rounded at 8 percent inflation, what do you
believe the impact of these higher energy costs are in terms of
the inflationary numbers that we are seeing right now?
Mr. Levy. Thank you, Senator. I do not have the numbers in
front of me. You frequently get these numbers put out, where
they will exclude food and energy and get to a core inflation,
which is usually 1 or 2 percentage points lower. But that still
leaves you at a very high number if you are starting at 8, so
on the order of 6 percent, but I cannot swear to a number.
Senator Rounds. Thank you. Professor Spriggs, I am curious.
What would be your thought with regard to how much the cost of
energy is adding or is a part of the inflationary trend today?
Mr. Spriggs. We are just going to just see the tip of that.
As you mentioned, it is an input throughout the system, whether
it just to fuel the tractor, but that tractor is then used to
produce our wheat. So we are going to see ripples of that, but
this is the point of overdependence on any specific energy
source, and why we must seek to diversify our energy sources.
And we must make the investments to allow for the just
transition of workers, not only because we need this
diversification but also because we know it is contributing to
some of the global warming crises that we are seeing.
But we cannot stop this right now, unfortunately, because--
--
Senator Rounds. But Dr. Spriggs, right now we are looking
at--and I recognize that we have to have energy from all
sources, and we should be in all of the above. But what I am
curious about is right now, with energy costs rising, and you
indicated earlier that, you talked about chips and oil, and I
think the similar thing here is we have got a shortage of chips
right now but apparently we have an increase in the cost of oil
as well.
Dr. de Rugy, I am just curious of your thoughts with regard
to inflation. And right now we are trying to split this up
between the impact of demand versus supply. But where does our
energy come into play with regard to the inflationary impacts
that we are seeing today?
Ms. de Rugy. So this is what I was saying earlier on, which
is we have to be careful when you actually try to measure what
is inflation and what is not, to not confuse inflation, which
is basically the rise of all prices including wages, and change
in relative prices. And it is true that the supply shock of
energy, this has reduced the supply of energy and has increased
the price of oil and energy, is picked up in the inflation
number.
The question is, is it going up month after month after
month, and what happens when the supply or the supply shock
dissipates? Is the price going to go down? The answer is very
likely yes.
With pure inflation, with inflation that is the product of
demand and excess money printing and spending, you do not have,
unless you, unfortunately, have very strong Fed action and
Congress restrictions spending. And I am afraid some slowdown
in the economy, you do not have these types of prices that go
down.
So it is a big difference. We always talk about all of this
as if they were exactly the same thing, but once the supply
shock, while it is painful right now, when it goes away
hopefully the price will go down. This is not going to be the
case for a lot of other prices that have gone up because of
inflation.
Senator Rounds. I just think that the fact that right now
we have got an increase in the costs of energy right now, and
that is impacting everything else, and as our economy starts to
pick up again, the demand for the energy, the demand for
gasoline and so forth, is going to be there. But most certainly
if we do not continue to increase the availability of energy in
the United States, of all sorts, we are going to continue to
see that increase impact the prices that we pay for all
products out there.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Tester, from Montana, is recognized from his
office.
Senator Tester. Yeah. Thank you, Mr. Chairman. This is for
Ms. Stevenson. You talked about a million-and-a-half people are
not returning to the workplace, and you said that women have
bailed us out in the past and they were not returning--and
correct me if I am wrong--were not returning at a very fast
rate. And you also spoke to childcare.
Could you tell me, number one, if childcare is one of the
major issues that is stopping women from returning to the
workforce, number one? Number two, what should Congress do
about it?
Ms. Stevenson. Thank you very much for that question. Yes,
childcare is a factor that is keeping women from returning to
the workforce. I actually also want to add that it is having a
big impact on fathers now as well. What we saw during the
pandemic was childcare responsibilities impacted the employment
of mothers and fathers. Women were more likely to leave the
workforce in its entirety because of their childcare concerns.
But in a wide-ranging survey of fathers, I found that fathers
turned down promotions, cut their hours, switched to more
flexible work, stopped training or upskilling. Parents were
forced to cut back their work efforts. That does not always
show up in employment but it is going to show up in
productivity as they switch to jobs that demand less because
their childcare demands cannot be met in the market.
I think it is also important to realize that both men and
women are held back not just by childcare needs but by
eldercare needs. We have seen a massive decline in employment
in nursing care homes, that is partially due to supply--it is
hard to find workers--partially due to demand--people do not
want to put people in nursing care homes because they are
worried about the health impacts. They need help with home
health aides so that they can keep people at home and keep
their jobs.
In research prior to the pandemic we found that most people
who are caring for an adult are prime-age workers, and a very
large share of them are not in the labor force, and tell us it
is because they cannot find a job with the flexibility they
need to provide that kind of care. And additional research has
found that, for each adult that gets access to sponsor to home
health care, you get about a third of an adult being able to
reenter the labor force. So you get two to three adults who
need care----
Senator Tester. I got that. What I am looking for, we know
the problem, and I agree with you 100 percent. The issue is
what can Congress do, and be very brief because I need to talk
about some supply chain and shipping too.
Ms. Stevenson. Sure. Thank you. So Build Back Better
actually outlines what you need to do when it comes to
caregiving and home health care aid. So I think it is simple.
Pass Build Back Better.
Senator Tester. OK. Thank you.
This is for Mr. Spriggs. Mr. Spriggs--or Dr. Spriggs, I am
sorry--you know, know what is going on in the ports right now.
From an agricultural standpoint we cannot get our exports out,
and they are taking back empty containers. We have seen
prepandemic container costs go from $1,300 a container to
$11,000 a container for stuff coming into this country, and
they are taking empty containers back.
When we had a hearing on this in Commerce a few weeks back,
anti-trust smacked all over the room. Can you talk about
whether we should be concerned about potential antitrust
violations in the shipping industry?
Mr. Spriggs. Yes, I think you should be concerned. I think
this is another one of those things that popped up. The United
States has more market concentration than is true in some other
countries, and it is part of the reason why prices have gone up
more in response to these shocks than in other countries. And
we saw this specifically when it came to shipping. As
complicated as they keep their ownership, it turns out that
that is a highly concentrated industry, and it is not beyond
the pale that some of this is those companies taking advantage
of their market power.
Senator Tester. All right. Well, I am going to check out,
but thank you guys very, very much. I appreciate it. This is a
big issue, and it is entirely caused by the pandemic, I
believe, when people were told to stay home worldwide. And we
lived off inventory for a while, and that inventory is not
there now.
Thanks, Mr. Chairman.
Chairman Brown. Thank you, Senator Tester.
Senator Warner is recognized, from Virginia.
Senator Warner. Thank you, Mr. Chairman. Dr. Stevenson, I
want to come back to you. In your testimony you talked about
the need to increase funding for training programs and mid-
career upskilling. I think we have seen, literally over the
last few decades, unfortunately the private sector decrease
their investments in training and upskilling. I think that is
bad for the individual. I think it is actually bad for the
company as well.
I have been working for some time, with very little success
unfortunately, on rethinking about the whole way we treat
classification, tax accounting, and porting-wise on investing
in human capital versus investment in tangible goods. I mean, I
have got a bill that has been modeled on the R&D tax credit
that would give that same kind of incentive for businesses to
invest if you upskill an individual.
I always cite--and apologies to my colleagues; you have
heard me use this example a number of times--a company spends
$5,000 investing in a robot. You get an R&D tax credit. The
robot is an asset. You can put it on your balance sheet. You
can brag about it if you are a public company.
The same company spends $5,000 training two human beings to
be better than the robot, you do not get the same tax
advantage. It is viewed as an expense. There is no asset
categorization.
So this Investing in American Workers Act is something I
would like you to speak about. Also I have been working the
head of the SEC, Gary Gensler, on robust human capital
reporting again, something I think that most investors want to
look at and need to make an honest assessment of the company's
performance.
So can you talk about these and other ideas to increase
private sector investment in their human capital?
Ms. Stevenson. Thank you so much for raising this point
because I believe that it is incredibly important. We have seen
companies invest less in worker skills. The fear that somebody
is going to poach your worker after you have invested means
that they do not want to invest, and we have also seen
declining public investment in a lot of these skills as well.
So we have workers, particularly those who are not
graduating from college or advanced programs but who need very
specific training so that they can be good at their job or that
they can adapt to changes, just not getting those investments.
You know, you positioned it as either the robot or the
worker. I actually want to encourage you to say it is the robot
and the worker, because if we look at what happened in the 20th
century, America led the way in productivity growth because
education kept pace with technological change, so that our
workers were able to take advantage of the new technology and
use it to its highest productive capacity. And we had the glory
days of productivity growth.
Senator Warner. Let me just interrupt you. I do not
disagree with you, but I think we ought to at least treat the
investment class the same way.
Ms. Stevenson. Exactly.
Senator Warner. I mean, for years we had abundance of labor
and shortage of capital. We still favored investment in
intangible goods over human beings. That balance has shifted
back, and I think we have to say investment in humans ought to
be treated as least as good as the investment in the robot. And
I do not think it is an either/or. I agree it ought to be both.
But this is a fairly radical shift in our thinking.
Ms. Stevenson. And I would say we are far behind in
investing in humans now. In the 21st century, we are behind
most other OECD countries in investing in the skills of our
people. That is not a place we should be. And if we want to
take advantage of technology we need to create the incentives
for employers to be investing in their workers, and I think
that that would allow us to have skilled workers who can work
better with technology.
So I do agree that it needs to be on equal footing. I would
actually put the thumb on the scale of invest more in workers
now because our workers have fallen behind relative to other
countries.
Senator Warner. And I think that the R&D notion of an asset
class back in the '70s was hard, I think sometimes, for
accountants to wrap their head around, that idea that it would
be fairly radical to think about investment in human capital as
an asset class. But I think it is time to push that and let
folks wrap their heads around it.
It looks like Dr. Fuchs, are you trying to jump in on this
one too?
Ms. Fuchs. I do not know if I am actually allowed to, but
if you call on me, yes.
Senator Warner. Yes.
Ms. Fuchs. I really like your proposal to invest in humans
and a tax credit.
Senator Warner. Well, if you like it you can jump in as
long as you would like. Keep going.
Ms. Fuchs. What I wanted to emphasize, complementing my
colleague's comments, is that some of the most advanced
technologies, advanced materials and processes, critical
technologies, lead, if manufactured domestically, to more good
jobs with more, exactly to Senator Brown's comment, more
engagement by high school-educated operators and technicians in
the innovation process itself in getting the products out the
door. So we need to strategically invest in those skills needed
for those future technologies.
And so I think thinking about how we are going to make sure
we are investing in the skills of the future is going to be
essential. I also continue to believe that the best way to
build skills and manufacturing capabilities in the country is
investing in the infrastructure future. That brings in the
ports concept. That brings in also the issue that Texas' grid
going down led to some of the shortages in semiconductors that
we are facing today. Not all of them. Oh my gosh, the shortages
are so much broader than that.
But if we improved our infrastructure, the resilience of
our electric grid so that it is smart, it is resilient, it has
dynamic capability, that improves cybersecurity, the
incorporates your renewables. We need to invest in that
infrastructure of the future as part of our training program.
Senator Warner. And I know my time has expired but I just
want to add again, I think Dr. Stevenson said, this notion that
private sector was afraid workers may be poached from each
other. I mean, I wish we would go back to potentially some of
the upside of when somebody went and worked for the same firm
for 30 years and that company felt an investment in that human
being. I do not think we are going to reverse that. And so I do
think we are going to need to think, frankly, more radically
around asset class definition, tax accounting, and I think some
of these ideas are worth pursuing.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warner.
Senator Van Hollen, from Maryland, is recognized.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today, and I know you have covered a lot
of things that I was planning to ask about. But I do want to
focus for a moment on the medical supply chain.
Dr. Fuchs, a couple of questions for you, because we did
see lots of bottlenecks when it came to our medical supply
chain during the pandemic. PPE, like N95 masks and nitrile
gloves, are essential to protecting our frontline workers. And
yet we saw a big backlog when it came to supplying those. The
U.S. market uses 55 to 60 billion pairs of these medical gloves
every year, and yet right now only 1 percent of the world's
supply comes from the United States, despite the fact that a
lot of these products were first developed in the United
States.
Now some companies are moving to fill the gaps. In my State
of Maryland, United Safety Technology, just last week announced
that it was opening a $350 million plant at a site called
Tradepoint Atlantic in Baltimore County, and it will bring
2,000 jobs to that area, leveraging Federal Government support
through a $96 million DoD-HHS contract.
So my question is, clearly this is a step in the right
direction, but how can we assure that as these investments are
made, and when this pandemic begins to subside, that the
downstream purchasers of these products do not simply go back
overseas to something that may be cheaper but also less
quality, but also, therefore, make us vulnerable again if we
are not supporting manufacturing here in the United States?
Ms. Fuchs. This is the million-dollar question, right? So
we are talking about, in our original defense, the act of 1990,
which looked at the concept of criticality, we did not have
health in there. So obviously the pandemic highlights the
importance of health, and more broadly social well-being in
addition to security and economic prosperity.
The question then becomes, though, how much do we need
here? Now much do we need to be able to pivot, right? If Ford
and GM, in 2 weeks, were able to bring up massive capacity for
ventilators and for masks, so how much do we need our economy
to pivot in order to move into that space, and how much do we
need to create the new products of the future that are better,
that everyone in the world wants? So I think those are all part
of the solution.
When we come to--and I know United Safety Technology from
our research--when we come to these firms that pivoted during
the pandemic into scaling and responding, there were issues
they faced in terms of regulation that slowed them down, higher
fees, for good reasons. There were issues that they faced also
in terms of having other types of support that they needed, and
there are issues now in terms of, as you noted, that continue
then and now, getting to large-scale hospital distributors.
I do not have an easy answer to you of how much we need. It
is actually why I believe we need an entity in our country that
is focused on critical technology analytics and that are cross-
missioned in order to figure out what is the cost and benefit.
We are not going to make everything here, so what do we need to
make sure, given the probability that it is going to be needed
under an unknown future, how much we do we need to invest to
make sure that we can sort of resiliently respond? How much do
we need to help companies to make the products of the future?
And how do we make sure, in certain cases, that we are
investing as a country, whether that be in better ventilation
or that be in ensuring the demand for mask, that we help these
people get into those broader distribution channels and also
continue to produce product for our country.
Senator Van Hollen. Thank you. I do not know if any of the
others of you want to comment on that question, your assessment
of the current state of the vulnerability of our medical supply
chain. If not, Dr. Fuchs, thank you, because I think this is an
area that we are going to continue to drill down on. I am
pleased to see these investments, but as you indicated in your
answer, we need to make sure that these are sustainable
investments that fix the problem over the long term.
Ms. Stevenson. I would, I guess, one thing, which is your
question was largely focused on manufacturing medical
equipment, but I also want us to think about workers who are
working in medical fields, where we actually see significant
drop-offs in enrollment in certification programs and training
programs.
So I think the challenges we are going to see along our
medical supply chain may move from being the PPE and goods to
the people who wear the PPE and goods.
Senator Van Hollen. No, I think that is a really good
point. I am glad you raised it. I had some other questions on
sort of the workforce shortage issue but I know some of those
issues were covered, and childcare. And thank you, Dr.
Stevenson, for your work on that.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Warnock is on his way. We will have a series of
questions with him.
Professor Fuchs, you seem eager to answer questions so I am
going to give you another shot, so I appreciate that.
Your work advances the notion that by investing in domestic
manufacturing we invest in innovation and creativity. And I
think one of the most important things to never forget in this
is the contribution workers make on the shop floor, or on the
jobsite, to innovation and technology and invention, and all
the things that workers can do. And I think that we probably
underestimate that, as we underestimate and do not talk enough
about the dignity of work and all that workers need at the
center of our economy. That helps us keep up with the changing
world.
So tell us more about how it will take a whole-of-
Government approach to build out the infrastructure to invest
in innovative and creative technologies and make them here at
home. How will that benefit us?
Ms. Fuchs. So I believe part of the reason that we have
underinvested historically in manufacturing and in
infrastructure is our inability to value the full value of
those investments. So for example, they do not only impact our
security, national security, they do not only impact our
economic prosperity, they also impact jobs. Those decisions
also could impact climate.
So if we take a cross-mission approach we might actually--
for example, in my work that I mentioned in the testimony on
semiconductors for communications, those high-end
semiconductors have better jobs, and having them domestically
enhances our security, so why would we not invest in them? So I
think if we take that cross-mission approach then we really
would be investing more than we are currently.
Chairman Brown. Professor Spriggs, talk for just a moment
or two about housing. I was talking to some people from rural
Ohio yesterday about how we fall so short, in rural areas and
in urban areas, in providing housing for workers that is
affordable and accessible. Talk about the role that you see
there.
Mr. Spriggs. Well, one of the great challenges we have seen
are trends driven by the growth in inequality, and we need to
remember that markets are one-dollar, one-vote, not one-person,
one-vote. At this high level of inequality, where the top 10
percent consume as much as the bottom 40 percent combined, it
moves the price point on a lot of things, the things that the
wealthy spend more on than the rest of us, housing being one of
them.
And so it sucks up the resources and it makes it harder to
make affordable housing somewhere else. So in rural areas, for
low-income families who live in urban areas, they are priced
out of this demand equation. It is important for us to
recognize that and to find ways to make public investment in
housing in rural areas as well as in urban areas, so that we
can put people back into the market, not just the dollars back
into the market.
Chairman Brown. Thank you, Dr. Spriggs. Senator Toomey has
a question, and then we will go to Senator Warnock.
Senator Toomey. And my question is for Dr. Levy. There are
some who think that we need to have the Government intervene in
the economy to make up for what the free markets are doing
wrong, and specifically onshoring economic activity. Some
openly describe this as national industrial policy, which
strikes me as a euphemism for having the Government decide who
they want to subsidize.
But it is happening. I mean, EXIM Bank, for instance, has a
whole new program where it is going to provide domestic
financing, in some cases to companies that are not even
exporting. I guess they think we do not have banks in America
that can provide that financing. It is unbelievable.
But what are your thoughts on the wisdom of devising a
centrally planned national industrial policy to deal with these
problems?
Mr. Levy. Well thank you for the question. I think it is
not a new idea. It is an idea that has been popular for many
decades. It is rather old. And as such, we have seen all kinds
of problems with this idea, that one of the real challenges--
knowing in what one should invest and picking the areas of the
future is inherently difficult. If you do it in the private
sector and you get it wrong you go out of business. That is
unfortunate but it happens. If you do it in the public sector
and you get it wrong there has been an unfortunate tendency
that you keep going and going and going, and these tend to be
sort of costly difficulties.
So I think one needs to be extremely careful looking for
instances where the public sector can outdo the private sector
in these, and I think we have seen a lot of errors in that
respect, looking around the world over the decades.
Senator Toomey. And Dr. de Rugy, did you want to add
anything to that?
Ms. de Rugy. I agree. It has been tried many times in the
past, and it often did not deliver on the promises that were
made, precisely because the political system allocates
resources not in the most effective ways. Very often it goes to
special interests, and that is the primary driver of the
decision.
And unfortunately, as my colleague has just said, it is
really hard when mistakes are made to correct the path. There
is extreme path dependency. When you name the Export-Import
Bank, I have been following the Export-Import program for a
long time, and you, Congress, have given the Export-Import Bank
very different mission goals ever since I have started
following it, and yet the Export-Import Bank keeps doing
exactly the same thing, independently of what you guys have
asked it to do.
So when it is convenient it is like, focus on China. Does
it actually change the allocation of activities at the Export-
Import Bank? Not really. Actually, it was always that Boeing
was the biggest beneficiary and a lot of the same constituents
in higher-income countries, a place where capital is actually
not that difficult to come by.
And now, of course, you know, while it has totally
underperformed on the China goal, there is a new mission, this
mission that is currently perfectly performed by private banks.
And that raises a lot of questions about whether it is going to
actually really deliver on this, and I doubt it, precisely
because of this path dependency.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Brown. Thank you. Senator Warnock, from Georgia,
is recognized.
Senator Warnock. Thank you so very much, Mr. Chairman.
Georgians are hurting and are dealing with the rising costs
of basic things like clothing and medicine and groceries. And
as someone who is home every week dealing with families, as
their Senator, and families in my church, I see this up close.
Families need immediate support as we are dealing with the
rising costs that are a consequence of the pandemic, where the
economy was slowed down significantly, supply chain issues, and
corporations artificially raising prices.
And that is why I introduced the Relief for Families Act.
This legislation would cut costs of essential goods for hard-
working families by allowing States to use their American
Rescue Plan dollars to offset sales tax holidays on essential
items like groceries, school supplies, diapers, and other
household goods. This is a win-win because it is covered by
revenue or resources we made available through the American
Rescue Plan. States do not have to take it onto their budget.
