The new era of big government: Biden rewrites the rules of economic policy

A defunct slide projector in an empty office and peeling paint in the employee canteen are among the few signs of the role that an industrial site in Buffalo once played in the rise and then fall of American manufacturing.

The campus was first built in 1923 for General Motors. A faded poster that reads “diversify, profitably grow and become global” dates from when it was later owned by American Axle & Manufacturing. The car part maker followed its own advice, shifting some production to Asia and later shutting its huge factory in the East Side area of the city in 2008.

A site that once employed thousands of people in one of the country’s most deprived communities became a symbol of deindustrialisation and rustbelt decay.

Now, however, the same location is starting to come back to life.

In one warehouse, workers employed by Viridi Parente, a cleantech firm backed by investors including the UK’s National Grid, are packing lithium-ion cells into metal boxes, making batteries the size of mini-fridges. These will then be housed within office blocks, hospitals or other buildings to provide vital back-up power.

Eric Stein, formerly head of JPMorgan’s investment banking and now Viridi’s chief financial officer, says the company aims by 2027 to churn out about 4 gigawatt-hours of battery capacity each year — more than the entire current storage capacity in the UK. For now, the lithium-ion cells packing the batteries are shipped in from Asia. But that will change when South Korea’s LG Energy opens a new battery plant in Arizona.

It is the kind of project that the White House wants to see sprout across the US, especially in the industrial areas that were ravaged during the globalisation era of the past four decades — a process which was facilitated by policies put in place by both Republican and Democratic presidents.

The new approach is spearheaded by two laws passed within days of each other last August — the Inflation Reduction Act and the Chips and Science Act — along with the Infrastructure Investment and Jobs Act, passed in late 2021.

Combined, they offer hundreds of billions of dollars of subsidies, grants and loans to spur new investment in broadband networks, semiconductors, electric vehicles and batteries.

Since the bills were passed, there has been a growing realisation that their significance goes well beyond their immediate impact on specific industries. They also represent a profound shift in economic thinking in America.

Four decades after Ronald Reagan rejected large-scale US government intervention in the economy, Biden is embracing it wholeheartedly with a raft of subsidies for domestic producers in strategic sectors, in the hope of creating hundreds of thousands of new jobs.

And 30 years after Bill Clinton signed the Nafta trade agreement and paved the way for China to join the WTO, Biden is no longer pushing for sweeping trade liberalisation.

“I don’t think you’ve seen something of this magnitude since Reaganomics came on the scene,” says Jennifer Harris, a former Biden administration official who worked on international economics at the White House National Security Council. “We’ve been living in that intellectual box and under those policymaking constraints for 40-plus years, and so this is really shaking those off towards the next turn of the screw.”

For the administration, economics is mixed with foreign policy — the laws are designed to both reverse the shift of manufacturing jobs to China, while also blunting China’s competitiveness in clean energy and tech.

“This vision is a fundamental break from the economic theory that has failed America’s middle class for decades now,” Biden said in a speech at the Old Post Office in downtown Chicago last month.

In a two-part series, the FT is looking at the implications of the Biden revolution in economic policy. On Thursday, we will examine how the new burst of industrial policy in the US has unsettled some of its closest allies in Europe and Asia and forced them to adapt to Washington’s attempt to rewire the global economy.

The question in this first piece is whether the policies will transform the US economy in a way that is durable and which will have the sort of tangible impact that resonates with voters.

The FT calculates that more than $200bn worth of projects have been promised since the IRA and Chips Act passed. Developers say as many as 85,000 jobs will be created.

Jon Williams, Viridi’s chief executive and a Buffalo native, pays his employees $18 an hour, with healthcare, stock options and a retirement plan included. For some of the workers it is their first job — a lifeline in an area stricken with social problems. “Industrial America just abandoned these communities,” says Williams.

But at the moment, its operation is limited in scale — it employs just 140 people.

Heather Boushey, a member of the White House council of economic advisers, says there have been encouraging signs that the strategy is working on the ground.

 “We’re seeing businesses say, ‘Great’,” she says. “They are starting to announce these investments and we’re starting to see shovels in the ground. And those are the kinds of early indicators that we are looking for.”

