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How Biden can save America Could US supply shortages lead to war with China?

Can he stand up to China? (Lintao Zhang/Getty Images)


October 14, 2021   5 mins

Joe Biden is starting to panic — and not just because of his dwindling approval ratings. More than 18 months since Covid struck, the shocking dependence of the United States on fragile global supply chains — and the corresponding absence of a functional manufacturing system — has been exposed.

The White House has responded with talk of creating more “robust” supply chains and reviving American manufacturing with its “Build Back Better” agenda. But if Biden is serious about addressing these issues, he needs to understand that this is a decades-long process, unlikely to be fully fixed during his presidency.

Even then, victory isn’t guaranteed. At every step there will be efforts to undermine his attempts by a slew of powerful interests, particularly those US corporations who have based their decisions to outsource manufacturing on narrow short-term profitability concerns, at the expense of acknowledging the strategic value of basing factories at home. And now America is paying the price.

Yet many of the same executives who now bemoan the lack of skilled labour in the US are themselves the architects of this very problem. Unlike their Japanese and German competitors, American firms have repeatedly underestimated the value of integrating their product-design and manufacturing processes. This poses a major barrier for newcomers, particularly in high-end industries such as semiconductors and biotech, as moving part of the the production overseas not only degrades the quality of the product (see Intel as an example), but also enhances the possibility of intellectual property theft.

At home, the impact of decades of offshoring and outsourcing jobs is impossible to ignore: manufacturing plants have been shuttered or scaled back, while many former employees have moved on to other jobs or simply retired. Young people, too, are opting for other careers, while, starved of students, many community colleges and vocational schools have scaled back their technical programmes.

Many business leaders, including the US Chamber of Commerce, have issued calls for increased immigration to solve the skills gap. But what kind of immigration? Right now in the US, we have an increasingly odd alliance defending today’s dysfunctional status quo. Both the libertarian Right and, increasingly, the progressive wing of the Democratic Party decry restrictions on immigration — the former because it shuts off an increasing source of cheap serf labour, the latter because they view such immigration restrictions as motivated by xenophobia (and also see the new immigrants as a source of long-term political support for their party). Meanwhile, political gridlock has precluded the shift toward a more coherent skills-based immigration policy, as opposed to the plethora of unskilled migrants now flooding the southern border.

The result is the worst of both worlds: relatively uncontrolled immigration of unskilled workers, which in turn inhibits wage growth among lower-income Americans, at a time when US manufacturing is undergoing an exodus. All of which means that high-quality American employment (as measured by the Job Quality Index) diminishes, and wages stagnate for the rest.

Advocates of globalisation argue that the resultant increase in profits to American companies spurs reinvestment, which in turn creates employment. But in many instances, profits are not directed toward domestic re-investment (and, as a result, more jobs), but to increasing investment abroad.

Consider the case of General Motors, which closed five profitable plants in North America — despite being a significant recipient of US and Canadian bailout funds after the 2008 crisis — in order to increase investment in the domestic Chinese market. That is, of course, when they are not using corporate cash to buy back stock and inflate share prices and CEO executive compensation. (By contrast, Toyota relies on suppliers clustered close to its base in Japan, making the company less susceptible to supply shocks or labour shortages.)

As far as redomiciling manufacturing goes, the Biden Administration has advocated a variety of economic measures for companies, such as tax incentives for insourcing. But on its own, this measure is unlikely to induce the requisite shift, as these rewards can easily be matched by the recipient investment country’s government. Hence, the state can and must drive this re-domiciling process in other ways: either via higher government-funded R&D expenditures or  local content requirements (LCRs).

This may run counter to 40 years of free market orthodoxy in the US; it posits a much more activist role for government in the formulation of national developmentalist goals. But it must happen. Even presidents said to be champions of the free market, such as Ronald Reagan, resorted to managed trade measures in order to safeguard US manufacturing interests and counter foreign mercantilism. More recently, former Treasury Secretary Lawrence Summers has acknowledged: “economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency
 More broadly our economic strategy will need to put less emphasis on short-term commercial advantage and pay more attention to long-run strategic advantage.”

For whether America likes it or not, the world — particularly in terms of national security — has changed in the 21st century. For most of the post-WW2 period, the United States was the dominant political power. Sustaining that position often meant that trade concerns were subsumed by broader Cold War considerations. The American domestic market was used as a carrot to sustain US political dominance in other regions, notably by creating Asian export dependency on the large American domestic consumer market, often without fully considering the longer impact on US industry.

