How Build Back Better and USICA Can Strengthen Supply Chains and Fight Inflation
By Matt Mazewski
Ever since the “Great Inflation” of the 1970s, mainstream policy discourse has taken as given that deficit reduction and interest rate hikes should be the go-to remedies whenever prices start to rise. Now that recorded measures of inflation have reached a 40-year high, largely as a result of unprecedented supply chain disruptions wrought by the ongoing pandemic, the Biden Administration and Democratic lawmakers have predictably been urged by critics — including from within their own party — to abandon their ambitious spending plans for the sake of preventing further “overheating” in the economy.
In reality, taking bold steps to bolster fraying supply chains would address a key driver of price increases, and would reduce the likelihood that future shocks to the system — whether new coronavirus variants, climate change-related natural disasters, or geopolitical disruptions — will kick off another bout of inflation. Fortunately, the Build Back Better Act that passed the House in November and the U.S. Innovation and Competition Act (USICA) that passed the Senate in June each contain a number of provisions that, if enacted, could do a lot of good on this front.
Here are five key elements of the Build Back Better Act that would help address supply chain unraveling:
Critical Manufacturing Supply Chain Resilience ($10 Billion)
The Commerce Department would be charged with using these funds to map and monitor supply chains in order to better identify potential trouble spots, to accelerate the adoption of new technologies that can improve logistics, and to increase supply chain “resilience, diversity, security, [and] strength,” including by building up manufacturing capacity to respond to future surges in demand for critical goods.
Public Health and Preparedness Research, Development, and Countermeasure Capacity ($7.5 Billion)
This appropriation would primarily be used to expand domestic manufacturing of medical supplies, including personal protective equipment, and to “mitigate supply chain risks and enhance supply chain elasticity” for critical drugs and pharmaceutical ingredients, such as raw materials for producing vaccines. Shortages of any good can be frustrating, but those that affect the healthcare system can be devastating. This measure would tackle the threat of such scarcities head-on.
Advanced Research Projects for Health ($3 Billion)
The establishment of an Advanced Research Projects Agency for Health (ARPA-H) modeled on the Defense Advanced Research Projects Agency (DARPA) has been a longtime goal of President Biden. The mission of ARPA-H would be to make “pivotal investments in breakthrough technologies … that have the potential to transform important areas of medicine and health for the benefit of all individuals and that cannot readily be accomplished through traditional biomedical research or commercial activity.” Research that leads to tools for more effective control of COVID-19 and other emerging infectious diseases would go a long way toward preventing repeats of the economic disruption the world has witnessed in the last two years. Indeed, an NIH white paper summarizing some of the proposed priorities for ARPA-H includes developing the capacity to formulate and roll out vaccines against a novel pathogen within 100 days of its discovery and identification as a threat to humans.
Port Infrastructure and Supply Chain Resilience ($2.5 Billion)
A great deal of media attention has been focused on congestion at seaports and container ship backups as important aspects of the supply chain crunch. And while some steps have been taken by governments at various levels to alleviate these problems, like waiving restrictions on how high containers can be stacked at shipyards, any sustainable solution must involve an expansion of port capacity. This $2.5 billion appropriation to the Maritime Administration would help to do just that, and to ensure that such investments are made in a way that also reduces the environmental impact of port activity.
Railroad Rehabilitation Infrastructure and Financing Credit Risk Premium Assistance ($150 Million)
In addition to promoting a state of good repair of U.S. rail infrastructure generally, a portion of these funds would be reserved specifically for freight railroads. This would help to reduce delays and disruptions to freight deliveries caused by the effects of deferred maintenance.
In addition, here are four pertinent provisions from USICA:
Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Fund ($52.7 Billion)
Easily the largest supply chain-related investment in the bill, the CHIPS fund would provide grants and incentives to boost domestic production of semiconductors, which have been subject to especially severe shortages throughout the current crisis, as well as to underwrite research and development. Although $2.5 billion would be earmarked for programs to meet the technology demands of the Department of Defense and the intelligence and diplomatic communities, the vast majority of the appropriation would help to ensure a reliable supply of semiconductors for other industries and for manufacturing deemed critical to the national interest.
