Construct Public Factories

Green industrial policy was the Biden administration’s principal strategy for advancing a clean energy transition in the United States. Centered in the Inflation Reduction Act (IRA), Bidenomics was premised heavily on deploying favorable tax credits and subsidies to nudge the private market to invest in domestic green supply chains. This approach has had some important successes.¹ However, it also has some significant drawbacks.² Incentive-based industrial policy is fundamentally indirect, relying on dangled carrots to coax green production in places and sectors deemed in the public interest. This poses significant challenges: Policymakers must create carrots that are generous enough to generate the investment levels we need without overly subsidizing private companies.

Setting a Goldilocks subsidy can be a moving target as market conditions shift, whether from inflation, Federal Reserve monetary policy, or changes to firms’ perceived investment payoffs. When industrial policy relies on private firms to do the work of investing in green productive capacity, it is implicitly pinning its hopes on an investment calculus that may change course as firms alter their profit calculations. Indeed, even before the second Trump administration’s assault on clean energy, we saw a raft of offshore wind and green manufacturing projects canceled as inflation and high interest rates prevented planned investments from profitably penciling out.³

Much of the current thinking on how to do an IRA 2.0 assumes private ownership of the green industrial base as a given. For example, other essays in this collection suggest a greater public role for governing, planning, and financing but leave the world of ultimately making things to profit-driven firms. But it’s a fundamentally risky bet to rely entirely on the private sector to generate the production we need to meet the climate crisis—and a bet that is at odds with how the United States has scaled production in prior “mobilization moments.” It doesn’t have to be that way: Public factories are a part of America’s past, and can be a part of its future.

How Roosevelt Built Public Producers

In May 1940, as the US government mobilized military production to support the Allied war effort in Europe, President Franklin D. Roosevelt used a fireside chat to recognize the limits of the private sector to meet the moment: “I know that private business cannot be expected to make all of the capital investment required for expansions of plants and factories . . . which this program calls for at once,” he told the nation. “It would be unfair to expect industrial corporations . . . to do this, when there is a chance that a change in international affairs may stop or curtail future orders a year or two hence.” With those limits in mind, he said, “the Government of the United States stands ready to advance the necessary money to help provide for the enlargement of factories, [and] the establishment of new plants.”⁴

Under the auspices of the Reconstruction Finance Corporation and its subsidiary Defense Plant Corporation, the federal government rapidly built—and retained ownership over—nearly two-thirds of all new factories constructed for the World War II mobilization effort. The government came to own more than 10 percent of the country’s total industrial stock.⁵ By 1945, the federal government had become the country’s leading manufacturer in the aircraft, shipbuilding, rubber, and aluminum industries.⁶ Most of these factories were owned by the government but operated by private manufacturers as contractors.

Even further back, there is a long, if forgotten, American tradition of mobilizing critical production through publicly owned factories.⁷ Throughout American history the US federal government, states, and localities have regularly turned to public factories to produce important goods across the defense, steel, agriculture, healthcare, and other sectors. Since the American Revolution, public factories have mobilized for emergencies, secured supply abundance, countered monopoly power, promoted innovation, and advanced economic development. American public factories are older than the republic, with the Continental Congress encouraging states to create their own weapons factories during the Revolutionary War. Public factories for arms, battlefield drugs, and other war-related supplies played a critical role in powering the Union to victory in the Civil War. Public factories even appeared in FDR’s New Deal response to the Great Depression, as his administration created a public rum factory in the US Virgin Islands as a means of regional economic relief.

How to Use Public Production for the Energy Transition

Today’s energy challenges may call for reviving that tradition: Decarbonization may simply demand production of critical energy components at a speed and scale beyond what the private sector on its own can fairly be expected to provide. Meeting the climate threat, along with a host of related challenges—outpacing China for advanced energy technologies, rapidly recalibrating energy supply to meet a shift in demand, and overcoming private-sector bottlenecks that constrain abundance and affordability—calls for the type of government-led manufacturing mobilization that Roosevelt launched during World War II. To start, the government could use public factories to increase the domestic supply of critical energy components like batteries and transformers.⁸

Batteries

Batteries are an increasingly important energy resource and are necessary inputs for a wide range of strategic and defense-related technologies. They are critical to the electrical grid, with 28 percent of new US electricity-generating capacity this year coming from utility-scale batteries—double the amount from wind, and four times the amount from natural gas.⁹ Yet China dominates lithium-ion battery supply chains, thanks to two and a half decades of its own industrial policy.¹⁰ While the US has successfully reshored a significant amount of final battery assembly in just the last few years, manufacturers remain heavily dependent on essential minerals and active materials imported from China.¹¹