It will not cost the States or the Federal Government any
additional money. It is a no-brainer investment in working
families.
Dr. Stevenson, my bill would cut taxes on essential goods,
like food, diapers, and clothing. Can you tell us who is likely
to benefit most from a policy like this?
Ms. Stevenson. Yes. Thank you for asking. I think that is
an extremely well-targeted policy because who is going to
benefit most are going to be the families that spend a higher
share of their budget on essential items like food, diapers,
and other necessities.
It is also the case, so as how economists talk about it, we
think of that as having very inelastic demand. You pretty much
have to buy those things, even if it means really sacrificing
spending elsewhere. Well that also means that when it comes to
tax incidence, like who sort of benefits when you cut the tax?
It is going to be those families that benefit rather than the
stores.
So I think it is a really good way of getting money back
into families and it is specifically targeting those families
that spend a high share of their budget on essential items, and
those are, by definition, lower-income families.
Senator Warnock. So these are ordinary folks, folks who do
not have a wide margin. And as you point out, these are
essential items. And so as the economy opens back up, how
important are policies that keep costs down for working-class
and middle-class families? How important is that for them and
for the larger economy?
Ms. Stevenson. Keeping costs down for low-income families
is critical because they spend all of their money now. They do
not have a way to hedge against inflation by putting into some
inflation-protected asset, because they are using their money
to live right now. They are the ones who are dealing with
higher prices at the pump, higher food prices, higher energy
prices, because these are a really big share of their budget.
So anything you can do to offer relief to families I think
is really critical. One of the things we saw disappear this
year that has been so hard on families is the end of the
expanded child tax credit.
Senator Warnock. Yeah, I agree with that, and I would hope
that we could extend the expanded child tax credit, the largest
tax cut for working and middle-class families in American
history, a tax cut for ordinary folks. This Federal tax
holiday, another tax cut for ordinary folks, which is why I am
glad we were able to pass the American Rescue Plan, and just
the other week, prevent $400 million from being clawed back
from people of Georgia so we could fund this kind of thing.
Gas prices, of course, is another issue that folks are
struggling with, and during the last year of supply chain
disruptions we saw ocean carriers use market volatility to
increase their profits by 2,000 percent in the middle of the
pandemic. This is why I called for a Federal investigation into
shipping carriers' corporate greed, and I am happy to see that
the Department of Justice answered my call and has subpoenaed
Maersk as part of a probe into supply chain disruptions. These
types of corporate greed have significantly affected our supply
chains for years.
Dr. Spriggs, what affect has corporate greed and market
consolidation had on our supply chains and manufacturing? Has
it, in fact, raised costs for families, pushed down wages, made
the economy less resilient, in your opinion?
Mr. Spriggs. Yes. We need to do more to police market
concentration. We know specifically you mentioned food, that
this has been critical. Cattle ranchers are not any happier
than those of us buying beef. Neither one of us are smiling at
this price. And the risk that the workers were put through in
producing this meat, the reckoning has not come for that.
We have characterized this disease so much as the loss of
those who were elderly, but we forget how many workers died
among the million Americans who have died from this disease. In
Georgia, your State, in particular, the disproportionate loss
of Black live was Black workers in food processing. And so that
market power seems to also protect them from the kind of steps
that we needed to take to protect workers. So yes, we need to
do a lot more about the market concentration of power.
Senator Warnock. Thank you so much. I think it is past time
for us to hold corporations accountable for price gouging, in
the middle of the pandemic, of all times, and I am glad that we
are thinking about ways to invest in an economy from the bottom
up rather than waiting on resources to trickle down. Thank you
so much.
Chairman Brown. Thank you, Senator Warnock.
Senator Sinema, from Arizona, is calling from her office.
Senator Sinema. Thank you, Mr. Chairman. Thank you to the
witnesses for being here today.
Global supply chains are comprised of complex working
relationships between private businesses. When they get
disrupted or broken they have ripple effects, and there is very
little that Government, or really anyone, can do to fix it in
the short term.
We are seeing higher prices at the pump and restaurants and
at the grocery stores, and working families feel the pinch the
most. Arizonans continue to tell me that supply chain
disruptions and inflation are their top concern.
Now the global pandemic and Russia's illegal war in Ukraine
stretched and broke the fragile supply chains of businesses
around the world, and Arizonans and Americans re dealing with
the consequences by paying higher prices for fewer goods. We
need to work together to find solutions that bring down costs
and make it easier for families and small businesses to make
ends meet.
Dr. Stevenson, thank you for being here today. Prior to the
pandemic, many businesses employed an operations strategy that
minimized the amount of slack in their supply chains, usually
by eliminating what was seen as access inventory or capacity.
The goal was to lower holding costs and production costs to
increase net earnings. Can you speak to the fragility of these
types of supply chains during the pandemic?
Ms. Stevenson. Yes. Thank you. I mean, I think you are
highlighting the fact that there were some gains that came from
this idea of ``just in time,'' but as soon as we have delays
that ``just in time'' means empty shelves. And that created a
set of fragility that meant that everyday items that consumers
wanted to buy just were not there.
And I think it something that people panic about a little
bit. Some of the price rises we have seen have come when people
overbuy, because they are so terrified they are not going to be
able to get their hands on things because they saw empty
shelves, and many stores took action to try to calm people
down.
But I think there is another aspect of that ``just in
time'' attitude that I would like to really highlight, which is
that ``just in time'' for workers. So workers are sent home
when it turns out there are not enough customers, even though
they have already paid for the childcare they needed to be able
to work that day. They are given insufficient hours because
they are trying to hold onto excess capacity of workers, just
in case we need to be able to ramp up production. ``I would
like to be able to give people more hours'' and so they keep
people sort of at under hours. And they provide them with their
schedule with insufficient notice.
All of those ways of sort of treating business as if what
they want to do is operate on the absolute slimmest of margins
but taking it out--really the consequences for that are paid by
workers. I think the way to build more resiliency is for our
businesses to understand that they need to invest in people and
long-term relationships with them as well as with their
suppliers.
Senator Sinema. Thank you. Dr. Levy, I would like your
thoughts here as well. Do you agree with Dr. Stevenson, and do
you think that operation strategies for global companies need
to adapt, moving forward, where businesses should plan to have
more slack in their supply chains to anticipate volatility and
avoid disruption for consumers?
Mr. Levy. Thank you, Senator. I think there are very
difficult tradeoffs there. It is costly to hold inventory. One
can get caught in the other direction by having excess
inventory that is no longer needed or simply is not consumed.
But you are right. If one errs by having too little, one
could get caught by surprise, and we have seen some companies
actually anticipate some of this. I think you see some of the
semiconductor industry very recently have noble gasses on hand,
which sort of insulated them against a cutoff. So I think this
is a major consideration that businesses are now thinking
about.
Senator Sinema. Thank you. There is a lot of conversation
about increasing domestic manufacturing in critical products
like semiconductors. Our bipartisan CHIPS for America Act
supports domestic semiconductor manufacturing, and it was
funded in the bipartisan Competition bill. We want Congress to
pass our law ASAP to build more resilient supply chains here at
home.
But repealing outdated tariffs like aluminum is another way
to lower prices and shore up supply chains. Dr. Stevenson, if
we ended the aluminum tariffs today how soon would we see a
change in prices?
Ms. Stevenson. Well markets react quite quickly to news,
and I think markets would react quite quickly to the news of
eliminating tariffs today. You know, while that may take a
little bit longer to get to the end to consumers, I think you
would pretty quickly see that show up in prices.
Senator Sinema. Thank you. You know, another approach is to
redesign our supply chains to bring them closer to home, to
reduce the potential for major disruptions.
Mr. Chairman, my time has expired so I will submit my
additional questions for the record.
Chairman Brown. Thank you, Senator Sinema.
Senator Reed, from Rhode Island, is recognized.
Senator Reed. Thank you very much, Mr. Chairman, and I
thank the witnesses.
One of the issues that is causing great inflationary
pressure in Rhode Island and across the country is rent and the
cost of housing. And to Dr. Spriggs, what steps can we take to
ease the import costs and increase the housing supply so that
it is affordable?
Mr. Spriggs. Thank you. So part of what is going on in the
housing market right now is they are having supply problems
also, so they are not able to produce as many homes as they
would like. So part of it is us getting through those. But part
of it is, again, recognizing it is a market and we need to have
public investment so that the investment matches people.
Housing, as a private matter, matches dollars, and dollars are
not equally distributed. As long as you are going to have a
market dominated by 10 percent who consume as much as the
bottom 40 percent you are going to have a lot of people outbid
on housing.
And so we must recognize that public investment in housing
is a necessary tool to make sure we get the proper level of
investment. We have long had a low-income tax credit. We should
think of ways that we can use that. We have a lot of us who
believe in a global minimum tax, and we need to find ways that
that low-income tax credit can still be effective, even in the
face of a global minimum tax.
And we need to make sure that we raise the wages of
workers. Fortunately, 21 States have been raising the minimum
wage this year. In January, the majority of American workers
got a raise at the bottom. That is a large part of what is
fueling not only, call it ``the great quit,'' because when the
minimum wage goes up, turnover goes up as well. There is a
ripple effect that goes on that makes people switch jobs more
and workers get a higher wage.
But we need that $15-an-hour legislation to be in place,
and we need the PRO Act. We need to have workers with the right
to organize so that we can get wages back up to go along with
the productivity increases that are coming from the automation
and the improvements in productivity that are being put in
place.
Senator Reed. Thank you. Dr. Stevenson, would expanding
training and apprenticeship programs for building trades
increase labor supply and also contribute to ease housing
prices and rental prices?
Ms. Stevenson. Absolutely. I mean, one of my biggest
concerns is that we see an ease in the supply chain constraints
around the materials, and then you cannot find the workers. We
need the workers and the materials to be together. There are
lots of reasons to think that we are going to find ourselves
without enough skilled tradespeople to be able to produce that
housing stock, and obviously a really great way to do that is
through apprenticeship programs and vocational training.
Senator Reed. Thank you. And Dr. Spriggs, there has been
some discussion of targeted Federal financial assistance for
grocery and gasoline costs, which, for low-income families are
some of the biggest expenditures, perhaps something like a
debit card that is exclusive for those items. And would that
effort, coupled with pay-fors by increasing the tax on very,
very wealthy Americans make sense?
Mr. Spriggs. In this situation, absolutely. We do not want
to exacerbate aggregate demand, and offsetting it would be a
great way to make that happen. It would be a great way to
target it to those at the bottom. Going forward, we know that
we are going to have disturbance with food prices because of
global warming. It would be nice to have a trigger so that SNAP
benefits could adjust automatically when we get these kinds of
disturbances. At some point in the next 15 years we are going
to get a major flooding of our Mississippi Valley, and we are
going to have huge disruptions to corn, hogs, beef, as well as
the transportation of those goods. And we should be ready
beforehand to make sure we can give people relief from those
price shocks.
Senator Reed. We also have ongoing disruption in Ukraine
with wheat and fertilizer, which will be reflected, and I think
first, in the developing world, because we can outbid them for
the supplies. But we will not be immune from that either.
Well thank you all very, very much. I appreciate it.
Chairman Brown. Thank you, Senator Reed.
Thank you, all five of you, for joining us today to talk
about how to build more resiliency into our supply chains and
into the economy.
Senators wishing to submit question for the hearing record,
those questions are due 1 week from today, Tuesday, March 29th.
To each of the five of you, please submit responses to those
questions for the record within 45 days from the time you
receive them.
With that the hearing is adjourned. Thank you so much for
joining us.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
For generations, manufacturing was the lifeblood of communities
across Ohio and throughout the country. It was heavily unionized and
the jobs paid well--and it's not a coincidence that those things go
together. Those jobs allowed generations of Americans to build a middle
class life. Workers innovated on the shop floor, propelling our economy
to new heights and allowing us to lead the world in developing new
industries.
But Ohioans know all too well what happened. Beginning in the 1970s
and 1980s, we stopped making things in America.
Look at places like my hometown of Mansfield, Ohio--an industrial
city of 50,000 halfway between Cleveland and Columbus. Companies like
Westinghouse, Tappan Stove, Ohio Brass, and General Motors closed down,
one after another. Go to any town in Ohio, and people can name a
similar list--they now measure their local history in lost
opportunities and lost jobs. All over America, companies were moving
production elsewhere, in the name of, quote, ``efficiency''--
``efficiency'' being business school speak for ``lower wages.''
Corporate America wanted cheaper labor, wherever they could find
it. First, they went to anti-union, antiworker, low-wage States, often
in the South. Then, when even those wages weren't low enough, they
moved overseas. And when these companies moved out, they weren't
replaced by new investment. The creative destruction the market
fundamentalists like to talk about wasn't followed by any
construction--creative or otherwise.
Corporate greed--aided by decades of underinvestment, bad trade
policy--which these corporations lobbied for--and worse tax policy--
which these special interests also lobbied for--all drove production
overseas.
It left us reliant on other countries--too often, our economic
competitors. It exposed us to supply shocks. And it gutted our middle
class. Ohioans and workers in historic industrial towns in all our
States felt it first. Now the whole country is feeling it in the form
of higher prices, empty shelves, and months-long waits for products
people need.
We need to make more things in America.
That's not going to happen on its own--not when the economy of the
last four decades was built on corporations hopping the globe in search
of workers to exploit. And not when countries like China steal our
ideas, monetize them, and use them to compete--and often cheat--against
American businesses and American workers.
We need a concerted, coordinated effort to invest in American
industries. We need to reverse decades of bad policy, and instead
invest in our greatest assets: American workers and American
innovation.
Look at what's happening now in Bucyrus, Ohio. There are few
innovations more quintessentially American than the light bulb. Every
elementary schooler learns that Ohioan Thomas Edison invented the light
bulb at his lab in Menlo Park, New Jersey. And Ohio became the center
of light bulb manufacturing.
But we have seen plants close across Ohio in places like Ravenna
and Warren. We were told that these plants were old and dated--they
made old-fashioned incandescent bulbs. Instead, Americans would make
new, next-generation technology like LED bulbs. That's not what's
happened.
We just learned that two Ohio factories that were part of the LED
lightbulb supply chain in Ohio--in Bucyrus and Logan--are closing their
operations.
Today, 99 percent of LED lightbulb production comes out of China.
Think about that--99 percent of production is in China. And when you
move the entire production overseas, you move the shop floor innovation
right along with it. Again, corporate America underestimated the
ingenuity of American workers--or they just didn't care.
Or let's look at the semiconductor shortage.
Americans developed the semiconductor. American research and
development created these chips, and American companies did most of the
manufacturing. Yet over time, production--often fueled by incentives
from foreign countries--moved overseas.
And look what happened: during the pandemic, companies across Ohio
and the rest of the country shut down production lines and laid off
workers because they couldn't get enough semiconductors.
Whether you are Ford Motor Company in Lima, Whirlpool in Clyde, or
Navistar in Springfield--you need these chips.
In the semiconductor industry, we see the problem--and we see the
solution.
At the end of January, I flew to Columbus to join Intel to announce
the largest ever domestic investment in semiconductor manufacturing.
It's going to create 10,000 good-paying jobs. Union tradespeople
are going to build the entire facility.
And it's all possible because we are on the verge of passing an
historic investment in American innovation and manufacturing.
We need to pass bipartisan legislation that supports efforts like
Intel's to build new production in the United States. Our bill invests
in research, development, and manufacturing in communities throughout
the country to enable us to compete for the jobs of the future.
That's going to build on the work we did with the Bipartisan
Infrastructure Law, which will create new jobs and allow us to move
more goods, more quickly, shortening our supply chains.
That's how we build a more resilient economy that can withstand
dynamic global events--whether it's a public health crisis, a
geopolitical crisis, or a climate crisis.
We also need to invest in our workers and ensure that they reap the
benefits of the economic growth they create--through good paying jobs
and investment in training programs and affordable childcare. Taken
together, these investments ensure that economic growth reaches the
whole country.
We need to support local and regional efforts to drive innovation.
Today, I'm submitting a statement for the record from a coalition
of businesses, industry associations, and nonprofits in Northeast Ohio
on how supply chain resilience affects Ohio's economy.
I ask unanimous consent that the coalition's letter be submitted
for the record.
I'm working closely with them to support their application for a
Federal challenge grant that would help turn the region into a national
hub for advanced manufacturing innovation.
It's the kind of effort we need in communities all over the
country.
We can lower prices and speed up supply chains. We can better
compete with China. And we can create jobs and economic growth in
places that corporate America left for dead decades ago.
I am excited to hear from our witnesses today about how we can make
smart investments that will spur innovation and job creation throughout
the country.
Today, we're hearing from experts on the unique nature of supply
shocks triggered by the pandemic--like in the semiconductor industry--
and how we can prevent them in the future. We'll talk about how we can
best support American workers and innovators, and about investments in
domestic manufacturing will position us to lead the world.
It's time to make things in America again. Ohio has buried the term
``Rust Belt''. It's time for our whole country to bury it.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Mr. Chairman, thank you.
This hearing is about supply chain resiliency. Of course, the
Banking Committee is talking about supply chains for one reason:
Inflation has hit a 40-year high.
Under President Biden consumer prices have risen by 8.4 percent.
That's more inflation than under the entirety of the Trump
administration.
Even though wages are rising, prices are rising faster. That's
causing workers, especially lower-income workers, to fall further and
further behind.
Milton Friedman said, ``Inflation is taxation without
representation.'' Democrat policies are hiking that tax.
Rather than course correct, Democrats have been trying to shift the
blame for their inflation tax to someone, anyone else. One of their
favorite scapegoats has been supply chains. That is, in addition to
blaming ``greedy corporations,'' Republicans, and Putin.
Actually, inflation is pretty easy to understand. It results from
more money chasing fewer goods.
The Biden administration's policies have limited the economy's
production of consumer goods. And Democrats' reckless spending has
resulted in more money chasing those fewer goods.
As an example, consider the President's war on American energy
independence. In 2020, then-candidate Joe Biden promised that in his
Administration there would be ``[n]o more ability for the oil industry
to continue to drill. Period.''
On day one of his Administration, he made good on that threat. He
stopped all new oil and gas leases on Federal land, and ended the
Keystone XL pipeline project.
Even before Russia's invasion of Ukraine, gas prices were up 40
percent. And now, the Administration is going on bended knee to plead
with Venezuela's illegitimate dictator to produce more oil that America
is quite capable of producing and exporting.
On the spending side, former Obama administration officials Larry
Summers and Jason Furman warned that Democrats' reckless spending spree
would cause inflation. Yet, with inflation at 8 percent, most Democrats
still support another deficit financed, blowout spending bill.
Today we're going to set the record straight.
First, inflation did not suddenly accelerate simply because global
free trade somehow made our supply chains more ``fragile.'' Global
trade has provided tremendous benefits to Americans and, if anything,
has made our economy less fragile.
Rather, supply chains are struggling because fiscal policy has
overstimulated demand. For example, because of high demand, port
volumes have hit record levels.
Second, Democrats' far-left agenda would continue to make inflation
worse, not better. Where to begin?
Democrats are pushing for price controls, and for using antitrust
law to reduce economic efficiency. And Democrats continue to push for
the reckless tax-and-spend Build Back Better plan that will further
fuel inflation and harm our economy.
Amazingly, the White House now claims that even more deficit
spending will lower inflation. That defies belief.
You don't have to take my word for it. Last month, former Obama
administration Treasury official Steven Rattner penned a New York Times
op-ed titled, ``Biden Keeps Blaming the Supply Chain for Inflation.
That's Dishonest''.
He said the president's claims about supply chain disruptions are
``both misleading and simplistic.'' Mr. Rattner asserted ``the bulk of
our supply problems are a product of an over-stimulated economy.'' He
advised prioritizing deficit reduction, calling it ``dishonest'' for
the President to claim that his Build Back Better plan would be deficit
neutral.
While supply chains are not to blame for inflation, our recent
experience highlights the need to enact sensible reforms that will
improve supply chains. These reforms include making U.S. ports more
efficient by increasing their use of automation, which obstructionist
unions have long blocked, and eliminating harmful tariffs that increase
transportation costs and bottlenecks by reducing the supply of needed
equipment, like truck chassis.
In addition, to help fight inflation, it's time for the President
to abandon his far-left agenda. He should end the war on American
energy that has led to higher prices for American families by
restarting the Keystone XL pipeline; expediting natural gas pipeline
and LNG facility approvals; and repealing broad and punitive
regulations and restrictions on American oil and gas production.
He should also drop his reckless tax-and-spending plan that would
dramatically increase the size and scope of Government by expanding the
welfare State.
The best approach to achieve economic growth is to unleash market
competition, the engine of economic growth. Congress can focus on three
areas: Cutting through the jungle of red tape preventing new
entrepreneurship, innovation, and competition; eliminating Government-
created barriers and distortions to Americans working and saving; and
increasing opportunities for global trade and getting rid of
protections for special interests.