That strategy succeeded and advanced American geopolitical interests for decades. It was a significant force multiplier — until it wasn’t. All of a sudden it became clear that the United States had failed to use trade to enhance its economy; if anything, it consistently sacrificed domestic economic interests in the service of foreign policy, keeping allies close and prosperous and pressuring adversaries. Today, however, it no longer makes sense for America to sacrifice manufactur­ing to its Asian economic rivals, many of whom are increasingly turning to China as their economic locus.

Absent a coherent policy that emphasises domestic manufacturing, then, American fiscal policy risks becoming a public works programme for the rest of the world. That’s undoubtedly wonderful for workers in China, Germany or Mexico, but hardly does much for the steadily rising casualties of globalisation in the US economy — the country’s blue-collar workers — who have continued to be dismissed as a rounding error.

Neoclassical economics has always recognised that there would be losers from free trade. But in theory, the net welfare gains — the increase in gross domestic product — would be large enough that it could be redistributed so that no one was worse off. In theory, it makes sense. But it is not always true in practice.

The opposite has happened. The gains have not been distributed equally — and American production capabilities and skills have deteriorated as a result.

It is true that in macroeconomic terms, imports are a benefit and exports a cost (as it means that the exporting country is unable to consume the fruits of its own labour force). But when such trade creates a deficit with a strategic competitor, such as China, it extracts a significant economic cost, as the resultant deficit can ultimately degrade other nations’ industrial capacity and create huge economic vulnerability as a result.

Take the Taiwan Semiconductor Manufacturing Company (TSMC), which has emerged over the past several years as the world’s most important semiconductor company. As the high-tech analyst Jon Stokes has argued, were China to invade Taiwan and seize TSMC, the resultant collapse in semiconductor production could well cause the US economy to crash. The lack of national resilience is precisely the kind of “inefficiency” that globalisation proselytisers seldom consider.

So if the US is truly committed to a policy of building back better, it will require years of industrial reconfiguration and hundreds of billions of dollars — money that is now being deployed wastefully in America’s bloated defence budgets (which both Democrats and Republicans remain determined to feed).

Yes, higher wages and re-domiciling may well lead to higher business costs and possibly higher prices in the short term. But they would also lead to the creation of more disposable income and an invigorated market capitalism, as well as a more socially stable polity as the economic gains would be more equitably distributed. A virtuous cycle would be created: workers would be paid more, competent managers will compensate for higher wages by using more and better machinery, and by improving the way work is organised. This will bring better products, higher productivity and increased profits, which in turn can lead to higher wages.

It won’t be easy. But Biden has little choice. The present is not sustainable: a world of shortages, fragile supply chain links and a degradation of national security interests. If America continues down this path, it will soon face the ultimate inefficiency that economists seldom address: dangerous international confrontations and, ultimately, war.


Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.

Mauerback

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JP Martin
JP Martin
2 years ago

Forgive my scepticism but Biden has been sitting inertly at the top of the US government hierarchy for decades so I see no reason to expect any sudden dynamism.

Tom Jennings
Tom Jennings
2 years ago
Reply to  JP Martin

Right you are. Biden’s primary talent is deflecting blame. Watch out for a lousy Christmas and a list of “culprits” who caused your child not to get the toys that are sitting in a trailer parked in California and not under your tree.

Saul D
Saul D
2 years ago

Sounds like the author is recommending Biden should follow Trump’s policies on de-offshoring, bringing jobs and industry back to America…

Lesley van Reenen
Lesley van Reenen
2 years ago
Reply to  Saul D

And the pandemic drove home this lesson.

Lesley van Reenen
Lesley van Reenen
2 years ago

Why do authors and commentators pursue the fiction that Biden is in charge of or deciding anything at all, except maybe the flavour of his ice cream.

James Joyce
James Joyce
2 years ago

This was exactly my first reaction. Biden will be lucky to finish the week/month/year—running for re-election or even walking up stairs out of the question.

Elizabeth Warren and Crazy Bernie are in charge. No one voted for them. And no one voted for this Biden
..

Jonathan Weil
Jonathan Weil
2 years ago
Reply to  James Joyce

Are Elizabeth and Bernie in charge really? Is anyone? Does the government control the government?