However, the US has an opportunity to leapfrog China¹² to commercialize next-generation battery technology that provides key performance improvements and strategic advantages, such as longer charge duration and better safety.¹³ Deploying next-generation batteries would also eliminate US dependence on Chinese-controlled inputs. Using public factories to produce these next-generation batteries would not only enable the US to achieve rapid scale in this emerging sector and beat China to a strategic technology, but also give the United States a domestic production base of advanced batteries.¹⁴

While other industrial policy tools could help the United States expand production of next-generation batteries, public factories are a uniquely powerful tool to achieve a rapid and dominant position in scaling this technology. Public factories are particularly effective when time-sensitive production is needed to win a “race,” whether an environmental race to decarbonize or a geostrategic race to outcompete China. And while research and development has given the US a technological lead with next-generation batteries, China is racing—and investing—to catch up.¹⁵

Transformers

Meanwhile, the US has also experienced severe shortages of grid equipment needed to transmit electricity, including large power transformers that connect large generation stations to high-voltage transmission. New orders now have a lead time of two to three years.¹⁶ These transformers are expensive to produce, difficult to transport, and highly customized.¹⁷ Their prices have increased by more than 80 percent since 2020.¹⁸ These production lags have created bottlenecks across the economy, delaying and increasing costs for new housing construction and infrastructure projects,¹⁹ hindering renewable energy projects,²⁰ and slowing disaster recovery efforts.²¹

Transformer shortages are the result of a combination of demand-side and supply-side pressures. Demand has increased due to the need to replace aging grid infrastructure; surging electricity demand from data centers, electric vehicles, and home electrification; and the addition of new generation sources to the grid.²² However, because transformer demand has historically been cyclical, producers have been reluctant to significantly scale up production, leading to a projected ongoing 30 percent shortfall in supply.²³ Transformers have also been constrained by input bottlenecks, particularly for grain-oriented electrical steel, which is currently only produced by a single domestic steelmaker at volumes insufficient to meet domestic demand. This has left transformer producers dependent on foreign imports, which puts them at risk of global trade disruptions like tariffs.²⁴

If the US develops mass production capabilities for technologies like next-generation batteries and transformers, it could export its surpluses to advance decarbonization and geopolitical priorities. Public factories could help power a durable green statecraft.

The United States could create public factories to increase the supply of transformers. The government could work with utilities to identify a common set of transformer designs they could use for new distribution lines to promote greater standardization. Public factories could overcome demand cyclicality concerns that hold back private-sector investment, and could thereby narrow the gap between expected demand and planned productive capacity. Public factories could also produce the core electrical steel used in transformers to expand domestic capacity and curb monopoly power in the US market. Other public factories could promote innovation to steer the grid toward advanced transformer technologies.

How to Create Public Factories Today

Policymakers could pursue a number of different pathways to create public factories for critical energy components. The executive branch could rely on statutory authority under the Defense Production Act or lending programs like the Department of Energy’s Loan Programs Office. It could incorporate public factories into new and novel trade deal investment funds financed by Japan and South Korea.²⁵ And it could use the military’s statutory authorities to establish public factories for critical energy components for defense-related uses.

Congress could also enact new legislation authorizing public factories for critical energy components. Alternatively, Congress could amend the existing Department of Energy authority to allow it to provide department-owned factory space for pilot production and larger-scale production. This could help scale emerging energy technologies from development toward commercialization. Congress could also appropriate Defense Production Act funding for critical energy components, which could be used to create public factories. DPA is particularly useful here, because it can be used to preempt permitting hurdles at the federal and sub-federal levels.²⁶

States and localities could also create public factories for critical energy components. These could be used first to meet in-state demand for batteries and transformers. They could then generate additional revenue by selling across state lines to meet out-of-state demand. Such public factories could advance economic development goals, a model that states like Mississippi pioneered in the 1930s. To achieve fiscal scale, states could coordinate with each other to optimize the use of their public factories for critical energy components.

Conclusion

In December 1940, as the government-led industrial mobilization for World War II was underway, President Roosevelt took to the airwaves to declare that the United States would be “the great arsenal of democracy” to arm the Allies to win the war.²⁷ That American arsenal was to be heavily powered by public factories. Today, public factories for critical energy components could form the foundation for a new global arsenal. If the US develops mass production capabilities for technologies like next-generation batteries and transformers, it could export its surpluses to advance decarbonization and geopolitical priorities. Public factories could help power a durable green statecraft.