To help us understand these issues, today we will hear from two
experts on global trade and fiscal policy: Phil Levy the chief
economist at Flexport, a leading supply chain logistics company, and
Vero de Rugy an economist from the Mercatus Center at George Mason
University.
I look forward to hearing from them about the importance of free
trade and free markets for creating strong and resilient growth, and
commonsense solutions for increasing growth and lowering inflation.
______
PREPARED STATEMENT OF WILLIAM E. SPRIGGS
Professor of Economics and Chief Economist, Howard University and AFL-
CIO
March 22, 2022
Thank you, Chair Brown for this invitation to give testimony before
your Committee today on the issue of improving the resiliency of the
American economy. I am happy to offer this testimony on behalf of the
AFL-CIO, America's house of labor, representing the working people of
the United States; and based on my expertise as a professor in Howard
University's Department of Economics.
The collapse in economic activity in the first quarter of 2020 in
response to the COVID crisis unleashed a chain of events that disrupted
normal economic activity. The global Pandemic, unlike other shocks, had
a simultaneous affect on the world economies. Necessary precautions
that delayed the spread of the disease and successfully mitigated worse
loss of life, significantly altered consumption. So, while the initial
impact was a drop in all consumption, the gradual reopening of some
activity led to different patterns of consumption than before the
Pandemic. But the responses of firms to the initial collapse in
consumption also created difficulties responding to shifting demand
patterns. What was clear is that our economy was not resilient.
It took the quick decisive steps of the Families First Act and the
CARES Act to stabilize the economy. These initial steps addressed the
obvious shortcomings of an inadequate unemployment insurance system,
the lingering effects of the Great Recession that left household
balance sheets woefully weak and revealing the lack of resiliency among
households to income shocks, the lack of paid sick leave, the
difficulties of main street businesses in accessing liquidity even in a
time of low interest rates, and the fragility of State and local
government infrastructure. These necessary pieces did not anticipate
the subsequent waves of COVID and how long the support proved to be
needed. So, fortunately, the American Rescue Plan extended support to
ensure the effects of COVID would not scar the economy. The American
economy ended 2021 with its fastest growth in decades and the strongest
recovery of the labor market on record.
But we began this year with the world still struggling with COVID
and all the disruptions that have now revealed the scars and fragility
of a global system. The continued disruptions to supply chains plague
all Nations. All advanced economies face higher rates of price changes
than in the pre-COVID era. This is a natural functioning of markets;
price pressures appear every time there is a shock to supply and is not
related to differences in fiscal responses.
There are specific reasons the U.S. measure of prices has run
higher than for other countries. The U.S. product markets have been
criticized for having higher levels of concentration than in Europe
because of weaker antitrust enforcement. (Covarrubias, Gutierrez, and
Philippon 2019) (Gutierrez and Philippon 2018) (Baker 2003) (Alemani,
et al., 2013) (Karabell 2020). Higher levels of concentration make it
easier for firms to raise prices, but also make an industry more
vulnerable to supply shocks should one firm's workforce be hit harder
by COVID.
Most other Nations' response to COVID was the aggressive use of job
retention schemes. These programs directly subsidized firms keeping
their workforces during COVID and lowered the frictions being
experienced in the United States of trying to recruit workers that were
sent to their best devices. Among OECD Nations, the U.S. unemployment
rate spiked significantly higher than for other countries, and while
U.S. unemployment rates have settled near their pre-COIVD level as they
have on average for the OECD, total labor hours in the U.S. still have
not recovered as they have on average in the OECD--this reflects lower
labor force participation rates in the U.S. The U.S. has low female
labor force participation because it lacks the infrastructure of
policies to support the care economy present in most OECD Nations.
Protecting individuals, through beefing up the coverage and generosity
of unemployment benefits helped to facilitate shifting workers to
sectors that faced rising demand during the initial stages of the COVID
crisis but has now slowed the recovery of those sections that had
initially faced the greatest spikes in unemployment. And the lack of
protection from the virus, and weak paid sick leave coverage in the
United States, meant several industries faced greater losses of workers
than other OECD countries. (Chen, et al., 2021) (Bureau of Labor
Statistics 2021) Fewer workers died in other OECD countries.
The shocks to markets have come from many directions. Price
volatility is at an astonishing level compared to previous periods.
Over the last 50 years, only the oil crisis of the mid-1970s and the
late-1970s coincide with a similar spike in price volatility. In both
those cases, a shock in the supply of oil, and overlapped with
hurricanes Eloise in 1975 and Frederic in 1979, the Yom Kippur War of
1973, the Iran Hostage Crisis of 1979, and the Lebanon War of 1982,
created price volatility. The similarity in massive supply shocks and
rising prices have people wanting to invoke rising inflation
expectations and excess demand.
Figure 1 shows price volatility, measured as the standard deviation
in monthly changes in prices (excluding food and fuel) over the
previous 12 months. It spikes in the early and late 1970s. This period
also spikes but at a lower level and has already started to recede. The
decline from the spike in the late 1970s was engineered by massive
interest rate hikes from the Federal Reserve that caused the greatest
recession since the Great Depression to that date. Prices have now
started a path to stability this time without interest rate hikes,
though they will clearly continue to face the head winds of potential
climate events, COVID and now war related supply shocks.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Because price volatility is high, it means there is a lot of noise
in the actual signal. Comparing prices one month to the last month or
the last 12 months will give wildly different views. And, unlike the
buildup to prices in the late 1970s, this price volatility came after a
period of price declines for many items and a deceleration in inflation
as measured by the CPI in 2020 and early 2021. So, the base years for
this level of price instability include a period of prices rebounding
to pre-COVID price levels.
What is important though is that prices become unstable from supply
shocks because households and businesses must seek substitutes for
items that become scarce or suppliers that fall off. Households shift
demand outward for substitutes, and businesses find other suppliers,
most of whom had been rejected before because they were higher cost
providers. Early on, COVID induced collapsing demand with shifts to new
items. For example, unable to go to gyms, households shifted demand for
in-home gym equipment. The drop in demand for gyms lowered prices for
gyms and was offset by rising prices for in-home gym equipment. This
explains the great moderation of prices from spring 2020 to fall 2021.
But supply shortages are different. Manufacturers unable to get
smart chips from their old suppliers had to hunt down chips from new
suppliers, and that raises costs and cuts supplies from manufacturers.
To see how one supply shock can echo with price increases, motor
vehicles are a key example. The shortage of chips, the necessary part
of new cars, reduced domestic automobile production in September 2021
to a low of 39 percent of its January 2020 production level. It has
since been slowly building up, but in January 2022 remained only at 58
percent of its January 2020 capacity. (The last major disruption to US
domestic auto production was the September to October 2019 strike by
the UAW against General Motors. During that two-month period, domestic
production dropped to 86 percent of its August 2019 capacity.) In
February, the price of new cars rising from 2021 to 2022 levels,
contributed 0.5 points of the 7.9 percentage point rise in the Consumer
Price Index. The rise in the price of new cars from the collapse in
automobile production, of course prompted households to increase their
demand for used cars, the next best substitute. That shift in demand
contributed 1.7 points of the 7.9-point rise in the CPI. An additional
boost came from increased demand for auto repairs, among those who
could not afford a new or used car, and 0.06 more points added to the
CPI. In all, the sustained record low in auto production contributed
2.3 points in the 7.9-point rise in CPI, or 29 percent of the price
rises. Similar shocks play out throughout the market and into the CPI.
Figure 2 traces out changes in U.S. domestic auto production (in
red), sales of vehicles (in black) and the CPI for used cars (in blue).
The surge in sales in early 2021 appears as mirror to the collapse in
sales in 2020. It should not be thought of as demand running too high,
since it subsequently recedes after returning to just above its average
during 2018, but as a smoothing of demand over a 2-year period. The
rising CPI for used cars climbs after the collapse in the production of
new cars.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Attempts to roll back demand, in the case of automobiles, to align
with current capacity would need to be a very drastic drop in aggregate
demand levels. Only the demand shock of the Great Recession
approximates the current collapse of auto production. The drop in
domestic vehicle production from July 2008 to December 2008 was to 64
percent of July's capacity. That took removing 2.8 million jobs from
the economy. That makes policies aimed at aggregate demand untenable.
Throughout 2021 various shocks disrupted supplies including Vietnam
needing to shut major factories to control the spread of COVID, 6 days
of blockage in the Suez Canal from a ship run aground, the need to
preserve oxygen for the rise in COVID cases in India that slowed
production where oxygen was used interrupting the production of active
pharmaceutical ingredients, an outbreak of COVID that China had at its
third largest container ports lowered shipment capacity to 30 percent
in late spring 2021, and Hurricane Ida in August slowed U.S. production
and shipments. These are just some of the shocks that make the prices
of various items jump, causing everyone to seek substitutes and put
more pressure on the broader measure of prices. Lowering aggregate
demand in the face of widespread supply constraints can only lead to
lower levels of output and stalled or falling labor market conditions.
Instead of focusing on aggregate demand as the Federal Reserve is
mistakenly doing, Congress should take this as another moment to
reflect on lessons we are learning during the Pandemic. Clearly, we do
not want an economy that is vulnerable to computer chip scarcity. While
issues of economy of scale in the production of chips has led to the
dominance of a few firms, the chips are too essential to be forced to
rely on a small set of firms that are too centrally located and
vulnerable to geopolitical or global warming shocks. The economies of
scale make for real entry barriers. A policy, like the CHIPs Act, would
help level the playing field for those seeking to make computer chips
in the U.S., where they were initially invented.
Increased scrutiny must be taken by the Department of Justice and
the Federal Trade Commission to combat growing market concentration.
Bottlenecks in production, especially of food, appeared throughout
COVID. They have hurt farmers and consumers, and the workers in those
plants. (Puzzanghera 2022) This experience demonstrates an extra
element of consumer surplus must be the risk factor of over reliance on
a few producers, especially in a time of crisis. In meat production,
especially, this can be crucial as increasing threats of disruptions
from global warming events can make us too reliant on the lack of
supplier diversity.
Energy independence must now be taken to include our ability to
rely on fuels like solar and wind that do not trade in the global
marketplace. We cannot simply rely on the fallacy of domestic oil
production as insulation from global force since its price is set by
global forces. Electric cars and reliable electricity sources are
better insurance for price volatility.
Our labor market is slowly healing from its greatest collapse in
the spring of 2020. Policies aimed at slowing aggregate demand will
make the recovery slower than necessary and create scarring in the
labor market that will leave more workers vulnerable because the slow
recovery leaves the most scarred the most likely to take precarious
jobs and lower earnings. Figure 3 shows the recovery underway in
women's labor force participation. For the sake of clarity, I only show
it for Black and White women. Black women are significantly more
sensitive to labor market conditions to increase their labor force
participation. The more rapid rise for Black women shows that
employment prospects have finally picked up, because their figure is
driven by increases in actual hiring. On the other hand, the slower
increase for White women's labor force participation is because we must
still drive policies that can get their labor force participation to
rise. Frictions in the labor market that cause barriers for women are
costly. They lead to higher search costs for employers, and weaker good
job matches for women. We need to adopt the proven policies that other
Nations in the OECD have in place which put a higher share of their
women in the labor force and produce lower gender pay gaps. Those
policies include paid sick leave, paid maternity leave, and public
childcare. They constitute the infrastructure needed to increase our
labor capacity and are as essential in a modern economy as good roads
and ports to moving products.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A key component of the Build Back Better Act is to put in place the
essential elements of labor market infrastructure that goes with the
21st century. As we saw from this crisis, firms do not benefit if we
favor policies that weaken the ties between employers and employees.
Women need a labor market framework that protects their careers. And we
need women's labor force participation to prosper as a Nation.
Our unemployment insurance system was woefully lacking in 2020.
That was clear from the onset of the COVID crisis. Instead of moving
forward, unfortunately, too many States are in the process of de-
investing in their labor market systems. They are making them weaker.
Some of their actions are exacerbating the poor job matches going on
now. Figure 4 shows the relationship between State unemployment benefit
levels and the rising quit rates. Those States with the lowest benefit
levels force workers to search for jobs while on the job, with the
result being greater labor turnover. Instead of getting workers to make
good matches with employers, employers in those States with low
benefits get workers that start the job trying to go elsewhere.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The falling share of unemployed workers who are eligible for
unemployment benefits weakens the automatic stabilizer that
unemployment insurance is supposed to provide. A lesson from this
crisis is that there is more uncertainty than we appreciated. With
rising risks, we cannot afford to be under-insured. Congress must look
at unemployment insurance before the next economic downturn.
We also must encourage the private sector to be more aware of
risks. Too great levels of entanglements with countries that can cause
geopolitical threats, and issues of managing risks from thin supply
chains in the face of rising global warming threats must get factored
in. Congress should think of policies that ensure the private sector
incorporate those risks. Some of that can come from weakening the hold
of financial markets and short-term thinking on corporate decisions.
Short term gains lead firms to hold thin inventory, which are just-in-
time until they aren't. When stock buybacks get rewarded on Wall
Street, they are cringe worthy when firms prove to lack the liquidity
to be resilient in a world of high risk. Rather than spend time
shifting incomes to create different tax bases in low-tax countries,
firms need to be making investments that make them more resilient.
Going forward, just as we often talk of personal responsibility, we
must also talk about policy responsibility. Policies should not put
high risks on the weak and low risks on the powerful. Just as firms
need infrastructure to plan long-term investments, workers also need
labor market infrastructure to ensure reliable paths to work. We should
expect price volatility given the rising risk of global warming related
events and think of ways to help cope with them. The risks are greatest
on food prices, and automatic triggers for expanding the protections of
the Supplemental Nutritional Assistance Program should be in place.
Being policy responsible means learning lessons from what goes wrong.
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Chen, Yea-Hung, Maria Glymour, Alicia Riley, John Balmes, Kate
Duchowny, Robert Harrison, Ellicott Matthay, and Kirsten Bibbins-
Domingo. 2021. ``Excess Mortality Associated With the COVID-19
Pandemic Among Californians 18-65 Years of Age, by Occupational
Sector and Occupation: March Through November 2020''. PLOS ONE.
doi:10.1371/journal.pone.0252454.
Covarrubias, Matias, German Gutierrez, and Thomas Philippon. 2019.
``From Good to Bad Concentration? U.S. Industries Over the Past 30
Years''. NBER Working Paper Series, Cambridge: National Bureau of
Economic Research.
Gutierrez, German, and Thomas Philippon. 2018. ``How EU Markets Became
More Competitive Than U.S. Markets: A Study of Institutional
Drift''. NBER Working Papers, Cambridge: National Bureau of
Economic Research.
Karabell, Zachary. 2020. ``What the EU Gets Right--and the U.S. Gets
Wrong--About Antitrust''. WIRED, Nov 21. https://www.wired.com/
story/what-eu-gets-right-us-wrong-antitrust/
Puzzanghera, Jim. 2022. ``Why Are Beef Prices so High?'' Boston Globe,
Feb 19. https://www.bostonglobe.com/2022/02/19/nation/why-are-beef-
prices-so-high-some-ranchers-white-house-say-its-more-than-just-
inflation/
______
PREPARED STATEMENT OF BETSEY STEVENSON
Professor of Public Policy and Economics, University of Michigan
March 22, 2022
Chairman Brown, Ranking Member Toomey, and distinguished Members of
the Committee, thank you for the invitation to speak to you today about
supply constraints. I am a labor economist who focuses on how the labor
market has evolved as women have come to play a more equal role in paid
employment and men have become more essential providers of care for
their family members. My work has studied how deeply personal decisions
about how to organize one's family are intertwined with economic trends
like work and inflation. As a policy adviser, I have helped to produce
macroeconomic forecasts for the U.S. economy. In my testimony I want to
help you see the link between the labor market, families, caregiving,
and the risk of higher future inflation for the United States. But let
me begin with the economic experience of the past year.
Both GDP and the labor market have recovered at a much more rapid
rate than many predicted. Unemployment has fallen to 3.8 percent in
less than 2 years since the worst decline in employment since the
depression. In comparison, it took more than 8 years for unemployment
to fall below 4 percent following the 2008 recession. People have the
confidence needed to look for better opportunities and leave their
current jobs. And they are finding better opportunities. A recent Pew
survey found that 56 percent of workers who quit a job in 2021 were now
earning more money, 53 percent reported more opportunities for
advancement, and 53 percent said that they had improved ability to
balance work and family responsibilities. \1\
---------------------------------------------------------------------------
\1\ https://www.pewresearch.org/fact-tank/2022/03/09/majority-of-
workers-who-quit-a-job-in-2021-cite-low-pay-no-opportunities-for-
advancement-feeling-disrespected/
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The dark side of the economy is inflation, which is now currently
at a pace last seen four decades ago. While inflation captures a
generalized rise in prices, it does not mean that all prices are rising
similarly. Energy commodities are up 37.9 percent over the 12 months
ending in February and energy supply remains a source of concern with
the Russian invasion of Ukraine. The prices of durable goods are up
18.7 percent. Price increases are particularly notable in autos with
the price of used vehicles soaring 41.2 percent. Many of the forces
that have led to rising prices in durable goods are difficult to
counter with policy. The pandemic led U.S. consumer demand for goods to
rise as people shifted their spending patterns from services to goods.
Health concerns discouraged people from buying the same quantity of in-
person services like dining, preventative medical care, and tourism
that they bought prior to the pandemic. Instead, they rearranged their
budgets to include more physical things which could be enjoyed in the
home or outside. \2\
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\2\ https://www.bls.gov/opub/mlr/2021/beyond-bls/covid-19-causes-
a-spike-in-spending-on-durable-goods.htm
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American consumers increased demand for goods meant increase demand
for goods produced in the United States and around the globe, using
American inputs and foreign inputs. Our infrastructure for receiving
goods has struggled under the increased flow of goods into U.S. ports.
And factory shutdowns across the world have meant delays and increased
transportation and warehousing costs. After years of extremely narrow
margins, \3\ cost cutting, and ``just in time'' shipping, \4\ goods
supply chains weren't ready to accommodate the extra demand and the
additional costs of covid along the supply chain.
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\3\ https://www2.deloitte.com/content/dam/insights/us/articles/
the-profit-margin-squeeze-structural-strategies-for-consumer-product-
companies/DUP104-Profit-Margin-Squeeze.pdf
\4\ https://labornotes.org/2021/12/supply-chain-disruption-
arrives-just-time
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In a healthy global economy, we benefit from global supply chains
that allow U.S. businesses and consumers to source material at the
lowest cost and enjoy a wider range of available products. Global trade
can also help insulate the U.S. economy against a recession by
providing billions of potential customers outside our national
boundaries for American businesses. While these same linkages are the
source of some of the price increases we have seen over the past year,
these are also the supply constraints that are most likely to loosen on
their own as we recover from the pandemic. The most important effort
you can make to build resiliency to these supply constraints is to
support widespread global vaccination against covid. The more the world
is vaccinated against covid, the easier it will be for factories and
shipping around the globe to resume smoothly.
Within the United States this also means trying to keep the economy
smoothly operating by ensuring widespread access to ventilated schools
and workplaces, vaccines, and covid testing. The last Covid surge in
January did not lead many people to lose jobs, but it did lead to
millions of people missing work due to illness. Containing the spread
of covid helps boost productivity and ensures that workers are healthy
enough to meet the demand of customers.
A healthy and robust labor supply is particularly important for the
service sector. So far we have seen inflation mostly in the goods
sector, which employs only 16 percent of American workers in the
private sector. In contrast, 84 percent of American private sector
workers are employed in the service sector. For much of the past year,
services have not experienced the upward price pressure experienced by
the goods sector. As of February 2022, the prices of services (not
including energy) had risen only 4.4 percent over the previous 12
months. And much of this 4.4 percent rise has been driven by the rising
cost of housing including owner occupied housing. Price increases for
services not including shelter are well within normal inflation rates.
For example, the price of medical services rose 2.4 percent and
education and communication services rose 1.7 percent over the 12
months ending in February 2022. These two services--medical and
education services--have historically risen faster than overall
inflation. The risk to ongoing high inflation is that the price of
these and other services start to rise at a faster pace. Indeed, the
past 2 months the monthly price increases in services have started to
show signs of this stress.
