Gongol.com Archives: October 2021

Brian Gongol

October 21, 2021

News Not an invaluable prescription, but a non-valuable one

An opportunistic member of the Senate is looking to score points against the current widely-known difficulties in the economic supply chain by pushing a bill to require the Departments of Commerce and Defense to come up with lists of products to subject to a 50% "local content requirement" for goods deemed "critical for the protection of the industrial base in the United States". ■ There isn't much subtlety to the proposal: On page 2, the draft bill declares that "Excessive globalization has been a disaster for United States workers in the manufacturing sector." That analysis is a stretch: Many American manufacturing jobs are doing just fine. ■ Work that exists to satisfy a capricious mandate or an arbitrary quota is likely to attract more rent-seekers than innovators. Innovators are attracted to markets where their products and services can efficiently fill needs and cultivate new customers. Rent-seekers tend to inhabit those markets where their energies are deployed to higher returns by finding new ways of locking in government protections. The effect of rewarding rent-seekers will not be to advance the economic progress or stability of the country, no matter what claims someone makes about the "industrial base". ■ The problem of product shortages early in the pandemic was less about the supply chains themselves than of a failure to have made adequate preparations for "rainy day" events. Stockpiles of necessary equipment like personal protective gear were insufficient for the demand shock of a viral pandemic. Our attentions need to be focused on making sufficient preparations for low-frequency, high-impact events like the Covid-19 outbreak, not on ham-handed "solutions". ■ The consequences of broad government interventions can be significant. Look at the case of Puerto Rico: Tax breaks (phased out in 2006) turned the island into an important site for pharmaceutical manufacturing -- the source of 25% of total pharmaceutical exports from the US. But that concentration (again, one specifically enhanced by government tax policies) turned severely consequential when Hurricane Maria did massive damage there in 2017, with consequences like shutting down all three of the factories belonging to one of America's largest suppliers of IV fluid bags. That hurricane was a domestic event, and the United States had to urgently turn to Australia and Ireland to make up the resulting shortfalls in products like antibiotics. ■ The efficiency gains from specialization and trade are vast -- even domestically, concentration tends to result from specialization. Just for example, a company like 3M (a major supplier of N95 respirators) has plants in 29 different states, but those facilities are highly specialized, and the risk to the company overall from disruptions at any one of them is specifically noted in their reports to the government. The company may have 64 domestic manufacturing sites in all, but they don't all make the same things. Regional advantages -- like access to raw materials, energy supplies, or graduates of research universities -- all matter. ■ A great deal of American manufacturing involves high-tech design and complex final assembly. It's very good business to be on the far end of a supply chain, where lots of value can be added by well-trained, sophisticated workers. Plenty of "foreign" manufacturers are hiring American workers because those choices are profitable, not because they're being forced to do it. But those supply chains, even for a lot of high-value, American-made products, require importation that isn't subject to bureaucratic definitions of value-added. ■ Sweeping mandates like a 50% value quota -- enforceable on whatever the government arbitrarily deems "critical to the manufacturing base" -- aren't real answers to the root causes of the shortages encountered over the last two years, nor to the long-term health of the economy. Real accountability for the problems we have experienced depends on looking carefully at worst-case scenarios for high-impact events, and developing (and executing) real plans for those, so that we're never stuck scrambling for N95 masks or IV bags ever again. Acting on specific needs is like taking out an insurance policy, and it's prudent for voters to demand that elected officials take those sorts of steps. Smacking the economy more generally with more red tape and greater government intervention in private affairs is a bad prescription.

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