A long time in the works

If the Biden approach amounts to a transformation in US economic policy, it has been a shift that has been building for some time.

The roots are in the financial crisis of 2008-9, when American confidence in laissez-faire economics was badly dented. The sluggish recovery that ensued was tarnished by anaemic labour markets and stagnant household incomes, leading to a sense of malaise that many believe contributed to Donald Trump’s victory in the 2016 election against Hillary Clinton.

Trump used his presidential inauguration address to call for an end to the “American carnage” of “rusted out factories”. He passed a big tax cut that cheered corporate America but on the trade front there was huge upheaval: he forced a high-stakes renegotiation of Nafta with Canada and Mexico, then launched tariff wars with China, the EU and other US trading partners around the world, in defiance of the traditional Republican approach to global commerce.

By the time Biden entered the White House in 2021, the mood had shifted even further. The pandemic had revealed the potential vulnerability of US supply chains, while geopolitical tensions with China rose sharply. Russia’s full-blown invasion of Ukraine then sent shockwaves through global energy markets.

And Biden — who was born in the rustbelt city of Scranton, Pennsylvania — made it his mission to provide massive subsidies for industrial America as the solution to maintaining both US economic primacy in the world and prevent further lurches towards forms of populism that could undermine democracy.

“I think the Biden camp really sees questions of trade and industrial policy as tools to a set of higher ends, or broader national aims, whereas [traditional Republicans and longtime Democratic policymakers] see markets as an end to itself,” says Harris.

Biden frequently cites predecessors from the early and mid 20th century — including FDR and Dwight Eisenhower — as the inspiration for his economic agenda, given their use of the government’s muscle to boost America’s economic potential in manufacturing and infrastructure. Since so much time has passed since then, his top officials have in recent weeks carefully crafted an intellectual framework to accompany it.

Janet Yellen, the US Treasury secretary, has dubbed it “modern supply-side economics”. “[It] seeks to spur economic growth by both boosting labour supply and raising productivity, while reducing inequality and environmental damage,” she said.

Jake Sullivan, Biden’s national security adviser, called it a “modern industrial and innovation strategy” insisting that it would “ build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere” in the globe, fending off criticism that America was reverting to protectionist policies it long decried.

But the need to compete with China, which also offers massive industrial subsidies, is a main driver of the shift in Washington, one that is recognised by both parties.

“Let’s be clear: winning the competition with China should unite all of us,” Biden told Congress earlier this year.

Too ambitious?

The Biden agenda has a lot of ambitious goals: to rejuvenate US industrial hubs, reorient global supply chains, decarbonise the American economy and drive down energy costs. Is it realistic to try and achieve these objectives all at the same time?

Some Republican critics believe the large-scale government spending, particularly in the IRA, constitutes a “reckless tax-and-spending spree” that will only worsen inflation in what some see as an already overheated economy.

Labour shortages are one potential obstacle. Contractors fret that a stretched labour market will be overwhelmed with projects, increasing costs and slowing schedules.

Red tape is another. Clean energy executives and fossil fuel developers are united in calls for reforms to make permitting of infrastructure such as transmission lines easier.

“We need a better process for connecting new generation to the grid,” says Greg Wetstone, the president and CEO of the American Council on Renewable Energy. “We’ll continue growing — the real question is are we going to be able to realise the full potential [of the IRA].”

“You can invent brilliant widgets. You can create wonderful business models, but the long pole in the tent is labour,” says Tracy Price, chief executive of Qmerit, an energy installation service. “[But] if somebody can’t install it, maintain it . . . it doesn’t matter.”

For all the talk about competing with China, the US remains a minnow in cleantech manufacturing and an also-ran in the supply of the critical minerals and parts needed for the energy transition. In solar power, for example, US efforts to limit China’s presence in supply chains have already proven difficult. Last year the Commerce Department launched an investigation into tariff-dodging by Chinese suppliers. But when this led to the first drop in solar installations in four years, the White House was forced under pressure from US developers to suspend the probe.

China also dominates the supply of parts for electric vehicles — one reason why Chinese company CATL, the world’s largest battery maker, remains so prominent in the US auto sector. The underlying concern of some analysts is that the effort to break dependence on China will slow down the efforts to decarbonise.