Inflation in the price of services could be driven by an increase
in demand for services as the economy continues to recover without a
subsequent rise in the availability of workers to provide those
services. A rise in inflation in services could have a devastating
impact on overall inflation even if the price increases for goods begin
to abate. The size differential between the service and goods sectors
means that a 1 percent increase in service inflation can have as much
of an impact as a 5 percent increase in goods prices. \5\
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\5\ https://www.nytimes.com/2022/02/08/podcasts/transcript-ezra-
klein-interviews-jason-furman.html
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The risk to rising inflation in the service sector is that labor
supply remains depressed relative to prepandemic trends. Overall the
economy remains short 1.4 million workers and 3.5 million jobs relative
to prepandemic projections. \6\ Prime age women's labor force
participation rate is down relative to prepandemic levels and relative
to prime age men's labor force participation. Women are coming back to
jobs, but they exited the labor force and lost jobs at higher rates
during the pandemic than did men. Women lost more jobs than men because
this was a service-sector led recession and women are more likely than
men to work in the service sector. \7\
---------------------------------------------------------------------------
\6\ https://www.piie.com/blogs/realtime-economic-issues-watch/us-
gained-surprising-number-jobs-february-wage-growth-was
\7\ https://www.hamiltonproject.org/papers/the-initial-impact-of-
covid-19-on-labor-market-outcomes-across-groups-and-the-potential-for-
permanent-scarring
---------------------------------------------------------------------------
Perhaps most notable, women lost jobs in education and health
services, a sector that experienced job growth during previous
recessions, as trend growth outpaced the cyclical downturn. These
relative weaknesses contrast even more sharply in the context of recent
recessions. In past recessions, contraction in the labor market mostly
spared women and once the market bottomed out, growth in women's
employment, particularly in the service sector, helped lead the
recovery. \8\
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\8\ Stevenson, Betsey. ``Women, Work, and Families: Recovering
From the Pandemic-Induced Recession''. The Hamilton Project (2020).
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One in four women work in education and health services and nearly
4 out of 5 workers in the sector are female. This is a sector that is
poised for rapid recovery in demand over the coming year. But will
there be workers to meet that demand?
There are two critical steps you can take to ensure that workers,
particularly women, return to the labor market. The first is ensure
access to childcare \9\ and home nursing care \10\ because these
services free up family caregivers to remain employed or return to the
labor force. Of course, these policies help male caretakers remain
employed as well. But because of the uneven distribution of informal
and formal care labor, polices that expand access to care are more
likely to encourage women into the workforce. By increasing labor
supply we can facilitate continued economic growth without adding
strain on prices. Supporting employment in the care industries not only
helps support some of our lowest paid female workers, but it frees up
informal care-providers who would prefer to find paying work.
---------------------------------------------------------------------------
\9\ https://bfi.uchicago.edu/wp-content/uploads/BFI-WP-202046.pdf
\10\ https://scholar.harvard.edu/files/kshen/files/caregivers.pdf
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The second step is to increase funding and improve access to
training programs for mid-skilled positions and community college.
Enrollment in vocational programs and community college programs fell
during the pandemic. Enrollment in community colleges declined by 14.8
percent since 2019. Enrollment in health-related programs has declined
by 9.2 percent and education programs have fallen by 12 percent. \11\
Enrollment has fallen the most for first-generation students and
underrepresented minorities. These declines are bad for the students
who have not received training that would help them find employment in
positions in which they can earn higher wages. But these declines are
the Achilles heel in our supply chain resiliency. The slowdown in
training in some fields is a harbinger of potential labor shortages
that will translate into an increase in prices. The Wall Street Journal
recently reported on a predicted decrease in certifications for medical
and nursing technicians, dental assistants, food safety workers,
cosmetology, and other professions requiring certifications. \12\ When
there are not enough skilled workers to fill positions, prices will
rise because skills cannot be gained overnight. As employers compete
for a dwindling supply of workers with the needed training, wages will
be bid up to the point that the additional costs will need to be passed
onto customers. The time to act is now.
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\11\ https://nscresearchcenter.org/stay-informed/
\12\ https://www.wsj.com/articles/covid-19-forces-vocational-
schools-to-adjust-11612348201
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Thank you for the opportunity to testify.
______
PREPARED STATEMENT OF ERICA R.H. FUCHS
Professor of Engineering and Public Policy, Carnegie Mellon University
March 22, 2022
Thank you Chairman Brown, Ranking Member Toomey, and Members of the
Committee for the opportunity to talk with you today about the
strategic capabilities our country needs to build a resilient economy.
I am a Professor in the Department of Engineering and Public Policy in
the College of Engineering at Carnegie Mellon University, and a
Research Associate with the National Bureau of Economic Research. My
research focuses on the development, commercialization and global
manufacturing of emerging technology, and national policy in that
context. My ``research laboratory'' is often the factory floor of
manufacturing firms across the U.S. and around the world.
From World War II to the present day, U.S. national security and
economic prosperity in an increasingly global economy has rested, to a
significant extent, on American leadership in technology, and through
that technology, production. The Allied victory in World War II (1939-
1945) was attributed to American (and Soviet) ability to turn out
military aircraft, tanks, and other weapons systems in unprecedented
quantities thanks to the technology advancements behind the American
System of Mass Production (Hounshell 1985). In the 1990 Defense
Authorization Act (PL 101-189), Congress defined ``critical
technologies'' as ``essential for the United States to develop to
further the long-term national security or economic prosperity of the
United States.'' The COVID-19 pandemic highlighted the criticality of
technological leadership--such as in mRNA and proline stabilization
techniques for vaccines (the latter which have helped U.S. vaccines
have better immunogenic responses to COVID as the virus mutates)--not
only for security and prosperity, but also for social well-being, in
particular, human health. Perhaps most significantly, the COVID-19
pandemic underscored that access to certain final products and their
intermediate inputs can likewise be critical to national security,
economic prosperity (including jobs), and social well-being. For
example, early on in the pandemic, limited access to latex-free elastic
for mask ear loops held certain companies up from manufacturing masks
entirely. In one company's case, they finally identified a supply of
elastic, but it was only available on a spool that didn't work with the
automated mask manufacturing equipment. With the textile industry
having moved manufacturing overseas decades earlier, the company was
unable to identify an automated de-spooler, and so was stuck for a
period of time having to have a worker hand-unspooling elastic, with
the expected productivity slow-down (Fuchs Testimony 2020).
When discussing critical technologies, we wouldn't ordinarily think
of elastic; yet during those early months of the most intense supply
shortages (roughly January through May 2020) were hospital workers were
left with garbage bags and home-sewn cloth masks, that lack of elastic
cost our country millions of masks a week (alone out of just one
company--with the total losses surely much more).
A similar story could be told in how the current shortage in
semiconductors for applications requiring high robustness and safety is
stopping cars from being produced and leading to job losses in
Michigan. The solution to these problems are not as simple as just
stockpiling masks or reshoring manufacturing of elastic or
semiconductors. It can be challenging to stockpile for an uncertain
future (we don't know the most effective protection for the next
pandemic) and concentrated or single-source manufacturing can also
reduce the resiliency of supply (electric grid power-outages in Texas
caused semiconductor plants clustered around Austin to go down, helping
contribute to the current shortages). As such, stockpiling and
reshoring are just two (important) tools in a broader suite of tools we
need in our arsenal: Other tools include leveraging and enhancing
firms' and the economy's capability to pivot, building design platforms
that reduce dependency on single-source suppliers, and innovating to
change the rules of the game and the supply chain dependencies
themselves.
For example, in the case of the mask producer facing global
shortages in elastic, the lesson of the story is not that the U.S.
needs to reshore or stockpile elastic. What's needed is for that firm
and the U.S. economy to have the capability to rapidly pivot--diversify
the suppliers internationally, adapt the equipment, change the elastic,
create a mask that does not require elastic, adapt regulations. or some
combination of these actions. To build an economy capable of rapidly
pivoting during crises, we need timely situational awareness, a robust
manufacturing ecosystem, tools in place that value common cross-mission
interests between social well-being (here health) and defense, and a
Government pre-prepared for adaptive response during crises.
In the case of shortages of safe, robust semiconductor chips for a
range of defense, transportation (including automotive and aerospace),
medical, and power electronic applications, cross-sector data sharing
in public-private partnerships and funding of common design platforms
will be essential. Innovations in hardware and software can facilitate
common design platforms across these sectors, and thereby enhance their
market power and their ability to switch production to alternative
manufacturing facilities during supply chain crises. Identifying the
right path will require sophisticated understanding of the technical
implications of defense and commercial interests, as well as
understanding and valuing the systemic implications of semiconductor
shortages across the economy for businesses (including start-ups
pushing the technical and possibility frontier), economic prosperity,
and jobs.
The stakes for creating effective policy in critical technologies,
supply chains, and infrastructure could not be higher or more
challenging. As illustrated above, critical technologies, supply
chains, and infrastructure are deeply interdependent, such that
capabilities (and policy) in one affects the other. In addition, their
impact cuts across all national missions: national security, economic
prosperity (including jobs), and societal well-being (including health,
equity, and the environment). When there were medical supply shortages,
small hospitals, rural doctors, essential workers, minorities, and
those in the lowest income classes were hardest hit. Energy outages and
environmental damage to infrastructure have significant costs for
national security and private companies (for example the February 17,
2021, electric grid power outages in Texas which led major
semiconductor plants clustered around Austin both to have to shut down
and throw out months of ruined products), and at the same time often
disproportionately affect minorities and those in lower income
brackets. The current semiconductor shortage is not only a threat to
national security, but also to jobs and economic prosperity, for
example in Michigan where fewer cars are being produced and layoffs are
happening as a result.
Key to the U.S. overcoming these challenges will be finding a way
to quantify the value of investments across multiple missions, and to
identify solutions that offer win-wins where the sum is greater than
the individual parts. Fortunately, while not simple, with today's
modern data and analytic tools, charting a path to a resilient economy
and supply that affords win-wins across missions and sectors is
attainable. Building this capability, however, is going to require
Congress creating a new institution capable of being strategic and
forward-looking, receiving work from all agencies including multiple
agencies on a single topic, and leveraging leading technical expertise
in engineering and the physical sciences, matched with leading
expertise in modern analytics (machine learning, operations research,
natural language processing) and the social sciences (economics,
political science, sociology, history).
In my remarks today I want to highlight three critical steps toward
building a resilient economy, and the nature of the cross-mission
critical technology analytics capability our country needs to
successfully implement these steps:
First, the U.S. must build timely situational awareness, otherwise
we are flying blind.
Inadequate data and analytic capability is weakening Government
decision-making regarding critical technologies and critical supply
chains. U.S. Defense agencies and policymakers lack mechanisms to
assess their strategic weaknesses and opportunities versus other
Nations in technologies critical to national security. The U.S.
Government also lacks timely, easy-to-navigate, product-level data on
the long chain of intermediate suppliers supporting the production of
final goods. Without knowing the U.S.' global standing in technology
and production, it is difficult to make policy--whether the importance
of secrecy about technological capabilities or where to enhance
domestic manufacturing capabilities and where to create alliances.
These challenges were underscored by COVID-19: While existing
surveys such as the Annual Survey of Manufactures and the Economic
Census provide snapshots of U.S. capabilities, these data do not
capture the rapidly evolving supply status during a crisis such as the
COVID-19 pandemic. (The US Census collects data on all domestic
businesses once every 5 years. At the time of the pandemic outbreak,
the last data collected on all domestic manufacturers was 2017). Real-
time information is essential to guide decisions to coordinate and
mobilize additional capacity during crises, whether a pandemic, other
natural disasters, or war. Fortunately, timely situational awareness is
attainable: Leveraging automated text analysis of public data, we were
able to gain real-time situational awareness of U.S. domestic
manufacturers entering, pivoting into, and scaling up in response to
the COVID-19 crisis, particularly small- and medium-sized businesses.
Within 2 weeks we revealed significantly greater domestic mask and
respirator manufacturing capacity than was known by the Government at
that time. (Fuchs, Karplus, Kalathil, Morgan 2020)
Importantly, data collection of any form is costly, whether by
Government, public-private partnership, or automated algorithm. For
this reason, it makes sense to focus on supply chains of products that
are sufficiently critical to national missions--whether national
security, economic security, or human health--for the benefits (such as
lives saved) of the full supply chain being tracked to outweigh the
costs. Similarly, not all products or sectors or situations warrant
data collection at the same frequency. For example, early on during the
pandemic the number of mask and respirator manufacturers was changing
by the week; in contrast, while manufacturing capabilities can change
from year to year, it takes five years to build a semiconductor
fabrication facility. Further, with modern data analytics, publicly
scrapable data is increasingly valuable, but in many cases, and
particularly during crises, the ability to rapidly spin-up public-
private partnerships around data may also be needed. For example,
during COVID-19 it became essential to understand personal protective
equipment and COVID-19 testing supply chains in great depth, but it may
not be necessary to collect detailed or the same data on these supply
chains all the time. Similarly, in the current semiconductor shortage
for safe, robust chips on mature process nodes, a public-private
partnership may be able to focus on data-sharing to identify design
commonalities and design paths toward less heterogeneous or production-
line-specific chips, and that same data may have less value once new
design platforms are in place.
Going forward, data collection and public private partnership
infrastructure should be built proactively, rather than reactively. \1\
To figure out which products and supply chains have sufficient national
value to be tracked will require cross-mission valuation that
aggregates across defense, health, labor, equity, and commercial
interests. Such cross-mission critical technology and supply chain
analytics must leverage technical expertise relevant to these sectors
alongside the latest data and analytic tools. As part of such an
effort, the U.S. Government should accelerate its investment and
research in automated tools that dynamically advance our capabilities
to have real-time situational awareness of global technology, human
capital, and production capabilities and the U.S.' standing therein.
The technical frontier in these capabilities are being advanced in the
U.S. by large companies, start-ups, and academics; but do not yet exist
throughout Government. A critical technology analytics program will
need to address what timely situational awareness is needed in
different sectors, what strategic information is in the public domain
(and therefore harvestable by automated algorithms), and how the
relevance of information in the public domain may vary by sector. A
critical technology analytics program will also need to address the
relative strengths and weaknesses of automated algorithms versus
public-private partnerships sharing Government and industry-
confidential data, versus groups of individual experts at assessing the
U.S. global standing in technologies and supply chains. Finally, a
critical technology analytics program should also reflect on how--given
its high relevance across missions, but the distinctly different goals
of those missions--to advance the algorithmic capabilities to build
timely situational awareness as a strategic capability in the U.S. As
goes without saying, as these capabilities become more advanced, they
should actively be integrated into agencies and departments across
Government.
---------------------------------------------------------------------------
\1\ Given the cost-benefit trade-offs in data collection, in our
white paper, ``A New Approach to Coordinate U.S. Critical Supply Chains
in Crisis'', (2021) Professor Valerie Karplus and I recommend taking a
strategic (and analytic) approach to data collection: The U.S.
Government should only regularly track and model domestic and
international supply chains of select products critical to national
missions. For these select products, the Department of Commerce should
create a ``critical product'' tracker at the U.S. Census that would
revitalize and revamp the U.S. Census's capability to update with
greater depth and frequency its relevant business establishments and
production capacity data in select critical end products. Aspects of
such industry studies at the Economic Census were historically paid for
by the Defense Logistics Agency, but discontinued a few years back.
This mutual interest by the Department of Defense and Department of
Commerce may also serve as an early indicator of strategic win-wins.
Given that such tracking is costly, the Department of Commerce should
through a national critical technology analytics program conduct cost-
benefit analysis to quantify the value of tracking different products
and their intermediate inputs and with what frequency. Such analyses
should be conducted by a cross-mission critical technology analytics
program in conjunction with relevant agencies (e.g., FEMA, HHS, CDC)
and include the value (in terms of lives saved and improved) of various
products during crises (starting with the current, past, and various
future scenarios of pandemic), the value of data on final products and
one or more of their intermediate inputs (not all may have high value
in being tracked), and the value of how frequently the data is
collected (which will vary widely by sector). Finally, the Department
of Commerce should develop mechanisms for the U.S. Census to share
business data with action-oriented arms of Government during crises.
(Fuchs and Karplus 2021). In parallel to these standing data collection
activities, the U.S. Government should create the public-private
infrastructure necessary to spin-up during crises near-real-time
situational awareness, assessment of potential capacity domestically
and internationally, and response. To do so, the U.S. Government should
invest in an integrated, secure, near-real-time data architecture for
supply chains considered ``critical'' and into which multiple
Government and industry data sources would feed; and maintain the
necessary connections to mobilize nonpartisan domestic stakeholder
teams by product with technical competency and visibility into evolving
production conditions. These public-private teams would commit now to
being tasked during a future crisis with providing data and options to
Federal and State decision makers, developing appropriate and
situationally relevant metrics for progress, and working to achieve an
equitable nationwide response. (Fuchs and Karplus 2021).
---------------------------------------------------------------------------
Second, the U.S. must create the supply chains of tomorrow, not fix
the supply chains of yesterday.
Timely situational awareness of the U.S. position globally in
critical technologies and supply chains is necessary, but by itself
insufficient. The U.S. must focus on and invest in innovation to
transform supply chains and our competitive position therein.
Energy storage solutions, particularly lithium-ion batteries for
electrified transportation, are growing geometrically in terms of
market size and material needs. And yet, the global supply chain for
lithium ion batteries is constrained in several ways that could be
catastrophically disruptive as demand rises. In this context, novel
battery materials that represent very little (or no) supply chain risk
in terms of cost, transport, working conditions, and/or geopolitical
strife; and novel methods for producing materials that are both free of
cobalt as well as able to be produced using materials that can be
sourced from within the U.S. (Burke and Whitacre 2020; Sovacool, et
al., 2020) could be transformative in terms of security and
geopolitical dependencies. Likewise, synthetic processes for these
materials that can be scaled with low cost and using well understood
and common production methods could be revolutionary in terms of
circumventing risky supply chain situations in favor of locally sourced
materials, recycled materials, and cost-optimizing processes (Ciez and
Whitacre 2019).
Similarly, national leadership in next-generation (e.g., beyond-
CMOS) computing device design and processing capabilities as well as
the innovations such devices will require across the stack is destined
to determine national leadership in computing, AI, and beyond (Khan,
Hounshell, and Fuchs 2018), and create entirely new industries and
innovation ecosystems. This revolution in the devices that drive
computing capabilities will draw on entirely new supply chains.
Both of these hardware innovations hold potential for new
entrepreneurial opportunities and fundamentally change the existing
industry, today's supply chain dependencies, and the U.S.' standing
therein. Excitingly, our research also suggests that these innovations
in advanced materials and processes are likely to also likely to have
more and more rewarding jobs for U.S. based high-school educated
operators and technicians (Combemale and Fuchs 2020; Combemale, Ales,
Whitefoot, Fuchs 2021; Cotterman, Fuchs, Small, and Whitefoot 2022).
While innovation is often a middle or long-run game, hardware and
software innovations that transform supply chain dependencies can also
be short-term solutions. Take, for example, the current shortage in
semiconductor chips for industrial applications requiring higher safety
and robustness but lower performance. In the semiconductor industry,
given the high capital costs and long lead times in building new
fabrication facilities, it can be easier to redesign chips for existing
production facilities than the other way around. The DoD has a long
history of redesigning chips from legacy systems to be produced on
available fabrication facilities. Analogously, many companies facing
shortages are currently redesigning some of their chips to circumvent
supply constraints.
Going forward there is an even greater opportunity to leverage
innovation and chip redesign to address semiconductor shortages in
applications requiring high safety and robustness but lower
performance. Production in the global semiconductor industry has in
recent years increasingly been concentrated in a small set of
geographic locations and suppliers. Further reducing supply resiliency,
semiconductor chips have been increasingly customized for unique
production lines and facilities, creating high switching costs, and
temporary monopoly power for suppliers during shortages. Industrial
applications like aerospace, automobiles, medical devices, power
electronics, and defense systems have different needs (e.g. robust to
vibrations and heat but lower performance), and are small percentages
(less than 25 percent) of the total semiconductor market. Application
needs within this 25 percent are highly heterogeneous, and the robust
but lower performance chips are produced by semiconductor suppliers
with lower profit margins. As a consequence, these companies and
sectors have low market power, which becomes particularly relevant
during shortages.
While not using the most advanced chips can limit options (older
nodes also have lower profit margins), it can also be an opportunity.
Government funding of common design platforms and design rules hold
promise to increase both the aggregate market power as well as the
supply chain resilience of these sectors critical to national security,
economic prosperity, and domestic jobs. Common design platforms hold
promise to increase the resiliency of supply chains by moving designs
away from being tailored to specific production facilities, and making
them more ``fab-agnostic,'' thus reducing the cost of switching the
manufacturing facility manufacturing the chip during global shortages.
The Department of Defense has similar needs to commercial sectors like
aerospace and automobiles in terms of prioritizing safety and
reliability over high performance, and similar to what is needed by
aerospace and automobiles, Department of Defense trusted fabrication
facilities likewise do not operate at the most advanced semiconductor
nodes. As such, the Departments of Commerce, Defense, and Energy have
common interests in funding the development of common design platforms
in both hardware (such as was done historically in RISC-5) and software
(such as was done historically in the S-MOSIS program) that enhance
commonality where sectors have common interests, and still leave room
for differentiation where interests differ. (Blanton, et al., 2021).