Tom Jennings
Tom Jennings
2 years ago
Reply to  Jonathan Weil

At the risk of being labeled a conspiracy theorist, I would look at “The Interagency” and the intelligence services. This is where the permanent bureaucracy resides and where the shots are being called.

Jonathan Ellman
Jonathan Ellman
2 years ago
Reply to  Tom Jennings

I know too little to comment. But which agency(ies) was it that concocted and more importantly promoted the Russiagate Conspiracy?

Last edited 2 years ago by Jonathan Ellman
Sean Penley
Sean Penley
2 years ago

I’m going to have to voice some skepticism he even chooses the flavor of his ice cream. I think he takes what he gets and is grateful for it. That helps explain why this is his approach to the rest of the country in its relation to the federal government

Ed Cameron
Ed Cameron
2 years ago

I’m not saying it’s over or nearly over, but I was reading On the Extinction of the Venetian Republic last night and, when reading this article, these lines came to mind:
And what if she had seen those glories fade,
Those titles vanish, and that strength decay;
Yet shall some tribute of regret be paid
When her long life hath reached its final day:
Men are we, and must grieve when even the Shade
Of that which once was great is passed away.

JP Martin
JP Martin
2 years ago
Reply to  Ed Cameron

Very beautiful, thank you for making this reference.

Ian McKinney
Ian McKinney
2 years ago

For the US, read the UK. Our reliance on cheap labour and cheap imports is actually worse.

But at least via Brexit we have a partial chance of getting back to something approaching profitability.

Galeti Tavas
Galeti Tavas
2 years ago

Not as persuasive as the earlier article on how close Hugo Chavez came to turning Venezuela into a economic Powerhouse, but still a good Lefty take on Bidenomics and Global trade.

That it is wrong by virtually every metric except how destructive unskilled migration is to every facet of a developed economy, it still does make one think of what is really going on.

“and reviving American manufacturing with its “Build Back Better” agenda.”

I do love this phrase, as I am a believer in Jungian Synchronicity, and you cannot get a better example than that when you think of all the Biden Policies, especially the one of the covid passports – which is right out of The Book of Revelations, 13:16.

Build Back Better = bbb, = 666

“16 And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads:
17 And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.
18 Here is wisdom. Let him that hath understanding count the number of the beast: for it is the number of a man; and his number is Six hundred threescore and six.” (666)

Jonathan Weil
Jonathan Weil
2 years ago
Reply to  Galeti Tavas

Strong mushrooms on Patmos


Lesley van Reenen
Lesley van Reenen
2 years ago
Reply to  Galeti Tavas

Sanford, is that you?

Andrew McDonald
Andrew McDonald
2 years ago

surely it is, although I subscribe to the theory that the great Sanford is in truth the Sanford Artzen Collective.

Julian Farrows
Julian Farrows
2 years ago
Reply to  Galeti Tavas

There is something to this.
The substance which will be used to make covid tattoos is called luciferase:
https://www.moleculardevices.com/sites/default/files/en/assets/newsletter/november-2020.html#gref
Also, little known fact, but the UN works with a publishing company known as the Lucis Trust. I don’t know all the details, but its roots lie in the occult and freemasonry:
https://en.wikipedia.org/wiki/Lucis_Trust
There’s more of these strange connections if you care to look. I remain skeptical myself, but now and again these odd coincidences do spring up.

Sean Penley
Sean Penley
2 years ago

Wait, why is this author suddenly bringing this idea up as if it is new? This was a large part of Trump’s agenda. As the author points out, it is not a quick process to convert a post-industrial society to one that actually makes stuff. But Trump made encouraging production in the US one of his priorities. I didn’t believe him during his campaign, but in fact this policy was playing out fairly well during his presidency. Biden was the one who wanted to stifle this effect by cutting off oil, taking away the restrictions on Chinese trade, and raising taxes and regulation (the reduction of the latter two being the primary reasons the prior administration was able to encourage domestic production–everything else is good, but making it a national priority is what really brings out the entrepreneur in folks).
So basically, for Biden to promote a made-in-America agenda would require him to backtrack on everything he promised during his campaign. In itself that shouldn’t be a problem, he has no real principles to defend. The real question is: why is this being portrayed as an opportunity for Biden to make his mark, rather than as the more mundane option of being a chance for Biden to build on success?