“It would be very difficult, very expensive to try to cut off all Chinese supply chains,” says Mark Wakefield, an analyst at consultancy AlixPartners. “It’s very impractical.”

Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, says the objective is to engineer a “pretty speedy transition” to electric vehicles and renewable energy. “The more expensive we make those imports or the harder we make it to have those imports . . . the slower that transition is going to be,” she says.

A wave of Asian investment

The hope within the Biden administration is that the forces it unleashed will nonetheless prove lasting in expanding America’s productive capacity.

GE, which once embodied the shift of manufacturing overseas under late CEO Jack Welch, is among investors which are capitalising on the IRA’s tax credits and the market opportunity created by the US’s clean energy shift to build new plants. One GE facility to make nacelles — the gearboxes for wind turbines — is in the works in Schenectady, New York, where the company’s roots date back 130 years to Thomas Edison.

The hourly rate for workers is “certainly more expensive in New York than it would be in other locations,” says Scott Strazik, chief executive of Vernova, GE’s energy unit. “But there are incentives to build in the US . . . that’s real.” The new $50mn facility will employ 160 people.

GE will ship the nacelles to the wind farms now springing up across the US. “The IRA is providing a more clear pathway towards onshore wind growth over the next decade,” Strazik says. GE is also considering a plant in New York state to make the giant blades used in offshore wind — a sector that barely exists in the US.

“The IRA really underpinned the business case to stay here,” adds Jorg Heinemann, chief executive of EnerVenue, a US battery company building a $264mn factory in Kentucky. “Take away the IRA, now it becomes a much more difficult equation . . . the pull of Asia would have been difficult to resist.”

Indeed, Asian companies are now in the vanguard of investors coming to the US, with South Korean giants such as Hyundai, LG, SK and Samsung pledging tens of billions of dollars to make battery plants. Hyundai is also building a $5.5bn electric vehicle factory near Savannah, Georgia, one of the largest EV investments to date.

Despite the Biden administration’s confidence that its strategy will pay off both politically and economically, there are some warning signs that it could be a disappointment.

Manufacturing employment boomed by just under 800,000 jobs since Biden took office, hitting a post-pandemic high close to 13mn last month and eclipsing the levels recorded under both Trump and Obama. But the sector’s job growth has slowed sharply this year and the ISM manufacturing index fell unexpectedly to its lowest level in three years last month, suggesting some significant cyclical headwinds are building, as the Federal Reserve presses ahead with higher interest rates to fight inflation.

“We have to stick the landing and prove that we can do this in ways that are resilient to inflation questions and to recession questions that are all still in the mix here. And that’s not straightforward,” says Harris. “I’m optimistic but I’m not going to say these are calm waters.”

In fact, the biggest fear when it comes to the Biden administration’s strategy to rebuild American industrial strength is that it could fail to ultimately deliver the transformation promised on the ground in places like Buffalo.

“Manufacturing is always going to be critically important to GDP, but it’s not going to be where the big numbers are for employment,” says Edelberg, pointing to long-term productivity trends and the continued dominance of the service sector in the US economy.

In Buffalo, the Viridi battery plant now stands as a beacon of opportunity in a depressed area. But its workforce is a fraction of the thousands that once worked in the plant shut down by American Axle & Manufacturing 15 years ago. Automation is coming fast too, and robots won’t revive the area — or vote in elections.

James Giles, a Christian pastor on the East Side and social justice advocate who is head of personnel for Viridi, is sceptical that tax breaks, subsidies and loans from Washington can deliver the change needed in communities like the East Side.

“They’ve literally dumped billions and billions into urban communities across this country,” he says, referring to earlier federal rejuvenation efforts.

Even so, the push to support US domestic manufacturing is almost certainly here to stay. While some Republicans have called for a reversal of Biden’s subsidies should they win back the White House and full control of Congress next year, it could be a very hard case to make.

“I don’t see a lot of politicians walking into a community and saying, ‘I know we like that battery factory where you’ve all got jobs but I’m going to take away the subsidies and send those jobs overseas’,” says Boushey. “That’s not a message that resonates with anyone.”

Source: Economy - ft.com