As these examples show, it is essential that a cross-mission
critical technology analytics program leverage experts at the technical
frontier to ensure that the U.S. is incentivizing innovation to change
the playing field, and incentivizing design platforms where there are
win-win gains across national missions of defense and economic
prosperity.
Third, to have a supply base resilient to demand shocks and to reap
the benefits of innovation domestically, the U.S. must invest in a
vibrant manufacturing base.
To make sure that the domestic economy can rapidly pivot into
manufacturing products experiencing global shortages during crises, the
U.S. must have a vibrant domestic manufacturing ecosystem. Already
before the current pandemic, my and other scholars' research showed
that countries like China are more competitive than the U.S. in
adaptively producing a wide diversity of products at low to medium
volumes (Treado and Fuchs 2015), at refining production systems for new
products (Fuchs and Kirchain 2010; Nahm and Steinfeld 2014), and at
scaling up that production (Fuchs and Kirchain 2010, Nahm and Seinfeld
2014). The COVID-19 pandemic underscored the dilapidation of our
domestic manufacturing ecosystem and the loss of human capital needed
for that ecosystem to be highly adaptive, flexible, and resilient. In
the context of mask and respirator (N95) production during the early
days of COVID-19, small and medium sized companies struggled with
access to capital, access to information on how to make medical-grade
masks, access to machines which were predominantly manufactured in
China, shipping delays for those same machines and the components
required for their repair, high qualification and certification costs,
and challenges breaking into mainstream hospital distributor markets.
(Kalathil, Morgan, Fuchs 2022)
That said, while U.S. companies, particularly small- and medium-
sized ones struggled to pivot into and ramp-up domestic production of
masks, in my research with Nikhil Kalathil and Granger Morgan on
companies that pivoted, I have been struck by how much what was left of
our domestic manufacturing ecosystem was central to U.S. companies
being able to pivot in the cases where they successfully did so. One
large American manufacturer was able to leverage its intellectual
property and aerospace sourcing and production expertise to establish
and ramp-up domestic manufacturing of masks within just a few weeks.
General Motors was similarly able to leverage its automotive sourcing
and production expertise to rapidly ramp-up domestic manufacturing of
masks and ventilators. In Indiana, America Meltblown and Filtration was
able, with support from the Indiana government, to leverage its
expertise in filtration materials and oil absorbent products to pivot
first into making meltblown polymer for masks and later to create a
subsidiary for also making N95 masks themselves. Another company
leveraged their company founder's technical macgyver skills to pivot
from past experience in waste management and construction into domestic
mask manufacturing. (Kalathil, Morgan, Fuchs 2022.) These observations
during COVID have strengthened my belief in the importance of domestic
core competencies in critical technologies and a strong domestic
manufacturing ecosystem to having a resilient supply base during
crises. Some pivoting companies' previous experience in waste
management, construction, and water or oil infrastructure products has
also strengthened my belief that the greatest promise for rebuilding
our manufacturing ecosystems may be equitable country-wide investments
in building the infrastructure of the future.
Resiliency to crises and the capability to pivot are not the only
reason to have a vibrant domestic manufacturing base. A vibrant
manufacturing ecosystem is also important to keeping leadership in
innovation domestically and creating well-paying U.S. jobs for
hardworking high school graduates. To make sure the best science and
technology advancements and the high-end operator and technician jobs
that go with them happen domestically, in parallel to investing in
science we need to rebuild our domestic physical and human capital
across a broader swath of our country. Since co-location with
manufacturing is in certain contexts, particularly materials and
process innovations at the technical frontier, necessary for
innovation, making sure the manufacturing processes happen domestically
is likewise important to ensuring the capability to innovate and
continue to lead at the technical frontier (c.f., Fuchs, 2014; Fuchs
and Kirchain 2010). Excitingly, my research with Christophe Combemale
and other colleagues shows that these game-changing products that
leverage the technical frontier in advanced materials and processes
also tend to have better jobs for high-school educated operators and
technicians, whose back-and-forth with engineers on the production line
is essential to bringing the new innovations successfully to market In
these products, when inventors are U.S.-based (as they often are) and
production processes for new products are still immature, the U.S.
should have an initial advantage in keeping production domestic.
However, unless the U.S. has invested in the prototyping facilities for
scale-up of new products (particularly knowledge and capital intensive
advanced materials and processes like those required in high-end next
generation semiconductors) and the regional manufacturing ecosystems
(including the highly-skilled high-school educated operators and
technicians needed) to subsequently make those products at scale,
investments in innovation will not stay domestically.
As I discussed in my 2020 testimony before the Ways and Means
Subcommittee on Trade and in my 2021 testimony before the House Space,
Science and Technology Subcommittee on Research and Technology, I have
come to believe strategic infrastructure investments hold the greatest
promise to revitalizing U.S. worker skills and firm necessary for
vibrant U.S. manufacturing ecosystems.\2\ \3\ By infrastructure I mean
not just roads, bridges, transit networks, water systems, and dams; but
also the energy, communications, manufacturing, and data infrastructure
necessary for all of those.
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\2\ My focus on strategic infrastructure investments is due to the
potential novelty of that approach. Manufacturing Extension Program and
Manufacturing USA innovation institutes already play and will need to
play an important role in reviving our manufacturing ecosystem. On the
Manufacturing Extension Program's effectiveness in upgrading and the
acquisition of competitive capabilities (c.f., Various pieces by
Whitford, J.; Shapira; McEvily, B.). On the Manufacturing USA
innovation institutes, their original goals, and evaluation thereof
(c.f., Recent studies by GAO, NASEM).
\3\ The U.S. generally lags behind other peer industrialized
Nations in infrastructure: The American Society of Civil Engineers
(ASCE)'s 2017 report finds that the Nation's infrastructure averages a
``D,'' meaning that conditions are ``mostly below standard,''
exhibiting ``significant deterioration,'' with a ``strong risk of
failure.'' This lag which can largely be traced back to funding: On
average, European countries spend the equivalent of 5 percent of GDP on
building and maintaining their infrastructure, while the United States
spends 2.4 percent. The United States also differs from most other
industrialized countries in the extent to which it relies on local and
State spending to meet its infrastructure needs--only 25 percent of
U.S. public infrastructure funding comes from the Federal Government.
---------------------------------------------------------------------------
Too often missing from national debates has been thinking about
infrastructure investments as strategic investments in technology and
knowledge capabilities, equity, national security, as well as platforms
that enhance productivity and innovation. To realize this potential,
our infrastructure investments need to be for the infrastructure of the
future. Transportation, transit, and urban infrastructure should be
designed to enable the safe and equitable introduction of driverless
vehicles and smart city systems, and the matching large-scale
interconnected data infrastructure for security, privacy, resilience
and machine learning on that data (Anderson, et al., 2016; Berges and
Samaras 2019.) Electric grids should be restructured to ensure a clean
and resilient power system that can accommodate a wide range of new
designs and services (NASEM 2010, Lueken 2012, NASEM 2017). \4\ (Fuchs
Testimony 2020)
---------------------------------------------------------------------------
\4\ Among other issues, much of our infrastructure was constructed
for the climate of the 20th century, rather than for the climate of the
21st century (Chester, et al., 2020). Rebuilding and reinvesting in our
infrastructure to be resilient to extreme weather is essential for the
safety of our communities and the resilience of our economy (Olsen, et
al., 2015).
---------------------------------------------------------------------------
Investments such as those described above address national needs
for resilience, energy and internet access, demand for products from
cement to steel to semiconductors (particularly if inputs are sourced
domestic manufacturing), and technology leadership (whether in
cybersecurity, software for resilient distributed systems,
semiconductors for communications, renewable energy sources, or
batteries for energy storage). Infrastructure investments also build
national capabilities for building things--not just in the form of
firms responding to the demand, but also in the form of operators and
engineers. These workers will learn by doing. As we think about these
investments strategically, it is critical to recognize the
interconnectedness of knowledge and skills across these infrastructure
domains. The physical and human capital relevant to deploying and
managing sensors for sustainable and smart infrastructure--from the
concrete layer to forman to the engineer to the data infrastructure
developer to the machine learning software--have corollaries in
resilient grid infrastructure, privacy-preserving health
infrastructure, and intelligent manufacturing. In other words, to have
the human capital and enterprises to manufacture the products of the
future, we should build the infrastructure of the future. We should be
strategic about these complementarities between infrastructure and
critical technology and manufacturing capabilities, in where and how we
invest, and in facilitating job and skill transitions across sectors
through targeted training.\5\ \6\ (Fuchs 2020 testimony).
---------------------------------------------------------------------------
\5\ A recent OECD report has looked at current worker skills, how
demand for those skills is expected to change with automation, and the
training required to support ``reasonable'' transitions (OECD 2019). In
our own research, we have been mapping skill requirements to jobs at a
individual operator task level (Combemale, Ales, Whitefoot, Fuchs
2020a), and we are extending that task-level skill mapping now beyond
the shop floor to technicians, engineers, and managers (Combemale,
Whitefoot, Fuchs 2020). Whether at the OECD level or our own more
granular one (or another method yet to emerge), we need to be mapping
and broadcasting to training entities the skill transitions required to
apply skills from one domain to the other across sectors.
\6\ In facilitating these transitions, we should not underestimate
the power of on-the-job learning and learning by doing (building). This
is not to suggest that training isn't necessary, rather that that
training may not happen ``out of work'', per se. Here, where large
firms exist, industry in each sector should lead the training that is
needed, where relevant in partnership with unions, with Government
facilitating assessment and dissemination of best practices and the
mapping of the cross-sector transitions. Where small companies are
involved, the Government will play an essential role, in conjunction
with larger companies, in mapping and funding necessary workforce
transition training.
---------------------------------------------------------------------------
Once again, a cross-mission critical technology analytics program
holds the potential to identify and quantify the systemic implications
of such investments and quantify paths to cross-mission win-wins.
As the above examples highlight, the U.S. needs to build the
capacity to identify and invest in solutions that offer win-wins across
missions, charting paths where the sum across missions may be greater
than the parts.
Unlike firms, Nations have multiple objectives: national
security, economic prosperity (including jobs), and social
welfare (including health, environment, and equity). In the
past the United States has pursued the technological component
of each objective through science and technology agencies with
singular missions, such as defense, energy, transportation,
commerce, and labor. The National Research Council beautifully
describes how this mix of missions helped create the revolution
in computing: ``By funding a mix of work in universities and
industry, [the United States] was able to marry long-term
objectives to real-world problems. And, by channeling its
funding through a variety of Federal agencies, it was able to
ensure broad-based coverage of many technological approaches
and to address a range of technical problems.'' Yet this
excellent system has a hole: even if each agency (or program
within an agency) perfectly fulfills its own narrowly specified
mission, the country could still fail to fulfill the Nation's
overarching multi-objective goal. (Fuchs, Boston Review 2021).
I suspect part of why our country hasn't invested more in domestic
manufacturing and infrastructure is failure to identify and quantify
the value across missions (labor and equity, health, security,
commerce) of these investments. Fortunately, with today's modern data
and analytic tools it is possible to identify, quantify the value of,
and incentivize technological solutions that are win-wins across
multiple national objectives.
For example, our research shows that certain innovations in areas
critical to national security (including high-end semiconductors for
communications) also offer better jobs for hard working high school
graduates (Combemale and Fuchs 2020; Combemale, Ales, Fuchs, Whitefoot
2021; Combemale, Ales, Fuchs, Whitefoot 2022).
Similarly, in the case of the current semiconductor shortage in
safety-critical robust applications, Government funding of design
platforms that embrace commonalities (but leave room for differences)
across the respective technological demands of the defense and
commercial sectors can lead to a solution where the sum is greater than
the parts for U.S. security, economic, labor, and equity interests.
(Blanton, et al., 2021)
As a third example, if we just want to reduce carbon emissions, the
best approach might be to scale up the use of electric vehicles as
quickly as possible. However, if we expand the objective of that
investment to also maximize national security, prosperity, and equity,
we would need to find ways to invest in innovations that reduce our
national reliance on concentrated supplies in geographic locations with
higher probabilities of disruption; quantify the value (in terms of
labor, supply resilience, and innovation) of domestic manufacturing of
batteries; and predict which citizens would gain and lose jobs, and
support those citizens in having jobs for the future of the industry
moving to that region and being trained for those positions. (Fuchs,
Boston Review 2021).
As I have described, getting these investments right is nontrivial.
In a mission-oriented Government, how do we build the national analytic
capacity in critical technologies and supply chains to identify, value,
and act across missions? We need to create a program whose goal is
strategically identifying opportunities across missions.
Today, the U.S. lacks real-time situational awareness of its
strengths, weaknesses, opportunities and threats in various
technologies and supply chains. The U.S. lacks ways of quantifying
technology or product criticality, or the value of various policy
responses (such as onshore manufacturing or secrecy) for technologies
identified as critical. Perhaps most importantly, the U.S. lacks ways
of analyzing the value of various policy responses across missions
(e.g., national security, economic prosperity, and social well-being
including health, equity, and the environment). To build a resilient
economy and ensure that the Nation's investments realize legislator's
multiple objectives for them the U.S. must establish a national
capability for critical technology analytics that will build the 21st
century intellectual foundations, data infrastructure, and analytic
tools needed to elucidate trade-offs and win-wins across national
missions, including the dimensions by which to measure a technology's
criticality, a proactive assessment of strengths weaknesses
opportunities and threats in technologies and supply chains versus
other Nations and the ability to spin-up timely situational awareness
thereon during crises, how innovation could potentially transform these
situations, and the trade-offs across missions presented by different
technology policy approaches.
A critical technology analytics program faces unique challenges in
that the intellectual foundations for identifying critical technologies
do not yet exist, the problems require talent not easily attracted by
individual agencies, and the problems are uniquely cross-mission in
nature, spanning multiple departments. In terms of talent, not only is
frontier technical knowledge and sectoral depth needed on the problem-
solving team, but also the latest in 21st century data and analytic
capabilities (such as machine learning and natural language
processing). Experts at the frontier of these types of knowledge
typically sit across academia and industry. Given the overlaps between
military and civilian demand for knowledge and products in ``critical''
areas, the organization would by definition be focused on problems at
the nexus of academia, industry, and Government.
Given these challenges, the ideal critical technology analytics
program would be a highly flexible, distributed model capable of
rapidly mobilizing and reconfiguring star private sector and academic
talent, data, and resources. To ensure absorptive capacity of these new
tools by Government, individual Government agencies would need to in
parallel be developing internal competencies, and would be responsible
for transitioning capabilities internally, and would have people on
rotation in the critical technology analytics program serving as the
bridge for that transition.
In summary, for a critical technology analytics program to identify
cross-mission win-wins and thus have the greatest value for our Nation,
the program must be set up so as to
1. Be strategic and forward-looking, not working on issues of the
day or week or becoming a statistical agency focused on
comprehensive data collection, rather with outputs involving
analytics to inform strategic action,
2. Be able to receive work from all departments of Government--
including from multiple departments on a single subject, such
that each department would still have their own analytic team
but would seek to leverage the organization where it
particularly needed star talent challenging to attract to
individual agencies, and where select critical technology
problems were particularly cross-mission in their nature;
3. Bring together to solve problems leading technical expertise in
engineering and the physical sciences, matched with analytic
(machine learning, operations research, natural language
processing) and social science (economics, political science,
sociology, history) expertise,
4. Be able to engage neutral third parties and have the capability
to forge public-private partnerships that can serve as a
neutral third party, and
5. Conduct work internally but also be able to leverage expertise
from academia and industry through contracts.
The U.S. has risen to the challenge of creating a star-studded
entity to cut-across missions before. Founded in the aftermath of
Sputnik with the goal of preventing technological surprises, DARPA was
set up to cut through the rivalry between the military services (Fuchs
2010). To ensure future U.S. security, competitiveness, and access to
critical supply, and to ensure the landmark science and infrastructure
legislation proposed achieves legislator's multiple objectives for it,
the U.S. must establish, a cross-mission critical technology analytics
program able to receive work across, collaborate with, and catalyze
initiatives within the existing mission-driven agencies.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF VERONIQUE DE RUGY
George Gibbs Chair in Political Economy at The Mercatus Center, George
Mason University
March 22, 2022
Chair Brown, Ranking Member Toomey, and Members of the Senate
Committee on Banking, Housing, and Urban Affairs, thank you for the
opportunity to testify today. My name is Veronique de Rugy, and I hold
the George Gibbs Chair at the Mercatus Center at George Mason
University, where I study tax and fiscal policy, the Federal budget
process, and the implications of Government spending for economic
growth.
I would like to offer the following three main takeaways:
1. The inflation Americans are experiencing today was to be
expected. There were sufficient warnings that this inflation
should not have been a surprise.
2. The inflation Americans are experiencing is the result mostly of
expansive monetary and fiscal policy, rather than the result of
global supply chain problems or other supply shocks.
3. Fiscal and monetary restraint are key to controlling inflation.
Background
The Consumer Price Index in February 2022 showed its sharpest year-
over-year spike in four decades, \1\ catching the Federal Reserve (Fed)
by surprise. After being slow to recognize the inflation, the Fed
claimed that the inflation is transitory, meaning that it would go away
all on its own. When inflation persisted, the Fed said that prices are
just catching up to prepandemic levels. When prices began to exceed
prepandemic levels, the list of ``causes'' of inflation began to change
with the circumstances, to the point that one could conclude that
inflation can be caused by nearly everything (the restricted supplies
of lumber, used cars, and other goods, as well as overall supply chain
tangles).
---------------------------------------------------------------------------
\1\ Bureau of Labor Statistics, ``Consumer Price Index-February
2022'', news release no. USDL-22-0145, March 10, 2022, https://
www.bls.gov/news.release/pdf/cpi.pdf.
---------------------------------------------------------------------------
Today, the argument that inflation is mostly the result of supply
shocks such as the war in Ukraine or of global supply chain problems
continues to be widespread. \2\
---------------------------------------------------------------------------
\2\ Betsy Stevenson, ``The Best Way To Tackle Inflation: Confirm
Biden's Fed Nominations'', The Hill, March 2022.
---------------------------------------------------------------------------
None of these alleged causes, however, can explain the persistence
of inflation or its scale compared with inflation in other countries.
In particular, explanations about supply-shock-driven inflation seem to
mistake inflation (i.e., an increase in the general price level-that
is, of all prices and wages) with changes in relative prices (i.e.,
when only some prices rise, as when the price of cars rises relative to
the price of other goods and to wages because of reductions in the
supply of computer chips). In the end, excessive focus on the supply
side of this issue causes people to fail to recognize the overwhelming
role played by the demand side, in particular the role of deficit
spending accommodated by the Fed's expansionary monetary policies. This
is surprising, considering that many legislators, Fed officials, and
many experts treated the pandemic and lockdown induced downturn as if
it were a demand-side shock and have responded with measures meant to
raise aggregate demand. They should not be surprised that this
inflation is demand pull rather than cost push.
Global Supply Chains Are Not the Primary Cause of Inflation
One of the most common talking points about the inflation is that
it was caused by supply shocks in general and global supply chain
weaknesses in particular. Fixing inflation therefore requires, among
other things, pulling in supply chains behind national borders. This
hypothesis is based on misconceptions about both supply chains and
inflation.
According to the World Trade Organization, trade in intermediate
goods continued to rise during the pandemic, albeit at a slower rate
than before, in spite of port and shipping bottlenecks. \3\ In other
words, although there were chokepoints, supply chains were far from
``cut off,'' as the president recently claimed on national television.
\4\ In fact, as I will show later, most of the supply chain issues had
to do with the tremendous increase in demand rather reductions in the
economy's ability to supply goods due to than supply-chain-specific
issues. Economist Scott Lincicome has demonstrated repeatedly that
``the Nation's overall productive capacity and its medical goods
industries are generally healthy and that domestic industries and their
supply chains have adapted during the pandemic to meet extraordinary
demand.'' \5\
---------------------------------------------------------------------------
\3\ ``Exports in Intermediary Goods Continue To Grow in Third
Quarter of 2021'', World Trade Organization, February 4, 2022, https://
www.wto.org/english/news-e/news22-e/stat-04feb22-e.htm.
\4\ ``ABC News Live Update: Biden's Exclusive Interview With
George Stephanopoulos'', interview by George Stephanopoulos, ABC News,
video, accessed March 18, 2022, https://abcnews.go.com/US/video/abc-
news-live-update-bidens-exclusive-interview-george-76510757.
\5\ Scott Lincicome, ``The Pandemic Does Not Demand Government
Micromanagement of Global Supply Chains'', Cato Institute, February 24,
2021, https://www.cato.org/pandemics-policy/pandemic-does-not-demand-
government-micromanagement-global-supply-chains.