J Bryant
J Bryant
2 years ago
Reply to  Sean Penley

The real question is: why is this being portrayed as an opportunity for Biden to make his mark, rather than as the more mundane option of being a chance for Biden to build on success?
For the same reason you’ll never see the media acknowledge that Biden’s covid vaccination plan is building on the success of Trump’s Warp Speed initiative to rapidly develop the vaccines.

D Hockley
D Hockley
2 years ago

How Biden can save America

To quote Captain Blackadder: Well, his immediate resignation and suicide would seem the obvious suggestion.

Last edited 2 years ago by D Hockley
JP Martin
JP Martin
2 years ago
Reply to  D Hockley

Thinking this through, President Kamala Harris is not a reassuring prospect!

Phil Mac
Phil Mac
2 years ago

It’s all around us;

  • Energy policies that ignore strategic issues of dependency in favour of short term cost or popularity.
  • Obsession with GDP (total output that produces tax income today) as a metric over Productivity (useful stuff created per person)
  • Corporations with short term objectives to achieve management rewards based on dim metrics, and tax incentives to encourage Entrepreneurs to sell out (anyone who thinks Entrepreneurs Relief is anything other than a wet dream of big Corps hasn’t thought it through.)
  • etc.

All this that the article says was entirely obvious 20 years ago to anyone who thought it through. I watched with amused horror as big Corps exported jobs chasing cheap labour knowing it’d be in my favour down the line since our solution to lower unit costs was, er, fewer not cheaper people. And so it has proved to be.
Oh well, I guess this is what you get when the qualifications to hold high office are pap like PPE and the Board stands for re-election every 4 years. Much hope of high level strategic thinking and decisions that defer gratification in that environment is there?

Last edited 2 years ago by Phil Mac
Liz Walsh
Liz Walsh
2 years ago

Sounds suspiciously like some Trump administration wish list, reheated and garnished anew. “We should have picked our own cotton” is more than just a mildly racist trope. And along with “there is no free lunch” we forget at our peril that accurate description “the high cost of cheap labor”.

Last edited 2 years ago by Liz Walsh
Hardee Hodges
Hardee Hodges
2 years ago

I had hoped Unherd would, indeed, get around to various economic issues and this article is refreshing. Of course, part of the ability to built factories and produce widgets rests on energy policy of which the US has decided it’s own cheap energy must not be used. The other factor is tax policy that favors industry of which the US has decided that free stuff is more important than economic clout. Corporations obviously never pay taxes but the politicians see them as way to hid the tax which devolves to citizens. So despite the notion of building anything, the politicians seem more intent on further transfer payments for which they personally are rewarded. Trump was trying to change the system which was roundly denounced by all vested in the system who have done well to demonize him. Sadly Trump, the man, has personal characteristics against him in spite of trying to develop solid policy to change the system.
A few upticks in interest rates will see a terrible collapse of the house and then awful changes will be needed to build anything. The politicians will not be immune to citizen anger.

John Riordan
John Riordan
2 years ago

America’s “bloated defence budgets” may well be what saves the West from totalitarianism in due course.
However I do mostly agree with the rest of the article.

LCarey Rowland
LCarey Rowland
2 years ago

This makes good sense. But our imports-dependent American globalism has built up an inertia of rest that will be very difficult for corporate decision-makers to reverse.
President Biden will be swimming upstream in advocating the reformative changes you prescribe. He is already paying a dear polls-price for his corrective approach to governance.
Sadly, the bluster of our former president has occluded sound decision-making and reformative governance.
America is, as we say here, up the creek without a paddle. And our very experienced President is stuck with the job of turning the ship around while prevailing global currents draw homegrown capitalists in the opposite direction.
I hope we don’t run Joe into the ground; he is not exactly a spring chicken, as JFK was, or Clinton. He is going to have to get some serious help from the Lawrence Summers crowd to pull this redirective turnaround in a more appropriate direction to solve the mega-problems of this Era.

Andrew Lale
Andrew Lale
2 years ago

Biden can’t even feed himself.

Mikey Mike
Mikey Mike
2 years ago

Think of how enticing it would be for US companies to return manufacturing to America if they could be assured non-union factories? And they can in Tennessee, Alabama and Mississippi where the best automobile plants in the country now operate. The unions have destroyed manufacturing in the north by inflating operating costs and lowering productivity and charging a premium for the privilege. If manufacturing is coming back, it’s setting up shop in the deep south.