Wireless Supply Chain Innovation ($1.5 Billion)
The 2021 Defense Authorization created a Public Wireless Supply Chain Innovation Fund that would receive a $1.5 billion infusion from USICA. One of the purposes of this fund would be to promote diversity in telecommunications supply chains, especially those that support 5G technology. In particular, one of the objectives of its sponsors is to reduce domestic dependence on equipment produced by the Chinese firms Huawei and ZTE, which they point to as cybersecurity risks and potential collaborators in espionage by the Chinese government. Whether or not this is the case (more on China below), building redundancy into supply chains is a worthwhile goal. As Syracuse University law professor William Snyder has put it, “Huawei is a threat to national security, but that misses the bigger point. Vulnerabilities in the supply chain of network hardware and software is, has been, and will continue to be a threat to the national security of the United States and many other countries …”
Critical Minerals Mining Research ($400 Million)
This appropriation is contained within the portion of USICA known as the Endless Frontier Act and would provide the National Science Foundation with resources to help end “national reliance on minerals and mineral materials that are subject to supply disruptions,” such as those used in the production of batteries and semiconductors. This funding would be deployed for research and development of new technologies for extraction, processing, and recycling minerals, including artificial intelligence systems for more efficiently detecting and sorting minerals of interest at mining sites.
Supply Chain Resiliency Program; Supply Chain Database and Toolkit (No appropriation specified)
USICA would establish within the Department of Commerce a “supply chain resiliency and crisis response program” to ensure that the U.S. is able to “sustain critical industry production … and access to critical goods and services during supply chain shocks, including pandemic and biological threats, cyberattacks, extreme weather events, terrorist and geopolitical attacks, great power conflicts, and other threats,” as well as a voluntary database to which companies could submit data on the sources of their inputs and, if interested, seek assistance from the department with identifying domestically produced alternatives.
As Jake Higdon argued on the Data for Progress blog last year, the anti-China framing of portions of USICA is concerning, and industrial policy should not be tied to a new Cold War. The human rights abuses of the Chinese Communist Party merit response, but industrial policy can ultimately be a way to de-escalate tensions by strengthening US domestic manufacturing.
For instance, Section 3101 allocates $75 million for the departments of Commerce and State to provide consulting services for companies to help them relocate production activities outside of the People’s Republic of China — with no stipulation that they necessarily be relocated to the United States. Paying to help private corporations shift production from one foreign country to another might make a statement, but otherwise advances no truly meaningful economic objective.
According to recent Data for Progress polling, a majority of voters agree that pandemic-related supply bottlenecks, and not excessive government spending, are the main drivers of the current flare-up of inflation. Moreover, pluralities of all voters and of Independents or third-party voters, along with nearly two-thirds of Democrats, support government investments to strengthen supply chains and believe they will help to mitigate inflationary pressures. A new message test from Data for Progress and Groundwork Collaborative finds that the most convincing arguments about inflation are those that emphasize the need to boost domestic manufacturing and supply chains.
Democratic lawmakers, then, should not fear the political consequences of making important investments at this moment. On the contrary, inaction in the face of rising costs is much more likely to be a losing strategy given the large fraction of Americans who report being personally affected by price increases and goods shortages.
Proponents of the view that inflation necessitates fiscal or monetary tightening often claim that without such moves, “inflation expectations” tend to become self-fulfilling. And while there are theoretical and historical reasons to doubt that this is the inevitability it’s often made out to be, to the extent that such expectations are an important determinant of inflation, then federal action to bolster supply chains could be doubly helpful — not only because of its direct impacts, but also because of the reassurance it can offer to the public that the problems in the system are being dealt with and the present situation won’t last forever.
As its name suggests, the objective of the Build Back Better agenda is to address the root causes of economic dislocations that were precipitated by the pandemic but whose causes can ultimately be traced to underinvestment and neglect that predated the arrival of COVID-19. Though a serious and sustained effort to control the pandemic itself is indispensable to that task, the provisions of both the Build Back Better Act and USICA would do much to move us in the right direction.
Matt Mazewski is a Fellow at Data for Progress and PhD candidate in economics at Columbia University.