---------------------------------------------------------------------------
Furthermore, it is at best unlikely that moving supply chains to
domestic producers will lower inflation by reducing the cost of
production. Global supply chains are global as they are because every
other available mode of production and distribution is more costly.
Were the Government to forcibly constrain and alter these supply
chains, it would increase costs further--and as costs go higher, so do
prices. Undoing decades of globalization would also take similar
decades.
Rachel Fefer, Andres Schwarzenberg, and Liana Wong, economists at
the Congressional Research Service, write that the United States, in
particular, was a driving force in breaking down trade and investment
barriers across the globe and constructing the open and rules-based
global trading system that has enabled [global value chains] to
proliferate. . . . For example, stronger linkages to the global economy
force U.S. industries and firms to focus on areas in which they have a
comparative advantage, provide them with export and import
opportunities, enable them to realize economies of scale, and encourage
knowledge sharing and innovation. In addition, households have been
able to enjoy lower product prices and a broader variety of goods and
services--some of which may not be produced domestically. \6\
---------------------------------------------------------------------------
\6\ Rachel F. Fefer, Andres B. Schwarzenberg, and Liana Wong,
``Global Value Chains: Overview and Issues for Congress'', (report no.
R46641, Congressional Research Service, Washington, DC, December 16,
2020).
---------------------------------------------------------------------------
Global supply chain constraints or port bottlenecks do exist, and
Congress can address them in several ways, some of which I will mention
later in this testimony. Indeed, the United States could get much more
out of global supply chains by removing the many Government-imposed
barriers that have intentionally diminished US supply chain capacity,
efficiency, and flexibility and thus made the supply chain crisis far
worse than it ever needed to be. \7\
---------------------------------------------------------------------------
\7\ Scott Lincicome, ``American Sclerosis'', Dispatch, November
10, 2021.
---------------------------------------------------------------------------
Finally, this is not to say that global supply chain constraints
cannot and have not led to an increase in the price level. However, one
needs to differentiate between supply constraints, which increase the
price of some or even many goods relative to other prices, and
inflation, which occurs when the prices of everything, including labor,
eventually rise. We are now seeing the price of everything go up, and
wages also rising though for now at a lower rate. Supply shocks and
constraints do not cause that broad-based pattern. Indeed, individual
price increases show up in measurements of inflation, but these
increases in relative individual prices should not be confused with
inflation. In addition, price-level hikes caused by supply-side shocks
(such as supply-chain chokepoints) are generally not ongoing, month-
after-month price hikes. They are usually a one-time price-level jump,
which eventually dissipates when the supply shock is over, and indeed
usually reverses resulting in a period of measured deflation. All
prices are rising, the inflation is persistent, and there is no sign of
a reversal.
Similarly, a shift in demand from services (restaurant means) to
goods (TVs) can cause goods prices to rise, but it causes services
prices to decline, with no effect on the overall price level. That is
not what we are seeing.
By contrast, inflation, or a general increase in all prices
including wages, and the associated fall in the dollar's purchasing
power has a single source: the creation of too many dollars and the
promise to print more dollars in the future.
The Main Cause of Inflation
Government-induced demand is a key player in this burst in
inflation. The U.S. Department of the Treasury first issued $3 trillion
of new debt, which the Fed quickly bought in exchange for $3 trillion
of new reserves that the Treasury sent out as checks and other forms of
payments to Americans. The Treasury then borrowed another $2 trillion
or so to send out another round of checks and payments to Americans.
Overall Federal debt rose by almost 30 percent of GDP.
This action was the product of a misdiagnosis of economic problems
on the basis of the belief that the pandemic-induced recession was
mostly an aggregate demand shock, not one of aggregate supply. That
means that sending money to people would have very little impact on
output, especially because a large share of the economy was closed. It
would, however, affect demand for durable goods.
The size of fiscal stimulus was also an issue. Even by Keynesian
economics standards, the $5 trillion injected into the economy was
larger than any plausible output gap, at any level of multiplier. The
same can be said of the $1.9 trillion American Rescue Plan, which was
passed in March 2021. Around early 2021, the Congressional Budget
Office projected that the output gap would be $700 billion through
2023, \8\ the period when most of the $1.9 trillion in spending would
take place. $1.9 trillion was two or three times more than needed to
fill the gap. \9\
---------------------------------------------------------------------------
\8\ Calculations of the Committee for a Responsible Federal Budget
based on Congressional Budget Office, An Overview of the Economic
Outlook: 2021 to 2031, February 2021. ``America Faces a $380 Billion
Output Gap'', Committee for a Responsible Federal Budget, February 1,
2021.
\9\ Veronique de Rugy, ``The Not-So-Stimulative $1.9 Trillion
Package'', National Review, March 19, 2021.
---------------------------------------------------------------------------
Whereas everyone from monetary experts to the Fed chairman to
President Joseph R. Biden, Jr.'s, Council of Economic Advisers spent
most of 2021 explaining this burst of inflation without any mention of
the role played by fiscal and monetary policies, economists such as
Larry Summers and Jason Furman, who had advised earlier Democratic
administrations, and Olivier Blanchard of the International Monetary
Fund were sounding the alarm. As some of the best Keynesian economists
out there, they recognized that the $1.9 trillion American Rescue Plan
was excessive and would cause an excessive increase in aggregate
demand, followed by inflation.
A series of new studies confirm the demand-side effects on
inflation. \10\ The World Trade Organization's chief economist Robert
Koopman also estimates that increased demand for goods was a major
factor behind supply chain issues, accounting for anywhere between two-
thirds to three-quarters of supply shortages. \11\ In other words,
there wouldn't be ``supply chain'' problems without the massive
increase in demand for durable goods fueled by Government spending.
---------------------------------------------------------------------------
\10\ Francois de Soyres, Ana Maria Santacreu, and Henry Young,
``Demand-Supply Imbalance During the COVID-19 Pandemic: The Role of
Fiscal Policy'', VoxEU, Center for Economic Policy Research, March 1,
2022, https://voxeu.org/article/demand-supply-imbalance-during-covid-
19-pandemic; ``Global Supply Chains: Risk, Repair and Restructuring'',
Morgan Stanley, February 17, 2022, https://www.morganstanley.com/ideas/
supply-chain-disruption-outlook; ``Demand Shock Behind Global
Bottlenecks Should Ease in Months--WTO'', Reuters, February 14, 2022. A
recent study by the International Monetary Fund estimates that, in the
second quarter of 2021, in the United States, about 45 percent of
changes in producer prices were driven by supply shocks and 55 percent
were driven by demand shocks. Oya Celasun, et al., ``Supply
Bottlenecks: Where, Why, How Much, and What Next?'' (working paper no.
WP/22/31, International Monetary Fund, Paris, February 2022).
\11\ ``Demand Shock Behind Global Bottlenecks Should Ease''.
---------------------------------------------------------------------------
The Government has been borrowing money for decades and the Fed has
been buying Treasury securities and turning the debt into reserves for
a decade without causing inflation. What was different this time
around? First, Americans have seen for a decade or so prices rise in
assets from housing to land to the stock market, but the increase
didn't spread to broader prices until now.
Second, as economist John Cochrane explains, the large money
printing and deficit spending alongside the absence of discussion about
paying down the debt once this crisis is over is what produced this
inflation:
Inflation comes when Government debt increases, relative to
people's expectations of what the Government will repay. If the
Treasury borrows, but everyone understands it will later raise tax
revenues or cut spending to repay the debt, that debt does not cause
inflation. It is a good investment, and people are happy to hold on to
it. If the Fed prints up a lot of money, buys Treasury debt, and the
Treasury hands out the money, as happened, but everyone understands the
Treasury will pay back the debt with future surpluses, the extra money
causes no inflation. The Fed can always soak up the money by selling
its Treasury securities, and the Treasury repays those securities with
surpluses (i.e., taxes less spending).
The 2020-2021 borrowing and money episode was distinctive because,
evidently, it came without a corresponding increase in expectations
that the Government would, someday, raise surpluses by $5 trillion in
present value to repay the debt. \12\
---------------------------------------------------------------------------
\12\ John H. Cochrane, ``Fiscal Inflation'' (paper presentation,
Cato Institute 39th Annual Monetary Policy Conference, Washington, DC,
December 22, 2021), https://static1.squarespace.com/static/
5e6033a4ea02d801f37e15bb/t/61d3c86e0797d1326136230b/1641269358431/
Cochrane-Final-12.pdf, 4.
---------------------------------------------------------------------------
Most economists believe that the Fed has the tools to control
inflation today by raising interest rates. However, one needs to face
the fact that the amount of America's debt may make fighting inflation
harder than in the past. A few fiscal facts are important to bear in
mind. Federal debt held by the public is now $23 trillion, or 100
percent of GDP, and a large share of that debt is short term (30
percent has a maturity of a year and over 60 percent a maturity of 4
years). Therefore, any increase in interest rates sufficient to fight
inflation would quickly lead to large increase in interest payments.
In addition to being politically unpopular, if the additional
interest payments are paid for with borrowed money rather than higher
taxes, the borrowing may add fuel to the inflation fire. Cochrane
explains: ``This consideration is especially relevant if the underlying
cause of the inflation is fiscal policy. If we are having inflation
because people don't believe that the Government can pay off the
deficits it is running to send people checks, and it will not reform
the looming larger entitlement promises, then people will not believe
that the Government can pay off an additional $1 trillion deficit to
pay interest costs on the debt. In a fiscally driven inflation, it can
happen that the central bank raises rates to fight inflation, which
raises the deficit via interest costs, and thereby only makes inflation
worse.'' \13\
---------------------------------------------------------------------------
\13\ John H. Cochrane, ``Fiscal Inflation'', Grumpy Economist,
January 3, 2022.
---------------------------------------------------------------------------
Reform Ideas
First, the Fed needs to fully step back from its expansionary
policy. It needs to raise interest rates significantly to tame
inflation. With inflation at 7 percent, even the Fed's promise to raise
interest rates to about 2 percent leaves the real, after-inflation,
cost of borrowing at a stunning negative 5 percent. The usual rule of
thumb is that to tame inflation, the Fed must raise the nominal
interest rate by more than the inflation rate, so the real inflation
rate rises. Current Fed policy will only achieve that goal if almost
all of today's inflation miraculously melts away on its own.
But Congress needs to do its part too. Without fiscal
consolidation, the Government's interest costs on the debt. Unless
fiscal policy tightens to pay those interest costs, raising interest
rates just makes deficit-induced inflation worse. As economist Eric
Leeper states, ``fiscal responses are fundamental, even indispensable
to monetary policy impacts on inflation.'' They are ``the difference
between a Brazilian-style interest rate and inflation spiral and a
successful reigning [sic] in of inflation,'' \14\ he adds.
---------------------------------------------------------------------------
\14\ Leeper, ``Shifting Policy Norms'', 2.
---------------------------------------------------------------------------
Empirical work confirms that fiscal contraction is a key element to
reducing persistent inflation. For instance, legislators implemented
fiscal consolidation (by raising revenue, decreasing spending, or both,
and passing pro-growth tax and regulatory reforms that increased the
tax base) during each of the three latest victories over inflation: in
the late 1940s, after the 1980-1982 Recession, and in the late 1980s
and mid-1990s. Unfortunately, this link between fiscal and monetary
expectations is too often overlooked in conventional inflation debates,
with fiscal authorities acting as though inflation outcomes are
independent of fiscal policy.
Higher real interest rates would also increase household wealth
through lower inflation (increasing the real value of wealth) and
higher interest receipts (raising household income flows). Thus,
although the central bank is aiming to lower inflation, its efforts
could backfire by boosting demand for goods and services. Higher levels
of debt work to amplify these (demand-driven) inflationary pressures if
there are no plans for fiscal consolidation (e.g., tax hikes to offset
the wealth effect). \15\
---------------------------------------------------------------------------
\15\ Eric M. Leeper, ``Shifting Policy Norms and Policy
Interactions'' (paper presentation, Jackson Hole Economic Symposium:
Macroeconomic Policy in an Uneven Economy, Federal Reserve Bank of
Jackson Hole, WY, September 8, 2021), https://www.kansascityfed.org/
documents/8357/Leeper-JHPaper.pdf.
---------------------------------------------------------------------------
Second, Congress needs to get its fiscal house in order above and
beyond the need to tame inflation. Inflation comes when people lose
faith that the U.S. will eventually repay its debts. Perpetual deficits
and the looming entitlements crisis undermine that faith. The good news
is everyone knows what types of fiscal adjustments are effective at
reducing the U.S. debt-to-GDP ratio. Alberto Alesina and others have
shown that fiscal adjustment packages based on spending cuts--
preferably reforms to programs that are the drivers of future debt:
Social Security and Medicare--rather tax increases are the most
effective way to reduce the debt. Such packages are also less likely to
cause short-term recessions and, if they do cause short-term
recessions, those recessions are mild and short, unlike those caused by
adjustments based on tax increases. \16\
---------------------------------------------------------------------------
\16\ Alberto Alesina and Veronique de Rugy, ``Austerity: The
Relative Effects of Tax Increases Versus Spending Cuts'' (Mercatus
Research, Mercatus Center at George Mason University, Arlington, VA,
March 2013).
---------------------------------------------------------------------------
Third, many of the long-term structural problems with the global
supply chain are legislative, and Congress should fix them. Here are a
few:
Eliminate the Jones Act (Merchant Marine Act of 1920). \17\
---------------------------------------------------------------------------
\17\ Under the act, all freight moved between U.S. ports must use
U.S.-built, U.S.-crewed, and U.S.-flagged ships to move all freight
between U.S. ports. This requirement makes shipping more costly and
puts more pressure on inland transit (trains and trucks). Thomas
Grennes, ``An Economic Analysis of the Jones Act'' (Mercatus Research,
Mercatus Center at George Mason University, Arlington, VA, May 2017);
Nita Ghei, ``The Jones Act and the Growth of Regulatory Barriers in the
U.S. Shipping Industry'', Mercatus Center at George Mason University,
April 4, 2017; ``Project on Jones Act Reform'', Cato Institute,
accessed March 18, 2022, https://www.cato.org/project-jones-act-reform.
Reform the Foreign Dredge Act, which requires that dredging
barges comply with the Jones Act. \18\
---------------------------------------------------------------------------
\18\ This significantly inflates the costs of dredging U.S. ports,
preventing expansions that could accommodate more and larger ships.
There has been no container terminal expansion since 2009 (Charleston).
End punitive tariffs, duties, and quotas, which inflate
costs and reduce the supply of goods that are essential for
alleviating supply constraints. \19\
---------------------------------------------------------------------------
\19\ For example, section 301 tariffs have drastically reduced the
supply of truck chassis in the United States, worsening truck shipping
bottlenecks. ``Tariffs Could Be Part of Why We're Short on Chassis'',
Flexport, October 28, 2021.
Ease immigration restrictions. \20\
---------------------------------------------------------------------------
\20\ Immigration restrictions have ``removed at least 1 million
potential (and lawful) workers from the U.S. labor market, putting
acute pressure on labor-intensive industries like warehousing. (And
backed-up warehouses make it more difficult to clear containers that
are stacked up at various ports.)'' Lincicome, ``American Sclerosis''.
End the ban on Mexican trucking companies' operation on
U.S. roads. \21\
---------------------------------------------------------------------------
\21\ The ban keeps `` `the largest and closest supply of potential
U.S. truck drivers' out of the country and reducing the number of
American trucks available for inland work because they're picking up
cargo at the border from Mexican truckers who have to drop it there.''
Mark Szakonyi, ``Western Countries Waking Up to Freight Infrastructure
Needs: DHL CEO'', Journal of Commerce, October 14, 2021, quoted in
Lincicome, ``American Sclerosis''.
These are some of the things that Congress can do specifically to
alleviate some of the restrictions imposed on global supply chains.
Finally, there is a temptation to offset inflation with subsidies,
to have the Government borrow more money to pay for gas, housing,
childcare, and more at subsidized prices. Since fiscal largesse is the
source of the problem, and since these efforts make the affected
markets more inefficient, this approach threatens a greater stagnation
spiral. Making a good cheaper for some consumers by subsidies makes it
more expensive for the economy as a whole.
______
PREPARED STATEMENT OF PHIL LEVY
Chief Economist, Flexport
March 22, 2022
Chairman Brown, Ranking Member Toomey, and Senators of the
Committee, thank you for the opportunity to testify today on the
performance of supply chains through the COVID-19 pandemic. Even from a
purely economic perspective, it has been a time of extraordinary
shocks, unprecedented policy responses, and shifting economic behavior.
One salient outcome has been disappointment in the performance of
global supply chains. Not only has it become significantly more
expensive to move goods by ocean or air than it was prepandemic, but
the amount of time it takes to move goods across the world has more
than doubled. From the perspective of consumers and businesses, this
has meant shortages, long waits, and rising prices.
In my testimony, I would like to address the question of why this
happened. Why did we not continue to enjoy the ready availability of
goods at moderate prices to which we had become accustomed? Of course,
there could be many reasons, but I will focus on two potential dominant
causes and then argue for a choice between them. I will also discuss
the implications of the arguments for how we view supply chain
resiliency and what we can expect for inflation.
Supply Chain Challenges
The first explanation attributes the shortages and the price hikes
the country has experienced to a failure of global supply chains. At
first blush, this seems obvious. Over the course of the pandemic, we
saw periods when factories around the world (and in the United States)
closed due to Covid infections, or were operating at limited capacity.
We saw infections and restrictions hit truckers, warehouses, rail, and
port operations. When health concerns severely limited international
passenger air travel, we lost the hold capacity in the bellies of those
planes that had accounted for roughly half of air cargo space. It is
inarguable that the pandemic posed serious challenges for supply chain
operations.
If one adopts this view, then one could well think that these
problems will soon recede. There are several reasons why they might.
First, if and when we improve the health situation in the United States
and abroad, these particular stresses should go away. Second, if there
is something particular that is broken with global supply chains, then
we could just fix the problem and watch goods flow freely again.
Finally, there are some who believe that if we just reduced our
dependence on foreign goods, then we would be insulated from such
shocks and enjoy greater resiliency in our supply chains.
All of these arguments are problematic, but the least compelling is
the argument that sourcing from abroad is at the root of the problem
and that nearshoring or onshoring will be the solution. The supply
chain challenges that I described above were by no means limited to
foreign suppliers, foreign ports, foreign warehouses, and foreign
truckers. They were not confined to any one country. We experienced all
of those difficulties in the United States as well. The pandemic surged
in different places at different times. At some points Asia was hit
most acutely, for example, but for substantial stretches over the last
2 years, Asian supplier countries have had the lowest case rates to
deal with of major supplying countries. Even if it were economically
feasible to produce all the goods we want in the United States at high
quality and reasonable prices--it is not--the result would only be
enhanced resiliency if the United States were immune to the ravages of
such pandemics. It is not.
A study by Bonadio, et al., (2021) makes this point more carefully.
\1\ It concludes: `` . . . renationalization of global supply chains
does not in general make countries more resilient to pandemic-induced
contractions in labor supply. This is because eliminating reliance on
foreign inputs increases reliance on the domestic inputs, which are
also disrupted due to nationwide lockdowns. In fact, trade can insulate
a country imposing a stringent lockdown from the pandemic-shock, as its
foreign inputs are less disrupted than its domestic ones.''
---------------------------------------------------------------------------
\1\ Bonadio, Barthelmy, Zhen Huo, Andrei A. Levchenko, and Nitya
Pandalai-Nayar, ``Global Supply Chains in the Pandemic'', NBER Working
Paper No. 27224, April 2021.
---------------------------------------------------------------------------
Even if we set aside the idea that putting all our eggs in a
domestic basket will deliver resiliency, this supply chain breakdown
explanation might appear to offer hope that relief from shortages and
inflation just awaits a few technical fixes.
A Demand Shock
Before we blame everything on supply chains, we need to consider
another powerful force at work that provides an alternative explanation
for recent experience. The pandemic era economy has been characterized
by a dramatic expansion in the demand for goods. This was not part of
the conventional recession playbook. In general, a recession is
characterized--defined--by a marked slowdown in economic activity. To
be fair, as Figure 1 shows, there was an initial dip in demand for
goods in the Covid recession, but the effect was as brief as the
recession (the vertical gray bar in the chart).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In the graph, services (the bottom line) behave the way we expect
recession consumption to work. Consumption of services fell from its
prepandemic level and has only just worked its way back, almost two
years later. In contrast, durable and nondurable goods consumption had
regained its prepandemic level by the early summer of 2021 and it
climbed from there. By the spring of 2021, durable goods consumption
was almost 35 percent above where it had been in February 2020. If it
had not been for the durables surge, nondurable goods consumption would
look impressive in its own right, rising and staying more than 10
percent above its prepandemic level.
How could it be that goods consumption rose so sharply in the wake
of such a powerful shock? We can look at three complementary
explanations. First, there was the clear effect of health measures.
When it became difficult to go to a gym, or a restaurant, or a movie
theater, people instead purchased home exercise equipment, kitchenware,
or entertainment centers.
Second, normally the principal constraint on purchases in a
recession is falling incomes. But in the wake of the pandemic, personal
income did not fall, due to powerful fiscal policies.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 2 shows that real personal income never fell back to its
level of March 2020, nor did the level of Government social benefits.
The jumps in social benefits match with jumps in income (unsurprising)
and with jumps in the consumption of goods in Figure 1.
This stimulus was coupled with an extraordinarily accommodative
monetary policy, as shown in Figure 3, which tracks the real Fed Funds
rate, the nominal rate less the trimmed mean PCE inflation rate. \2\
The nominal rate, for most of the period shown, was fixed near zero,
but the inflation rate steadily mounted, driving the difference well
into negative territory. While the graph does not show it, the previous
low value of this series was just below -2.0 percent in late 2008
during the global financial crisis. The series dates back to the 1970s.
Highly negative real interest rates provide an incentive for consumers
and businesses to move purchases forward in time, thus stimulating
present consumption.
---------------------------------------------------------------------------
\2\ While the discussion focuses on the negative real Fed Funds
rate, this was accompanied by a dramatic expansion of the Federal
Reserve's balance sheet, from just over $4 trillion on the eve of the
pandemic to almost $9 trillion today. See https://
www.federalreserve.gov/monetarypolicy/bst-recenttrends.htm. This
includes over $2.7 trillion in mortgage-backed securities.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thus, in this explanation of the pandemic economic experience,
there was a dramatic increase in the demand for goods consumption,
driven by higher incomes, very low interest rates, and a pandemic-
induced shift in preferences toward goods and away from services.
Deciding Between the Explanations
Note that either an expansion of demand or a contraction of supply
could drive up prices. However, only an expansion of demand would
explain the additional quantity consumed. We already saw this expansion
depicted in Figure 1, when consumption of durable and nondurable goods
rose appreciably. Had the supply chain been unable to deliver the
goods, quantities consumed would necessarily have fallen. Instead they
grew significantly. The story of a broken supply chain as the source of
trouble does not fit the evidence.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
While Figure 1 illustrated this for consumption, this held true at
the international supply level as well. Figure 4 shows quarterly real
U.S. imports, not seasonally adjusted. Without seasonal adjustment the
fairest comparison is to look at the fourth quarter of successive
years. 2020Q4 was 5.4 percent above 2019Q4; and 2021Q4 was 13.6 percent
above the figure from two years before. Thus, we not only saw strong,
persistent growth in real imports, but the Q4 figures in 2020 and 2021
were record highs. This is not consistent with an international supply
system that has broken down.
This still leaves us with an important question: if a supply chain
breakdown was not the culprit, how do we explain the very high shipping
prices and the extensive delays? Those were real and important, and
they persist to the present day. Figure 5 shows Flexport's Ocean
Timeliness Indicator, which measures the time it takes for containers
to move from a factory in Asia to pickup at a destination port in
either North America (Transpacific Eastbound) or to Europe (Far East
Westbound).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The answer gets to what we mean by ``resilient.'' The supply chain
system was able to deliver significantly more goods in the face of
surging demand, but it had its limits. It was built with a certain
capacity in mind. In general, for international logistics, the capacity
was meant to handle the peak season of imports leading up to year-end
holidays. Normally that period would be preceded and followed by lulls,
which would allow the system to catch up. Instead, the system has now
been operating at or above peak capacity for almost 2 years. That has
brought congestion, high prices, strains, and delays.
One might ask why we did not have an even more resilient system
that could readily accommodate such surges in demand. The answer is
that capacity is costly. For the public sector, there is a reluctance
to allocate funds to build out infrastructure beyond any realistically
anticipated need. For the private sector, the cost of excess capacity
can drive companies out of business.
It is also worth noting that capacity constraints apply both in the
aggregate, but also in individual sectors. If everyone suddenly decides
they want substantially more personal protective equipment (PPE) or
home-sized toilet paper rolls, then even a well-functioning domestic
private sector may have difficulty meeting demand in the short run. In
some cases, as with imported toilet paper during the pandemic,
international trade can provide a source of resilience.
Implications for Inflation
Beyond concerns about resilience, the question of how we should
understand recent supply chain experience is important in thinking
about what is likely to happen next with inflation. In traditional
monetary analysis, when an excess of demand has caused inflation to
rise, it has been necessary to raise interest rates above the inflation
rate to rein in the demand. \3\ This was done dramatically in the late
1970s and early 1980s.
---------------------------------------------------------------------------
\3\ For a recent analysis of why inflation is a concern, see
Blanchard, Olivier, ``Why I Worry About Inflation, Interest Rates, and
Unemployment'', PIIE, March 14, 2022.
---------------------------------------------------------------------------
It is interesting to note that the Federal Reserve has announced a
different course. In their economic projections released on March 16,
they project core PCE inflation to be 4.1 percent in 2022. Yet their
estimates of the nominal Fed Funds rate do not exceed 2.8 percent
through 2024. It is unlikely that negative real Fed Funds rates would
do much to bring down inflation, so that raises the question of what
else would drive inflation down? In response to such a question,
Chairman Powell repeatedly cited supply chain improvement as an
expected positive force.
If we believed that supply chains had broken down and that were a
driving cause of inflation difficulties, this would be a plausible
reason for hope. Just fix the broken supply chains. If instead, as
argued above, supply chains have been overwhelmed by a surge in demand,
then the most likely source of relief would be a reduction in demand.
The reasoning gets circular if we do not distinguish cause and effect.
There are other possibilities for improvement, of course. The
demand for goods could abate if the health situation improves and
consumers revert to their prepandemic preference for services. \4\
There could also be progress if supply chains became more efficient--
e.g., through increased adoption of technology--or expanded capacity
through investment. The latter is not likely to bring short-run relief.
---------------------------------------------------------------------------
\4\ Flexport tracks and forecasts this preference with its Post-
Covid Indicator, updated monthly. To date, there is only limited
evidence of reversion.
---------------------------------------------------------------------------
In sum, if strong demand pushed the supply chain system beyond its
limits, it seems unwise to count on near-term supply chain improvement
in the absence of demand restraint.
Before leaving the topic of inflation, it may be worth noting one
type of policy that would be actively counterproductive if one wishes
to combat price pressures: trade protection and impediments to
international sourcing. Companies that source abroad do not do so
because of the ease of operating a supply chain across thousands of
miles and many time zones. They do so because they can produce that
specific good for lower cost abroad. If they could have produced it for
less domestically, it would almost certainly have been easier to do so.
Thus, policies that compel more costly production are likely to add to
cost pressures and rising prices.
Further, the U.S. labor market is currently operating at 3.8
percent unemployment, below the Federal Reserve Board's 4.0 percent
estimate of long run unemployment. The Atlanta Fed's Wage Growth
Tracker shows wage growth at the highest rate in the 25-year history of
the series. Thus, policies that compel domestic production and add to
labor demand are likely to increase price pressures.
Paths to Resiliency
There is no simple, low-cost policy that allows an economy to
gracefully accommodate very large and sector-specific surges in demand.
In specific cases, such as PPE, it may be worthwhile to maintain a
stockpile if there are specific expectations of a demand surge. In
general, though, an efficient trading system that allows for flexible,
competitive sourcing is most likely to meet shifting demand. As a
policy measure, this argues for an open, rules-based trading system.
Conclusion
The pandemic impacted supply chains directly, but also indirectly,
as a shift in preferences and a strong policy response induced an
extreme and sustained demand for goods. The global logistics system was
able to partially accommodate this surge in demand, even amidst
operational difficulties. But global supply chains had and have
capacity constraints. As surging demand hit those constraints, costs
have risen and goods have taken a long time moving from factories to
customers. The resulting scarcity, along with pressures for increased
production and hiring, have contributed to rising inflation. The
measures most likely to ease supply chain pressures are those which
curtail demand. The measures most likely to bring resilient supply
chains are those which facilitate global sourcing.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM WILLIAM E. SPRIGGS
Q.1. What can Congress do to increase the number of skilled
construction workers?
A.1. Response not received in time for publication.
Q.2. Nearly half of the construction industry's workforce will
be retired in just over a decade.
How can Congress promote more young people to pursue trade-
oriented jobs?
A.2. Response not received in time for publication.
Q.3. What role can unions play in getting more recent high
school and college graduates into the trades workforce?
A.3. Response not received in time for publication.
Q.4. How can the U.S. work with its allies to build resiliency
in our supply chains for staple crops and basic necessities?
A.4. Response not received in time for publication.
Q.5. Should Congress consider the larger role strategic
reserves play in stabilizing global prices as well as domestic
prices in times of disruption?
A.5. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM BETSEY STEVENSON
Q.1. What are some of the consequences families are
experiencing because Congress has not yet renewed the expanded
tax cut?
A.1. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM ERICA R.H. FUCHS
Q.1. What technologies should the Government finance now to
address supply chain issues, climate needs and infrastructure?
What do you recommend as top priority investments?
A.1. To address this question properly the U.S. needs to invest
in a cross-mission critical technology analytics program that
builds the data and analytic capabilities to inform Government
decisions, so that we're not flying blind.
The U.S. must create the supply chains of tomorrow, not fix
the supply chains of yesterday. Based on our own research over
the decades, Government should (1) invest in funding innovation
to reduce concentrated supply chain dependencies in energy
storage, (2) invest in funding design rules and common design
platforms in robust, safety-critical semiconductor applications
shared by defense and transportation systems, and (3) invest in
smart infrastructure for transportation, communications, and
transport. In addition, the U.S. must invest now in a
prototyping facility for researchers across the stack to
experiment in next-generation (beyond-CMOS) semiconductors, to
ensure it can lead the AI, semiconductor and computing supply
chain beyond Moore's Law.
In parallel, to have the economic resiliency to pivot to
meet demand as it changes and during crises, the U.S. needs to
rebuild its manufacturing ecosystem through investments in
infrastructure. In our research on domestic manufacturers
pivoting during the pandemic, what was left of the U.S.
manufacturing ecosystem was central to the U.S. response. In
Wisconsin, the founder of a waste management and construction
company macgyvered broken mask manufacturing machines into
working for commercial-scale production. In Indiana, a company
leveraged its expertise in filtration materials and oil
absorbent products to pivot into making meltblown polymer for
masks and later also making N95 masks themselves. These
pivoting companies' previous experience in waste management,
construction, and water or oil infrastructure strengthens my
belief that the greatest promise for rebuilding our
manufacturing ecosystem may be equitable country-wide
investments in infrastructure of the future. Infrastructure--
for transit, energy, communications and data--address needs of
society and manufacturing. In the same way that we need to
create the supply chains of the future not fix the supply
chains of the past, our infrastructure investments need to be
for the infrastructure of the future. Transportation, transit,
and urban infrastructure should be designed to enable the safe
and equitable introduction of driverless vehicles and smart
city systems, and the matching large-scale interconnected data
infrastructure for security, privacy, resilience and machine
learning on that data (Anderson, et al., 2016; Berges and
Samaras 2019.) Electric grids should be restructured to ensure
a clean and resilient power system that can accommodate a wide
range of new designs and services (NASEM 2010, Lueken 2012,
NASEM 2017). \1\ Foundries should be built to lead the world in
the invention and commercialization of next generation
semiconductors and synthetic biology. Investments such as those
described above address national needs for resilience, energy
and internet access, and technology leadership within and
beyond manufacturing.
---------------------------------------------------------------------------
\1\ Among other issues, much of our infrastructure was constructed
for the climate of the 20th century, rather than for the climate of the
21st century (Chester, et al., 2020). Rebuilding and reinvesting in our
infrastructure to be resilient to extreme weather is essential for the
safety of our communities and the resilience of our economy (Olsen, et
al., 2015).
---------------------------------------------------------------------------
Done right, investments in smart, climate-resilient
infrastructure of the future can build the companies and
skilled workers who become the manufacturing technologies and
workforce of the future: Infrastructure investments build
national capabilities for building things--not just in the form
of firms responding to the demand, but also in the form of
operators and engineers. These workers learn by doing. Indeed,
it is critical to recognize the interconnectedness of the
knowledge and skills across manufacturing and these
infrastructure domains. The skills relevant to deploying and
managing sensors for sustainable and smart infrastructure--from
the concrete layer to forman to the engineer to the data
infrastructure developer to the machine learning software--have
corollaries in resilient grid infrastructure, privacy-
preserving health infrastructure, and intelligent
manufacturing.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM ERICA R.H. FUCHS
Q.1. How have corporate decisions, like off-shoring and just-
in-time supply chains, affected the resiliency of America's
workforce and supply chains?
A.1. Over the last half a century, the world and the U.S.'
position in that world has changed dramatically. The global
geopolitical balance of scientific, economic, and production
capabilities has shifted away from U.S. dominance. China is now
the largest producer and second largest market in the world,
and the U.S. is no longer in a singular position of scientific
and technological leadership across domains (Branstetter,
Glennon, and Jensen 2018; Segal 2019). At the same time, the
U.S. faces equal or greater challenges on its home front.
Domestic economic inequality has increased (Autor, Katz, and
Kearney 2008; Autor 2014; Leonhardt 2017, Autor 2019), social
mobility declined (Chetty, et al., 2017, Chetty, et al., 2020),
and political polarization is on the rise (Autor, Dorn, Hanson,
and Majlesi 2020). Center stage to both of these trends are
trade and technology: research has documented negative impacts
of import competition on employment and earnings in trade-
exposed local labor markets (Autor, Dorn, and Hanson, 2013;
Acemoglu, et al., 2016) and a rise in political extremism in
locations hardest hit by trade (Autor, Dorn, Hanson, and
Majlesi 2020).
Unfortunately, in this moment of dual internal and external
crises, we lack the intellectual and institutional foundations
to guide our Nation on how to act. While earlier research
highlighted the benefits of global trade (Ricardo 1817) and
technology change (Solow 1957), empirical evidence has
increasingly pointed to how these benefits can be uneven:
Globalization can decrease some wages (Samuelson 2004, Autor,
et al., 2016) and innovation (Fuchs and Kirchain 2010, Fuchs
2014, Autor, et al., 2020) domestically; certain forms of
technology change, such as automation, can reduce jobs without
increasing productivity (Acemoglu, et al., 2020) and exacerbate
inequality (Autor, et al., 2003). In light of these more recent
findings, some intellectual leaders have suggested slowing the
progress and adoption of technology (Piore 2018, Acemoglu, et
al., 2020), and gradualism as a principle for trade policy
(Autor, et al., 2016). Others are raising concerns about the
U.S. losing global technology competitiveness, particularly to
China (Augustine and Lane 2020). These experts are arguing for
dramatically increasing funding of science and technology
(Segal 2019, Johnson and Gruber 2019, Augustine and Lane 2020),
and using regional distribution of funding of science and
technology to reduce inequality and increase jobs (Johnson and
Gruber 2019).\1\ \2\
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\1\ These first two paragraphs are taken directly from my
Congressional Testimony (Fuchs 2021).
\2\ Unfortunately, despite the relatively small total number of
jobs in the production of science and technology research, the long gap
between science funding and broader positive economic outcomes, and the
additional local investments required for the commercialization of
science to remain local, leave little likelihood that the positive
externalities of just 15 regional hubs (particularly in their proposed
locations) will reach the majority of impoverished areas--and
particularly not rural areas--in the next decade if ever (c.f., Fuchs
2021, Brookings guy in testimony).
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Missing from these debates is that technology directions
are a choice and while some technology directions may increase
trade-offs, there may also be win-win technology choices--
strategic technology investments that could meet multiple
national objectives, such as improving national security and
economic competitiveness, winning in global trade, and good
jobs. For example, Combemale, et al., (2021) show that not all
technology leads to wage and skill polarization, indeed many of
the technologies on today's critical technology lists may lead
to better jobs for hard-working high school graduates
(Combemnale, et al., 2021, Combemale and Fuchs 2022). \3\
Combemale, et al., 2020 find that innovation in semiconductors
for communications would lead to more, middle-skilled
manufacturing operator jobs in the U.S. Cotterman, et al.,
(2022) likewise find that electric vehicles (and in particular
battery electric vehicle powertrains) will require more
operator labor hours, and equal or higher labor skills
(Cotterman 2022).
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\3\ Indeed, work by Combemale, et al., (2020) shows that
technologies with different labor outcomes compete as perfect
substitutes (with the same performance and production costs) in the
marketplace.
Q.2. What kind of responsible incentives could Congress put in
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place to bring these supply chains back home?
A.2. For the U.S. to compete, we must make innovative products
here in the U.S., that can best be made domestically (due to
comparative advantage), and that are demanded by the world.
Doing so can be a win-win for the economy and jobs (as well as
for technology leadership, national security, and access to
critical supply). Importantly, making advanced products
domestically need not equal automation and fewer ``good'' jobs.
I want to start by debunking the assumption that
manufacturing advanced technologies needs to equal fewer jobs,
or more low-skill (often low-wage) and high-skill (often high-
wage) jobs and fewer jobs in ``the middle.'' Some time ago, I
began to feel troubled by the focus on automation, robotics,
and IT in the discussions on technology and the future of work.
While these technologies are important, they are only one set
of the vast innovations in the world and the world economy.
Our research demonstrates that some of our more important
emerging technologies--particularly those in advanced materials
and processes--may be win-wins in terms of national security,
the economy, and jobs, including for hardworking high-school
graduates. As an initial example, we focused on parts
consolidation--a technically challenging objective well-known
to the public for example in Intel's ability to fabricate more
and more components on a single chip (Moore's Law), and General
Electric's ability to additively manufacture what was formerly
a 455 piece engine in just 12 parts. It's also a capability
being pursued in at least 4 of our ManufacturingUSA institutes.
\4\ Our research shows that whereas automation leads to more
low-end and more high-end skills being required of high-school
educated manufacturing shop floor operators with some of the
high-skill tasks moving outside the jurisdiction of the
operator, parts consolidation leads to more middle skills being
required of high-school educated shop floor operators
(Combemale, Ales, Whitefoot, Fuchs 2020a). \5\ In addition, in
their early days the consolidated design production processes
require more ``sorcery'' from the operators and more back-and-
forth between operators and engineers, the latter who are skill
working to stabilize and understand the relationship between
material, process, and geometry design decisions and production
outcomes (Combemale and Fuchs 2020). \6\
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\4\ The U.S. Government has funded 15 manufacturing innovation
institutes. One of those 15 is focused on robotics (ARM) and another
one on digitization (MxD). A third has a digitization component
(CESMII). At least four (AIM, America Makes, IACMI, and NextFlex) of
the 15 manufacturing institutes involve advanced material and process
innovations that lead to design and parts consolidation, and another
three (biofabusa, lift, and poweramerica) likely involve parts
consolidation or part integration through innovations in materials and
processes as part of their broader projects and mission.
\5\ We expect the convergence of skills we see with consolidation
to generalize across contexts--from advanced materials and processes to
software (Combemale, Ales, Whitefoot, Fuchs 2020b).
\6\ Research suggests the complex relationship between design and
production (and thus engineers and operators working together to bring
new science to reality on the production floor) generalizes to immature
materials and process technologies at the technical frontier. Due to
technologists still being in the process of figuring out the underlying
science, it is common for advanced materials and process technologies
in their early stages to have nonstandardized production processes
where the operator and engineer's joint role is more of an art and also
thus difficulty separating design from manufacturing (Fuchs 2010, Fuchs
2014). Historical examples include the early days of electronic
semiconductors; and emerging technologies in chemical processes such as
electronic and photonic semiconductors, pharmaceuticals, batteries,
additive manufacturing, and many others yet today (Bohn 1995, Pisano
1997, Holbrook 2000, Bassett 2002, Bohn 2005, Lecuyer 2005, Bonnin-
Roca, et al., 2017).
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In the future, materials and process innovations behind
parts consolidation may let you manufacture your iPhone as a
single flexible electronic device, or an optoelectronic
transceiver so small that it can fit on your contact lens.
Imagine if your iPhone, were a single flexible electronic
bracelet like my daughter's slap bracelet--which you wore as a
watch, but could take off and then unfold on your desktop and
use as a computer. What if instead of having its components
produced around the world (primarily in Asia) and assembled in
China as it is currently, it were produced and manufactured
here in the U.S., with middle-skill operator jobs. The goal of
the U.S. cannot be to produce today's iPhone in the U.S. in the
same way it is currently made in developing Asia. We want to
produce the flexible electronic slap-bracelet watch/phone/
computer of the future, that everyone in the world wants, and
that only U.S. technologists and operators can together make.
The win-win, is that that futuristic technology might also have
more fulfilling jobs, not just for engineers, but also for
high-school educated operators.
How do we get to that technology being manufactured in the
United States? We need to take immediate steps to support
start-ups pursuing advanced materials and process technologies
for longer, and to rebuild our manufacturing ecosystem. The
U.S. currently still leads the technical frontier in multiple
of the above-described technologies (if barely); \7\ however,
my research shows that globalization means that the valley of
death is getting larger for certain advanced material and
process technologies: when firms move manufacturing overseas to
developing countries, such as China, Singapore, Malaysia, and
otherwise, it can become unprofitable for those firms to pursue
innovative new products and technologies. Lower wages and
better assembly overseas reduce the costs of incumbent
technologies, making emerging technologies have to achieve more
\8\ before they are able to successfully enter and complete
against incumbent technologies on the market. (Fuchs and
Kirchain 2010; Fuchs, Field, Roth, Kirchain 2011; Fuchs 2014).
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\7\ While the U.S. currently still leads the technical frontier in
multiple of the above-described technologies, we do not clearly have
leadership in the operator skills to manufacture that technology
domestically, and if we don't manufacture that technology locally, we
will be unable to maintain our marginal technological leadership.
\8\ Here, ``more'' could be achieving lower production costs or
achieving more in terms of improved performance and thus consumer
demand despite higher prices.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Innovative Research (SBIR) funding is one
important tool. (Lerner 1999, Fuchs 2014). Given the
traditionally high capital expenditures required, long concept
to development timeline, and dearth of venture capital funds in
advanced manufacturing (c.f., Combemale, Glennon, Whitefoot,
Fuchs 2020), SBIR funding may also need to be more and longer
just for advanced materials and processes, given their
different nature.
Materials-tailored SBIR funding and changing corporate
incentives to invest in longer-term goals including manufacture
domestically, \9\ however, alone is not enough. We need to
rebuild a U.S. domestic manufacturing ecosystem both to keep
companies here and to innovate.
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\9\ Given the greater proportion of large firms in manufacturing
versus nonmanufacturing sectors, it is important to also address large
firms in manufacturing policy. 66 percent of industrial R&D spending
comes from manufacturing firms, with the five leading subsector
spenders being pharmaceuticals and medicine, semiconductors and
electronic components, communications equipment, automobile and light
duty motor vehicles, and aerospace products and parts. Due in large
part to significant offshoring during the last decade by these and
other manufacturing subsectors, manufacturing contributes only 12
percent to domestic value added, as measured. (Combemale, Glennon,
Whitefoot, Fuchs 2020) The erosion of U.S. semiconductor manufacturing
capabilities suggests the need for alternative incentives to support
longer-term goals and to keep less profitable business lines (Fuchs,
Mai, Blanton, Morgan proposal). More research is needed on this front.
Part of the challenge may be increasingly short-term pressures on firm
leadership leading to decision-making that maximizes short-term profits
rather than undertaking more risky directions that confer long-term
advantage (c.f., Fuchs and Kirchain 2010 on short-termism in
offshoring, Lazonik 2014 on stockholder buy-backs). Government R&D
funding has historically played an important role in seeding and
launching new industries, as well as seeding nonmainstream projects
within companies that would otherwise have been cut internally (c.f.,
NRC Funding a Revolution, Fuchs 2010). Companies have also themselves
organized public-private partnerships (Khan, Hounshell, Fuchs 2015) and
used venture funding and other mechanisms (c.f., Gawer and Cusumano
2002) to advance research and development in technologies critical to
their industrial roadmap 3-7 years out.
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To rebuild a domestic manufacturing ecosystem, R&D funding,
supply-side (e.g., R&D tax credit and tax incentives for
domestic manufacturing) and traditional demand-side (domestic
procurement) policy instruments need to be aligned with
strategic investments in the broader manufacturing and
innovation ecosystem.
Let me provide an example of how, given the dilapidated
state of our manufacturing ecosystem, funding research and
development alone is insufficient (even if that funding were
spread around the country.) My former Ph.D. student, Hassan
Khan, after receiving his undergraduate degree in Chemical
Engineering from Berkeley, moved to Mississippi to help launch
the manufacturing facility of a Silicon Valley headquartered
solar photovoltaic startup. Although the photovoltaic cell was
invented at Bell Labs, by 2010 U.S. capabilities in the
manufacturing ecosystem had atrophied. My student found himself
flying multiple times with wafers to Canada, because they
didn't have locally the fabrication capabilities they needed.
The firm struggled to find operators they needed in
Mississippi, despite receiving thousands of applications and
hired Chinese-trained operators instead. The start-up was also
reliant entirely on foreign suppliers of process tools,
including from Italy, Germany, and Japan. Eventually the start-
up failed, unable to compete against Chinese manufacturers that
captured the majority of the market. The firm's IP was sold,
investors and the State of Mississippi took a loss and Hassan
came to Carnegie Mellon to start his Ph.D.
To rebuild domestic manufacturing, we need to use strategic
infrastructure investments as pathways to revitalizing U.S.
worker skills and manufacturing ecosystems.\10\ \11\ By
infrastructure I mean not just to roads, bridges, transit
networks, water systems, and dams; but also energy,
communications, manufacturing, and data infrastructure
necessary for all of those. In the same way that we need to
build domestically the products that global markets want and
only we can make, our infrastructure investments need to be for
the infrastructure of the future. Transportation, transit, and
urban infrastructure should be designed to enable the safe and
equitable introduction of driverless vehicles and smart city
systems, and the matching large-scale interconnected data
infrastructure for security, privacy, resilience and machine
learning on that data (Anderson, et al., 2016; Berges and
Samaras 2019). Electric grids should be restructured to ensure
a clean and resilient power system that can accommodate a wide
range of new designs and services (NASEM 2010, Lueken 2012,
NASEM 2017). \12\ Foundries should be built to lead the world
in the invention and commercialization of next generation
semiconductors and synthetic biology.
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\10\ My focus on strategic infrastructure investments is due to
the potential novelty of that approach. Manufacturing Extension Program
and Manufacturing USA innovation institutes already play and will need
to play an important role in reviving our manufacturing ecosystem. On
the Manufacturing Extension Program's effectiveness in upgrading and
the acquisition of competitive capabilities (c.f., Various pieces by
Whitford, J.; Shapiro; McEvily, B.). On the Manufacturing USA
innovation institutes, their original goals, and evaluation thereof
(c.f., Recent studies by GAO, NASEM).
\11\ The U.S. generally lags behind other peer industrialized
Nations in infrastructure: The American Society of Civil Engineers
(ASCE)'s 2017 report finds that the Nation's infrastructure averages a
``D,'' meaning that conditions are ``mostly below standard,''
exhibiting ``significant deterioration,'' with a ``strong risk of
failure.'' This lag which can largely be traced back to funding: On
average, European countries spend the equivalent of 5 percent of GDP on
building and maintaining their infrastructure, while the United States
spends 2.4 percent. The United States also differs from most other
industrialized countries in the extent to which it relies on local and
State spending to meet its infrastructure needs--only 25 percent of
U.S. public infrastructure funding comes from the Federal Government.
\12\ Among other issues, much of our infrastructure was
constructed for the climate of the 20th century, rather than for the
climate of the 21st century (Chester, et al., 2020). Rebuilding and
reinvesting in our infrastructure to be resilient to extreme weather is
essential for the safety of our communities and the resilience of our
economy (Olsen, et al., 2015).
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Infrastructure has the interesting property not only of
creating demand, but also of solving a problem. Investments
such as those described above address national needs for
resilience, energy and internet access, and technology
leadership within and beyond manufacturing. Infrastructure
investments also build national capabilities for building
things--not just in the form of firms responding to the demand,
but also in the form of operators and engineers. These workers
will learn by doing. Indeed, as we think about these
investments strategically, it is critical to recognize the
interconnectedness of the knowledge and skills across these
infrastructure domains. The skills relevant to deploying and
managing sensors for sustainable and smart infrastructure--from
the concrete layer to forman to the engineer to the data
infrastructure developer to the machine learning software--have
corollaries in resilient grid infrastructure, privacy-
preserving health infrastructure, and intelligent
manufacturing. We should be strategic about those
complementarities, in where and how we invest, in creating
demand in the complementary areas, as well as about
facilitating those transitions across sectors through targeted
training.\13\ \14\
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\13\ More work on skill transition mapping is needed. A recent
OECD report has looked at current worker skills, how demand for those
skills is expected to change with automation, and the training required
to support ``reasonable'' transitions (OECD 2019). In our own research,
we have been mapping skill requirements to jobs at a individual
operator task level (Combemale, Ales, Whitefoot, Fuchs 2020a), and we
are extending that task-level skill mapping now beyond the shop floor
to technicians, engineers, and managers (Combemale, Whitefoot, Fuchs
2020). Whether at the OECD level or our own more granular one (or
another method yet to emerge), we need to be mapping and broadcasting
to training entities that may not have the necessary knowledge the
skill transitions required from current construction and manufacturing
for any of the above to the construction and manufacturing for the
transportation, energy, health and manufacturing infrastructure of the
future, as well as the skill transitions necessary in each skill domain
to apply skills from one to the other across sectors.
\14\ In facilitating these transitions, we should not
underestimate the power of on-the-job learning and learning by doing
(building). This is not to suggest that training isn't necessary,
rather that that training may not happen ``out of work'', per se. Here,
where large firms exist, industry in each sector should lead the
training that is needed, where relevant in partnership with unions,
with Government facilitating assessment and dissemination of best
practices and the mapping of the cross-sector transitions. Where small
companies are involved, the Government will play an essential role, in
conjunction with larger companies, in mapping and funding necessary
workforce transition training.
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Finally, to fully benefit from what economists refer to as
infrastructure's ``multiplier effect'' (a multiplier effect
I've arguably defined much more broadly here), as much as
possible, not only the final product but also the intermediate
inputs should be largely sourced domestically. Further,
influence in standards for those technologies should be
aggressively pursued internationally.
Q.3. What place does working with geographic partners through
near-shoring have in creating a resilient supply chain
ecosystem?
A.3. The U.S. must maintain trade relations with allied and--
where not strategically detrimental--non-allied partners.
Global manufacturing can drive down prices in a way that speeds
the adoption of new technologies beneficial to social welfare
(see for example the piece by Helveston and Nahm in Science on
solar production in China), even if in certain cases global
manufacturing in low-wage Nations can reduce incentives for
producing the most advanced innovations and the technical
frontier (see, for example, Fuchs and Kirchain on
semiconductors for communications). Rather than ceasing
international relations, the U.S. should focus on leveraging
innovation and investments in the vitality of our domestic
manufacturing ecosystem to change the rules of the game and
make the U.S. the best place in the world to manufacture the
innovative products of the future. In addition, the U.S. must
continue to grow its allied partners with whom they have pre-
agreed plans for exchange of products and knowledge during
times of domestic shortages or other crises.
The questions for which the U.S. must leverage modern data
and analytic tools and build institutional capacity to answer,
is in which products access is sufficiently critical to
national security or social welfare that given the
probabilities of various future disruptions (natural disasters,
pandemics, tariffs, wars), the U.S. should be attempting to
ensure leading in innovating and manufacturing those
technologies and products onshore (in addition to making
agreements with allied partners). In addition, the U.S. needs
to leverage modern data and analytic tools to answer where,
rather than ensuring domestic manufacturing or stockpiling,
investments in manufacturing resilience to pivot production in
times of shortages or crises (natural or security related) may
be a better option. In these analytics, it is important to note
that during global shortages in the early days of the COVID
pandemic, most countries enacted protective measures to keep
products for which they had domestic production inside their
borders. In these contexts, it was companies and Government's
abilities to support companies in pivoting into new product
areas that became essential to meeting domestic demand (and
later demand globally.)
As Valerie Karplus and I note in our 2021 policy paper on
``A New Approach to Coordinate U.S. Critical Supply Chains in
Crisis'', the analytic tools exist to inform Government
decision-making, but often the data is laking. In the context
of medical supplies we make a series of recommendations, the
approach for which could be applied to critical technologies
more broadly. The following recommendations are excerpted
directly from that piece:
Bottleneck 1: Product-Level Data: A lack of timely,
comprehensive, easy-to-navigate product-level data on
domestic manufacturing capacity and global supply chain
bottlenecks made it difficult for the White House to
know how to act to expand these sources on short times
frames with high confidence when the pandemic hit in
March of 2020.
Strategic Recommendation: Regularly track and model
domestic and international supply chains of select
products critical to public health.
1. For select products, create a ``critical product''
tracker at the U.S. Census that increases frequency of
company sampling and collects data at the product-
level; Revitalize and revamp the U.S. Census's
capability to update with greater depth and frequency
its relevant business establishments and production
capacity data in select critical end products (aspects
of such industry studies were historically paid for by
the Defense Logistics Agency). AND, Given that such
tracking is costly, the Department of Commerce should
in conjunction with relevant agencies (e.g., FEMA, HHS,
CDC) conduct cost-benefit analysis to quantify the
value of tracking different products and their
intermediate inputs and with what frequency. Such
analyses should include the value (in terms of lives
saved and improved) of various products during crises
(starting with the current, past, and various future
scenarios of pandemic), the value of data on final
products and one or more of their intermediate inputs
(not all may have high value in being tracked), and the
value of how frequently the data is collected (which
will vary widely by sector).
2. Model expected delta between capacity and demand and
bottleneck points during demand surges, and the
expected national value of increased resiliency
(including but not limited to increased domestic
capacity).
Bottleneck 2: The U.S. does not possess a capability to
quickly scale up access to critical medical supplies,
including via domestic production, to meet national
needs in the event of a major disruption to global
supply chains. Participants involved in the response to
the first COVID wave lacked rapid-acting policy tools
and other mechanisms to identify and access supplies.
Markets will create incentives for firm action in the
short-to-medium term, but on their own, there are not
market incentives for firms to develop capabilities to
respond to low-probability high-risk events. Domestic
manufacturers in aerospace, automotive, and oil and gas
industries were able to leverage their existing
knowledge base, sourcing structures, and human capital
to pivot particularly quickly. Medium and large
manufacturers that pivoted or recreated domestic
production largely served Government contracts.
Although small- and medium-sized firms and domestic
manufacturers from nonmedical product industries that
entered or pivoted into medical products significantly
enhanced U.S. domestic capacity in critical products,
many expressed that their efforts were slowed by
barriers in knowledge, shipping, and regulatory
approvals. These producers also disproportionately
served customers who were not served by traditional
distributors of PPE.
Bottleneck 5: Global Geography of Medical Supply
Chains: The concentration of critical supply production
in East Asia, and largely in China, meant that U.S.
Governments and companies had neither full visibility
into supply chains nor the ability to expand U.S.-bound
product flow, and access to critical products made in
these regions was largely beyond U.S. control. These
bottlenecks created conditions ripe for temporal
arbitrage by U.S. and foreign product brokers,
generating windfall profits amid wide-scale shortages
and suffering. Excess funds were spent on product and
shipping, due to rent-seeking behavior, and affordable
product was not able to reach vulnerable populations in
time. Geopolitical tensions also played a role, as
workshop discussions revealed that there were multiple
ways in which China was perceived to act both for and
against U.S. interests in the response to the pandemic.
Strategic Recommendation: Identify the elements and
appropriate scale of a domestic health industrial base
with surge capacity (e.g., running one shift, capable
of ramp-up to three shifts) beyond what is currently
maintained for defense; solicit interest from corporate
partners in voluntarily providing available or flexible
capacity; and evaluate the extent to which these
products will have a higher price point, including
conduct a study--including analytic assessment by
domain experts--to quantify
1. For which final products and intermediate inputs we
should maintain a health industrial supply base,
2. Domestic demand is in those products, and expected demand
under various expected future pandemic scenarios,
3. What percentage of that demand should be fulfilled
domestically during steady-state, and what excess
capacity should be held under various pandemic
scenarios
4. The expected value of stockpile size in different
products, given ``keep warm'' and ``pivot'' agreements
and speed for these companies to scale
5. What percentage of demand should be fulfilled through
pivots versus alliances during steady-state, and what
excess capacity should be secured through pivots versus
maintained with allies under various pandemic scenarios
6. Who the ideal players would be to fulfill that domestic
capacity (expanding the existing defense medical supply
base versus private large and/or small- and medium-
sized firms)
Excerpted from: Fuchs, E., and Karplus, V. 2021. ``A
New Approach To Coordinate U.S. Critical Supply Chains
in Crisis. Policy Brief''. Insights derived from:
``Lessons From COVID Medical Supply Chains for Critical
Technologies: Real-Time Situational Data Infrastructure
and Adaptive Manufacturing Ecosystems''. Chatham House
Rule Workshop. Carnegie Mellon University. September
10, 2021.
Q.4. Please describe how you would implement a critical
technologies analytics program.
A.4. A critical technology and innovation analytics program
faces the formidable challenge that it must serve the Nation in
developing the analytics to inform critical technology policy,
where the intellectual foundations for determining those
problems do not yet exist, where those problems require talent
not easily attracted by individual agencies, and where the
problems are uniquely cross-mission in nature, spanning
multiple departments. To achieve this goal, the critical
technology analytics program will need to build new
intellectual foundations on what makes a technology critical
and how much data is valuable in what situations. In addition,
it will need to build tools (institutional and algorithmic) to
spin-up timely situational awareness and build the intellectual
foundations for the frequency and applications where various
analytic options have the greatest value; build analytic tools
to identify where innovation could transform U.S. geopolitical
standing; and quantify cross-mission critical technology policy
opportunities.
To meet these challenges, the ideal critical technology
analytics program would be a highly flexible, distributed model
capable of rapidly mobilizing and reconfiguring star private
sector and academic talent, data, and resources. In particular,
a critical technology and innovation analytics program needs to
be set up to
a. Be strategic and forward-looking--e.g. conduct work on
timelines on the order of 6 months to 2 years rather
than days or weeks (including thinking about problems
on the one to 50-year timeline--for example, the
critical technology analytics program would not focus
on building data infrastructure long-term rather on
strategic and quantitative guidance on how to think
about building such capabilities, and demonstrating
what capabilities are possible)
b. Have integrated teams that leverage leading technical
expertise in engineering and the physical sciences,
modern data analytics (machine learning, operations
research, natural language processing) and the social
sciences (economics, political science, sociology,
history.)
c. Work on interagency projects, including receiving work
from multiple agencies on one topic
d. Itself be a neutral third party or have the capability to
spin off public-private partnerships that can serve as
a neutral third party
e. Conduct some work internally but also leverage academic
and industry expertise through contracts
A national cross-mission capability for critical technology
analytics would ideally report to ``mission central'' and at
minimum needs neutrality across departments. Logical homes
might include under the direction of the Office of Science and
Technology Policy (as an expansion of STPI or possibly joint
with the Office of Management and Budget); the National Science
Foundation's Technology, Innovation, and Partnerships Office;
or Commerce. Other options might be to report to an independent
authority, as was the case with the Nuclear Regulatory
Commission, or to establish an independent entity as was done
with the Health Effects Institute. To ensure engagement from
all missions, a critical technology analytics program should
have an advisory board from the relevant research arms in each
department of Government plus leaders from academia and
industry (perhaps selected out of the National Academies of
Science, Engineering, and Medicine). Government departments
would in parallel develop internal competencies into which they
would merge the strategic cross-mission insights or new
analytic capabilities they contracted from the critical
technology analytics program. To enhance engagement and more
seamlessly transition capabilities, departments would have
people on rotation at the program. These rotational members
could sit in academia or industry or join a small initial
research staff of about 10 individuals established in the host
agency (such as NSF or Commerce) or FFRDC (such as STPI)
focused on transitioning novel data infrastructure and analytic
capabilities developed by the Program and elsewhere in academia
and industry.
To have sufficient funds to draw talent from academic
institutions and the private sector nationwide, the critical
technology analytics program should initially be funded at
$10M-20M annually for 5 years. If successful, the program
should grow by the end of its second 5 years to a budget
equivalent to $52M per year in today's dollars. (This funding
is equivalent to the Office of Technology Assessment's budget
when it closed in 1995.) If the program succeeds in receiving
work from multiple agencies (e.g., NSF, DOD, DOC, DOE, DOT,
NIH, DOL), this $52M could come from multiple agency funding.
Foundations might also serve as start-up funding. Contract
authorities that might serve well to mobilize academic talent
from across the Nation (and flexibly configure and reconfigure
teams) and facilitate private sector data sharing might include
an Other Transaction Authority (OTA) or a direct subcontract
within an agency or FFRDC. The Critical Technology and
Innovation Analytics Program (CTIAP) act in COMPETES sets up an
Other Transaction Authority (OTA) in Commerce.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY NORTHEAST OHIO BUILD BACK BETTER REGIONAL
COALITION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]